As filed with the Securities and Exchange Commission on April 27, 2001
REGISTRATION NO. 333-59328
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SEAGATE TECHNOLOGY INTERNATIONAL
(Exact name of Registrant as specified in its charter)
CAYMAN ISLANDS 3572
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
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7000 ANG MO KIO AVENUE #5
SINGAPORE 569877
(65) 483-3888
(Address, including Zip Code, and Telephone Number, including Area Code,
of Registrant's principal executive offices)
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CT CORPORATION SYSTEM
111 EIGHTH AVENUE, 13TH FLOOR
NEW YORK, NEW YORK 10011
(212) 894-8400
(Name, Address, including Zip Code, and Telephone Number, including Area
Code, of Agent for Service)
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CAYMAN ISLANDS 98-0182115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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7000 ANG MO KIO AVENUE #5
SINGAPORE 569877
(65) 483-3888
(Address, including Zip Code, and Telephone Number, including
Area Code, of Registrant's principal executive offices)
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CT CORPORATION SYSTEM
111 EIGHTH AVENUE, 13TH FLOOR
NEW YORK, NEW YORK 10011
(212) 894-8400
(Name, Address, including Zip Code, and Telephone Number, including
Area Code, of Agent for Service)
----
WITH A COPY TO:
WILLIAM L. HUDSON, ESQ. WILLIAM H. HINMAN, JR., ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL SIMPSON THACHER & BARTLETT
920 DISC DRIVE 3330 HILLVIEW AVENUE
P.O. BOX 66360 PALO ALTO, CALIFORNIA 94304
SCOTTS VALLEY, CALIFORNIA 95067 (650) 251-5000
(831) 438-6550
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Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this Form are being offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF MAXIMUM PROPOSED
SECURITIES TO AMOUNT TO OFFERING PRICE MAXIMUM AMOUNT OF
BE REGISTERED BE REGISTERED PER NOTE AGGREGATE OFFERING PRICE (2) REGISTRATION FEE
12 1/2% Senior Subordinated Notes due 2007 $210,000,000 100% $210,000,000 $52,500(3)
Guarantees of 12 1/2% Senior Subordinated Notes $210,000,000 100% $210,000,000 (4)
due 2007 (1)
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(1) See inside facing page for additional registrant guarantors.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) A registration fee of $52,500 was paid with the initial filing.
(4) Pursuant to Rule 457(n) under the Securities Act of 1933, as amended, no
separate fee for the Guarantees is payable.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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TABLE OF REGISTRANT GUARANTORS
PRIMARY ADDRESS, INCLUDING ZIP CODE,
STATE OR OTHER STANDARD AND TELEPHONE NUMBER,
JURISDICTION OF I.R.S. EMPLOYER INDUSTRIAL INCLUDING AREA CODE, OF
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION CLASSIFICATION REGISTRANT GUARANTOR'S
GUARANTOR AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER CODE NUMBER PRINCIPAL EXECUTIVE OFFICES
- --------------------------------------- ------------------ ----------------- ---------------- -----------------------------
New SAC Cayman Islands 98-0230396 3572 c/o Maples & Calder
P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Quinta Corporation(1) California 77-0426766 3572 920 Disc Drive
P.O. Box 66360
Scotts Valley,
California, 95067
(831) 438-6550
Seagate Technology(1) Delaware 77-0551570 3572 920 Disc Drive
(US) Holdings, Inc. P.O. Box 66360
Scotts Valley,
California, 95067
(831) 438-6550
Seagate Technology LLC(1) Delaware 77-0545899 3572 920 Disc Drive
P.O. Box 66360
Scotts Valley,
California, 95067
(831) 438-6550
Seagate Removable Storage Delaware 77-0551572 3572 920 Disc Drive
Solutions (US) Holdings, P.O. Box 66360
Inc.(1) Scotts Valley,
California, 95067
(831) 438-6550
Seagate Removable Storage Delaware 77-0545900 3572 1650 Sunflower Avenue
Solutions LLC(1) Costa Mesa, CA 92626
(714) 641-1230
Seagate RSS LLC(1) Delaware 77-0545902 7363 1650 Sunflower Avenue
Costa Mesa, CA 92626
(714) 641-1230
Seagate US LLC(1) Delaware 77-0545987 7363 920 Disc Drive
P.O. Box 66360
Scotts Valley,
California, 95067
(831) 438-6550
Redwood Acquisition Delaware 52-2134904 3572 920 Disc Drive
Corporation(1) P.O. Box 66360
Scotts Valley,
California, 95067
(831) 438-6550
Crystal Decisions, Inc.(2) Delaware 77-0537234 7372 895 Emerson St.
Palo Alto, CA 94301
(650) 473-3132
XIOtech Corporation(3) Minnesota 41-1821093 3572 6455 Flying Cloud
Drive
Eden Prairie, MN
55344-3305
(952) 983-3000
PRIMARY ADDRESS, INCLUDING ZIP CODE,
STATE OR OTHER STANDARD AND TELEPHONE NUMBER,
JURISDICTION OF I.R.S. EMPLOYER INDUSTRIAL INCLUDING AREA CODE, OF
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION CLASSIFICATION REGISTRANT GUARANTOR'S
GUARANTOR AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER CODE NUMBER PRINCIPAL EXECUTIVE OFFICES
- --------------------------------------- ------------------ ----------------- ---------------- ------------------------------
XIOtech (Canada) Ltd. New Brunswick, N/A 3572 c/o Stewart McKelvey
Canada Stirling Scales
44 Chipman Hill,
10th Floor
P.O. Box 7289, Stn. "A"
Saint John, N.B.
E2L456,
Canada
(506) 632-8312
Crystal Decisions, Corp New Brunswick, N/A 7372 840 Cambie Street
Canada Vancouver, BC V6B 4J2
Canada
(604) 681-3435
Seagate Technology Holdings Cayman Islands 98-0232277 3572 c/o Maples & Calder
P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Technology HDD Cayman Islands N/A 3572 c/o Maples & Calder
Holdings P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Technology China Cayman Islands 98-0182119 3572 c/o Maples & Calder
Holding Company P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Technology Asia Cayman Islands 98-0336209 3572 c/o Maples & Calder
Holdings P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Technology (Ireland) Cayman Islands N/A 3572 c/o Maples & Calder
P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
PRIMARY ADDRESS, INCLUDING ZIP CODE,
STATE OR OTHER STANDARD AND TELEPHONE NUMBER,
JURISDICTION OF I.R.S. EMPLOYER INDUSTRIAL INCLUDING AREA CODE, OF
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION CLASSIFICATION REGISTRANT GUARANTOR'S
GUARANTOR AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER CODE NUMBER PRINCIPAL EXECUTIVE OFFICES
- --------------------------------------- ------------------ ----------------- ---------------- ------------------------------
Seagate Technology Media Cayman Islands N/A 3695 c/o Maples & Calder
(Ireland) P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Technology Far East Cayman Islands N/A 3572 c/o Maples & Calder
Holdings P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Technology Cayman Islands N/A 3572 c/o Maples & Calder
(Philippines) P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Technology SAN Cayman Islands N/A 3572 c/o Maples & Calder
Holdings P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Removable Storage Cayman Islands N/A 3572 c/o Maples & Calder
Solutions Holdings P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Removable Storage Cayman Islands 98-0229623 3572 c/o Maples & Calder
Solutions International P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
PRIMARY ADDRESS, INCLUDING ZIP CODE,
STATE OR OTHER STANDARD AND TELEPHONE NUMBER,
JURISDICTION OF I.R.S. EMPLOYER INDUSTRIAL INCLUDING AREA CODE, OF
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION CLASSIFICATION REGISTRANT GUARANTOR'S
GUARANTOR AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER CODE NUMBER PRINCIPAL EXECUTIVE OFFICES
- --------------------------------------- ------------------ ----------------- ---------------- ------------------------------
Seagate Software (Cayman) Cayman Islands 77-0397623 7371 c/o Maples & Calder
Holdings P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Seagate Technology Cayman Islands N/A 3572 c/o Maples & Calder
(Malaysia) Holding Company P.O. Box 309GT
Ugland House
South Church Street
George Town,
Grand Cayman
Cayman Islands
(345) 949-8066
Nippon Seagate Inc. Japan N/A 3572 Tennoz Parkside
Building 3F, 2-5-8,
Higashi-Shinagawa,
Shinagawa-ku, Tokyo
140-022, Japan
(81)354622900
Nippon Seagate Software KK Japan N/A 7372 Bridgestone Bldg.,
3rd Fl.,
2-13-12 Hirakawa-cho,
Chiyoda-Ku, Tokyo,
102-0093 Japan
(81)352263601
Seagate Technology-Reynosa, Mexico N/A 3572 Blvd. Montebello #737
S. de R.L. de C.V. Esq. Blvd. Chapultepec,
Parque Industrial
Colonial, Cd. Reynosa,
Tamps. 88780, Mexico
(52)89211200
Seagate Distribution (UK) Scotland N/A 5045 1 Brewster Place,
Limited Riverside Business
Park, Oldhall West,
Irvine KA11 5DE,
Scotland
(44)1294277766
Seagate Singapore Singapore N/A 5045 Seagate AMK Bldg.,
Distribution Pte. Ltd. 7000 Ang Mo Kio
Avenue 5,
Singapore 569877
(65)4833888
Crystal Decisions (Singapore) Singapore N/A 7372 14 Science Park Dr.,
Pte Ltd #03-02 The Maxwell,
Singapore Science Park
118226
Singapore
(65)7770533
PRIMARY ADDRESS, INCLUDING ZIP CODE,
STATE OR OTHER STANDARD AND TELEPHONE NUMBER,
JURISDICTION OF I.R.S. EMPLOYER INDUSTRIAL INCLUDING AREA CODE, OF
EXACT NAME OF REGISTRANT INCORPORATION OR IDENTIFICATION CLASSIFICATION REGISTRANT GUARANTOR'S
GUARANTOR AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER CODE NUMBER PRINCIPAL EXECUTIVE OFFICES
- --------------------------------------- ------------------ ----------------- ---------------- ------------------------------
Seagate Technology Thailand 98-0182120 3572 No. 1627 Moo 7
(Thailand) Limited Teparuk Road, Tambol
Teparuk, Amphur
Muang,
Samutprakarn 10270
Thailand
(66)27152999
Seagate Technology England and N/A 3572 Seagate House, Globe
(Marlow) Limited Wales Park, Fieldhouse Lane,
Marlow Bucks SL7
1LW, United Kingdom
(44)1628890366
Crystal Decisions (UK) England and 77-0465436 7372 The Broadwalk #54 The
Limited Wales Broadway Ealing
England W5 5JN
(44)1815662330
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(1) The agent for service of process for this registrant is its corporate
secretary, who is currently William L. Hudson. The address and telephone
number for the agent is 920 Disc Drive, P.O. Box 66360, Scotts Valley,
California 95067, (831) 438-6550.
(2) The agent for service of process for this registrant is its corporate
secretary, who is currently Susan P. Wolfe. The address and telephone
number for the agent is 895 Emerson Street, Palo Alto, California 94301,
(650) 473-3132.
(3) The agent for service of process for this registrant is its corporate
secretary, who is currently John P. Guider. The address and telephone
number for the agent is 6455 Flying Cloud Drive, Eden Prairie, Minnesota
55344, (952) 983-3000.
For all other registrants listed above, the agent for service of process is CT
Corporation System, as specified on the front cover of this amended
registration statement.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER, SOLICITATION
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 27, 2001
PROSPECTUS
$210,000,000
SEAGATE TECHNOLOGY INTERNATIONAL
OFFER TO EXCHANGE ALL OUTSTANDING 12 1/2% SENIOR SUBORDINATED NOTES DUE 2007 FOR
12 1/2% SENIOR SUBORDINATED NOTES DUE 2007, WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
THE EXCHANGE OFFER
o We will exchange all outstanding notes that are validly tendered and not
validly withdrawn for an equal principal amount of exchange notes that are
freely tradeable.
o You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
o The exchange offer expires at 5:00 p.m., New York City time, on ,
2001, unless extended. We do not currently intend to extend the expiration
date.
o The exchange of outstanding notes for exchange notes in the exchange offer
will not be a taxable event for U.S. federal income tax purposes.
o We will not receive any proceeds from the exchange offer.
THE EXCHANGE NOTES
o The exchange notes are being offered in order to satisfy certain of our
obligations under the exchange and registration rights agreement entered
into in connection with the placement of the outstanding notes.
o The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the outstanding notes, except that the exchange
notes will be freely tradeable.
RESALES OF EXCHANGE NOTES
o The exchange notes may be sold in the over-the-counter market, in
negotiated transactions or through a combination of these methods.
If you are a broker-dealer and you receive exchange notes for your own account,
you must acknowledge that you will deliver a prospectus in connection with any
resale of the exchange notes. By making that acknowledgment, you will not be
deemed to admit that you are an "underwriter" under the Securities Act of 1933.
Broker-dealers may use this prospectus in connection with any resale of
exchange notes received in exchange for outstanding notes where the outstanding
notes were acquired by the broker-dealer as a result of market-making
activities or trading activities. We will make this prospectus available to any
broker-dealer for use in any such resale for a period of up to 180 days after
the date of the prospectus. A broker-dealer may not participate in the exchange
offer with respect to outstanding notes acquired other than as a result of
market-making activities or trading activities. See "Plan of Distribution."
If you are an affiliate of Seagate Technology International or any of the
guarantors of the outstanding notes or are engaged in, or intend to engage in,
or have an agreement or understanding to participate in, a distribution of the
exchange notes, you cannot rely on the applicable interpretations of the
Securities and Exchange Commission and you must comply with the registration
requirements of the Securities Act of 1933 in connection with any resale
transaction.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 17 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is , 2001.
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary ............................... 1
Risk Factors ..................................... 17
Use of Proceeds .................................. 36
Capitalization ................................... 37
The Transactions ................................. 38
Unaudited Pro Forma Consolidated
Condensed Statements of Income of
New SAC ....................................... 42
Selected Historical Consolidated Financial
Information of New SAC ........................ 50
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... 54
Industry ......................................... 120
Business ......................................... 123
Management ....................................... 139
Security Ownership of Certain Beneficial
Owners and Management ......................... 154
Certain Relationships and Related
Transactions .................................. 157
Description of the Senior Credit Facilities ...... 163
The Exchange Offer ............................... 167
Description of the Notes ......................... 177
Certain Income Tax Considerations ................ 231
Exchange and Registration Rights
Agreement ..................................... 232
Book-Entry; Delivery and Form .................... 235
Plan of Distribution ............................. 238
Legal Matters .................................... 239
Experts .......................................... 239
Where You Can Find More Information .............. 241
Index to Financial Statements .................... F-1
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SHORTHAND REFERENCES
Throughout this prospectus, we use the following terms for ease of
reference, unless it is otherwise noted or evident from the context:
o The "Issuer" refers to Seagate Technology International, a Cayman Islands
limited liability company, as the issuer of the notes.
o Suez Acquisition Company refers to Suez Acquisition Company (Cayman)
Limited before the transactions that closed on November 22, 2000
described in this prospectus and to New SAC after these transactions.
Prior to November 22, 2000, Suez Acquisition Company entered into a stock
purchase agreement to purchase substantially all the operating assets of
Seagate Technology, Inc.
o "We," "us" and "our" refer to New SAC, a Cayman Islands limited liability
company, and its subsidiaries after giving effect to the transactions
that closed on November 22, 2000 described in this prospectus, or, where
the context otherwise requires, to Seagate Technology, Inc. and its
subsidiaries, prior to the closing of the transactions on November 22,
2000 described in this prospectus. Before the closing of these
transactions, Suez Acquisition Company assigned all its rights and
obligations under the stock purchase agreement referred to above to New
SAC, a shell company formed in connection with the transactions. After
the closing, New SAC became the indirect parent company of the Issuer and
of various other former subsidiaries of Seagate Technology, Inc.
o "Seagate Technology" refers to Seagate Technology, Inc., a Delaware
corporation, and, where applicable, to Seagate Technology, Inc. and its
subsidiaries, prior to giving effect to the transactions that closed on
November 22, 2000 described in this prospectus.
o "Crystal Decisions" refers to Crystal Decisions, Inc., a Delaware
corporation and an indirect subsidiary of New SAC, and, where applicable,
to its predecessor, Seagate Software Information Management Group
Holdings, Inc.
o "Seagate Software Holdings" refers to Seagate Software Holdings, Inc., a
Delaware corporation.
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FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical facts
i
included in this prospectus, including statements under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Industry" and "Business," regarding our financial condition,
strategy, the industry in which we compete, restructuring activities and other
statements regarding other future events or prospects, are forward-looking
statements. We have used the words "may," "will," "expect," "anticipate,"
"believe," "estimate," "plan," "intend" and similar expressions in this
prospectus to identify forward-looking statements. We have based these
forward-looking statements on our current views with respect to future events
and financial performance. Actual results could differ materially from those
suggested in the forward-looking statements. These forward-looking statements
are subject to risks, uncertainties and assumptions, regarding, among other
things:
o our substantial leverage, the restrictive covenants in our debt
instruments and other risks related to our ability to comply with our
debt obligations;
o competition within our industry and, in particular, the related effects
of declining average sales prices of rigid disc drives and short product
life cycles;
o changes in the demand for systems in which our products are components;
o declining demand for information technology;
o our ability to achieve a competitive time to market with new products;
o the uncertainty of the realization of cost savings from restructuring
plans and other cost savings initiatives;
o potential loss of material licensed technology;
o the difficulty in predicting quarterly demand for our products;
o technological changes and other trends in the information storage
industry, in general, and the rigid disc drive industry, in particular;
o our dependence on obtaining a future supply of product components;
o the effects of high fixed costs associated with our vertical integration
strategy;
o our dependence on key customers;
o risks associated with our international operations and the risks related
to the Issuer and some of our other subsidiaries having been incorporated
in jurisdictions outside the United States;
o control by the sponsor group, whose interests may differ from yours;
o risks associated with future acquisitions;
o risks of intellectual property litigation and our dependence on
intellectual property;
o adverse results of other litigation;
o our dependence on key personnel;
o system failures; and
o the execution and success of our business strategies.
Except as required by the U.S. federal securities laws, we are not
obligated to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. All forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this prospectus. Because of these risks, uncertainties and assumptions, you
should not place undue reliance on these forward-looking statements.
------------------
INDUSTRY AND MARKET SHARE DATA
In this prospectus, we refer to information regarding the information
storage industry and the rigid disc drive, tape drive, software and other
sectors of the information storage industry. Unless otherwise indicated, all
information in this prospectus was obtained from Dataquest Incorporated, a
division of The Gartner Group, Inc. The Gartner Group, founded in 1979, is a
research group focusing on the computer hardware, software, communications and
related information technology
ii
industries. Although most of the industry information was obtained from market
statistics reports periodically published by Dataquest, some of the information
was prepared by Dataquest specifically for inclusion in this prospectus.
Although we believe this information is generally reliable, we cannot guarantee
the accuracy and completeness of the information and have not independently
verified it. Silver Lake Partners, which owns approximately 35% of the
outstanding ordinary shares of New SAC, owns, together with Integral Capital
Partners, whose partners are also principals of Silver Lake Partners,
convertible securities which would represent, upon conversion, approximately
17.8% of the voting capital stock of The Gartner Group on a fully diluted
basis. In addition, a member of the board of directors of The Gartner Group,
Glenn D. Hutchins, is a member of the board of directors of New SAC.
In addition, some of the market share and other information in this
prospectus does not contemplate or otherwise give effect to the recent
acquisition of Quantum Corporation's disc drive operations by Maxtor
Corporation. Maxtor and Quantum are two of our principal competitors. According
to Dataquest, following this acquisition, Maxtor will become the largest
manufacturer of rigid disc drives in terms of the units of rigid disc drives
shipped.
------------------
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
The Issuer and several of the note guarantors, including New SAC, are
organized under the laws of the Cayman Islands and many other note guarantors
are organized in various other jurisdictions outside the United States. Some of
the directors and officers and a substantial portion of the assets of these
companies are located outside the United States. Although the Issuer and the
note guarantors which are organized outside the United States have agreed to
accept service of process in the United States by their agent designated for
that purpose, it may be difficult for you to effect service of process within
the United States upon these persons or to enforce against them, in courts
outside the United States, judgments of courts of the United States predicated
upon civil liabilities under the U.S. federal securities or other laws. The
Issuer and the note guarantors organized outside of the United States have
designated CT Corporation as their agent for service of process in any action
brought against any of them under the U.S. federal securities and other laws,
with respect to the outstanding notes and the exchange notes, the guarantees of
the outstanding notes and the exchange notes and the indenture under which the
outstanding notes, the exchange notes and these guarantees were issued.
We have been advised by our Cayman Islands legal counsel, Walkers, that
there is doubt with respect to Cayman Islands law as to (a) whether a judgment
of a U.S. court predicated solely upon the civil liability provisions of the
U.S. federal securities or other laws would be enforceable in the Cayman
Islands against the Issuer or a note guarantor and (b) whether an action could
be brought in the Cayman Islands against the Issuer or a note guarantor in the
first instance on the basis of liability predicated solely upon the provisions
of the U.S. federal securities or other laws. In addition, we have been advised
by our counsel in the jurisdictions of organization of the note guarantors
other than the Cayman Islands that there is similar doubt with respect to the
laws of these other jurisdictions. In addition, other laws of these
jurisdictions, such as those limiting a party's enforcement rights on the
grounds of public policy of that jurisdiction, and the fact that a treaty may
not exist between the United States and the governments of these jurisdictions
regarding the enforcement of civil liabilities, may also restrict the ability
to enforce the note guarantors' obligations under their guarantees.
------------------
TRADEMARKS
The "S" logo, "Seagate," "Seagate Technology," "Barracuda" and "Cheetah,"
among others, are our registered trademarks.
iii
PROSPECTUS SUMMARY
This summary highlights some of the information described in detail in
other parts of this prospectus. It does not contain all of the information that
may be important to you in making a decision to exchange the outstanding notes
for the exchange notes. Unless otherwise stated, references to the "notes" in
this prospectus are references to both the outstanding notes and the exchange
notes.
OUR COMPANY
We are a leading designer, manufacturer and marketer of products for
storage, retrieval and management of electronic data. Businesses, other
organizations and individuals use rigid disc drives as the primary medium for
storing electronic information in computer systems ranging from desktop
computers to data centers delivering information over corporate networks and
the Internet. We produce a broad range of rigid disc drive products and are a
leader in both the enterprise (primarily Internet servers, mainframes and
workstations) and desktop (personal computers, or PCs), sectors of the rigid
disc drive industry. We also design, manufacture and market tape drives and
intelligent storage solutions and are a leading provider of business
intelligence software. We sell our rigid disc drives primarily to major
original equipment manufacturers, or OEMs, and also market to distributors
under our globally recognized brand name. We also have key relationships with
major distributors, who sell our rigid disc drive products to small OEMs,
dealers, system integrators and retailers in most geographic areas of the
world.
THE TRANSACTIONS
The private offering of the outstanding notes was part of a series of
transactions, which closed on November 22, 2000. They consisted of the
following:
o the contribution by a group of private equity investment firms, which we
refer to as the sponsor group, of approximately $875 million in cash to
Suez Acquisition Company in exchange for ordinary and preferred shares of
Suez Acquisition Company;
o the purchase by Suez Acquisition Company of substantially all of the
operating assets of Seagate Technology, which comprised Seagate
Technology's rigid disc drive, tape drive, software and intelligent
storage solutions businesses, a portion of the cash on the balance sheet
of Seagate Technology, and other assets of Seagate Technology and the
assumption by Suez Acquisition Company of substantially all of the
liabilities of Seagate Technology;
o the acquisition by VERITAS Software Corporation of the assets of Seagate
Technology that Suez Acquisition Company did not purchase through a
merger of Seagate Technology and a subsidiary of VERITAS and the payment
by VERITAS to the shareholders of Seagate Technology of cash and VERITAS
common stock as merger consideration for their shares of Seagate
Technology common stock and options to purchase these shares;
o the assignment by Suez Acquisition Company of all its rights and
obligations under its agreement to purchase substantially all the
operating assets of Seagate Technology to New SAC, a shell company formed
in connection with these transactions;
o the exchange by a group of officers of Seagate Technology, which we
refer to as the management group, of a portion of their Seagate
Technology common stock and options to purchase Seagate Technology common
stock, valued at approximately $184 million, into deferred compensation
and ordinary and preferred shares of New SAC, which we refer to as the
management rollover, and contribution of approximately $41 million in
cash in exchange for ordinary and preferred shares of New SAC;
o the financing of the purchase of the assets described above by New SAC
and the payment of fees and expenses related to the transactions; and
1
o the redemption by Seagate Technology of its then existing senior notes,
which constituted substantially all of its outstanding debt.
These events are collectively referred to in this prospectus as the
"transactions."
RECENT DEVELOPMENTS
On April 26, 2001, we announced our preliminary, unaudited consolidated
results for the quarter ended March 31, 2001. For the quarter, our revenue was
$1.574 billion and our net income $24 million. Combined revenue for the
immediately preceding quarter was $1.718 billion. For the quarter ended March
31, 2000, Seagate Technology reported revenue of $1.573 billion and net income
of $136 million.
---------------------
PRINCIPAL EXECUTIVE OFFICES
The address of the Issuer's principal executive office is 7000 Ang Mo Kio
Avenue #5, Singapore 569877 and its telephone number is (65) 483-3888. The
address of New SAC's principal executive office is c/o Maples & Calder, P.O.
Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman
Islands and the telephone number there is (345) 949-8066.
---------------------
2
CHART OF OUR CORPORATE STRUCTURE
The following diagram provides a summary illustration of our corporate
structure following the closing of the transactions.
[GRAPHIC OMITTED]
[Corporate Structure Chart--text and graphics]
At the top of the page is the title in bold "Chart of Our
Corporate Structure." Immediately below that is the sentence "The following
diagram provides a summary illustration of our corporate structure following the
closing of the transactions."
Below this title and sentence is a diagram with a number of
boxes representing New SAC, its sponsor and management groups and its
subsidiaries. The boxes that contain restricted subsidiaries are shaded dark
grey, the boxes that contain designated subsidiaries are shaded light grey and
the boxes that contain unrestricted subsidiaries are white. The boxes for New
SAC itself, its sponsor group and its management group have parallel diagonal
lines running through them.
At the top of the diagram are two boxes side by side. The left
box says "Sponsor Group" and the right box says "Management Group." Coming down
from these two boxes are lines that connect them with a box immediately below
them that says "New SAC." Next to this box are the words "Guarantor of senior
credit facilities" and "Note Guarantor." A line coming down from the New SAC box
leads directly to three other boxes below that are parallel with one another.
The first of these three boxes, which is on the far left of the page, says
"Seagate Technology Holdings" and is shaded dark grey. Next to this box are the
words "Guarantor of senior credit facilities" and "Note Guarantor." The second
box, which is in the center of the three boxes, says "Seagate Removable Storage
Solutions Holdings" and is light grey. Next to this box are the words "Guarantor
of senior credit facilities" and "Note Guarantor." The third box, which is on
the far right of the page, says "Seagate Technology Investment Holdings LLC" and
is white. Next to this box are the words "Non-Guarantor" and "Owns existing
unrestricted entities."
At the left of the page, a line coming down from the Seagate
Technology Holdings box connects directly to two other boxes below. The first,
which is on the left, says "Seagate Technology HDD Holdings" and is shaded dark
grey. Next to this box are the words "Guarantor of senior credit facilities" and
"Note Guarantor." The second says "Seagate Technology SAN Holdings" and is
shaded light grey. Next to this box are the words "Guarantor of senior credit
facilities" and "Note Guarantor."
Directly below the Seagate Technology SAN Holdings box is
another light grey box that says "XIOtech Corporation." Next to this box are the
words "Guarantor of senior credit facilities" and "Note Guarantor." Directly
below that box is another light grey box that says "XIOtech (Canada) Ltd." Next
to this box are the words "Guarantor of senior credit facilities" and "Note
Guarantor."
Directly below the Seagate Technology HDD Holdings box is a
dark grey box that says "Seagate Technology (US) Holdings, Inc." Next to this
box are the words "Borrower under the senior credit facilities," "Guarantor of
senior credit facilities" and "Note Guarantor." Directly below that is another
dark grey box that says "U.S. rigid disc drive operating subsidiaries."
Underneath this box are the words "Guarantors of senior credit facilities" and
"Note Guarantors." Between the Seagate Technology (US) Holdings, Inc. box and
the U.S. rigid disc drive operating subsidiaries box is a line that leads to a
dark grey box parallel to the U.S. rigid disc drive operating subsidiaries box.
This box is entitled "Non-U.S. rigid disc drive operating subsidiaries."
Underneath this box is the word "Non-Guarantors."
Between the Seagate Technology HDD Holdings box and the
Seagate Technology (US) Holdings, Inc. box is a line that extends out to the
right to another dark grey box. This box
says "Seagate Technology International." Next to this box are the words
"Borrower under the senior credit facilities," "Guarantor of senior credit
facilities" and "Issuer of the Notes." Below the Seagate Technology
International box are two other dark grey boxes that are connected to it by a
line. The box on the left says "Non-U.S. rigid disc drive operating
subsidiaries." Underneath this box are the words "Guarantors of senior credit
facilities" and "Note Guarantors." The box on the right also says "Non-U.S.
rigid disc drive operating subsidiaries." Underneath this box is the word
"Non-Guarantors."
In the center of the page, under the Seagate Removable Storage
Solutions Holdings box are the following four light grey boxes that are
connected to the Seagate Removable Storage Solutions Holdings box with lines.
Directly below the Seagate Removable Storage Solutions Holdings box are a box on
the left that says "Seagate Removable Storage Solutions International" and a box
on the right that says "Seagate Removable Storage Solutions (US) Holdings, Inc."
Next to each of these boxes are the words "Guarantor of senior credit
facilities" and "Note Guarantor." Directly below the Seagate Removable Storage
Solutions International box is a box that says "Seagate RSS (M) Sdn. Bhd.
(Malaysia)." Next to this box is the word "Non-Guarantor." Directly below the
Seagate Removable Storage Solutions (US) Holdings, Inc. box is a box that says
"U.S. tape drive operating subsidiaries." Underneath this box are the words
"Guarantors of senior credit facilities" and "Note Guarantors."
At the right of the page, in between the Seagate Removable
Storage Solutions Holdings box and the Seagate Technology Investment Holdings
LLC box is a line extending down to a light grey box that says "Seagate Software
(Cayman) Holdings." Next to this box are the words "Guarantor of senior credit
facilities" and "Note Guarantor." Directly below the Seagate Software (Cayman)
Holdings box is a light grey box that says "Crystal Decisions, Inc." Next to
this box are the words "Guarantor of senior credit facilities" and "Note
Guarantor." Below the Crystal Decisions, Inc. box are two more light grey boxes
that are connected to the Crystal Decisions, Inc. box with lines. The box on the
left says "Non-U.S. Crystal Decisions operating subsidiaries." Underneath this
box are the words "Guarantor of senior credit facilities" and "Note Guarantors."
The box on the right also says "Non-U.S. Crystal Decisions operating
subsidiaries." Underneath this box is the word "Non-Guarantors."
3
SUMMARY OF TERMS OF THE EXCHANGE OFFER
On November 22, 2000, we completed the private offering of the outstanding
notes.
The Issuer and the guarantors entered into an exchange and registration
rights agreement with the initial purchasers in the private offering in which
the Issuer and the guarantors agreed to deliver to you this prospectus as part
of the exchange offer and the Issuer agreed to complete the exchange offer
within 300 days after the date of original issuance of the outstanding notes.
You are entitled to exchange in the exchange offer your outstanding notes for
exchange notes which are identical in all material respects to the outstanding
notes except:
o the exchange notes have been registered under the Securities Act of 1933
and will not bear legends restricting their transfer;
o the exchange notes are not entitled to registration rights which are
applicable to the outstanding notes under the exchange and registration
rights agreement; and
o the exchange notes will not provide for liquidated damages upon the
failure of the Issuer to fulfill its obligations to file and cause to be
effective a registration statement.
The Exchange Offer.......... The Issuer is offering to exchange up to
$210,000,000 aggregate principal amount of
outstanding notes for up to $210,000,000
aggregate principal amount of exchange notes.
Outstanding notes may be exchanged only in
integral multiples of $1,000.
Resale...................... Based on an interpretation by the staff of the
Securities and Exchange Commission contained in
no-action letters issued to third parties, we
believe that the exchange notes issued under the
exchange offer in exchange for outstanding notes
may be offered for resale, resold and otherwise
transferred by you (unless you are an "affiliate"
of the Issuer or the guarantors, within the
meaning of Rule 405 under the Securities Act of
1933) without compliance with the registration
and prospectus delivery provisions of the
Securities Act of 1933, provided that you are
acquiring the exchange notes in the ordinary
course of your business and that you have not
engaged in, do not intend to engage in, and have
no arrangement or understanding with any person
to participate in, a distribution of the exchange
notes.
Each participating broker-dealer that receives
exchange notes for its own account pursuant to
the exchange offer in exchange for outstanding
notes that were acquired as a result of
market-making or other trading activity must
acknowledge that it will deliver a prospectus in
connection with any resale of the exchange
notes. See "Plan of Distribution."
Any holder of outstanding notes who:
o is an affiliate of the Issuer or the
guarantors;
o does not acquire exchange notes in the
ordinary course of its business; or
4
tenders in the exchange offer with the
intention to participate, or for the
purpose of participating, in a
distribution of exchange notes
cannot rely on the position of the staff of the
Commission enunciated in Exxon Capital Holdings
Corporation, Morgan Stanley & Co. Incorporated
or similar no-action letters and, in the absence
of an exemption from them, must comply with the
registration and prospectus delivery
requirements of the Securities Act of 1933 in
connection with the resale of the exchange
notes.
Expiration Date; Withdrawal of
Tender..................... The exchange offer will expire at 5:00 p.m.,
New York City time, on , 2001, or such later
date and time to which the Issuer extends it,
which we refer to as the "expiration date." The
Issuer does not currently intend to extend the
expiration date. A tender of outstanding notes
pursuant to the exchange offer may be withdrawn
at any time prior to the expiration date. Any
outstanding notes not accepted for exchange for
any reason will be returned without expense to
the tendering holder promptly after the
expiration or termination of the exchange offer.
Certain Conditions to the Exchange
Offer...................... The exchange offer is subject to customary
conditions, which the Issuer may waive. Please
read the section captioned "The Exchange Offer --
Certain Conditions to the Exchange Offer" of this
prospectus for more information regarding the
conditions to the exchange offer.
Procedures for Tendering Outstanding
Notes...................... If you wish to accept the exchange offer, you
must complete, sign and date the accompanying
letter of transmittal, or a facsimile of the
letter of transmittal according to the
instructions contained in this prospectus and the
letter of transmittal. You must also mail or
otherwise deliver the letter of transmittal, or a
facsimile of the letter of transmittal, together
with the outstanding notes and any other required
documents, to the exchange agent at the address
set forth on the cover page of the letter of
transmittal. If you hold outstanding notes
through The Depository Trust Company, or DTC, and
wish to participate in the exchange offer, you
must comply with the Automated Tender Offer
Program procedures of DTC, by which you will
agree to be bound by the letter of transmittal.
By signing, or agreeing to be bound by the letter
of transmittal, you will represent to us that,
among other things:
o any exchange notes that you receive will
be acquired in the ordinary course of your
business;
5
o you have no arrangement or understanding
with any person or entity to participate
in a distribution of the exchange notes;
o if you are a broker-dealer that will
receive exchange notes for your own
account in exchange for outstanding notes
that were acquired as a result of
market-making activities, that you will
deliver a prospectus, as required by law,
in connection with any resale of such
exchange notes; and
o you are not an "affiliate," as defined in
Rule 405 of the Securities Act of 1933 of
the Issuer, or, if you are an affiliate,
you will comply with any applicable
registration and prospectus delivery
requirements of the Securities Act of
1933.
Special Procedures for Beneficial
Owners..................... If you are a beneficial owner of outstanding
notes which are registered in the name of a
broker, dealer, commercial bank, trust company or
other nominee, and you wish to tender such
outstanding notes in the exchange offer, you
should contact such registered holder promptly
and instruct such registered holder to tender on
your behalf. If you wish to tender on your own
behalf, you must, prior to completing and
executing the letter of transmittal and
delivering your outstanding notes, either make
appropriate arrangements to register ownership of
the outstanding notes in your name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the expiration date.
Guaranteed Delivery
Procedures.................. If you wish to tender your outstanding notes and
your outstanding notes are not immediately
available or you cannot deliver your outstanding
notes, the letter of transmittal or any other
documents required by the letter of transmittal
or comply with the applicable procedures under
DTC's Automated Tender Offer Program prior to the
expiration date, you must tender your outstanding
notes according to the guaranteed delivery
procedures set forth in this prospectus under
"The Exchange Offer -- Guaranteed Delivery
Procedures."
Effect on Holders of Outstanding
Notes...................... As a result of the making of, and upon
acceptance for exchange of all validly tendered
outstanding notes pursuant to the terms of the
exchange offer, we will have fulfilled a covenant
contained in the registration rights agreement
and, accordingly, there will be no increase in
the interest rate on the outstanding notes under
the circumstances described in the registration
rights agreement. If you are a holder of
outstanding notes and you do not tender your
outstanding
6
notes in the exchange offer, you will continue
to hold such outstanding notes and you will be
entitled to all the rights and limitations
applicable to the outstanding notes in the
indenture, except for any rights under the
registration rights agreement that by their
terms terminate upon the consummation of the
exchange offer.
To the extent that outstanding notes are
tendered and accepted in the exchange offer, the
trading market for outstanding notes could be
adversely affected.
Consequences of Failure to
Exchange................... All untendered outstanding notes will continue
to be subject to the restrictions on transfer
provided for in the outstanding notes and in the
indenture. In general, the outstanding notes may
not be offered or sold, unless registered under
the Securities Act of 1933, except pursuant to an
exemption from, or in a transaction not subject
to, the Securities Act of 1933 and applicable
state securities laws. Other than in connection
with the exchange offer, the Issuer does not
currently anticipate that it will register the
outstanding notes under the Securities Act of
1933.
Income Tax Considerations... The exchange of outstanding notes for exchange
notes in the exchange offer will not be a taxable
event for United States federal income tax
purposes.
Use of Proceeds............. We will not receive any cash proceeds from the
issuance of exchange notes pursuant to the
exchange offer.
Exchange Agent.............. The Bank of New York is the exchange agent for
the exchange offer. The address and telephone
number of the exchange agent are listed under
"The Exchange Offer -- Exchange Agent" of this
prospectus.
7
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The following summary contains basic information about the notes. It does
not contain all the information that may be important to you. For a more
complete description of the notes, please refer to the section of this
prospectus entitled "Description of the Notes."
Issuer...................... Seagate Technology International.
Notes Offered............... $210,000,000 aggregate principal amount of
12 1/2% Senior Subordinated Notes due 2007.
Maturity.................... November 15, 2007.
Interest.................... Annual rate: 12 1/2%
Payment frequency: every six months on May 15
and November 15.
First Payment............... The first payment under the outstanding notes
is due May 15, 2001. The first payment under the
exchange notes will be due November 15, 2001.
Optional Redemption......... After November 15, 2004, the Issuer may redeem
some or all of the notes at the redemption prices
listed in the section entitled "Description of
the Notes -- Optional Redemption." Prior to that
date, the Issuer may not redeem the notes, except
as described in the following paragraphs.
At any time prior to November 15, 2003, the
Issuer may redeem up to 35% of the aggregate
principal amount of the notes with the net cash
proceeds of certain equity offerings at a
redemption price equal to 112.5% of the
principal amount of the notes, plus accrued and
unpaid interest and liquidated damages thereon,
if any, so long as (a) at least 65% of the
aggregate amount of the notes remain outstanding
after each redemption and (b) any redemption by
the Issuer is made within 90 days of the equity
offering. See "Description of the Notes --
Optional Redemption."
The Issuer may redeem all but not part of the
notes if there are specified changes in tax law,
at a redemption price equal to 100% of the
principal amount of the notes plus accrued and
unpaid interest to the date of redemption. See
"Description of the Notes -- Redemption for
Changes in Withholding Taxes."
Change of Control........... Upon the occurrence of a change of control of
us, the Issuer, or various of our subsidiaries,
(1) the Issuer will have the option, at any time
before November 15, 2004, to redeem the notes in
whole, but not in part, at a redemption price
equal to 100% of the principal amount of the
notes plus the applicable premium, as defined in
the indenture, together with accrued and unpaid
interest and liquidated damages, if any, to the
date of redemption and (2) if the Issuer has not
exercised its right to redeem all of the notes,
you will have the right to require the Issuer to
purchase all or a portion of your notes at a
purchase price in cash equal to 101% of the
8
principal amount thereof, plus accrued and
unpaid interest and liquidated damages thereon,
if any, to the date of purchase. See
"Description of the Notes -- Change of Control."
Note Guarantees............. The notes are fully and unconditionally
guaranteed on an unsecured, senior subordinated
basis, jointly and severally, by us and each of
our existing or subsequently acquired or
organized direct or indirect subsidiaries, other
than the Issuer, any unrestricted subsidiary and
any subsidiary that does not provide a guarantee
under the senior credit facilities. This includes
our subsidiaries that have been, or will be,
formed in Australia, Barbados, China, Denmark,
France, Germany, Hong Kong, Indonesia, Italy,
Malaysia, the Netherlands, Sweden, Switzerland,
Taiwan and the U.S. Virgin Islands. We refer to
these subsidiaries as the non-guarantors.
The note guarantees are subordinated to the
guarantees of senior debt issued by the note
guarantors under the senior credit facilities.
See "Description of the Notes -- Note
Guarantees."
Security and Ranking........ The notes are unsecured and:
o junior in right of payment to all of the
existing and future senior debt of the Issuer,
including borrowings under the senior credit
facilities;
o rank equally in right of payment with any of
the Issuer's future senior subordinated debt;
o rank senior in right of payment to any of the
Issuer's future subordinated debt;
o are effectively junior to any secured debt of
us and our subsidiaries to the extent of the
value of the assets securing the debt; and
o are effectively junior in right of payment to
all liabilities, including trade payables, and
preferred stock of each subsidiary of ours that
is not a note guarantor.
Similarly, the note guarantees of each note
guarantor are unsecured and:
o are junior in right of payment to all of the
note guarantors' existing and future senior
debt, including their guarantees of the
Issuer's borrowings under the senior credit
facilities;
o rank equally in right of payment with any of
the note guarantor's future senior subordinated
debt;
o rank senior in right of payment to any of the
note guarantor's future subordinated debt; and
9
o are effectively junior to any secured debt of
us and our subsidiaries to the extent of the
value of the assets securing the debt.
See "Description of the Notes -- Ranking."
The indenture governing the notes permits us to
incur a significant amount of additional senior
debt.
Certain Covenants........... The indenture, among other things, restricts
our ability and the ability of our restricted
subsidiaries, including the Issuer, to:
o incur additional debt;
o issue redeemable equity interests and preferred
equity interests;
o pay dividends or make other distributions;
o repurchase equity interests;
o make other restricted payments including,
without limitation, investments;
o create liens;
o redeem debt that is junior in right of payment
to the notes;
o sell or otherwise dispose of assets, including
capital stock of subsidiaries;
o conduct rigid disc drive operations through
designated subsidiaries;
o amend deferred compensation plans;
o enter into mergers or consolidations; and
o enter into transactions with affiliates.
These covenants are subject to a number of
important exceptions and qualifications. See
"Description of the Notes -- Certain Covenants"
and "-- Merger and Consolidation."
Unrestricted Subsidiaries... Seagate Technology Investment Holdings LLC is
what we refer to as an unrestricted subsidiary.
An unrestricted subsidiary is neither:
o a guarantor of the notes; nor
o subject to the restrictive covenants of the
indenture.
We can sell the assets or capital stock of an
unrestricted subsidiary without restriction and
can dividend or distribute the proceeds of these
sales on the terms and subject to the conditions
in the indenture. We can also sell several of
the investments owned by Seagate Technology
Investment Holdings LLC, each of which we refer
to as an existing unrestricted entity, without
restriction and dividend or distribute these
investments or the proceeds of the sales of
these investments on the terms and subject to
the conditions in the indenture. Under
circumstances specified in the indenture, we can
designate other subsidiaries as unrestricted
subsidiaries.
10
Restricted Subsidiaries and
Designated Subsidiaries.... All of our other subsidiaries are what we refer
to as restricted subsidiaries. Restricted
subsidiaries are subject to the restrictive
covenants in the indenture. Three of these
restricted subsidiaries, Seagate Removable
Storage Solutions Holdings, through which we
operate our tape drive business, Seagate Software
(Cayman) Holdings, through which we operate our
software business, and Seagate Technology SAN
Holdings, through which we operate our
intelligent storage solutions business, and their
subsidiaries are also what we refer to as
designated subsidiaries.
Designated subsidiaries are subject to the same
restrictive covenants that govern the restricted
subsidiaries, but:
o a designated subsidiary may be released from
its guarantee, to the extent it was issued, if
we effect specified sales of its capital stock,
including in an initial public offering; and
o we may dividend the capital stock of these
designated subsidiaries or the proceeds of
secondary sales of their capital stock on the
terms and subject to the conditions specified
in the indenture.
We will not be able to designate other
subsidiaries as designated subsidiaries.
Absence of a Public Market for the
Exchange Notes............. The exchange notes generally will be freely
transferable, but will be new securities for
which there will not initially be a market.
Accordingly, we cannot assure you as to the
development or liquidity of any market for the
exchange notes. We do not intend to apply for a
listing of the exchange notes on any securities
exchange or any automated dealer quotation
system. In connection with the offering of the
outstanding notes, the initial purchasers, Chase
Securities, Inc., Goldman, Sachs & Co. and
Merrill Lynch, Pierce, Fenner & Smith
Incorporated, advised us that they intend to make
a market in the exchange notes. However, they are
not obligated to do so, and any market making
with respect to the exchange notes, may be
discontinued without notice. See "Transfer
Restrictions" and "Plan of Distribution."
11
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF NEW SAC
We list in the table below summary historical consolidated financial
information of Seagate Technology as of the end of and for each of the last
three fiscal years ended June 30, 2000 and for the six months ended December
31, 1999 and the period from July 1, 2000 to November 22, 2000 and summary
historical consolidated financial information for New SAC as of the end of and
for the period from November 23, 2000 to December 29, 2000. The operations of
New SAC are substantially identical to the operations of Seagate Technology
before the transactions and New SAC had no significant operations from the date
of its incorporation on August 10, 2000 to the consummation of the transactions
on November 22, 2000. We have derived the historical consolidated financial
information of Seagate Technology below as of the end of and for fiscal years
1998, 1999 and 2000 and for the period for July 1, 2000 through November 22,
2000 and the historical consolidated financial information of New SAC as of the
end of and for the period from November 23, 2000 through December 29, 2000 from
the audited consolidated financial statements and the related notes of New SAC
and its predecessor, Seagate Technology, included elsewhere in this prospectus.
We have derived the summary financial information for the six months ended
December 31, 1999 from the unaudited interim consolidated condensed financial
statements and the related notes of Seagate Technology included elsewhere in
this prospectus, which in our opinion include all adjustments, consisting only
of normal recurring adjustments, which we consider necessary for the fair
presentation of our financial position and results of operations for these
periods. Operating results for the periods from July 1, 2000 through November
22, 2000 and from November 23, 2000 to December 29, 2000 are not necessarily
indicative of results that may be expected for the entire year or any future
period.
You should read the summary financial information below in conjunction
with "Selected Historical Consolidated Financial Information of New SAC,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- New SAC" and the consolidated financial statements and related
notes of New SAC and its predecessor, Seagate Technology, included elsewhere in
this prospectus.
SEAGATE TECHNOLOGY NEW SAC
------------------------------------------------------------ -------------
SIX MONTHS JULY 1, 2000 NOVEMBER 23,
FISCAL YEAR (a) ENDED TO 2000 TO
------------------------------ DECEMBER 31, NOVEMBER 22, DECEMBER 29,
1998 1999 (b) 2000 1999 2000 2000
--------- ---------- --------- -------------- -------------- -------------
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Revenue .................................. $6,819 $6,802 $6,448 $3,327 $ 2,449 $1,017
Cost of sales ............................ 5,788 5,176 5,056 2,665 2,130 896
Product development ...................... 627 655 725 359 442 73
Marketing and administrative ............. 502 534 515 243 490 101
Amortization of goodwill and other
intangibles ............................. 40 39 51 17 26 5
In-process research and
development (c) ......................... 223 2 105 -- -- 59
Restructuring (d) ........................ 347 60 207 135 20 --
Unusual items (e) ........................ (22) 78 350 325 -- --
------ ------ ------ ------ -------- ------
Total operating expense .................. 7,505 6,544 7,009 3,744 3,108 1,134
------ ------ ------ ------ -------- ------
Income (loss) from operations ............ (686) 258 (561) (417) (659) (117)
Other income (expense):
Interest income ......................... 98 102 101 42 58 3
Interest expense ........................ (51) (48) (52) (26) (24) (10)
Other non-operating income
(expense) (f) ........................... (65) 1,561 1,121 414 (1,015) (8)
------ ------ ------ ------ -------- --------
Income (loss) before income taxes ........ (704) 1,873 609 13 (1,640) (132)
Benefit (provision) for income taxes ..... 174 (697) (299) (70) 76 (21)
------ ------ ------ ------ -------- -------
Net income (loss) ........................ $ (530) $1,176 $ 310 $ (57) $ (1,564) $(153)
====== ====== ====== ====== ======== =======
12
SEAGATE TECHNOLOGY NEW SAC
-------------------------------------------------------------- -------------
SIX MONTHS JULY 1, 2000 NOVEMBER 23,
FISCAL YEAR (a) ENDED TO 2000 TO
-------------------------------- DECEMBER 31, NOVEMBER 22, DECEMBER 29,
1998 1999 (b) 2000 1999 2000 2000
--------- ---------- ----------- -------------- -------------- -------------
(IN MILLIONS, EXCEPT FOR RATIOS)
OTHER FINANCIAL DATA:
EBITDA (j) ................................. $529 $1,104 $831 $392 $282 $ 53
Depreciation and amortization .............. 664 696 693 351 271 69
Capital expenditures, net .................. 709 603 580 279 272 34
Working capital (g) ........................ 414 150 17 (95)
Cash interest expense ...................... 52 52 52 26 26 --
Ratio of EBITDA to cash interest
expense ................................... 10.2 x 21.2 x 16.0 x 15.1 x 10.8 x --
Ratio of total debt to EBITDA .............. 1.33 x 0.64 x 0.85 x 17.1 x
Ratio of net debt to EBITDA (h) ............ 0.07 x 0.28 x (0.21) x 3.2 x
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents (i) .............. $ 666 $ 396 $ 875 $ 732
Short-term investments ..................... 1,161 1,227 1,140 118
Total assets ............................... 5,645 7,072 7,167 3,509
Total debt (including current portion of
long-term debt) ........................... 705 704 704 904
Total shareholders' equity ................. 2,937 3,563 3,847 759
- ----------
(a) Seagate Technology reported financial results on a fiscal year of 52
or 53 weeks ending on the Friday closest to June 30 of that year.
Accordingly, fiscal year 1998 ended on July 3, 1998, fiscal year
1999 ended on July 2, 1999, and fiscal year 2000 ended on June 30,
2000. Fiscal years 1999 and 2000 were 52 weeks, and fiscal year 1998
was 53 weeks. All references to years represent fiscal years unless
otherwise noted.
(b) On May 28, 1999, Seagate Technology contributed all of the
operations and assets of its Network & Storage Management Group, or
NSMG, to VERITAS Software Corporation in exchange for the issuance
to its subsidiary, Seagate Software Holdings, of shares of VERITAS
common stock representing approximately 42% of the outstanding
shares of VERITAS at that time and the assumption by VERITAS of some
of the liabilities associated with the operations of NSMG. We refer
to the above transaction as the NSMG contribution. As a result of
the NSMG contribution, we recognized a gain of $1.808 billion offset
by compensation charges of $124 million and transaction costs of $12
million for a net gain of $1.670 billion. We also incurred a charge
in fiscal year 1999 of approximately $85 million in connection with
the write-off of in-process research and development by VERITAS
which was included in other income (expense) as activity related to
equity interest in VERITAS. The NSMG contribution led to a permanent
reduction in gross margins for Seagate Technology since the NSMG
business provided higher gross margins than the rigid disc drive
business.
(c) These amounts represent portions of the purchase price of prior
acquisitions that were attributed to in-process research and
development projects of the acquired companies. The allocated amount
is written off in the period the acquisition closes because we
cannot be sure that the technologies under development will achieve
technological feasibility. We recorded charges related to the
write-off of in-process research and development: (1) in fiscal year
1998, which principally consisted of $214 million in connection with
the acquisition of Quinta Corporation and of $7 million in
connection with the acquisition of Eastman Software; (2) in fiscal
year 1999, of $2 million in connection with the acquisition of a
minority interest in Seagate Software Holdings; (3) in fiscal year
2000, of $105 million in connection with the acquisition of XIOtech;
and (4) for the period from November 23, 2000 through December 29,
2000, of $59 million in connection with the transactions that closed
on November 22, 2000 described in this prospectus. Please see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- All Entities -- Prior Acquisitions" for
more information.
(footnotes continue on next page)
13
(d) Restructuring charges are the result of board approved restructuring
plans we have implemented to align our global work force and
manufacturing capacity with existing and anticipated future market
requirements. These charges are described in more detail in
footnotes to the audited consolidated financial statements of New
SAC and its predecessor included elsewhere in this prospectus and
under "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- New SAC -- Restructuring Activities."
(e) Unusual items include: (1) in fiscal year 1998, a $22 million
reversal of expense recognized in fiscal year 1997 but paid in a
lesser amount in fiscal year 1998 relating to a settlement of
litigation; (2) in fiscal year 1999, a charge of $78 million of cash
compensation expense related to the acquisition of Quinta; (3) in
fiscal year 2000, $286 million of compensation expense and payroll
taxes related to the reorganization of Seagate Software Holdings and
$64 million related to the settlement of litigation; and (4) in the
six months ended December 31, 1999, $286 million of compensation
expense related to the reorganization of Seagate Software Holdings
and $39 million related to the settlement of litigation.
(f) Other non-operating income (expense) includes (1) in fiscal year
1998, mark-to-market losses on foreign exchange hedging contracts
offset by gains on the sale of certain investments in equity
securities; (2) in fiscal year 1999, the net gain on our
contribution of NSMG to VERITAS offset by activity related to our
investment in VERITAS; (3) in fiscal year 2000, the gains on sales
and exchanges of certain investments in equity securities and
activity related to our investment in VERITAS; (4) in the six months
ended December 31, 1999, the activity related to our investment in
VERITAS offset by a gain on the sale of VERITAS and SanDisk stock;
(5) in the period from July 1, 2000 through November 22, 2000, the
activity related to our investment in VERITAS, losses recognized on
our Lernout & Hauspie Speech Products N.V. or LHSP investment and
the loss on the sale of Seagate Technology's operating assets to New
SAC offset by gains on sales of SanDisk and Veeco stock.
(g) Working capital represents total current assets, excluding cash,
cash equivalents and short-term investments, less total current
liabilities, excluding short-term borrowings and current maturities
of long-term debt.
(h) Net debt is total debt less cash and cash equivalents.
(i) On the closing of the transactions, New SAC received, as part of the
assets it purchased from Seagate Technology, $765 million of cash,
subject to upward adjustment, that was on the balance sheet of
Seagate Technology. We used approximately $149 million of this
amount as a source of cash in connection with the closing of the
transactions. For more information regarding these adjustments, see
"The Transactions."
(j) EBITDA represents income (loss) before income taxes, interest income
(expense), and depreciation and amortization and excludes the impact
of certain non-recurring events summarized below. We have included
certain information concerning EBITDA because management believes
EBITDA is generally accepted as providing useful information
regarding a company's ability to service and incur debt. EBITDA
should not be considered, however, in isolation or as a substitute
for net income, cash flows or other consolidated income or cash flow
data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or
liquidity. Although EBITDA is frequently used as a measure of
operations and ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculation. EBITDA, as
calculated above, differs from the definition of EBITDA and the
related definition of Consolidated Coverage Ratio described under
the caption "Description of the Notes -- Certain Definitions." We
have calculated EBITDA for the periods presented as follows:
(footnotes continue on next page)
14
SEAGATE TECHNOLOGY NEW SAC
-------------------------------------------------------------- -------------
SIX MONTHS JULY 1 NOVEMBER 23,
FISCAL YEAR ENDED TO 2000 TO
-------------------------------- DECEMBER 31, NOVEMBER 22, DECEMBER 29,
1998 1999 2000 1999 2000 2000
---------- ----------- --------- -------------- -------------- -------------
(IN MILLIONS)
Income (loss) before income taxes (1) ......... $ (704) $ 1,873 $ 609 $ 13 $ (1,640) $(132)
Interest income ............................... (98) (102) (101) (42) (58) (3)
Interest expense .............................. 51 48 52 26 24 10
Depreciation and amortization ................. 664 696 693 351 271 69
Non-recurring items:
Non-cash items:
Gain on contribution of NSMG to
VERITAS, net ............................... -- (1,670) -- -- -- --
Activity related to equity interest in
VERITAS (2) ................................ -- 119 326 183 99 --
Gain on exchange of certain
investments in equity securities,
net (3) .................................... -- -- (231) -- -- --
In-process research and
development ................................ 223 2 105 -- -- 59
Loss on LHSP investment ..................... -- -- -- -- 138 --
Loss on sale of operating assets to
New SAC .................................... -- -- -- -- 889 --
Restructuring ............................... 203 35 109 76 7 --
Unusual items (4) ........................... -- -- 286 286 584 --
Other, net (5) .............................. 68 -- 29 -- (11) --
Cash items:
Gain on sale of VERITAS stock ............... -- -- (537) (537) -- --
Gain on sale of SanDisk stock ............... -- -- (679) (62) (102) --
Gain on sale of Veeco stock ................. -- -- -- -- (20) --
Transaction related costs ................... -- -- _ -- 88 --
Restructuring ............................... 144 25 98 59 13 --
Unusual items (4) ........................... (22) 78 64 39 -- 40
Other, net (5) .............................. -- -- 8 -- -- 10
------ -------- ------ ------ -------- -------
EBITDA ....................................... $ 529 $ 1,104 $ 831 $ 392 $ 282 $ 53
====== ======== ====== ====== ======== =======
- ----------
(1) Income (loss) before income taxes includes: (1) in fiscal year 1999,
$1.670 billion net gain related to the NSMG contribution to VERITAS; (2)
in fiscal year 2000, gains on the sale of portions of our investments in
VERITAS and SanDisk and gains on the exchange of certain investments in
equity securities of $537 million, $679 million, and $231 million,
respectively; (3) in the six months ended December 31, 1999, combined
gains on the sale of portions of our investments in VERITAS and SanDisk
of $537 million, and $62 million respectively; and (4) in the period from
July 1, 2000 to November 22, 2000, gains on the sale of portions of our
investment in SanDisk and Veeco of $102 million and $20 million,
respectively, offset by losses on our investment in LHSP of $138 million
and the sale of our operating assets to New SAC of $889 million. The
equity investments in VERITAS and SanDisk were not acquired by New SAC
under the stock purchase agreement.
(2) Activity related to equity interest in VERITAS includes Seagate
Technology's share of the net income or loss of VERITAS, adjusted to
reflect the difference between the amortization of the intangible assets
by Seagate Technology and VERITAS. The net income or loss of VERITAS was
included in the results of Seagate Technology on a one quarter lag basis.
In fiscal year 1999, Seagate Technology recorded $34 million of
amortization expense related to its equity interest in VERITAS and a
charge of $85 million in connection with the write-off of in-process
research and development by VERITAS. In fiscal year 2000, Seagate
Technology recorded $356 million of amortization expense related to its
equity interest in VERITAS, which was partially offset by our $30 million
share of the net income of VERITAS for the same period. For the six
months ended December 31, 1999, Seagate Technology recorded $190 million
of amortization expense related to Seagate Technology's equity investment
in VERITAS, and Seagate Technology's $7 million share of the net loss of
VERITAS for the same period. For the period from July 1, 2000 through
November 22, 2000, Seagate Technology recorded $129 million of
amortization expense related to its equity investment in VERITAS, which
was partially offset by its $30 million share of the net income of
VERITAS for the same period. The equity investment in VERITAS was not
acquired by New SAC under the stock purchase agreement.
(footnotes continue on next page)
15
(3) Represents gain recognized by Seagate Technology in fiscal year 2000
comprised of (1) the exchange of all the shares of stock of Dragon
Systems for shares of stock of LHSP in connection with the merger of
Dragon Systems and LHSP; (2) the exchange of all the shares of stock of
CVC for shares of stock of Veeco in connection with the merger of CVC and
Veeco; and (3) the exchange of shares of stock of iCompression for shares
of stock of GlobeSpan. The shares of stock in LHSP and Veeco were not
acquired by New SAC.
(4) Represents (1) in fiscal year 1998, a $22 million cash reversal of
expense recognized in fiscal year 1997 but paid in a lesser amount in
fiscal year 1998 relating to a settlement of litigation; (2) in fiscal
year 1999, $78 million of cash compensation expense related to the
acquisition of Quinta; (3) in fiscal year 2000, $286 million of non-cash
compensation expense and payroll taxes related to the reorganization of
Seagate Software Holdings and $64 million of cash expense related to the
settlement of litigation; (4) for the six months ended December 31, 1999,
$39 million of cash expense related to the settlement of litigation, $286
million of non-cash compensation expense and payroll related taxes
related to the reorganization of Seagate Software Holdings; (5) for the
period from July 1, 2000 through November 22, 2000, $584 million non-cash
compensation expense related to the acceleration of options in Seagate
Technology in connection with the transactions; and (6) for the period
from November 23, 2000 through December 29, 2000, $40 million for
consulting and advisory fees paid to certain sponsors in connection with
the transactions.
(5) Other, net (1) in fiscal year 1998, includes mark-to-market losses on
foreign exchange hedging contracts of $76 million offset by gains on the
sale of certain investments in equity securities of $8 million; (2) in
fiscal year 2000, includes non-cash compensation charges for termination
of certain employees of $29 million and costs related to the transactions
of $8 million; (3) in the period from July 1, 2000 through November 22,
2000, includes mark-to-market gain on equity securities of $27 million
offset by losses on our investment in Gadzoox of $8 million and loss on
sale of marketable securities of $8 million.
16
RISK FACTORS
You should carefully consider the risk factors described below, together
with the other information in this prospectus, before deciding to participate
in the exchange offer.
RISKS RELATING TO THE NOTES
FAILURE TO EXCHANGE -- THERE MAY BE ADVERSE CONSEQUENCES IF YOU DO NOT EXCHANGE
YOUR OUTSTANDING NOTES.
If you do not exchange your outstanding notes for exchange notes under the
exchange offer, then you will continue to be subject to the transfer
restrictions on the outstanding notes as set forth in the offering memorandum
distributed in connection with the offering of the outstanding notes. In
general, the outstanding notes may not be offered or sold unless they are
registered or exempt from registration under the Securities Act of 1933 and
applicable state securities laws. Except as required by the exchange and
registration rights agreement, we do not intend to register resales of the
outstanding notes under the Securities Act of 1933. You should refer to
"Prospectus Summary -- Summary of Terms of the Exchange Offer" and "The
Exchange Offer" for information about how to tender your outstanding notes.
The tender of outstanding notes under the exchange offer will reduce the
principal amount of the outstanding notes outstanding, which may have an
adverse effect upon, and increase the volatility of, the market price of the
outstanding notes due to a reduction in liquidity.
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR
ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES AND OPERATE OUR BUSINESS.
We are highly leveraged and have significant debt service obligations. As
of December 29, 2000, we had total debt of approximately $904 million,
excluding unused commitments, and total shareholders' equity of $759 million.
For fiscal year 2000 and the combined results for the six months ended December
29, 2000, our interest expense was $52 million and $34 million, respectively.
For fiscal year 2000 and the six months ended December 29, 2000, our ratio of
earnings to fixed charges would have been 2.8 to 1 and 5.0 to 1, respectively
on a pro forma basis. We may incur additional debt from time to time to finance
strategic acquisitions, investments and alliances, capital expenditures or for
other purposes, subject to the restrictions contained in the senior credit
facilities and in the indenture.
Our substantial debt could have important consequences to you, including
the following:
o we are required to use a substantial portion of our cash flow from
operations to pay principal and interest on our debt, thereby reducing
the availability of our cash flow to fund working capital, capital
expenditures, product development efforts, strategic acquisitions,
investments and alliances and other general corporate requirements;
o our interest expense could increase if interest rates in general increase
because a substantial portion of our debt bears interest at floating
rates;
o our substantial leverage increases our vulnerability to general economic
downturns and adverse competitive and industry conditions and could place
us at a competitive disadvantage compared to those of our competitors
that are less leveraged;
o our debt service obligations could limit our flexibility in planning for,
or reacting to, changes in our business and the information storage
industry;
o our level of debt may restrict us from raising additional financing on
satisfactory terms to fund working capital, capital expenditures, product
development efforts, strategic acquisitions, investments and alliances
and other general corporate requirements;
17
o our level of debt may prevent us from raising the funds necessary to
repurchase all of the notes tendered to the Issuer upon the occurrence of
a change of control, which would constitute an event of default under the
notes; and
o our failure to comply with the financial and other restrictive covenants
in our debt instruments, which, among other things, require us to
maintain specified financial ratios and limit our ability to incur debt
and sell assets, could result in an event of default that, if not cured
or waived, could have a material adverse effect on our business or
prospects.
See "Description of the Notes -- Certain Covenants" and "-- Default" and
"Description of the Senior Credit Facilities."
ABILITY TO SERVICE DEBT -- SERVICING OUR DEBT REQUIRES A SIGNIFICANT AMOUNT OF
CASH, AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR
CONTROL.
We expect to obtain the cash to make payments on the notes and the senior
credit facilities and to fund working capital, capital expenditures, product
development efforts, strategic acquisitions, investments and alliances and
other general corporate requirements from our operations. Our ability to
generate cash is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We
cannot assure you that our business will generate sufficient cash flow from
operations, that we will realize currently anticipated cost savings, revenue
growth and operating improvements on schedule or at all or that future
borrowings will be available to us under the senior credit facilities, in each
case, in amounts sufficient to enable us to service our debt, including the
notes, or to fund our other liquidity needs. If we cannot service our debt, we
will have to take actions such as reducing or delaying capital expenditures,
product development efforts, strategic acquisitions, investments and alliances,
selling assets, restructuring or refinancing our debt, which could include the
notes, or seeking additional equity capital. We cannot assure you that any of
these remedies could, if necessary, be effected on commercially reasonable
terms, or at all. In addition, the terms of existing or future debt agreements,
including the credit agreement relating to the senior credit facilities and the
indenture, may restrict us from adopting any of these alternatives. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Additional Discussion -- Relevant to All of New SAC, Seagate
Technology Holdings, Seagate Technology SAN Holdings, Seagate Removable Storage
Solutions Holdings and Crystal Decisions -- Liquidity and Capital Resources,"
"Description of the Notes -- Certain Covenants" and "Description of the Senior
Credit Facilities."
ADDITIONAL BORROWING CAPACITY -- DESPITE OUR SUBSTANTIAL LEVERAGE, WE WILL BE
ABLE TO INCUR MORE DEBT, WHICH MAY INTENSIFY THE RISKS ASSOCIATED WITH OUR
SUBSTANTIAL LEVERAGE, INCLUDING OUR ABILITY TO SERVICE OUR DEBT.
The senior credit facilities and the indenture permit us, subject to the
conditions described under "Description of the Senior Credit Facilities" and
"Description of the Notes -- Certain Covenants -- Limitation on Indebtedness,"
to incur a significant amount of additional debt. In addition, we may incur
additional debt under our $200 million revolving credit facility, of which
approximately $144 million was available as of December 29, 2000. See
"Description of the Senior Credit Facilities." If we incur additional debt
above the levels in effect upon the closing of the transactions, the risks
associated with our substantial leverage, including our ability to service our
debt, could intensify.
STRUCTURAL SUBORDINATION -- THE ISSUER DEPENDS ON THE RECEIPT OF DIVIDENDS OR
OTHER INTERCOMPANY TRANSFERS FROM ITS SUBSIDIARIES AND THE OTHER SUBSIDIARIES
OF NEW SAC TO PAY THE PRINCIPAL OF AND INTEREST ON THE NOTES. CLAIMS OF
CREDITORS OF THESE COMPANIES MAY HAVE PRIORITY OVER YOUR CLAIMS WITH RESPECT TO
THE ASSETS AND EARNINGS OF THESE COMPANIES.
The Issuer conducts a substantial portion of its operations through its
subsidiaries. The Issuer therefore is dependent upon dividends or other
intercompany transfers of funds from these companies and other of our
subsidiaries in order to pay the principal of and interest on the notes and to
meet its other obligations. Generally, creditors of these companies will have
claims to the assets and earnings of these companies that are superior to the
claims of creditors of the Issuer, except to the extent the claims of the
Issuer's creditors are guaranteed by these entities.
18
Although the note guarantees provide the holders of the notes with a
direct claim against the assets of the note guarantors, enforcement of the note
guarantees against any note guarantor may be challenged in a bankruptcy or
reorganization case or a lawsuit by or on behalf of creditors of the note
guarantor and could be subject to the defenses available to guarantors
generally. To the extent that the note guarantees are not enforceable, the
notes would be effectively subordinated to all liabilities of the note
guarantors, including trade payables and contingent liabilities, and preferred
stock of the note guarantors. In any event, the notes will be effectively
subordinated to all liabilities of the non-guarantors. In addition, the
designated subsidiaries which initially were note guarantors may be released
from their note guarantees and cease to be note guarantors under the conditions
specified in the indenture.
Accordingly, in the event of the Issuer's dissolution, bankruptcy,
liquidation or reorganization, the holders of the notes may not receive any
amounts with respect to the notes until after the payment in full of the claims
of creditors of its subsidiaries and our other subsidiaries. The note
guarantees are unsecured obligations of the note guarantors that are
subordinated to all senior debt of the note guarantors.
Although the indenture limits the ability of subsidiaries to enter into
consensual restrictions on their ability to pay dividends and make other
payments, these limitations have a number of significant qualifications and
exceptions. See "Description of the Notes -- Certain Covenants -- Limitations
on Restrictions on Distributions from Restricted Subsidiaries." In addition, we
have been advised by our counsel in the jurisdictions of incorporation of the
non-U.S. note guarantors that the ability of the Issuer's and note guarantors'
subsidiaries to pay dividends and make other distributions and payments to them
may be restricted by, among other things, applicable corporate, tax and other
laws and regulations and agreements of the subsidiaries.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS -- RESTRICTIONS IMPOSED BY THE
INDENTURE AND THE AGREEMENT GOVERNING THE SENIOR CREDIT FACILITIES LIMIT OUR
ABILITY TO FINANCE FUTURE OPERATIONS OR CAPITAL NEEDS OR ENGAGE IN OTHER
BUSINESS ACTIVITIES THAT MAY BE IN OUR INTEREST.
The indenture imposes, and the terms of any future debt may impose,
operating and other restrictions on us and our restricted subsidiaries,
including the Issuer. These restrictions affect, and in many respects limit or
prohibit, among other things, the Issuer's, the other restricted subsidiaries'
and our ability to:
o incur additional debt;
o issue redeemable equity interests and preferred equity interests;
o pay dividends or make distributions;
o repurchase equity interests;
o make other restricted payments including, without limitation,
investments;
o create liens;
o redeem debt that is junior in right of payment to the notes;
o sell or otherwise dispose of assets, including capital stock of
subsidiaries;
o enter into mergers or consolidations; and
o enter into transactions with affiliates.
In addition, the senior credit facilities include other and more restrictive
covenants and prohibit us from prepaying our other debt, including the notes,
while debt under the senior credit facilities is outstanding. The agreement
governing the senior credit facilities also requires us to achieve specified
financial and operating results and maintain compliance with specified
financial ratios. Our ability to comply with these ratios may be affected by
events beyond our control.
The restrictions contained in the indenture and the agreement governing
the senior credit facilities could:
19
o limit our ability to plan for or react to market conditions or meet
capital needs or otherwise restrict our activities or business plans; and
o adversely affect our ability to finance our operations, strategic
acquisitions, investments or alliances or other capital needs or to engage
in other business activities that would be in our interest.
A breach of any of these restrictive covenants or our inability to comply with
the required financial ratios could result in a default under the agreement
governing the senior credit facilities. If a default occurs, the lenders under
the senior credit facilities may elect to:
o declare all borrowings outstanding, together with accrued interest and
other fees, to be immediately due and payable; or
o prevent us from making interest payments on the notes,
any of which would result in an event of default under the notes. The lenders
also have the right in these circumstances to terminate any commitments they
have to provide further borrowings. If we are unable to repay outstanding
borrowings when due, the lenders under the senior credit facilities also have
the right to proceed against the collateral, including our available cash,
granted to them to secure the debt. If the debt under the senior credit
facilities and the notes were to be accelerated, we cannot assure you that our
assets would be sufficient to repay in full that debt and our other debt,
including the notes. See "Description of the Notes -- Ranking," "-- Certain
Covenants" and "Description of the Senior Credit Facilities."
CONTRACTUAL SUBORDINATION -- IF A BANKRUPTCY, LIQUIDATION OR DISSOLUTION OF THE
ISSUER OR ANY NOTE GUARANTOR OCCURS, THE ASSETS OF THE ISSUER OR NOTE GUARANTOR
WILL NOT BE AVAILABLE TO PAY OBLIGATIONS TO YOU UNDER THE NOTES UNTIL THE
ISSUER OR NOTE GUARANTOR HAS MADE ALL PAYMENTS ON ITS SENIOR DEBT.
The notes are general, unsecured obligations of the Issuer that are junior
to the prior payment in full of all of the Issuer's existing and future senior
debt. The note guarantees are general, unsecured obligations of the note
guarantors that are junior in right of payment to all of the existing and
future senior debt of the note guarantors.
The indenture permits us and our subsidiaries, including the Issuer, to
borrow certain additional debt, which may be senior debt, if we meet specified
conditions. However, it does not permit the Issuer or any note guarantor to
incur or otherwise become liable for any debt that is junior in right of
payment to any senior debt and senior in any respect in right of payment to the
notes and the note guarantees. See "Description of the Notes -- Ranking."
Neither the Issuer nor the note guarantors may pay principal, premium, if
any, interest or other amounts on account of the notes or a note guarantee in
the event of a payment default or some other defaults in respect of senior
debt, including debt under the senior credit facilities, unless the senior debt
has been paid in full or the default has been cured or waived. In addition, in
the event of some other defaults with respect to the senior debt, the Issuer
and the note guarantor may not be permitted to pay any amount on account of the
notes or the note guarantees for a designated period of time. Because of the
subordination provisions of the notes and the note guarantees, if a bankruptcy,
liquidation or dissolution of the Issuer or any note guarantor occurs, the
assets of the Issuer or the note guarantors will not be available to pay
obligations under the notes or the note guarantors until the Issuer or the note
guarantors have made all payments on their senior debt. If any of these events
were to occur, we cannot assure you that sufficient assets would remain after
all these payments have been made to make any payments on the notes, including
payments of interest when due.
UNSECURED OBLIGATIONS -- BECAUSE THE NOTES ARE NOT SECURED, OUR ASSETS MAY BE
INSUFFICIENT TO PAY AMOUNTS DUE ON YOUR NOTES.
In addition to being contractually subordinated to all existing and future
senior debt, the notes and the note guarantees are unsecured obligations of the
Issuer and the note guarantors, as applicable, whereas debt outstanding under
the senior credit facilities is secured. This debt is secured by the following:
20
o substantially all of the real and personal property that is located in
the Cayman Islands, the Netherlands (with the exception of intellectual
property), Northern Ireland, Scotland, Singapore and the United States and
that is owned by the Issuer and each of our other existing subsidiaries
that guarantee the senior credit facility;
o some real property located in Thailand;
o some personal property located in the United Kingdom; and
o a pledge of all the capital stock held by us and each of our
subsidiaries that is organized under, or that holds the capital stock of
an entity organized under, the laws of the Cayman Islands, the
Netherlands, Northern Ireland, Scotland, Singapore and the United States
and some other subsidiaries.
In addition, borrowings under the senior credit facilities are secured by:
o substantially all of the real and personal property of any newly formed
subsidiary of us if the newly formed subsidiary accounts for 10% or more
of our total assets or consolidated EBITDA; and
o all the capital stock of subsidiaries of us owned directly by that newly
formed subsidiary.
As of December 29, 2000, on a consolidated basis, we had $703 million of
secured debt, excluding unused commitments. In addition, we may incur other
senior debt, which may be substantial in amount, and which may, in some
circumstances, be secured.
Because the notes and the note guarantees are unsecured obligations, your
right of repayment may be compromised if any of the following situations were
to occur:
o a bankruptcy, liquidation, reorganization or other winding-up involving
the Issuer, us or any of our subsidiaries;
o a default in payment under the senior credit facilities or other secured
debt; or
o an acceleration of any debt under the senior credit facilities or other
secured debt.
If any of these events were to occur, the secured lenders could foreclose on
the pledged stock of the Issuer and our other subsidiaries and on the assets of
the Issuer and the note guarantors in which they have been granted a security
interest, in each case to your exclusion, even if an event of default exists
under the indenture at that time. As a result, upon the occurrence of any of
these events, there may not be sufficient funds to pay amounts due on the notes
and the note guarantees. Furthermore, under the note guarantees, if all shares
of any note guarantor are sold to persons under an enforcement of the pledge of
shares in the note guarantor for the benefit of the lenders under the senior
credit facilities, then the applicable note guarantor will be released from its
note guarantee automatically and immediately upon the sale. Additionally, the
note guarantee of a designated subsidiary will be released upon some sales of
that designated subsidiary's common stock. See "Description of the Senior
Credit Facilities."
INABILITY TO REPURCHASE NOTES PRIOR TO MATURITY -- BECAUSE THE SENIOR CREDIT
FACILITIES PROHIBIT THE ISSUER FROM REPURCHASING THE NOTES, A DEFAULT UNDER THE
INDENTURE MAY BE TRIGGERED IF YOU EXERCISE YOUR RIGHT TO REQUIRE THE ISSUER TO
REPURCHASE THE NOTES IN THE EVENT THE ISSUER OR ANY OF ITS DIRECT OR INDIRECT
PARENT COMPANIES EXPERIENCE A CHANGE OF CONTROL OR WE OR ANY OF OUR RESTRICTED
SUBSIDIARIES, INCLUDING THE ISSUER, MAKE ASSET SALES THAT DO NOT MEET SPECIFIED
CONDITIONS.
The senior credit facilities prohibit, and other future senior debt may
prohibit, the Issuer from repurchasing any notes, even though the indenture
requires the Issuer to offer to repurchase some or all of the notes if
specified events occur. Specifically, if we and our restricted subsidiaries,
including the Issuer, make specified asset sales or if a change of control of
the Issuer or any of its direct or indirect parent companies occurs when the
Issuer is prohibited under the senior credit facilities or agreements for other
future senior debt from repurchasing notes, the Issuer could ask the lenders
21
under the senior credit facilities, or that future senior debt, for permission
to repurchase the notes or we could attempt to refinance the borrowings that
contain these prohibitions. If the Issuer does not obtain the consent to repay
the borrowings or is unable to refinance the borrowings, it would be unable to
repurchase the notes. The Issuer's failure to repurchase tendered notes at a
time when the repurchase is required by the indenture would constitute an event
of default under the indenture, which, in turn, would constitute a default
under the senior credit facilities and may constitute an event of default under
other, future senior debt. Under these circumstances, the subordination
provisions in the indenture would restrict payments to you before these other
obligations are satisfied. See "Description of the Notes -- Ranking," "--
Change of Control" and "-- Certain Covenants" and "Description of the Senior
Credit Facilities."
In addition, the change of control provisions, which are contained in the
indenture, will not necessarily afford you protection in the event of a highly
leveraged transaction that may adversely affect you, including a
reorganization, restructuring, merger or other similar transaction involving
any of the direct or indirect parent companies of the Issuer. These
transactions may not involve a change in voting power or beneficial ownership,
or, even if they do, may not involve a change of the magnitude required under
the definition of change of control in the indenture to trigger these
provisions. Except as described under "Description of the Notes -- Change of
Control," the indenture does not contain provisions that permit the holders of
the notes to require the Issuer to repurchase or redeem the notes in the event
of a takeover, recapitalization or similar transaction.
U.S. FRAUDULENT TRANSFER OR CONVEYANCE CONSIDERATIONS -- UNDER U.S. FEDERAL AND
STATE FRAUDULENT TRANSFER OR CONVEYANCE STATUTES, A COURT COULD VOID THE
OBLIGATIONS OF THE ISSUER AND THE NOTE GUARANTORS OR TAKE OTHER ACTIONS
DETRIMENTAL TO HOLDERS OF THE NOTES.
Under U.S. federal or state fraudulent transfer or conveyance laws, a
court could take actions detrimental to you if it found that, at the time the
notes or the note guarantees were issued:
(1) the Issuer or the note guarantor issued the notes or the note
guarantee with the intent of hindering, delaying or defrauding current
or future creditors; or
(2) (a) the Issuer or the note guarantor received less than fair
consideration or reasonably equivalent value for incurring the debt
represented by the notes or the note guarantees; and
(b) the Issuer or the note guarantor:
o was insolvent or rendered insolvent by issuing the notes or the note
guarantees;
o was engaged, or about to engage, in a business or transaction for
which the assets remaining with the Issuer or the note guarantor
would constitute unreasonably small capital to carry on the Issuer's
or the note guarantor's business; or
o intended to incur, believed that it would incur or did incur, debt
beyond the Issuer's or the note guarantor's ability to pay.
If a court made this finding, it could:
o void all or part of the Issuer's or the note guarantor's obligations to
the holders of the notes and direct the repayment of any amounts
thereunder to the Issuer's and the note guarantors' other creditors;
o subordinate the Issuer's or the note guarantor's obligations to the
holders of the notes to the Issuer's or the note guarantors' other debt;
or
o take other actions detrimental to the holders of the notes.
In that event, we cannot assure you that the Issuer could pay amounts due
on the notes. Under fraudulent transfer statutes, it is not certain whether a
court would determine that the Issuer or the note guarantor was insolvent on
the date that the notes and note guarantees were issued. However, the Issuer or
the note guarantor generally would be considered insolvent at the time it
incurred the notes or the note guarantees if:
22
o the fair saleable value of the Issuer's or the note guarantor's assets,
as applicable, was less than the amount required to pay the Issuer's
total existing debts and liabilities, including contingent liabilities,
or those of the note guarantor, as applicable, as they become absolute
and mature; or
o the Issuer or the note guarantor incurred debts beyond its ability to pay
as these debts mature.
We cannot predict:
o what standard a court would apply in order to determine whether the
Issuer or any of the note guarantors were insolvent as of the date the
Issuer or the note guarantors issued the notes or the note guarantees, or
that regardless of the method of valuation, a court would determine that
the Issuer or the note guarantors were insolvent on that date; or
o whether a court would determine that the payments constituted fraudulent
transfers or conveyances on other grounds.
To the extent a court voids a note guarantee as a fraudulent transfer or
conveyance or holds it unenforceable for any other reason, holders of notes
would cease to have any claim against the note guarantor. If a court were to
take this action, the note guarantor's assets would be applied to the note
guarantor's liabilities and preferred stock claims. We cannot assure you that a
note guarantor's assets would be sufficient to satisfy the claims of the
holders of notes relating to any voided portions of any of the note guarantees.
In rendering their opinions in connection with the transactions, our
counsel and counsel to the initial purchasers of the notes did not express any
opinion as to the applicability of U.S. federal bankruptcy or state fraudulent
transfer and conveyance laws.
Based upon financial and other information available to us, we believe
that the Issuer and the note guarantors issued the notes and the note
guarantees for proper purposes and in good faith and that, at the time the
notes and the note guarantees are issued, the Issuer and the note guarantors:
o were not insolvent or rendered insolvent by the issuance;
o had sufficient capital to run their businesses; and
o were able to pay their debts as they mature or become due.
In reaching these conclusions, we have relied on various valuations and
estimates of future cash flow that necessarily involve a number of assumptions
and choices of methodology. However, if the notes or the note guarantees were
to be subject to any of these kinds of claims, a court may not adopt the
assumptions and methodologies that we have chosen or concur with our conclusion
as to our solvency and the solvency of our subsidiaries.
Additionally, under U.S. federal bankruptcy or applicable state insolvency
law, if certain bankruptcy or insolvency proceedings were initiated by or
against the Issuer or the note guarantors within 90 days after any payment by
the Issuer with respect to the notes or by the note guarantors under their note
guarantees, or if the Issuer or the note guarantors anticipated becoming
insolvent at the time of the payment, all or a portion of the payment could be
avoided as a preferential transfer and the recipient of the payment could be
required to return the payment. In the event there are any additional note
guarantors in the future, the foregoing would also apply to their guarantees.
ORIGINAL ISSUE DISCOUNT -- IN THE EVENT OF BANKRUPTCY, CLAIMS OF HOLDERS OF
NOTES MAY BE REDUCED BY THE AMOUNT OF UNAMORTIZED ORIGINAL ISSUE DISCOUNT.
The outstanding notes were issued at a discount from their principal
amount. Consequently, if a bankruptcy case is commenced by or against us under
the U.S. bankruptcy code after the issuance of the notes, the claim of a holder
of the notes may be limited to an amount equal to the sum of (1) the initial
public offering price of the notes and (2) that portion of the original issue
discount that is not deemed to constitute "unmatured interest" for purposes of
the U.S. bankruptcy code. Any original issue discount that had not been
amortized as of the date of the commencement of this bankruptcy filing would
constitute "unmatured interest."
23
NON-U.S. FRAUDULENT PREFERENCES AND BANKRUPTCY LAWS -- UNDER NON-U.S.
FRAUDULENT PREFERENCE AND BANKRUPTCY LAWS, A COURT COULD VOID THE OBLIGATIONS
OF THE ISSUER AND THE NOTE GUARANTORS OR TAKE OTHER ACTIONS DETRIMENTAL TO
HOLDERS OF THE NOTES.
Under applicable provisions of the Cayman Islands Companies Law (2000
Revision), if at any time, a winding-up of the Issuer or the note guarantors
incorporated in the Cayman Islands were to begin in circumstances in which the
issuance of the notes or the issuance of the note guarantees, or any related
security, would be deemed to be a fraudulent preference within the meaning of
the Companies Law, then the notes and these note guarantees could be voided or
claims in respect of the notes could be subordinated to all our other claims.
In addition, under Cayman Islands law, similar provisions to those outlined
under "-- U.S. Fraudulent Transfer or Conveyance Considerations" above may also
apply to the notes and these note guarantees. Furthermore, a disposition of the
Issuer's or note guarantors' property at an undervalue with an intention to
defraud other creditors is voidable at the instance of the creditor prejudiced
by that disposition. The payment of interest and principal by the Issuer under
the notes or the payment of amounts by the note guarantors under the note
guarantees could be voided and required to be returned to the person making
those payments or to a fund for the benefit of the Issuer's creditors or the
note guarantors' creditors. In addition, the procedural and substantive
provisions of Cayman Islands insolvency laws generally are more favorable to
secured creditors than comparable provisions of U.S. laws and afford debtors
only limited protection from creditors. In addition, under Cayman Islands
insolvency law, the liabilities in the event of a winding-up will be paid only
after repayment of some kinds of debts which are entitled to priority under
Cayman Islands law. These debts include:
o amounts owed in respect of rates, taxes, assessments or impositions;
o amounts owed to depositors;
o amounts owed to employees, subject to certain limits; and
o liquidation expenses.
We have been advised by our local counsel in the jurisdictions of incorporation
of the note guarantors other than the Cayman Islands that broadly similar
issues with respect to fraudulent or unfair preference and bankruptcy laws
exist in these jurisdictions.
NO PRIOR MARKET FOR THE NOTES -- THERE IS NO PRIOR MARKET FOR THE NOTES. IF ONE
DEVELOPS, IT MAY NOT BE LIQUID.
The exchange notes will generally be permitted to be resold or otherwise
transferred by each holder without requirements of further registration subject
to the restrictions described under "Exchange and Registration Rights
Agreement" and "Transfer Restrictions." However, the exchange notes will
constitute a new issue of securities with no established trading market. If any
of the notes are traded after their initial issuance or the completion of the
exchange offer, they may trade at a discount from their initial offering price,
depending upon:
o prevailing interest rates;
o the market for similar securities; and
o other factors, including general economic conditions and our financial
condition, performance and prospects.
We do not intend to list the outstanding notes or exchange notes on any
national securities exchange or to seek their quotation on any automated dealer
quotation system. In addition, the market for non-investment grade debt has
been historically subject to disruptions that have caused volatility in their
prices independent of the operating and financial performance of the Issuers of
these securities. It is possible that the market for the outstanding notes and
the exchange notes will be subject to these kinds of disruptions. Accordingly,
declines in the liquidity and market price of the outstanding notes or exchange
notes may also occur independent of our operating and financial performance.
The exchange offer will not be conditioned upon any minimum or maximum
aggregate
24
principal amount of notes being tendered for exchange. We cannot assure you
that any liquid market for the exchange notes will develop. In addition,
notwithstanding that the initial purchasers have informed us that they
currently intend to make a market in the exchange notes, they are not obligated
to do so and may discontinue without notice any market making with respect to
the exchange notes, at any time in their sole discretion.
RISKS RELATED TO OUR BUSINESS
COMPETITION -- OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS EXPERIENCED
SIGNIFICANT PRICE EROSION.
Even during periods when demand is stable, the rigid disc drive industry
is intensely competitive and vendors experience price erosion over the life of
a product. Historically our competitors have offered new or existing products
at lower prices as part of a strategy to gain or retain market share and
customers. We expect these practices to occur again in the future. We also
expect that price erosion in the rigid disc drive industry will continue for
the foreseeable future. Because we may need to reduce our prices to retain our
market share, the competition could adversely affect our results of operations.
We have experienced and expect to continue to experience intense competition
from a number of domestic and foreign companies, including other independent
rigid disc drive manufacturers and large integrated manufacturers, such as:
INTEGRATED INDEPENDENT
- ---------------------------------------------------- ----------------------------
Fujitsu Limited Maxtor Corporation
International Business Machines Corporation Western Digital Corporation
NEC Corporation
Samsung Electronics Co. Ltd.
Toshiba Corporation
The term "independent" in this context refers to manufacturers that
primarily produce rigid disc drives as a stand-alone product, and the term
"integrated" refers to manufacturers that produce complete computer or other
systems which contain rigid disc drives or other information storage products.
Integrated manufacturers are formidable competitors because they have the
ability to determine pricing for complete systems without regard to the margins
on individual components. Because components other than rigid disc drives
generally contribute a greater portion of the operating margin on a complete
computer system than do rigid disc drives, integrated manufacturers do not
necessarily need to realize a profit on the rigid disc drives included in a
computer system and, as a result, may be willing to sell rigid disc drives to
third parties at very low margins. Many integrated manufacturers are also
formidable competitors because they have more substantial resources and greater
access to customers than we do. We face risks that integrated manufacturers
will enter into agreements with our customers to supply those customers' rigid
disc drive requirements as part of more expansive agreements. In addition,
Maxtor's recent acquisition of Quantum's disc drive operations makes Maxtor the
largest manufacturer of rigid disc drives in terms of the number of rigid disc
drives shipped, according to Dataquest, and may make it a more formidable
competitor.
We also face indirect competition from present and potential customers,
including several of the computer manufacturers listed above, that evaluate
whether to manufacture their own rigid disc drives and other information
storage products or purchase them from outside sources. If our customers decide
to manufacture their own rigid disc drives or other information storage
products, it could have a material adverse effect on our business, results of
operations and financial condition.
We also compete with manufacturers of products that use alternative data
storage and retrieval technologies. Products using alternative technologies,
such as semiconductor memory, could become a significant source of competition.
Semiconductor memory is much faster than rigid disc drives, but currently is
volatile in that it is subject to loss of data in the event of power failure
and much more costly. Flash EE prom, a nonvolatile semiconductor memory, is
currently much more costly and, while
25
it has higher read performance than rigid disc drives, it has lower write
performance. Flash EE prom could become competitive in the near future for
applications requiring less storage capacity than is required in traditional
markets for our products, such as that for less than 200 megabytes.
INDUSTRY DEMAND -- SLOWDOWN IN DEMAND FOR COMPUTER SYSTEMS MAY CAUSE A DECLINE
IN DEMAND FOR OUR PRODUCTS.
Our rigid disc drives and tape drives are components in computer systems
and collectively accounted for approximately 97% of our consolidated revenue
for both fiscal year 2000 and the six months ended December 29, 2000 and
approximately 94% and 86% of our consolidated gross profit for fiscal year 2000
and the six months ended December 29, 2000. The demand for our products,
therefore, depends to a significant degree upon demand for computer systems,
which has been volatile. In the past, unexpected slowdowns in demand for
computer systems have generally caused sharp declines in demand for rigid disc
drive and tape drive products. As a result of recent demand slowdowns
experienced by a number of computer systems suppliers, short-term demand for
rigid disc drive and tape drive products has declined. Causes of the declines
in demand for our products in the past have included the announcement or
introduction of major operating system or semiconductor improvements, such as
Windows 95 or the Pentium II semiconductor chip. We believe these announcements
and introductions caused consumers to defer their purchases and made existing
inventory obsolete.
In addition, in our industry, the supply of rigid disc drives and tape
drives periodically exceeds demand. When this happens, the oversupply of
available products causes us to have higher than anticipated inventory levels
and we experience intense price competition from other rigid disc drive and/or
tape drive manufacturers.
SHORT PRODUCT LIFE CYCLES -- SHORT PRODUCT LIFE CYCLES MAKE IT DIFFICULT TO
RECOVER THE COST OF DEVELOPMENT AND FORCE US TO CONTINUALLY QUALIFY NEW
PRODUCTS WITH OUR CUSTOMERS.
Over the last several years, the rate of increase of areal density, or the
storage capacity per rigid disc drive, has grown at a much more rapid pace than
it had previously. Higher areal densities mean that fewer read/write heads and
rigid discs are required to achieve a given rigid disc drive storage capacity.
In addition, advances in computer hardware and software have led to the demand
for successive generations of storage products with increased storage capacity
and/or improved performance and reliability. Product life cycles have shortened
because increases in areal density and advances in computer hardware and
software have allowed the introduction of a new generation of rigid disc drives
that is more efficient and cost effective than the previous one. Shorter
product cycles make it more difficult to recover the cost of product
development because those costs must be recovered over increasingly shorter
periods of time during the life cycles of products. We expect this trend to
continue and cannot assure you that we will be able to recover the cost of
product development in the future.
Short product life cycles also require us to engage regularly in new
product qualification of next generation products with our customers. In order
for our products to be considered by our customers for qualification, we must
be among the leaders in time-to-market with those new products. Once a product
is accepted for qualification testing, any failure or delay in the
qualification process can result in our losing sales to that customer until the
next generation of products is introduced. The effect of missing a product
qualification opportunity is magnified by the limited number of high volume
computer manufacturers, most of which continue to increase their share of the
personal computer market. These risks are magnified because we expect cost
improvements and competitive pressures to result in declining sales and
declining gross margins on our current generation products. We cannot assure
you that we will be among the leaders in time to market with new products, or
that we will be able to successfully qualify new products with our customers in
the future.
IMPORTANCE OF TIME TO MARKET -- OUR OPERATING RESULTS DEPEND ON OUR BEING AMONG
THE FIRST-TO-MARKET AND ACHIEVING SUFFICIENT PRODUCTION VOLUME WITH OUR NEW
PRODUCTS.
26
To achieve consistent success with our original equipment manufacturer, or
OEM, customers, we must be an early provider of next generation rigid disc
drives featuring leading, high quality technology. If we fail to:
o consistently maintain or improve our time-to-market performance with our
new products;
o produce these products in sufficient volume;
o qualify these products with key customers on a timely basis by meeting
our customers' performance and quality specifications; or
o achieve acceptable manufacturing yields and costs with these products,
then our market share would be adversely affected, which would harm our
operating results. In addition, if delivery of our products is delayed, our OEM
customers may use our competitors' products to meet their production
requirements. If delivery of those OEMs' computer systems into which our
products are integrated is delayed, consumers and businesses may purchase
comparable products from the OEMs' competitors.
Moreover, we face the related risk that consumers and businesses may wait
to make their purchases if they want to buy a product that has been shipped or
announced but not yet released. If this were to occur, we may be unable to sell
our existing inventory of products which may have become less efficient and
cost effective compared to new products. As a result, even if we are among the
first-to-market with a given product, subsequent introductions or announcements
by our competitors of next generation products could cause us to lose revenue
and not achieve a positive return on our investment in existing products and
inventory.
IMPORTANCE OF REDUCING OPERATING COSTS -- IF WE DO NOT REDUCE OUR OPERATING
EXPENSES, WE WILL NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY.
Our strategy involves, to a substantial degree, increasing revenue while
at the same time reducing operating expenses. In furtherance of this strategy,
we are engaged in ongoing, company-wide manufacturing efficiency activities to
increase productivity and reduce costs. These activities include closures and
transfers of facilities, significant personnel reductions and efforts to
increase automation. We cannot assure you that we will be able to implement our
plans without delay or that, when implemented, our efforts will result in the
increased profitability, cost savings or other benefits management expects.
Moreover, the reduction of personnel and closure of facilities may adversely
affect our ability to manufacture our products in required volumes to meet
customer demand and may result in other disruptions that affect our products
and customer service. In addition, the transfer of manufacturing capacity of a
product to a different facility frequently requires qualification of the new
facility by some of our OEM customers. We cannot assure you that these
activities and transfers will be implemented on a cost-effective basis without
delays or disruption in our production and without adversely affecting our
results of operations.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE -- IF WE DO NOT DEVELOP
PRODUCTS IN TIME TO KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR OPERATING RESULTS
WILL BE ADVERSELY AFFECTED.
Our customers have demanded new generations of rigid disc drive products
as advances in computer hardware and software have created the need for
improved storage products with features such as increased storage capacity or
improved performance and reliability. We and our competitors have developed
improved products, and we will need to continue to do so in the future. As a
result, the life cycles of our products have been shortened and we have been
required to constantly develop and introduce new cost-effective products within
time to market windows that become progressively shorter. We had product
development expenses of $655 million and $725 million for fiscal years 1999 and
2000, respectively. Excluding product development allocated compensation
expense related to the transactions, we would have had combined product
development expenses of $391 million for the six months ended December 29,
2000. We cannot assure you that we will be able to successfully complete the
design or introduction of new products in a timely manner, manufacture new
products in sufficient volumes with acceptable manufacturing yields, or
successfully market these new products, or that these products will perform to
specifications on a long-term basis.
27
When we develop new products with higher capacity and more advanced
technology, our operating results may decline because the increased difficulty
and complexity associated with producing these products increases the
likelihood of reliability, quality or operability problems. If our products
suffer increases in failures, are of low quality or are not reliable, customers
may reduce their purchases of our products and our manufacturing rework and
scrap costs and service and warranty costs may increase. In addition, a decline
in the reliability of our products may make us less competitive as compared
with other rigid disc drive manufacturers.
CHANGES IN INFORMATION STORAGE PRODUCTS -- FUTURE CHANGES IN THE NATURE OF
INFORMATION STORAGE PRODUCTS MAY REDUCE DEMAND FOR TRADITIONAL RIGID DISC DRIVE
PRODUCTS.
We expect that in the future new personal computing devices and products
will be developed, some of which, such as Internet appliances, may not contain
a rigid disc drive. While we are investing development resources in designing
information storage products for new applications, it is too early to assess
the impact of these new applications on future demand for rigid disc drive
products. We cannot assure you that we will be successful in developing other
information storage products.
In addition, there are currently no widely accepted standards in various
technical areas that may be important to the future of our business, including
the developing sector of intelligent storage solutions. We participate in
working groups of the Storage Networking Industry Association to develop
industry standards for storage area network solutions. We cannot assure you,
however, that the standards we support will prevail or be widely adopted, or
that our products will be compatible with any standards that are ultimately
adopted.
HIGH FIXED COSTS -- OUR VERTICAL INTEGRATION STRATEGY ENTAILS A HIGH LEVEL OF
FIXED COSTS.
Our vertical integration strategy entails a high level of fixed costs and
requires a high volume of production and sales to be successful. During periods
of decreased production, these high fixed costs have had, and could in the
future have, a material adverse effect on our operating results and financial
condition. In addition, a strategy of vertical integration has in the past and
could in the future delay our ability to introduce products containing
market-leading technology, because we may not have developed the technology and
source of components for our products and do not have access to external
sources of supply without incurring substantial costs.
DEPENDENCE ON SUPPLY OF COMPONENTS -- IF WE EXPERIENCE SHORTAGES OR DELAYS IN
THE RECEIPT OF CRITICAL COMPONENTS FOR OUR PRODUCTS, WE MAY SUFFER LOWER
OPERATING MARGINS, PRODUCTION DELAYS AND OTHER MATERIAL ADVERSE EFFECTS.
The cost, quality and availability of some components for rigid disc
drives and other information storage products are critical to the successful
manufacture of these products. Particularly important components include
read/write heads, recording media, application specific integrated circuits, or
ASICs, spindle motors, printed circuit boards and resistors. We rely on sole
suppliers and a limited number of suppliers for some of these components, such
as the read/write heads and recording media which we do not manufacture, ASICs,
spindle motors and printed circuit boards. In the past, we have experienced
increased costs and production delays when we were unable to obtain sufficient
quantities of some components and have been forced to pay higher prices for
some components that were in short supply in the industry in general. For
example, in the fourth quarter of fiscal year 2000 and in the first half of
fiscal year 2001, we and other rigid disc drive manufacturers experienced
shortages and delays in the receipt of ASICs, a critical component in the
manufacture of rigid disc drives. We believe these shortages and delays were
caused by several reasons, including a recent consolidation among the
manufacturers of these components and the use of ASIC manufacturing capacity to
produce semiconductor chips for other applications, including wireless
communications devices. If there is further consolidation among ASIC
manufacturers or if any other factors should cause us to experience renewed
shortages or delays in the receipt of ASICs in the future, our financial
condition and results of operations could be materially adversely affected. In
particular, shortages of ASICs may require us to allocate the ASICs we are able
to obtain between
28
products or customers, which would have the effect of reducing our shipment
volumes. Also, increased costs of ASICs would increase our cost of sales and,
if we are unable to achieve corresponding increases in prices for our products,
reduce our profit margins. In addition, Maxtor's recent acquisition of
Quantum's disc drive operations may enable Maxtor to obtain a proportionately
greater supply of critical components from third party manufacturers than we
may be able to obtain because of the increased size and negotiating leverage of
Maxtor, which could adversely affect our ability to source a sufficient amount
of these components for our operations.
If there is a shortage or delay in supplying us with critical components,
then:
o it is likely that our suppliers would raise their prices and, if we
could not pass these price increases to our customers, our operating
margin would decline;
o we might have to reengineer some products, which would likely cause
production and shipment delays, make the reengineered products more
costly and provide us with a lower rate of return on these products;
o we would likely have to allocate the components we receive among some of
our products and ship less of other products, which would reduce our
revenues and could cause us to lose sales to customers who could purchase
more of their required products from manufacturers, which either did not
experience these shortages or delays or which made different allocations;
and
o we might be late in shipping products, causing potential customers to
make purchases with our competitors and, thus, causing our revenue and
operating margin to decline.
We cannot assure you that we will be able to obtain critical components in a
timely and economic manner, or at all.
DEPENDENCE ON KEY CUSTOMERS -- WE MAY BE ADVERSELY AFFECTED BY THE LOSS OF, OR
REDUCED, DELAYED OR CANCELED PURCHASES BY, ONE OR MORE OF OUR LARGER CUSTOMERS.
For fiscal year 2000 and the combined results for the six months ended
December 29, 2000, our top 10 customers accounted for approximately 63% and 67%
of our disc drive revenue. Compaq, our largest customer, accounted for
approximately 17% of our disc drive revenue in both fiscal year 2000 and the
six months ended December 29, 2000 and EMC Corporation accounted for
approximately 14% of our disc drive revenue for the six months ended December
29, 2000. If any of our key customers were to significantly reduce its
purchases from us, our results of operations would be adversely affected. While
sales to major customers may vary from period to period, a major customer that
permanently discontinues or significantly reduces its relationship with us
could be difficult to replace. In line with industry practice, new customers
usually require that we pass a lengthy and rigorous qualification process at
the customer's cost. Accordingly, it may be difficult for us to attract new
major customers.
Typically, our OEM purchase agreements permit OEMs to cancel orders and
reschedule delivery dates without significant penalties. In the past, orders
from many of our OEMs were canceled and delivery schedules were delayed as a
result of changes in the requirements of the OEM's customers. These order
cancellations and delays in delivery schedules have had a material adverse
effect on our results of operations in the past and may again in the future.
Our OEMs and foreign distributors typically furnish us with non-binding
indications of their near-term requirements, with product deliveries based on
weekly confirmations. Shipments to domestic distributors are on a consignment
basis, whereby our inventory held by these distributors is still owned by us
and our revenue recognition is delayed until the product is actually used by
the distributor to fill an end-user order. If actual orders from foreign
distributors and OEMs decrease from their non-binding forecasts, or actual
orders placed by end-users with our domestic distributors are not in line with
expectations, these variances could have a material adverse effect on our
business, results of operations and financial condition.
29
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS -- OUR INTERNATIONAL OPERATIONS
SUBJECT US TO SOCIAL, POLITICAL AND ECONOMIC RISKS OF DOING BUSINESS IN FOREIGN
COUNTRIES.
We have significant operations in foreign countries, including
manufacturing facilities, sales personnel and customer support operations. For
fiscal year 2000 and the combined results for the six months ended December 29,
2000, approximately 34% and 35% of our revenue was from sales to customers
located in Europe and approximately 24% and 22% was from sales to customers
located in Asia. We have manufacturing facilities in China, Indonesia,
Malaysia, Mexico, Northern Ireland, Singapore and Thailand, in addition to
those in the United States. A substantial portion of our desktop drive assembly
occurs in our facility in China.
Our offshore operations are subject to risks inherent in doing business in
foreign countries, including the following:
o fluctuations in currency exchange rates, which resulted, in fiscal year
1998, in a $76 million charge to income from marking our hedge positions
to market;
o longer payment cycles for sales in foreign countries;
o difficulties in staffing and managing international manufacturing
operations;
o seasonal reductions in business activity in the summer months in Europe
and other countries;
o increases in tariffs and duties, price controls, restrictions on foreign
currencies and trade barriers imposed by foreign countries;
o political unrest, particularly in areas in which we have manufacturing
facilities;
o local legal and regulatory requirements;
o increased costs of transportation and shipping;
o the credit risk of local customers and distributors;
o potential difficulties in protecting intellectual property;
o the risk of nationalization of private enterprises by foreign
governments; and
o potential adverse tax consequences, including imposition of withholding
or other taxes on payments by subsidiaries.
Prices for our products are denominated predominately in U.S. dollars,
even when sold to customers which are located outside the United States.
Currency instability in Asian and other geographic markets may make our
products more expensive than products sold by other manufacturers that are
priced in the local currency. Therefore, foreign customers may reduce purchases
of our products. Disruption in financial markets and the deterioration of the
underlying economic conditions in the past in some countries, including those
in Asia, have had an impact on our sales to customers located in, or whose
end-user customers are located in, these countries. Disruptions in financial
markets and the deterioration of the underlying economic conditions may affect
our future operating results due to:
o the impact of currency fluctuations on the relative price of our
products, because the increased strength of the dollar increases the
effective price to local customers of a product, the price of which is
denominated in dollars;
o customers' reduced access to working capital to fund purchases of our
products due to:
-- higher interest rates;
-- reduced bank lending due to contractions in the money supply or the
deterioration in the customer's or its bank's financial condition; or
-- the inability to access other financing.
30
Many of the costs associated with our operations located outside the United
States are denominated in local currencies. The increased strength of local
currencies against the dollar in countries where we have foreign operations
would result in higher effective operating costs and, potentially, reduced
earnings. Currently we do not hedge our foreign exchange risk. We cannot assure
you that fluctuations in foreign exchange rates will not have a negative effect
on our operations and profitability.
In addition, our international operations and, specifically, the ability
of our non-U.S. subsidiaries to dividend or otherwise to transfer cash among
our subsidiaries, including transfers of cash to the Issuer to pay interest and
principal on the notes, may be affected by limitations on imports, currency
exchange control regulations, transfer pricing regulations and potentially
adverse tax consequences, among other things. In addition, the governments of
many countries, including China, Malaysia, Singapore and Thailand, in which we
have significant operating assets, have exercised and continue to exercise
significant influence over many aspects of their domestic economies and
international trade. We cannot assure you that the governments of these
countries will not take actions that will materially affect our business and
our ability to pay interest on and the principal of the notes and, if
necessary, the note guarantees.
We cannot assure you that we will continue to be found to be operating in
compliance with applicable customs, currency exchange control regulations,
transfer pricing regulations or any other laws or regulations to which we may
be subject. We also cannot assure you that these laws will not be modified, the
result of which may be to prevent us from transferring sufficient cash to the
Issuer to service and repay its debt.
DIFFICULTY IN PREDICTING QUARTERLY DEMAND -- IF WE FAIL TO PREDICT DEMAND
ACCURATELY FOR OUR PRODUCTS IN ANY QUARTER, WE MAY NOT BE ABLE TO RECAPTURE THE
COST OF CAPITAL INVESTMENTS.
The rigid disc drive industry operates on quarterly purchasing cycles,
with much of the order flow in any given quarter coming at the end of that
quarter. Our manufacturing process requires us to make significant
product-specific capital investments in each quarter for that quarter's
production. Because we typically receive the bulk of our orders late in a
quarter, after we have made our capital investments, there is a risk that our
orders will not be sufficient to allow us to recapture the costs of our
investment before that investment has become obsolete. We cannot assure you
that we will be able to accurately predict demand in the future. Other factors
that may negatively impact our ability to recapture the cost of capital
investments in any given quarter include:
o our inability to reduce our fixed costs to match sales in any quarter
because of our vertical manufacturing strategy, which means that we make
more capital investments than we would if we were not vertically
integrated;
o the timing of orders from and shipment of products to major customers,
such as Compaq;
o our product mix, and the related margins of the various products;
o accelerated reduction in the price of our rigid disc drives due to an
oversupply of rigid disc drives in the market;
o manufacturing delays or interruptions, particularly at our major
manufacturing facilities in China, Indonesia, Malaysia, Singapore and
Thailand;
o variations in the cost of components for our products;
o limited access to components that we obtain from a single or a limited
number of suppliers; and
o the impact of changes in foreign currency exchange rates on the cost of
producing our products and the effective price of these products to
foreign consumers.
31
IT MAY NOT BE POSSIBLE TO SUE THE ISSUER AND THE NON-U.S. NOTE GUARANTORS --
BECAUSE THE ISSUER AND SOME OF THE NOTE GUARANTORS ARE ORGANIZED IN
JURISDICTIONS OUTSIDE THE UNITED STATES, YOU MAY NOT BE ABLE TO SERVE PROCESS
ON THEM OR THEIR OFFICERS AND DIRECTORS, REALIZE UPON JUDGMENTS AGAINST THEIR
ASSETS OR BRING SUIT AGAINST THEM IN JURISDICTIONS OUTSIDE THE UNITED STATES.
The Issuer and several of the note guarantors are incorporated under the
laws of the Cayman Islands and many other note guarantors are organized in
various other jurisdictions outside the United States. Some of the directors
and officers and a substantial portion of the assets of these companies are
located outside the United States. Although the Issuer and the note guarantors
which are organized outside the United States have agreed to accept service of
process in the United States by their agent designated for that purpose, it may
be difficult for investors in the notes to effect service of process within the
United States upon these persons or to enforce against them, in courts outside
the United States, judgments of courts of the United States predicated upon
civil liabilities under the U.S. federal securities or other laws.
We have been advised by our Cayman Islands legal counsel, Walkers, that
there is doubt with respect to Cayman Islands law as to (a) whether a judgment
of a U.S. court predicated solely upon the civil liability provisions of the
U.S. federal securities or other laws would be enforceable in the Cayman
Islands against the Issuer or the note guarantors and (b) whether an action
could be brought in the Cayman Islands against the Issuer or a note guarantor
in the first instance on the basis of liability predicated solely upon the
provisions of the U.S. federal securities or other laws. In addition, we have
been advised by our counsel in the jurisdictions of organization of the note
guarantors other than the Cayman Islands that there are similar doubts with
respect to the laws of these other jurisdictions. In addition, other laws of
these jurisdictions, such as those limiting a party's enforcement rights on the
grounds of public policy of that jurisdiction, and the fact that a treaty may
not exist between the United States and the governments of these jurisdictions
regarding the enforcement of civil liabilities, may also restrict the ability
to enforce the note guarantors' obligations under their guarantees.
CONTROL BY THE SPONSOR GROUP -- WE ARE CONTROLLED BY THE SPONSOR GROUP, AND
THEIR INTERESTS MAY CONFLICT WITH YOUR INTERESTS.
Affiliates of Silver Lake Partners, Texas Pacific Group, August Capital
and Chase Capital Partners and investment funds affiliated with Goldman, Sachs
& Co. own approximately 35%, 23%, 12%, 7%, and 2%, respectively, of our
outstanding ordinary shares, and we, in turn, indirectly own 100% of the
outstanding share capital of the Issuer. If members of the sponsor group who
hold ordinary shares with voting rights vote together, the sponsor group will
have the power to control all matters submitted to our shareholders, elect our
directors and exercise control over our business, policies and affairs. We have
entered into a shareholders agreement with the members of the sponsor group
which requires the approval of their designated members of our board of
directors before we will be allowed to take specified actions. Accordingly, our
ability to engage in some transactions requiring the approval of our board of
directors will be limited without the consent of specified members of the
sponsor group. The interests of the members of the sponsor group may differ
from each other and from yours. For more information regarding the shareholders
agreement, see "Certain Relationships and Related Transactions -- Shareholders
Agreement."
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS -- WE MAY NOT BE ABLE TO IDENTIFY
SUITABLE ALLIANCE, ACQUISITION OR INVESTMENT OPPORTUNITIES, OR SUCCESSFULLY
ACQUIRE AND INTEGRATE COMPANIES THAT PROVIDE COMPLEMENTARY PRODUCTS OR
TECHNOLOGIES.
Our growth strategy involves pursuing strategic alliances with, and making
acquisitions of or investments in, other companies that are complementary to
our business. There is substantial competition for attractive strategic
alliance, acquisition and investment candidates. We cannot assure you that we
will be able to partner with, acquire or invest in suitable candidates, or
integrate acquired technologies or operations successfully into our existing
technologies and operations. Our ability to finance potential acquisitions will
be limited by our high degree of leverage and the covenants contained in the
senior credit facilities and the indenture.
32
If we are successful in acquiring other companies, these acquisitions may
have an adverse effect on our operating results, particularly while the
operations of an acquired business are being integrated. It is also likely that
integration of acquired companies would lead to the loss of key employees from
those companies or the loss of customers of these companies. In addition, the
integration of any acquired companies would require substantial attention from
our senior management, which may limit the amount of time available to be
devoted to our day-to-day operations or to the execution of our strategy. In
addition, the expansion of our business involves the risk that we might not
manage our growth effectively, that we would incur additional debt to finance
these acquisitions or investments and that we would incur substantial charges
relating to the write-off of in-process research and development, similar to
that which we incurred in connection with several of our prior acquisitions.
Each of these items could have a material adverse effect on our financial
position and results of operations.
POTENTIAL LOSS OF MATERIAL LICENSED TECHNOLOGY -- THE CLOSING OF THE
TRANSACTIONS TRIGGERED CHANGE OF CONTROL OR ANTI-ASSIGNMENT PROVISIONS IN SOME
OF OUR MATERIAL LICENSE AGREEMENTS WHICH MAY RESULT IN A LOSS OF OUR RIGHT TO
USE MATERIAL LICENSED TECHNOLOGY.
We license technology from third parties that is integral to the
production of our products. A number of these licenses contain change of
control or anti-assignment provisions which provide that the licenses would
terminate on the closing of the transactions. A number of the licenses that may
be so terminated are material to our business, including the agreements with
other companies in the rigid disc drive industry. Our inability to renegotiate
these terminated agreements or obtain new licenses from these parties could
result in delays in product development or prevent us from selling our products
until equivalent substitute technology can be identified, licensed and/or
integrated or until we are able to substantially engineer our products to avoid
infringing the rights of these counterparties. We might not be able to
renegotiate these agreements, obtain the necessary licenses in a timely manner,
on acceptable terms, or at all or be able to engineer our products
successfully. The loss of these material licenses could have a material adverse
effect on our business.
RISK OF INTELLECTUAL PROPERTY LITIGATION -- OUR PRODUCTS MAY INFRINGE THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH MAY CAUSE US TO INCUR UNEXPECTED
COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.
We cannot be certain that our products do not and will not infringe issued
patents or other intellectual property rights of others. Historically, patent
applications in the United States and some foreign countries have not been
publicly disclosed until the patent is issued, and we may not be aware of
currently filed patent applications that relate to our products or technology.
If patents later issue on these applications, we may be liable for
infringement. We may be subject to legal proceedings and claims in the ordinary
course of our business, including claims of alleged infringement of the
patents, trademarks and other intellectual property rights of third parties by
us or our licensees in connection with their use of our products. Intellectual
property litigation is expensive and time-consuming, regardless of the merits
of any claim, and could divert our management's attention from operating our
business. Moreover, software patent litigation has increased due to the current
uncertainty of the law and the increasing competition and overlap of product
functionality in the field. If we were to discover that our products infringe
the intellectual property rights of others, we would need to obtain licenses
from these parties or substantially reengineer our products in order to avoid
infringement. We might not be able to obtain the necessary licenses on
acceptable terms, or at all, or be able to reengineer our products
successfully. Moreover, if we are sued for infringement and lose the suit, we
could be required to pay substantial damages and/or be enjoined from using or
selling the infringing products or technology. Any of the foregoing could cause
us to incur significant costs and prevent us from selling our products.
33
DEPENDENCE ON INTELLECTUAL PROPERTY -- IF OUR INTELLECTUAL PROPERTY AND OTHER
PROPRIETARY INFORMATION WERE COPIED OR INDEPENDENTLY DEVELOPED BY COMPETITORS,
OUR OPERATING RESULTS WOULD BE NEGATIVELY AFFECTED.
Our success depends to a significant degree upon our ability to protect
and preserve the proprietary aspects of our technology. However, we may be
unable to prevent third parties from using our technology without our
authorization or independently developing technology that is similar to ours,
particularly in those countries where the laws do not protect our proprietary
rights as fully as in the United States. The use of our technology or similar
technology by others could reduce or eliminate any competitive advantage we
have developed, cause us to lose sales or otherwise harm our business. If it
became necessary for us to resort to litigation to protect these rights, any
proceedings could be burdensome and costly, and we may not prevail.
Although we have numerous U.S. and foreign patents and numerous pending
patents that relate to our technology, we cannot assure you that any patents,
issued or pending, will provide us with any competitive advantage or will not
be challenged by third parties. Moreover, our competitors may already have
applied for patents that, once issued, will prevail over our patent rights or
otherwise limit our ability to sell our products in the United States or
abroad. Our competitors also may attempt to design around our patents or copy
or otherwise obtain and use our proprietary technology. With respect to our
pending patent applications, we may not be successful in securing patents for
these claims. Our failure to secure these patents may limit our ability to
protect the intellectual property rights that these applications were intended
to cover.
We have entered into confidentiality agreements with our employers and
non-disclosure agreements with customers, suppliers and potential strategic
partners, among others. If any party to these agreements were to violate their
agreement with us and disclose our proprietary technology to a third party, we
may be unable to prevent the third party from using this information. Because a
significant portion of our proprietary technology consists of specialized
knowledge and technical expertise developed by our employees, we have a program
in place designed to ensure that our employees communicate any developments or
discoveries they make to other employees. However, employees may choose to
leave our company before transferring their knowledge and expertise to our
other employees. Violations by others of our confidentiality or non-disclosure
agreements and the loss of employees who have specialized knowledge and
expertise could harm our competitive position and cause our sales and operating
results to decline. Our trade secrets may otherwise become known or
independently developed by others, and trade secret laws provide no remedy
against independent development or discovery.
We have registered and applied for some service marks and trademarks, and
will continue to evaluate the registration of additional service marks and
trademarks, as appropriate. We cannot guarantee that any of our pending
applications will be approved by the applicable governmental authorities.
Moreover, even if the applications are approved, third parties may seek to
oppose or otherwise challenge these registrations. A failure to obtain
trademark registrations in the United States and in other countries could limit
our ability to use our trademarks and impede our marketing efforts in those
jurisdictions.
ENVIRONMENTAL MATTERS -- WE COULD INCUR SUBSTANTIAL COSTS, INCLUDING CLEANUP
COSTS, FINES AND CIVIL OR CRIMINAL SANCTIONS, AS A RESULT OF VIOLATIONS OF OR
LIABILITIES UNDER ENVIRONMENTAL LAWS.
Our operations are subject to laws and regulations relating to the
protection of the environment, including those governing discharge of
pollutants into the air and water, the management and disposal of hazardous
substances and wastes and the cleanup of contaminated sites. We could incur
substantial costs, including cleanup costs, fines and civil or criminal
sanctions, third party property damage or personal injury claims, as a result
of violations of or liabilities under environmental laws or non-compliance with
environmental permits required at our facilities. Contaminants have been
detected at some of our present and former sites, principally in connection
with historical operations. In addition, we have been named as a potentially
responsible party at a number of superfund sites.
34
While we are not currently aware of any contaminated or superfund sites as to
which material outstanding claims or obligations exist, the discovery of
additional contaminants or the imposition of additional cleanup obligations at
these or other sites could result in significant liability. In addition, the
ultimate costs under environmental laws and the timing of these costs are
difficult to predict. Liability under some environmental laws relating to
contaminated sites can be imposed retroactively and on a joint and several
basis. In other words, one liable party could be held liable for all costs at a
site. Potentially significant expenditures could be required in order to comply
with environmental laws that may be adopted or imposed in the future.
DEPENDENCE ON KEY PERSONNEL -- THE LOSS OF SOME KEY EXECUTIVE OFFICERS AND
EMPLOYEES COULD NEGATIVELY IMPACT OUR BUSINESS PROSPECTS.
Our future performance depends to a significant degree upon the continued
service of key members of management as well as marketing, sales, and product
development personnel. The loss of one or more of our key personnel would have
a material adverse effect on our business, operating results and financial
condition. We believe our future success will also depend in large part upon
our ability to attract and retain highly skilled management, marketing, sales
and product development personnel. We have experienced intense competition for
personnel, and we cannot assure you that we will be able to retain our key
employees or that we will be successful in attracting, assimilating and
retaining them in the future.
SYSTEM FAILURES -- SYSTEM FAILURES CAUSED BY EVENTS BEYOND OUR CONTROL COULD
ADVERSELY AFFECT COMPUTER EQUIPMENT AND ELECTRONIC DATA ON WHICH OUR OPERATIONS
DEPEND.
Our operations are dependent on our ability to protect our computer
equipment and the information stored in our databases from damage by, among
others, earthquake, fire, natural disaster, power loss, telecommunications
failures, unauthorized intrusion and other catastrophic events. A significant
part of our operations are based in an area of California that has experienced
earthquakes and is considered seismically active. Additionally, California is
currently experiencing power outages and the threat of increased energy costs
due to a shortage in the supply of power within the state. We cannot be sure
that any measures we take will be sufficient to prevent system failures caused
by power losses, natural disasters or other events beyond our control. Any
damage or failure that causes interruptions in our operations could have a
material adverse effect on our business, results of operations and financial
condition.
RISKS OF LEGAL PROCEEDINGS -- OUR OPERATING RESULTS MAY BE NEGATIVELY AFFECTED
BY CLAIMS AND LAWSUITS AGAINST US.
We are subject to a number of claims and lawsuits, the outcomes of which
are, at this time, difficult to predict. Even if we are successful in defending
these claims and lawsuits, they are costly to manage, investigate and pursue.
In fiscal year 2000 and through the six months ended December 29, 2000, we
recorded $73 million in litigation settlement costs. In the future, our future
operating earnings may also be adversely affected if we receive an adverse
judgment in or settle these claims and lawsuits.
35
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes.
The net proceeds from the issuance of the outstanding notes were
approximately $190 million after deducting the initial purchasers' discount and
expenses related to the offering. We applied the proceeds from the issuance of
the outstanding notes, together with the cash contributions from the sponsor
group, the management rollover and borrowings under the senior credit
facilities, to fund the payment of the purchase price under the stock purchase
agreement, and to pay related fees and expenses of the transactions as
described under "The Transactions."
36
CAPITALIZATION
The table below lists our cash, cash equivalents and short term
investments and capitalization as of December 29, 2000. You should read this
table in conjunction with "The Transactions," and "Selected Historical
Consolidated Financial Information of New SAC."
In consideration for issuing the exchange notes as contemplated in this
prospectus, we will receive in exchange a like principal amount of outstanding
notes, the terms of which are substantially identical to the terms of the
exchange notes, except that the exchange notes will be freely tradable, will
not bear legends restricting their transfer and will not be subject to payments
described in "Description of the Notes -- Principal, Maturity and Interest" and
in "Exchange and Registration Rights Agreement." The outstanding notes
surrendered in exchange for the exchange notes will be retired and cancelled
and cannot be reissued. Accordingly, issuance of the exchange notes will not
result in any change in our capitalization.
AS OF
DECEMBER 29, 2000
NEW SAC
------------------
(IN MILLIONS)
Cash, cash equivalents and short term investments (a) ......... $ 850
======
Total debt (including current portion of long-term debt):
Senior credit facilities:
Revolving credit facility (b) .............................. $ --
Term loan A facility (c) ................................... 200
Term loan B facility (c) ................................... 500
Senior subordinated notes (d) ............................... 201
Capitalized lease obligations ............................... 3
------
Total debt .................................................... 904
------
Shareholders' Equity:
Paid-in capital ............................................. 938
Accumulated deficit ......................................... (179)
------
Total shareholders' equity .................................... 759
------
Total capitalization ....................................... $1,663
======
- ----------
(a) On the closing of the transactions, New SAC received, as part of the
assets it purchased from Seagate Technology, $765 million of cash,
subject to upward adjustment, that was on the balance sheet of
Seagate Technology. We used approximately $149 million of this
amount as a source of cash in connection with the closing of the
transactions. For more information regarding these adjustments, see
"The Transactions."
(b) The senior credit facilities contain a five year, senior secured
$200 million revolving credit facility, with a sublimit of $100
million for letters of credit. We did not borrow under this facility
on the closing of the transactions. We had approximately $56 million
of letters of credit outstanding on the closing of the transactions
which reduced availability to approximately $144 million. For more
information regarding the revolving credit facility, see
"Description of the Senior Credit Facilities."
(c) The senior credit facilities contain a five year, senior secured
$200 million term loan A facility and a six year, senior secured
$500 million term loan B facility. We borrowed the entire amount of
these facilities on the closing of the transactions. For more
information regarding these facilities, see "Description of the
Senior Credit Facilities."
(d) The senior subordinated notes were issued at a discount to the
aggregate principal amount of $210 million, for gross proceeds of
approximately $201 million.
37
THE TRANSACTIONS
We summarize below the principal terms of the stock purchase agreement and
other agreements that relate to the transactions. For further information
regarding the terms and provisions of these agreements please refer to the
agreements themselves which we have filed as exhibits to the registration
statement of which this prospectus is a part.
OVERVIEW
The private offering of the outstanding notes was part of a series of
simultaneous transactions, which consisted of the following:
o the purchase by Suez Acquisition Company under the stock purchase
agreement of substantially all of the operating assets of Seagate
Technology, which comprised its rigid disc drive, tape drive, software,
and intelligent storage solutions businesses, and a portion of the cash
on the balance sheet of Seagate Technology, and some other assets of
Seagate Technology; the assumption by Suez Acquisition Company of
substantially all of the liabilities of Seagate Technology; and the
assignment by Suez Acquisition Company of all its rights and obligations
under the stock purchase agreement to us;
o the acquisition by VERITAS, under a merger agreement dated March 29,
2000 among VERITAS, Seagate Technology and Victory Merger Sub., Inc., a
wholly owned subsidiary of VERITAS, of the assets of Seagate Technology
that we did not purchase through a merger of Seagate Technology and a
subsidiary of VERITAS and the payment by VERITAS to the shareholders of
Seagate Technology of cash and VERITAS common stock as merger
consideration for their shares of Seagate Technology common stock and
options to purchase these shares;
o the cash contributions from the sponsor group in exchange for our
ordinary and preferred shares;
o the cash contributions from the management group in exchange for our
ordinary and preferred shares;
o the exchange by the management group of a portion of their Seagate
Technology common stock and options to purchase Seagate Technology common
stock for deferred compensation and our ordinary and preferred shares;
o the issuance of the notes;
o the entering into by the Issuer and certain of our other subsidiaries of
the senior credit facilities and borrowings under them;
o the redemption by the Issuer of its existing senior notes, which
constituted substantially all of its outstanding debt; and
o the payment of fees and expenses in connection with the above
transactions, including the fees and expenses of the lenders under the
senior credit facilities, the initial purchasers, the trustee and our
lawyers, accountants and printing company.
On the close of the transactions, the sponsor group beneficially owned
approximately 79% and the management group beneficially owned approximately 21%
of our outstanding ordinary shares.
On March 29, 2000, the Issuer, Seagate Software Holdings, a subsidiary of
Seagate Technology, and Suez Acquisition Company, entered into a stock purchase
agreement. Suez Acquisition Company was a limited liability company organized
under the laws of the Cayman Islands. It was formed solely for the purpose of
entering into the stock purchase agreement and closing the transactions
contemplated by that agreement. On November 22, 2000, Suez Acquisition Company
assigned all of its rights and obligations under the stock purchase agreement
to us.
38
Under the stock purchase agreement, we agreed to purchase substantially
all of the operating assets of Seagate Technology, which comprised the rigid
disc drive, tape drive, software and intelligent storage solutions businesses
of Seagate Technology, and some other assets of Seagate Technology and to
assume substantially all of the liabilities of Seagate Technology. The acquired
assets consisted of the following:
o the capital stock of all of Seagate Technology's subsidiaries comprising
its rigid disc drive business;
o the capital stock of all of Seagate Technology's subsidiaries comprising
its tape drive business;
o the capital stock of substantially all of Seagate Technology's
subsidiaries comprising its software business, which consisted of the
majority of the outstanding capital stock of Crystal Decisions and the
capital stock of other indirect subsidiaries of Seagate Technology;
o the capital stock of Seagate Technology's subsidiaries comprising its
intelligent storage solutions business;
o $765 million of cash on the balance sheet of Seagate Technology, subject
to upward adjustment. We used approximately $149 million of this amount
as a source of cash on the closing of the transactions. As of December
29, 2000 we had $850 million of cash, cash equivalents and short-term
investments on our balance sheet; and
o the capital stock of Seagate Technology Investments, a subsidiary of
Seagate Technology, which owns investments in several privately owned
companies, including CacheVision and Iolon, Inc.
The portion of the capital stock of Crystal Decisions that we did not purchase
consists of the shares of Crystal Decisions common stock that are outstanding
as a result of the exercise of options to purchase these shares under the 1999
and 2000 stock option plans of Crystal Decisions. The outstanding unexercised
options granted under these plans continue to remain outstanding. For more
information, see "Management -- Employment and Other Agreements -- Option Plans
- -- 1999 Stock Option Plan and 2000 Stock Option Plan of Crystal Decisions."
We purchased the assets under the stock purchase agreement for a purchase
price of $1.840 billion in cash, including transaction costs of $25 million. On
the closing of the transactions, we deposited $50 million of the purchase price
into an escrow account to be held by VERITAS, which will be released by VERITAS
to the former shareholders of Seagate Technology in accordance with a
stipulation of settlement, as described under "Business -- Legal Proceedings --
Securities Class Actions." In addition, we may owe VERITAS additional amounts
related to the transactions under the indemnification agreement dated as of
March 29, 2000 among Suez Acquisition Company, Seagate Technology and VERITAS.
MANAGEMENT GROUP
The management group consisted of approximately 200 officers of Seagate
Technology, including members of its senior management team. Under rollover
agreements that we entered into with each of the members of the management
group by the closing of the transactions, a group of officers of Seagate
Technology, which we refer to as the management group, exchanged, or rolled, a
portion of their Seagate Technology common stock and options to purchase
Seagate Technology common stock, valued at approximately $184 million, into
deferred compensation and our ordinary and preferred shares, which we refer to
as the management rollover, and contributed approximately $41 million in cash
in exchange for our ordinary and preferred shares. On the closing of the
transactions, the management group beneficially owned approximately 21% of our
outstanding ordinary shares. The value of the rolled securities was exchanged
on the closing of the transactions for deferred compensation, representing
approximately 97% of the value of the rolled securities, our
39
preferred shares, representing approximately 3% of the value of the rolled
securities, and our ordinary shares, representing the portion of the total
ordinary shares equal to the value of the rolled securities divided by the sum
of the cash contributions by the sponsor group plus the value of the rolled
securities.
The portion of the management rollover consisting of the deferred
compensation was credited into deferred compensation accounts established and
maintained by Seagate Technology HDD Holdings, Seagate Technology SAN Holdings
and Seagate Removable Storage Solutions Holdings. For a description of the
vesting, payment and other provisions of the deferred compensation plans, see
"Management -- Employment and Other Agreements -- Rollover Agreements and
Deferred Compensation Plans."
SPONSOR GROUP
Silver Lake Partners organized and lead a group of investors that,
together with the management group, owns New SAC. Specifically, affiliates of
Silver Lake Partners, Texas Pacific Group, August Capital and Chase Equity
Associates and investment funds affiliated with Goldman, Sachs & Co., which we
refer to as the sponsor group, made cash contributions to us on the closing of
the transactions in exchange for our ordinary and preferred shares. The sponsor
group contributed $875 million in cash and received, in exchange, approximately
79% of our outstanding ordinary shares on the closing of the transactions. We
indirectly own 100% of the outstanding ordinary shares of the Issuer.
MERGER AGREEMENT
On March 29, 2000, Seagate Technology, VERITAS and Victory Merger Sub,
Inc., a wholly owned subsidiary of VERITAS, entered into a merger agreement.
Under the merger agreement, Seagate Technology, which at that time owned only
the assets of Seagate Technology not purchased by us under the stock purchase
agreement, became a wholly owned subsidiary of VERITAS. As a result of the
merger, VERITAS indirectly acquired the following assets:
o 128.1 million shares of common stock of VERITAS, which were held by
Seagate Software Holdings and which were received in connection with the
sale of Seagate Technology's Network and Storage Management Group to
VERITAS in fiscal year 1999, which we describe under "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- All Entities -- Transactions with VERITAS and Other Events;"
o the capital stock of Seagate Software Holdings provided that the capital
stock of Crystal Decisions and the capital stock of any other indirect
subsidiaries of Seagate Software Holdings were sold to us before the
capital stock of Seagate Software Holdings was acquired by VERITAS;
o cash on the balance sheet of Seagate Technology in excess of the
required cash balance of $765 million as adjusted, which was purchased by
us;
o Seagate Technology's investments in Gadzoox Networks, Inc. and LHSP, to
the extent they were owned by Seagate Technology at the closing of the
transactions; and
o rights to the value of specified tax refunds claimed and credits used by
VERITAS which are attributable to Seagate Technology.
REDEMPTION OF EXISTING SENIOR NOTES
Under the stock purchase agreement, Seagate Technology agreed to call the
four series of its outstanding debt and to redeem these existing senior notes
at the closing of the transactions. The existing senior notes consisted of the
following:
o $200 million principal amount of 7.125% senior notes due March 1, 2004;
40
o $200 million principal amount of 7.37% senior notes due March 1, 2007;
o $100 million principal amount of 7.875% senior debentures due March 1,
2017; and
o $200 million principal amount of 7.45% senior debentures due March 1,
2037.
Seagate Technology redeemed these existing senior notes under the optional call
provisions of the indenture under which they were issued. The giving of an
irrevocable notice of redemption and the deposit of funds sufficient to redeem
the existing senior notes was a condition to the issuance of the outstanding
notes.
OTHER AGREEMENTS AND PLANS
In connection with the transactions, we entered into the following
agreements and benefit and compensation plans, at or following the closing of
the transactions:
o a shareholders agreement with the sponsor group;
o a management shareholders agreement with the management group;
o an indemnification agreement with VERITAS and Seagate Technology;
o employment agreements and management retention agreements with our
senior management team;
o the rollover agreements and the related deferred compensation plans, as
described above;
o the New SAC 2000 and New SAC 2001 restricted stock plans, under which
New SAC granted restricted stock awards; and
o an assumption of indemnification and insurance obligations of Seagate
Technology regarding our directors and officers.
In addition, we have adopted stock option plans at Seagate Technology
Holdings and Seagate Removable Storage Solutions Holdings and, although no
options have yet been issued, we expect options to be issued under these plans
in the future. We also expect to adopt a stock option plan at Seagate
Technology SAN Holdings in fiscal 2001. We describe the principal terms of
these agreements and plans under "Management -- Employment and Other
Agreements" and "Certain Relationships and Related Transactions."
41
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME OF NEW SAC
The following unaudited pro forma consolidated condensed financial
information of New SAC has been prepared based on the consolidated financial
statements of New SAC from November 23, 2000 through December 29, 2000 and the
historical consolidated financial statements of Seagate Technology, predecessor
to New SAC, included elsewhere in this prospectus, adjusted to give pro forma
effect to the transactions that closed on November 22, 2000, the acquisition of
XIOtech on January 28, 2000, and the reorganization of Seagate Software
Holdings on October 20, 1999, the latter two of which are referred to as the
prior pro forma events. The unaudited pro forma consolidated condensed
statements of operations of New SAC for the six months ended December 29, 2000
and the year ended June 30, 2000 give effect to the transactions that closed on
November 22, 2000 and the prior pro forma events as if they had occurred at
July 1, 1999. For a description of the transactions that closed on November 22,
2000, see "The Transactions." For a description of the acquisition of XIOtech
and the reorganization of Seagate Software Holdings, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- All
Entities -- Prior Acquisitions -- Acquisition of XIOtech Corporation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- All Entities -- Transactions with VERITAS and Other Events --
Seagate Software Holdings Reorganization."
The unaudited pro forma adjustments, which are based upon available
information and upon assumptions that management believes are reasonable, are
described in the accompanying notes. The unaudited pro forma consolidated
condensed financial information is for informational purposes only and does not
purport to represent what our financial position or results of operations would
actually have been had the transactions and prior pro forma events occurred as
of the dates indicated, nor does the unaudited pro forma consolidated condensed
financial information purport to project our results for any future period. In
particular, the unaudited pro forma consolidated condensed statements of
operations do not reflect certain future charges and uses of cash that we may
incur which are described in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- All Entities -- Transactions."
You should read the unaudited pro forma consolidated condensed financial
information in conjunction with the "Selected Historical Consolidated Financial
Information of New SAC," the audited consolidated financial statements of New
SAC and its predecessor, Seagate Technology, as of the end of and for the
period from November 23, 2000 through December 29, 2000 and for the period from
July 1, 2000 through November 22, 2000 and as of the end of and for the three
year period ended June 30, 2000, together with the related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- New
SAC" and the other financial information included elsewhere in this prospectus.
The purchase by Suez Acquisition Company under the stock purchase
agreement was accounted for using the purchase method of accounting. The
purchase price under the stock purchase agreement was allocated to the assets
acquired and liabilities assumed, based on their respective fair values. The
purchase accounting adjustments reflect the fair values of the assets that were
acquired and liabilities assumed were based upon independent appraisals. An
allocation of the purchase price was made to major categories of assets and
liabilities in the accompanying unaudited pro forma consolidated condensed
financial information.
The acquisition of XIOtech was accounted for using the purchase method of
accounting. The total purchase price for XIOtech was allocated to the assets
acquired and liabilities assumed, based on their respective fair values. The
operating results for XIOtech for the period prior to the acquisition are not
included in the pro forma financial statements as the results are immaterial.
The reorganization of Seagate Software Holdings was accounted for using
the purchase method of accounting. The total purchase price for the
reorganization of Seagate Software Holdings was allocated to the assets
acquired and liabilities assumed, based on their respective fair values.
42
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME OF NEW SAC
FOR THE YEAR ENDED JUNE 30, 2000
(IN MILLIONS, EXCEPT RATIOS)
ADJUSTMENTS
FOR PRIOR
ORGANIZATIONAL
ACTIVITIES PRO FORMA
SEAGATE BY SEAGATE SEAGATE
TECHNOLOGY TECHNOLOGY TECHNOLOGY
------------ ---------------- ------------
Revenue .................................. $6,448 6,448
Cost of sales ............................ 5,056 5 (a) 5,061
Product development ...................... 725 725
Marketing and administrative ............. 515 515
Amortization of goodwill and other
intangible .............................. 51 20 (a) 71
In-process research and development ...... 105 (105)(b)
Restructuring ............................ 207 207
Unusual items ............................ 350 (286)(c) 64
------ ---- -----
Total operating expenses ................ 7,009 (366) 6,643
------ ---- -----
Income (loss) from operations ........... (561) 366 (195)
Interest income .......................... 101 101
Interest expense ......................... (52) (52)
Activity related to equity interest in
VERITAS ................................. (326) (326)
Gain on sale of SanDisk stock ............ 679 679
Gain on sale of VERITAS stock ............ 537 537
Other, net ............................... 231 231
Other income (expense), net ............. 1,170 -- 1,170
------ ---- -----
Income (loss) before income taxes ....... 609 366 975
Benefit (provision) for income taxes ..... (299) (43)(d) (342)
------ ---- -----
Net income .............................. $ 310 $ 323 $ 633
====== ======== =======
Ratio of earnings to fixed charges .......
NEW
ACCOUNTING
BASIS IN
ASSETS
FINANCINGS AND
AND LIABILITIES
REDEMPTION AS A
MERGER OF EXISTING RESULT OF PRO FORMA
WITH SENIOR THE STOCK NEW
VERITAS NOTES PURCHASE SAC
---------------- ------------- -------------- ----------
Revenue .................................. $6,448
Cost of sales ............................ (1)(e) 10 (v) 4,754
(316)(w)
Product development ...................... (38)(w) 687
Marketing and administrative ............. (6)(g) 9 (o) (20)(w) 502
4 (y)
Amortization of goodwill and other
intangible .............................. (16)(e) (16)(e) (31)(v) 24
In-process research and development ...... --
Restructuring ............................ 207
Unusual items ............................ 64
------
Total operating expenses ................ (23) 9 (391) 6,238
--- -- ---- ------
Income (loss) from operations ........... 23 ( 9) 391 210
Interest income .......................... (66)(p) 35
Interest expense ......................... (41)(q) (100)
(7)(r)
Activity related to equity interest in
VERITAS ................................. 326 (e) --
Gain on sale of SanDisk stock ............ (679)(j) --
Gain on sale of VERITAS stock ............ (537)(j) --
Other, net ............................... (199)(k) 32
Other income (expense), net ............. (1,089) (114) -- (33)
------ ---- ---- ------
Income (loss) before income taxes ....... (1,066) (123) 391 177
Benefit (provision) for income taxes ..... 423 (n) (81)(t) --
------ ---- ------
Net income .............................. $ (643) $ (204) $ 391 $ 177
======== ======= ======== ======
Ratio of earnings to fixed charges ....... 2.8x
43
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME OF NEW SAC
FOR THE SIX MONTHS ENDED DECEMBER 29, 2000
(IN MILLIONS, EXCEPT RATIOS)
SEAGATE
TECHNOLOGY FOR
THE PERIOD FINANCINGS
FROM AND
JULY 1, 2000 REDEMPTION
THROUGH MERGER OF EXISTING
NOVEMBER 22, WITH SENIOR
2000 VERITAS NOTES
---------------- --------------- ---------------
Revenue ...................... $ 2,449
Cost of sales ................ 2,130 (1)(e)
(270)(f)
Product development .......... 442 (124)(f)
Marketing and
administrative .............. 490 (4)(g) 4(o)
(88)(h)
(190)(f)
Amortization of goodwill
and other intangibles ....... 26 (5)(e)
Restructuring ................ 20
Unusual items ................ --
--------
Total Operating
Expenses ................... 3,108 (682) 4
-------- ---- -
Income (Loss) from
Operations ................. (659) 682 (4)
Interest income .............. 58 (42)(p)
Interest expense ............. (24) (21)(q)
(3)(r)
Activity related to equity
interest in VERITAS ......... (99) 99(e)
Gain on sale of SanDisk
stock ....................... 102 (102)(j)
Gain on sale of Veeco
stock ....................... 20 (20)(j)
Loss on LHSP investment....... (138) 138 (i)
Loss on sale of operating
assets to New SAC ........... (889) 889 (s)
Other, net ................... (11) 8 (l)
8 (m)
----
Other Income
(Expense), net ............. (981) 131 823
-------- ---- -----
Income (loss) before
income taxes ............... (1,640) 813 819
Benefit (provision) for
income taxes ................ 76 143 (n) (246)(u)
-------- ---- ------
Net Income (Loss) ........... $ (1,564) $ 956(n) $ 573
======== ======== ==========
Ratio of earnings to fixed
charges (dd) ................
NEW NEW
ACCOUNTING SAC
BASIS IN FOR THE
ASSETS AND PERIOD ADJUSTMENTS
LIABILITIES NOVEMBER 23, PRO FORMA FOR NON-
AS A RESULT 2000 NEW SAC RECURRING PRO
OF THE THROUGH PRIOR TO CHARGES FORMA
STOCK DECEMBER 29, NON-RECURRING RELATED TO NEW
PURCHASE 2000 ADJUSTMENTS TRANSACTIONS SAC
--------------- -------------- --------------- ---------------- ------------
Revenue ...................... 1,017 3,466 $3,466
Cost of sales ................ 2 (v) 896 2,527 2,527
(99)(w)
(131)(x)
Product development .......... (17)(w) 73 374 374
Marketing and
administrative .............. (7)(w) 101 308 (40)(aa) 268
2 (y)
Amortization of goodwill
and other intangibles ....... (11)(v) 5 15 15
Restructuring ................ 20 20
Unusual items ................ 59 59 (59)(bb) --
----- ----- --- ------
Total Operating
Expenses ................... (261) 1,134 3,303 (99) 3,204
---- ----- ----- --- ------
Income (Loss) from
Operations ................. 261 (117) 163 99 262
Interest income .............. 3 19 19
Interest expense ............. (10) (58) (58)
Activity related to equity
interest in VERITAS ......... --
Gain on sale of SanDisk
stock ....................... --
Gain on sale of Veeco
stock ....................... --
Loss on LHSP investment....... --
Loss on sale of operating
assets to New SAC ........... --
Other, net ................... (8) (3) (3)
Other Income
(Expense), net ............. -- (15) (42) -- (42)
---- ------- ------- --- -------
Income (loss) before
income taxes ............... 261 (132) 121 99 220
Benefit (provision) for
income taxes ................ (42)(z) (21) (90) 38 (cc) (52)
---- ------- ------- --- -------
Net Income (Loss) ........... $ 219 $(153) $ (31) $ 137 $ 168
======== ======= ======= ======== =======
Ratio of earnings to fixed
charges (dd) ................ 4.8x
(footnotes appear on next page)
44
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF INCOME OF NEW SAC
(a) To record amortization of developed technology of $5 million and
amortization of $20 million for intangibles related to the
acquisition of the minority interests of Seagate Software Holdings
and the XIOtech acquisition for the period prior to the date of the
acquisitions.
(b) To write off in-process research and development recognized for the
XIOtech acquisition in January 2000.
(c) To eliminate the compensation expense and related payroll taxes
recorded in the reorganization of Seagate Software Holdings in
October 1999. Such compensation expense represented the value of
Seagate Technology common stock exchanged for Seagate Software
Holdings common stock and held by employees for less than six
months.
(d) To eliminate the tax effects of the events referred to in notes (a)
through (c) above.
(e) To eliminate activity relating to the equity investment in VERITAS.
The VERITAS investment was not acquired by New SAC.
(f) To eliminate the compensation expense recorded as a result of the
acceleration of Seagate Technology stock options in connection with
the transactions.
(g) To eliminate amortization of deferred compensation related to the
Seagate Technology restricted stock plan. Shares issued under the
restricted stock plan were exchanged for merger consideration.
(h) To eliminate transaction related costs.
(i) To eliminate loss on investments in LHSP that were not acquired by
New SAC.
(j) To eliminate the gains upon the sale of a portion of Seagate
Technology's equity investments in VERITAS, Veeco, and SanDisk that
were not acquired by New SAC.
(k) To eliminate the gain upon the exchange of all of the shares of
stock of Dragon Systems for shares of stock of LHSP and the gain on
the exchange of all of the shares of CVC, for shares of Veeco in
connection with the merger of CVC and Veeco. The shares of stock in
LHSP and Veeco were not acquired by New SAC in the transactions.
(l) To eliminate the other than temporary loss recorded by Seagate
Technology on its investment in Gadzoox that was not acquired by New
SAC in the transaction.
(m) To eliminate the loss on sale of marketable securities that were
sold in anticipation of the transactions.
(n) To eliminate the tax effects of the events referred to in notes (e)
through (m) above.
(o) To record amortization associated with unvested restricted ordinary
and preferred shares issued under the deferred compensation plan.
The compensation of $23 million is amortized over the vesting
period, 30 months, at approximately $9 million per year.
(footnotes continue on next page)
45
(p) On the closing of the transactions, New SAC acquired $765 million of
cash, subject to upward adjustment. Approximately $149 million of
this amount was used as a source of cash in connection with the
transactions. Interest income was reduced to reflect the average
rate of return earned by Seagate Technology on its cash equivalents,
and short-term investments applied to the pro forma cash balance of
New SAC on the closing of the transactions.
(q) To record interest expense that New SAC will incur as a result of
entering into the senior credit facilities and issuing the Notes,
and the elimination of historical interest expense related to
existing senior notes, which were redeemed as part of the
transactions.
SIX
YEAR MONTHS
ASSUMED ENDED ENDED
PRINCIPAL INTEREST JUNE 30, DECEMBER 29,
AMOUNT RATE 2000 2000
----------- ---------- ---------- -------------
(IN MILLIONS)
Senior Credit Facilities:
Term loan A facility (*) .............. $500 9.2 % $ 47 $24
Term loan B facility (*) .............. 200 9.7 % 20 10
Revolving credit facility (*) ......... -- -- -- --
Senior Subordinated Notes (*) ........... 210 12.5 % 26 13
Amortization of $9 million discount on
Senior Subordinated Notes over a 7
year life ............................. 1 --
Less: historical interest expense on
existing Senior Notes of Seagate
Technology:
March 1, 2004 ......................... 200 7.125% (15) (7)
March 1, 2007 ......................... 200 7.37% (15) (7)
March 1, 2017 ......................... 100 7.875% (8) (4)
March 1, 2037 ......................... 200 7.45% (15) (8)
------ ------
Net adjustments.......................... $ 41 $21
====== =====
(*) We have assumed that we will use the LIBOR options for the term loan A
facility and the term loan B facility which is LIBOR plus 2.50%, and
LIBOR plus 3.00%, respectively. We have assumed a rate of 6.7% for LIBOR.
The effect of an 0.1250% increase or decrease in interest rates would
increase or decrease total Interest expense by approximately $1 million,
and $0.5 million for the year ended June 30, 2000, and the six months
ended December 29, 2000, respectively.
(r) To record amortization of debt issuance costs, not including the $9
million discount on the face value of the Notes, of $37 million over
the weighted average life of the Senior Credit Facilities and the
Notes.
(s) To eliminate the loss on the sale of Seagate Technology's operating
assets to New SAC. This amount included $95 million representing the
premium paid on the redemption of Seagate Technology's existing
senior notes, fees related to a hedging contract entered into by
Seagate Technology to mitigate interest rate exposure on the
redemption of the debt and interest of $3 million.
(footnotes continue on next page)
46
(t) Eliminate tax effect of transaction.
(u) Tax effects of adjustments (o) through (s) above.
(v) To record for the amortization of intangibles acquired at the
closing of the transactions based upon the purchase accounting used
to record the transaction.
We accounted for the transactions as a purchase in accordance with
Accounting Principles Board, or APB, Opinion No. 16, "Business
Combinations." All acquired tangible assets, identifiable intangible
assets as well as assumed liabilities were valued based on their relative
fair values and reorganized into the following businesses: (1) the rigid
disc drive business (HDD, which is now Seagate Technology Holdings), which
includes the storage area networks business (SAN, which is now Seagate
Technology SAN Holdings), (2) the removable storage solutions business
(RSS, which is now Seagate Removable Storage Solutions Holdings), (3) the
software business (Crystal Decisions), and (4) an investment holding
company (STI). The fair value of the net assets exceeded the net purchase
price by approximately $909 million. Accordingly, the resultant negative
goodwill was allocated on a pro rata basis to the acquired long-lived
assets and reduced the recorded amounts by approximately 46%.
The completion of the underlying in-process projects acquired within
each business combination was the most significant and uncertain
assumption utilized in the valuation 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 we are unable to
successfully complete a certain research and development project. We are
primarily responsible for estimating the fair value of the purchased
research and development in all business combinations accounted for under
the purchase method.
The table below summarizes the allocation of net purchase price by
business. Amounts for HDD include SAN.
ESTIMATED FAIR VALUE
-------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------------
USEFUL
LIFE TOTAL CRYSTAL
DESCRIPTION IN YEARS NEW SAC HDD SAN RSS DECISIONS STI
- ------------------------------------ ---------- --------- --------- -------- --------- ----------- ------
Net current assets (1)(4) $ 939 $ 873 $ 27 $32 $ 9 $25
Long-term investments (2) 42 -- -- -- -- 42
Other long-lived assets 42 42 -- -- -- --
Property, plant & equipment (3) Up to 30 778 764 2 9 5 --
Identified intangibles:
Trade names (5) 10 47 47 1 -- -- --
Developed technologies (5) 3-7 76 50 5 11 15 --
Assembled workforces (5) 1-3 53 43 1 3 7 --
Other 5 1 1 1 -- -- --
------ ------ ----- ---- --- ---
Total identified intangibles 177 141 8 14 22 --
Long-term deferred taxes (4) (75) (70) -- (3) (2) --
Long term liabilities (122) (122) (10) -- -- --
------ ------ ----- ----- ----- ---
Net assets 1,781 1,628 27 52 34 67
In-process research &
development (5) 59 52 25 -- 7 --
------ ------ ----- ----- ----- ---
NET PURCHASE PRICE $1,840 $1,680 $ 52 $52 $41 $67
====== ====== ===== ===== ===== ===
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book
values. Short-term investments were valued based on quoted market
prices. Inventory values were estimated based on the current market
value of the inventories less completion costs and less a profit
margin for activities remaining to be completed until the inventory
is sold. Valuation allowances were established for current deferred
tax assets in excess of long-term deferred tax liabilities.
Assumed current liabilities included accounts payable, accrued
compensation and expenses and accrued income taxes. The fair values of
current liabilities generally approximated the historic recorded book
values because of the monetary nature of most of the liabilities.
(footnotes continue on next page)
47
(2) The value of individual long-term equity investments was based upon
quoted market prices, where available, and when such market prices
were not available an independent appraisal was performed to estimate
the fair values of the individual investments.
(3) We obtained an independent valuation of the acquired property, plant
and equipment. In arriving at the determination of market value for
the assets, the appraisers considered the estimated cost to construct
or acquired comparable property. Machinery and equipment were
assessed using replacement cost estimates reduced by depreciation
factors representing the condition, functionality and operability of
the assets. The sales comparison approach was used for office and
data communication equipment. Land, land improvements, buildings, and
building and leasehold improvements were valued based upon
discussions with knowledgeable personnel.
(4) Long-term deferred tax liabilities arose as a result of the excess
of the fair values of inventory, long-term investments, and acquired
intangible assets over their related tax basis. We have $350 million
of federal and state deferred tax assets for which a full valuation
allowance has been established.
(5) We obtained an independent valuation of acquired identified
intangibles. The significant assumptions relating to each category
are discussed in the following paragraphs. Also, these assets are
being amortized on the straight-line basis over their estimated
useful life and resultant amortization is included in amortization of
goodwill and other intangibles.
Trade names--The value of the trade names was based upon discounting to
their net present value the licensing income that would arise by
charging the operating businesses that use the trade names.
Developed technologies--The value of this asset for each operating
business was determined by discounting the expected future cash flows
attributable to all existing technologies which had reached
technological feasiblility, after considering risks relating to: (1)
the characteristics and applications of the technology, (2) existing
and future markets, and (3) life cycles of the technologies. Estimates
of future revenues and expenses used to determine the value of
developed technology was consistent with the historical trends in the
industry and expected outlooks.
Assembled workforces--The value of the assembled work force was
determined by estimating the recruiting, hiring and training costs to
replace each group of existing employees.
In-process research & development--The value of in-process research &
development was based on an evaluation of all devolopmental projects
using the guidance set forth in Interpretation No. 4 of Financial
Accounting Standards Board, or FASB, Statement No. 2, "Accounting for
Research and Development Costs" and FASB Statement No. 86, "Accounting
for the Cost of Computer Software to Be Sold, Leased, or Otherwise
Marketed."
The amount was determined by: (1) obtaining management estimates of
future revenues and operating profits associated with existing
developmental projects, (2) projecting the cash flows and costs to
complete the underlying technologies and resultant products and (3)
discounting these cash flows to their net present value.
Estimates of future revenues and expenses used to determine the value
of in-process research and development was consistent with the
historical trends in the industry and expected outlooks. The entire
amount was charged to operations because related technologies had not
reached technological feasibility and they had no alternative future
use.
At the valuation date, HDD's developmental projects focused on
increasing capacity, reducing size and power consumption, improving
performance and reliability, and reducing production costs. They were
grouped into three categories. Those included in category one had
completed conceptualization and there was substantial progress in
coding, building, simulating, and testing the technologies
functionality and performance. For those included in category two,
subsystem requirements had been identified, design plans had been
completed, and substantial progress had been made in coding and/or
building the technologies. Those included in category three had
completed design plans and system requirements. Based upon an analysis
of efforts to date, developmental projects in these three categories
were 70%, 50%, and 30% complete, respectively, and were scheduled for
completion throughout the period ended in fiscal 2003 at an additional
estimated cost of $107 million.
(footnotes continue on next page)
48
At the valuation date, SAN was in the process of developing two next
generation versions of existing technologies, which, based on an effort
to date, were 50% and 75% complete. Activities necessary to convert
this in-process research and development into commercially viable
technologies include the writing and testing of code diagnostic
software design development testing and system integration. SAN expects
resultant products will be successfully developed in fiscal 2002 at an
additional estimated cost of $1 million.
At the valuation date, the software business was in the process of
developing three next generation versions of existing technologies
which, based on total man hours and absolute time, were 70% to 85%
complete. Activities necessary to covert this in-process research and
development into commercially viable products include completion of all
planning, designing, prototyping, verifying and testing to establish
the products can meet their design specifications. This business
expects resultant products will be successfully developed in fiscal
2002 at an additional estimated cost of $28 million.
(w) To record reduction in depreciation as the new accounting basis in the
property, plant and equipment and leasehold improvements is lower than the
historical basis of Seagate Technology.
(x) To eliminate the write up of inventories to fair value for inventories
acquired at the close of the transactions.
(y) To reflect that portion of the annual fee of $4 million to be paid to
members of the sponsor group to render management, consulting and financial
services to New SAC.
(z) To record tax effects on adjustments (v) through (y) above.
(aa) To eliminate management consulting and advisory fees paid to certain
sponsors at the close of the transactions.
(bb) To eliminate the write-off of in-process research and development acquired
in connection with the transactions.
(cc) To record tax effects on adjustments (aa) through (bb) above.
(dd) Earnings used in computing the ratio of earnings to fixed charges consist
of income (loss) before provision (benefit) for income taxes plus fixed
charges. Fixed charges consist of interest expense.
49
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF NEW SAC
We list in the table below selected historical consolidated financial
information of Seagate Technology as of the end of and for each of the last
five fiscal years ended June 30, 2000, for the six month period ended December
31, 1999 and for the period from July 1, 2000 to November 22, 2000 and of New
SAC as of the end of and for the period from November 23, 2000 to December 29,
2000. The operations of New SAC are substantially identical to the operations
of Seagate Technology before the transactions and we consider Seagate
Technology to be our predecessor. We have derived the historical financial
information of Seagate Technology below as of the end of and for fiscal years
1996 and 1997 from audited consolidated financial statements and related notes
of Seagate Technology, which are not included in this prospectus. We have
derived the historical financial information of Seagate Technology below as of
the end of and for fiscal years 1998, 1999 and 2000 and for the period from
July 1, 2000 through November 22, 2000 and the historical financial information
of New SAC below as of the end of and for the period from November 23, 2000
through December 29, 2000 from the audited consolidated financial statements
and related notes of New SAC and its predecessor, Seagate Technology, included
elsewhere in this prospectus. We have derived the historical financial
information for the six months ended December 31, 1999 from the unaudited
interim consolidated condensed financial statements and related notes of
Seagate Technology included elsewhere in this prospectus, which in our opinion
include all adjustments, consisting only of normal recurring adjustments, which
we consider necessary for the fair presentation of our financial position and
results of operations for these periods. Operating results of New SAC from the
date of its inception, August 10, 2000, through the date of the transactions,
November 22, 2000, were not material and have thus not been included here.
Operating results for the periods from July 1, 2000 to November 22, 2000 and
from November 23, 2000 to December 29, 2000, are not necessarily indicative of
results that may be expected for the entire year or any future period. You
should read the selected historical consolidated financial information below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--New SAC" and the consolidated financial statements
and related notes of New SAC included elsewhere in this prospectus.
SEAGATE TECHNOLOGY
------------------------------------------------------
FISCAL YEAR (a)
------------------------------------------------------
1996 1997 1998 1999 (b) 2000
---------- ------------ --------- ---------- ---------
(IN MILLIONS, EXCEPT FOR RATIOS)
STATEMENT OF OPERATIONS DATA:
Revenue ................................. $8,588 $ 8,940 $6,819 $6,802 $6,448
Cost of sales ........................... 7,007 6,918 5,788 5,176 5,056
Product development ..................... 420 459 627 655 725
Marketing and administrative ............ 486 493 502 534 515
Amortization of goodwill and other
intangibles ............................ 47 50 40 39 51
In-process research and
development (c) ........................ 99 3 223 2 105
Restructuring (d) ....................... 242 (7) 347 60 207
Unusual items (e) ....................... -- 166 (22) 78 350
------ ---------- ------ ------ ------
Income (loss) from operations ........... 287 858 (686) 258 (561)
Other income (expense):
Interest income ........................ 94 92 98 102 101
Interest expense ....................... (56) (35) (51) (48) (52)
Other non-operating income
(expense) (f) ......................... 6 (24) (65) 1,561 1,121
------ ---------- ------ ------ ------
Income (loss) before income taxes........ 331 891 (704) 1,873 609
Benefit (provision) for income
taxes .................................. (118) (233) 174 (697) (299)
------ ---------- ------ ------ ------
Net income (loss) ....................... $ 213 $ 658 $ (530) $1,176 $ 310
====== ========== ====== ====== ======
OTHER FINANCIAL DATA:
EBITDA (i) .............................. $1,051 $ 1,603 $ 529 $1,104 $ 831
Depreciation and amortization ........... 417 607 664 696 693
Capital expenditures, net ............... 907 941 709 603 580
Working capital (g) ..................... 790 433 414 150 17
Cash interest expense ................... 64 27 52 52 52
Ratio of earnings to fixed
charges (h) ............................ 6.9x 26.5x 40.0x 12.7x
Net cash provided by (used in)
operating activities ................... 572 1,880 500 1,200 73
Net cash provided by (used in)
investing activities ................... (885) (1,532) (848) (706) 993
Net cash provided by (used in)
financing activities ................... (43) 193 (39) (761) (585)
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents ............... $ 504 $ 1,047 $ 666 $ 396 $ 875
Short-term investments .................. 670 1,236 1,161 1,227 1,140
Total assets ............................ 5,240 6,723 5,645 7,072 7,167
Total debt (including current portion
of long-term debt) ..................... 801 703 705 704 704
Total shareholders' equity .............. 2,466 3,476 2,937 3,563 3,847
SEAGATE TECHNOLOGY NEW SAC
----------------------------- -------------
SIX MONTHS JULY 1, 2000 NOVEMBER 23,
ENDED TO 2000 TO
DECEMBER 31, NOVEMBER 22, DECEMBER 29,
1999 2000 2000
-------------- -------------- -------------
(IN MILLIONS, EXCEPT FOR RATIOS)
STATEMENT OF OPERATIONS DATA:
Revenue ................................. $3,327 $ 2,449 $1,017
Cost of sales ........................... 2,665 2,130 896
Product development ..................... 359 442 73
Marketing and administrative ............ 243 490 101
Amortization of goodwill and other
intangibles ............................ 17 26 5
In-process research and
development (c) ........................ -- -- 59
Restructuring (d) ....................... 135 20 --
Unusual items (e) ....................... 325 -- --
------ -------- ------
Income (loss) from operations ........... (417) (659) (117)
Other income (expense):
Interest income ........................ 42 58 3
Interest expense ....................... (26) (24) (10)
Other non-operating income
(expense) (f) ......................... 414 (1,015) (8)
------ -------- --------
Income (loss) before income taxes........ 13 (1,640) (132)
Benefit (provision) for income
taxes .................................. (70) 76 (21)
------ -------- -------
Net income (loss) ....................... $ (57) $ (1,564) $(153)
====== ======== =======
OTHER FINANCIAL DATA:
EBITDA (i) .............................. $ 392 $ 282 $ 53
Depreciation and amortization ........... 351 271 69
Capital expenditures, net ............... 279 272 34
Working capital (g) ..................... (95)
Cash interest expense ................... 26 26 --
Ratio of earnings to fixed
charges (h) ............................ 1.5x
Net cash provided by (used in)
operating activities ................... 33 105 (89)
Net cash provided by (used in)
investing activities ................... 767 (404) (953)
Net cash provided by (used in)
financing activities ................... (710) (576) 1,774
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents ............... $ 732
Short-term investments .................. 118
Total assets ............................ 3,509
Total debt (including current portion
of long-term debt) ..................... 904
Total shareholders' equity .............. 759
(footnotes appear on next page)
50
- ----------
(a) Seagate Technology reported financial results on a fiscal year of 52
or 53 weeks ending on the Friday closest to June 30 of that year.
Accordingly, fiscal year 1996 ended on June 28, 1996, fiscal year
1997 ended on June 27, 1997, fiscal year 1998 ended on July 3, 1998,
fiscal year 1999 ended on July 2, 1999, and fiscal year 2000 ended
on June 30, 2000. Fiscal years 1996, 1997, 1999 and 2000 were 52
weeks, and fiscal year 1998 was 53 weeks. All references to years
represent fiscal years unless otherwise noted.
(b) On May 28, 1999, Seagate Technology contributed all of the
operations and assets of its Network & Storage Management Group, or
NSMG, to VERITAS Software Corporation in exchange for the issuance
to its subsidiary, Seagate Software Holdings of shares of VERITAS
common stock representing approximately 42% of the outstanding
shares of VERITAS at that time and the assumption by VERITAS of some
of the liabilities associated with the operations of NSMG. We refer
to the above transaction as the NSMG contribution. As a result of
the NSMG contribution, Seagate Technology recognized a gain of
$1.806 billion offset by compensation charges of $124 million and
transaction costs of $12 million for a net gain of $1.670 billion.
Seagate Technology also incurred a charge in fiscal year 1999 of
approximately $85 million in connection with the write-off of
in-process research and development by VERITAS which was included in
other income (expense) as activity related to equity interest in
VERITAS. The NSMG contribution led to a permanent reduction in gross
margins for Seagate Technology since the NSMG business produced
higher gross margins than the rigid disc drive business.
(c) These amounts represent portions of the purchase price of prior
acquisitions that were attributed to in-process research and
development projects of the acquired companies. The allocated amount
is written off in the period the acquisition closes because we
cannot assure you that the technologies under development will
achieve technological feasibility. Seagate Technology recorded
charges related to the write-off of in-process research and
development (1) in fiscal year 1996, of $99 million in connection
with the acquisition of certain software companies; (2) in fiscal
year 1997, of $3 million in connection with the acquisition of
certain software companies; (3) in fiscal year 1998, these amounts
principally consisted of $214 million in connection with the
acquisition of Quinta Corporation and $7 million in connection with
the acquisition of Eastman Software; (4) in fiscal year 1999, of $2
million in connection with the acquisition of a minority interest in
Seagate Software Holdings; and (5) in fiscal year 2000, of $105
million in connection with the acquisition of XIOtech. New SAC
recorded an in-process research and development charge of $59
million for the period from November 23, 2000 to December 29, 2000
in connection with the transactions. Please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- All Entities -- Prior Acquisitions" for more
information.
(d) Restructuring charges are the result of board approved restructuring
plans we have implemented to align our global work force and
manufacturing capacity with existing and anticipated future market
requirements. These charges are described in more detail in
footnotes to the audited consolidated financial statements of New
SAC and its predecessor included elsewhere in this prospectus and
under "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- New SAC -- Restructuring Activities."
(e) Unusual items include: (1) in fiscal year 1997, compensation expense
of $13 million realized in connection with certain acquisitions and
expenses of $153 million in connection with the settlement of
litigation; (2) in fiscal year 1998, a $22 million reversal of
expense recognized in fiscal year 1997 but paid in a lesser amount
in fiscal year 1998 relating to the settlement of litigation; (3) in
fiscal year 1999, a charge of $78 million of cash compensation
expense related to the acquisition of Quinta; (4) in fiscal year
2000 $64 million of expense related to the settlement of litigation,
and $286 million of compensation expense and payroll taxes related
to the reorganization of Seagate Software Holdings; and (5) for the
six months ended December 31, 1999, $39 million related to the
settlement of litigation and $286 million of compensation expense
and payroll taxes related to the reorganization of Seagate Software
Holdings.
(f) Other non-operating income (expense) includes (1) in fiscal year
1998, mark-to-market losses on foreign exchange hedging contracts
offset by gains on the sale of certain investments in equity
securities; (2) in fiscal year 1999, the net gain on our
contribution of NSMG to VERITAS offset by activity related to our
investment in VERITAS; (3) in fiscal year 2000, the gains on sales
and exchanges of certain investments in equity securities and
activity related to our investment in VERITAS; (4) in the six months
ended December 31, 1999, the activity
(footnotes continue on next page)
51
related to our investment in VERITAS offset by a gain on the sale of
VERITAS and SanDisk stock; (5) for the period from July 1, 2000
through November 22, 2000, the activity related to our investment in
VERITAS, losses recognized on our LHSP investment and the loss on the
sale of Seagate Technology's operating assets to New SAC offset by
gains on sales of SanDisk and Veeco Stock; and (6) for the period
from November 23, 2000 through December 29, 2000, compensation
charges of $10 million for bonuses paid in connection with the
acquisition of XIOtech offset by foreign currency gains of $2
million.
(g) Working capital represents total current assets, excluding cash,
cash equivalents and short-term investments, less total current
liabilities, excluding short term borrowings and current maturities
of long-term debt.
(h) Earnings used in computing the ratio of earnings to fixed charges
consist of income (loss) before provision (benefit) for income taxes
plus fixed charges. Fixed charges consist of interest expense. For
fiscal year 1998, the period from July 1, 2000 through November 22,
2000, and the period from November 23, 2000 through December 29,
2000 earnings were insufficient to cover fixed charges by $653
million, $1.616 billion, and $122 million, respectively.
(i) EBITDA represents income (loss) before income taxes, interest income
(expense), and depreciation and amortization and excludes the impact
of certain non-recurring events summarized below. We have included
certain information concerning EBITDA because management believes
EBITDA is generally accepted as providing useful information
regarding a company's ability to service and incur debt. EBITDA
should not be considered, however, in isolation or as a substitute
for net income, cash flows or other consolidated income or cash flow
data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or
liquidity. Although EBITDA is frequently used as a measure of
operations and ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculation. EBITDA, as
calculated above, differs from the definition of EBITDA and the
related definition of Consolidated Coverage Ratio described under
"Description of the Notes -- Certain Definitions." We have
calculated EBITDA for the periods presented as follows:
SEAGATE TECHNOLOGY
--------------------------------------------------------
FISCAL YEAR
--------------------------------------------------------
1996 1997 1998 1999 2000
---------- ------------ ---------- ----------- ---------
(IN MILLIONS)
Income (loss) before income taxes (1) ..... $ 331 $ 891 $ (704) $ 1,873 $ 609
Interest income ........................... (94) (92) (98) (102) (101)
Interest expense .......................... 56 35 51 48 52
Depreciation and amortization ............. 417 607 664 696 693
Non-recurring items
Non-cash items:
Gain on contribution of NSMG to
VERITAS, net .......................... -- -- -- (1,670) --
Activity related to equity interest
in VERITAS (2) ........................ -- -- -- 119 326
Gain on exchange of certain
investments
in equity securities, net (3) ......... -- -- -- -- (231)
In-process research and
development ........................... 99 3 223 2 105
Loss on LHSP investment ................ -- -- -- -- --
Loss on sale of operating assets to
New SAC ............................... -- -- -- -- --
Restructuring .......................... -- -- 203 35 109
Unusual items (4) ...................... -- 13 -- -- 286
Other, net (5) ......................... -- -- 68 -- 29
Cash items:
Gain on sale of VERITAS stock .......... -- -- -- -- (537)
Gain on sale of SanDisk stock .......... -- -- -- -- (679)
Gain on sale of Veeco stock ............ -- -- -- -- --
Transaction related costs .............. -- -- -- -- --
Restructuring .......................... 242 (7) 144 25 98
Unusual items (4) ...................... -- 153 (22) 78 64
Other, net (5) ......................... -- -- -- -- 8
------ ------- ------ --------- -------
EBITDA .................................. $1,051 $1,603 $ 529 $ 1,104 $ 831
====== ======= ====== ========= =======
SEAGATE TECHNOLOGY NEW SAC
------------------------------------------
SIX MONTHS JULY 1 NOVEMBER 23,
ENDED TO 2000 TO
DECEMBER 31, NOVEMBER 22, DECEMBER 29,
1999 2000 2000
-------------- -------------- -------------
(IN MILLIONS)
Income (loss) before income taxes (1) ..... $ 13 $ (1,640) $(132)
Interest income ........................... (42) (58) (3)
Interest expense .......................... 26 24 10
Depreciation and amortization ............. 351 271 69
Non-recurring items
Non-cash items:
Gain on contribution of NSMG to
VERITAS, net .......................... -- -- --
Activity related to equity interest
in VERITAS (2) ........................ 183 99 --
Gain on exchange of certain
investments
in equity securities, net (3) ......... -- -- --
In-process research and
development ........................... -- -- 59
Loss on LHSP investment ................ -- 138 --
Loss on sale of operating assets to
New SAC ............................... -- 889 --
Restructuring .......................... 76 7 --
Unusual items (4) ...................... 286 584 --
Other, net (5) ......................... -- (11) --
Cash items:
Gain on sale of VERITAS stock .......... (537) -- --
Gain on sale of SanDisk stock .......... (62) (102) --
Gain on sale of Veeco stock ............ -- (20) --
Transaction related costs .............. -- 88 --
Restructuring .......................... 59 13 --
Unusual items (4) ...................... 39 -- 40
Other, net (5) ......................... -- -- 10
------- -------- -------
EBITDA .................................. $ 392 $ 282 $ 53
======= ======== =======
------------
(1) Income (loss) before income taxes includes the following activity in
certain investments in equity securities (1) in fiscal year 1999,
$1.670 billion of net gain related to the contribution of NSMG to
VERITAS; (2) in fiscal year 2000, gains on the sale of portions of our
investments in VERITAS and SanDisk and gains on the exchange of
certain investments in equity securities of $537 million, $679 million
and $231 million,
(footnotes continue on the next page)
52
respectively; (3) in the six months ended December 31, 1999, gains on
the sale of portions of our investments in VERITAS and SanDisk of
$537 million, and $62 million, respectively; and (4) in the period
from July 1, 2000 to November 22, 2000, gains on the sale of portions
of our investment in SanDisk and Veeco of $102 million and $20
million, respectively, offset by losses on our investment in LHSP of
$138 million and the sale of operating assets to New SAC of $889
million. The equity investments in VERITAS and SanDisk were not
acquired by New SAC under the stock purchase agreement.
(2) Activity related to equity interest in VERITAS includes Seagate
Technology's share of the net income or loss of VERITAS, adjusted to
reflect the difference between the amortization of the intangible
assets by Seagate Technology and VERITAS. The net income or loss of
VERITAS is included in the results of Seagate Technology on a one
quarter lag basis. In fiscal year 1999, Seagate Technology recorded
$34 million of amortization expense related to its equity interest in
VERITAS and a charge of $85 million in connection with the write-off
of in-process research and development by VERITAS. In fiscal year
2000, Seagate Technology recorded $356 million of amortization expense
related to its equity interest in VERITAS, which was partially offset
by its $30 million share of the net income of VERITAS for the same
period. For the six months ended December 31, 1999, Seagate Technology
recorded $190 million of amortization expense related to its equity
interest in VERITAS, and Seagate Technology's $7 million share of the
net loss of VERITAS for the same period. For the period from July 1,
2000 to November 22, 2000, Seagate Technology recorded $129 million of
amortization expense related to its equity investment in VERITAS,
which was partially offset by its $30 million, share of the net income
of VERITAS for the same period. The equity investment in VERITAS was
not acquired by New SAC under the stock purchase agreement.
(3) Represents gain recognized by Seagate Technology in fiscal year 2000
comprised of (1) the exchange of all the shares of stock of Dragon
Systems for shares of stock of LHSP in connection with the merger of
Dragon Systems and LHSP, (2) the exchange of all the shares of stock
of CVC for shares of stock of Veeco in connection with the merger of
CVC and Veeco and (3) the exchange of shares of stock of iCompression
Inc. for shares of stock of GlobeSpan, Inc. The investments in LHSP
and Veeco were not acquired by New SAC.
(4) Represents (1) in fiscal year 1997, $13 million of non-cash
compensation charges related to the acquisition of certain software
companies and cash expense of $153 million relating to the settlement
of certain litigation; (2) in fiscal year 1998, a $22 million cash
reversal of expense accrued in a prior period, but paid in a lesser
amount in fiscal year 1998 relating to a settlement of litigation; (3)
in fiscal year 1999, $78 million of cash compensation expense related
to the acquisition of Quinta; (4) in fiscal year 2000, $64 million of
cash expense related to the settlement of litigation, and $286 million
of non-cash compensation expense and payroll taxes related to the
reorganization of Seagate Software Holdings; (5) for the six months
ended December 31, 1999, $39 million of cash expense related to the
settlement of litigation and $286 million of non-cash compensation
expense and payroll related taxes related to the reorganization of
Seagate Software Holdings; (6) for the period from July 1, 2000
through November 22, 2000, $584 million of non-cash compensation
expense related to the acceleration of options in Seagate Technology
in connection with the transactions; and (7) for the period from
November 23, 2000 through December 29, 2000 consulting and advisory
fees paid to certain sponsors in connection with the transactions.
(5) Other, net (1) in fiscal year 1998, includes mark-to-market losses on
foreign exchange hedging contracts of $76 million offset by gains on
the sale of certain investments in equity securities of $8 million;
(2) in fiscal year 2000, principally includes non cash compensation
charges for termination of certain employees of $29 million, and costs
related to the transactions of $8 million; (3) for the period from
July 1, 2000 through November 22, 2000, includes mark-to-market gain
on equity securities of $27 million offset by losses on our investment
in Gadzoox of $8 million and loss on sale of marketable securities of
$8 million; and (4) in the period from November 23, 2000 through
December 29, 2000, a $10 million compensation payment relating to a
previous acquisition.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations for the fiscal years ended July 3, 1998, July 2, 1999 and June 30,
2000 and for the six months ended December 31, 1999 for Seagate Technology, and
of the combined results in the period from July 1, 2000 through December 29,
2000 for Seagate Technology and New SAC. Through November 22, 2000, we operated
as Seagate Technology. Since November 23, 2000, we have been operating as New
SAC.The operations of New SAC are substantially identical to what the
operations of Seagate Technology were before November 22, 2000, and thus we
have presented the results of Seagate Technology and New SAC on a combined
basis for the six months ended December 29, 2000.
The following also includes a discussion of the financial condition and
results of operations for the fiscal years ended July 3, 1998, July 2, 1999 and
June 30, 2000 and for the six months ended December 31, 1999 and December 29,
2000 for three former business units of Seagate Technology that are now
subsidiaries of New SAC, Seagate Technology Holdings, Seagate Technology SAN
Holdings and Seagate Removable Storage Solutions Holdings, each of which
intends to issue options in the future, and one subsidiary of New SAC, Crystal
Decisions, that already has options outstanding. Each of these subsidiaries is
a guarantor of the notes. Certain discussions below are pertinent to all four
of these subsidiaries as well as us, including "--All Entities --The
Transactions," "--All Entities -- Allocation of Net Purchase Price," "--All
Entities -- Prior Acquisitions," "--All Entities -- Transactions with VERITAS
and Other Events," "-- All Entities -- Other Events" and "-- Additional
Discussion -- Relevant to All of New SAC, Seagate Technology Holdings, Seagate
Technology SAN Holdings, Seagate Removable Storage Solutions Holdings and
Crystal Decisions."
You should read this discussion in conjunction with the consolidated
financial statements and the related notes included elsewhere in this
prospectus. See "Risk Factors," "Selected Historical Consolidated Financial
Information of New SAC" and "Business -- Business Strategy." Except as noted,
references to any fiscal year mean to the twelve month period ending on the
Friday closest to June 30 of that year.
ALL ENTITIES
THE TRANSACTIONS
On November 22, 2000, Seagate Technology, Seagate Software Holdings, a
subsidiary of Seagate Technology, and Suez Acquisition Company completed a
stock purchase agreement, and Seagate Technology and VERITAS Software
Corporation completed an agreement and plan of merger and reorganization. Suez
Acquisition Company was a limited liability company organized under the laws of
the Cayman Islands and formed solely for the purpose of entering into the stock
purchase agreement and related acquistions. Suez Acquisition Company assigned
all of its rights and obligations under the stock purchase agreement to us.
Under the stock purchase agreement, Suez Acquisition Company agreed to
purchase for $1.840 billion in cash, including transaction costs of $25
million, all of the operating assets of Seagate Technology and its consolidated
subsidiaries, including Seagate Technology's disc drive, tape drive and
software businesses and operations and certain cash balances, but excluding the
approximately 128 million shares of VERITAS common stock held by Seagate
Software Holdings and Seagate Technology's equity investments in Gadzoox
Networks, Inc. and Lernout & Hauspie Speech Products N.V., or LHSP. In
addition, under the stock purchase agreement, Suez Acquisition Company agreed
to assume substantially all of the operating liabilities of Seagate Technology
and its consolidated subsidiaries. In addition, Suez Acquisition Company
acquired Seagate Technology Investments, Inc., a subsidiary of Seagate
Technology which holds strategic investments in various companies.
Immediately following the consummation of these transactions, VERITAS
acquired the remainder of Seagate Technology and a wholly-owned subsidiary of
VERITAS merged with and into Seagate Technology, with Seagate Technology
becoming a wholly-owned subsidiary of VERITAS. We refer to this transaction as
the VERITAS merger. VERITAS did not acquire Seagate Technology's disc drive
business or any other Seagate Technology operating business. In the VERITAS
merger, the Seagate Technology stockholders received merger consideration
consisting of VERITAS stock and cash.
54
An indemnification agreement provided that we are required to indemnify
VERITAS and its affiliates for any liability for taxes of Seagate Technology,
Crystal Decisions and the subsidiaries of Seagate Technology we acquired, in
excess of an amount deposited into an escrow account by VERITAS. VERITAS
deposited $150 million in an escrow account, which may be withdrawn by us to
satisfy these tax liabilities. See "Certain Relationships and Related
Transactions -- Indemnification Agreement."
We refer to the transactions relating to the stock purchase agreement, the
agreement and plan of merger and the VERITAS merger as the "transactions".
At the closing of the transactions, the board of directors of New SAC
adopted the New SAC 2000 Restricted Share Plan. The 2000 Restricted Share Plan
allows for grants of ordinary and preferred share awards to key employees,
directors and consultants. We have authorized 1,843,000 ordinary shares and
48,500 preferred shares to be granted under this plan.
On February 2, 2001, the board of directors of New SAC approved the 2001
Restricted Share Plan. Unlike the 2000 Restricted Share Plan, the 2001
Restricted Share Plan only provides for the grant of restricted ordinary shares
and does not provide for the grant of restricted preferred shares.
In addition, members of the management group of Seagate Technology entered
into rollover agreements in connection with the transactions. Under these
agreements, members of the management group agreed not to receive merger
consideration for a portion of their shares of Seagate Technology common stock
and options to purchase shares of Seagate Technology common stock, valued at
approximately $184 million. In exchange for the management rollover, the
members of the management group received deferred compensation and ordinary and
preferred shares of New SAC. The unvested ordinary and preferred shares vest as
follows:
o one-third of the shares will vest on the first anniversary of the
closing of the transactions;
o one-third will vest proportionately each month over the next 18 months;
and
o the final one-third will vest on the date which is 30 months after the
closing of the transactions.
Of the total value of the management rollover, approximately $179 million
of the management rollover has been credited to the management group's accounts
in respect of the restricted stock awards. With respect to the restricted
ordinary and preferred shares received in connection with the rollover
agreements, we will recognize compensation expense of approximately $23 million
over the next 30 months as these shares vest.
In connection with the management rollover, members of the management
group also received interests in deferred compensation plans adopted at Seagate
Technology Holdings, Seagate SAN Holdings and Seagate Removable Storage
Solutions Holdings, depending on which subsidiary employed the individual.
Under the terms of the deferred compensation plans, the employee vests in
certain deferred compensation at the same rate as vesting in the ordinary and
preferred shares. However, such vesting can be accelerated at any time at the
election of the subsidiary. Payments, if any, under these deferred compensation
plans are contingent upon the occurrence of future events. As a result,
compensation expense recognition will be deferred until these future events
occur. For a description of the deferred compensation plans, see "Management --
Rollover Agreements and Deferred Compensation Plans."
Following the closing of the transactions, the board of directors of
Seagate Technology Holdings and Seagate Removable Storage Solutions Holdings
adopted stock option plans for the grant of options to employees for the
purchase of ordinary shares. These plans provide for grants of non-qualified
and incentive stock options to key employees, directors, and consultants of the
subsidiaries and their affiliates. The board of directors of Seagate Technology
SAN Holdings is also expected to adopt a stock option plan in fiscal year 2001.
When options are granted under any of these plans, these subsidiaries, like
Crystal Decisions, will constitute non-wholly owned subsidiaries of New SAC. We
have included the results of operations of these subsidiaries in this
management's discussion by entity.
55
ALLOCATION OF NET PURCHASE PRICE
We accounted for the transactions as a purchase in accordance with
Accounting Principles Board, or APB, Opinion No. 16, "Business Combinations."
All acquired tangible assets, identifiable intangible assets as well as assumed
liabilities were valued based on their relative fair values and reorganized
into the following businesses: (1) the rigid disc drive business (HDD, which is
now Seagate Technology Holdings), which includes the storage area networks
business (SAN, which is now Seagate Technology SAN Holdings), (2) the removable
storage solutions business (RSS, which is now Seagate Removable Storage
Solutions Holdings), (3) the software business (Crystal Decisions), and (4) an
investment holding company (STI). The fair value of the net assets exceeded the
net purchase price by approximately $909 million. Accordingly, the resultant
negative goodwill was allocated on a pro rata basis to the acquired long-lived
assets and reduced the recorded amounts by approximately 46%.
The table below summarizes the allocation of net purchase price by
business. Amounts for HDD include SAN.
ESTIMATED FAIR VALUE
-------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------------
USEFUL
LIFE TOTAL CRYSTAL
DESCRIPTION IN YEARS NEW SAC HDD SAN RSS DECISIONS STI
- --------------------------------- ---------- --------- --------- -------- --------- ----------- ------
Net current assets (1)(4) $ 939 $ 873 $ 27 $32 $ 9 $25
Long-term investments (2) 42 -- -- -- -- 42
Other long-lived assets 42 42 -- -- -- --
Property, plant & equipment (3) Up to 30 778 764 2 9 5 --
Identified intangibles:
Trade names (5) 10 47 47 1 -- -- --
Developed technologies (5) 3-7 76 50 5 11 15 --
Assembled workforces (5) 1-3 53 43 1 3 7 --
Other 5 1 1 1 -- -- --
------ ------ ----- ---- --- ---
Total identified intangibles 177 141 8 14 22 --
Long-term deferred taxes (4) (75) (70) -- (3) (2) --
Long term liabilities (122) (122) (10) -- -- --
------ ------ ----- ----- ----- ---
Net assets 1,781 1,628 27 52 34 67
In-process research &
development (5) 59 52 25 -- 7 --
------ ------ ----- ----- ----- ---
NET PURCHASE PRICE $1,840 $1,680 $ 52 $52 $41 $67
====== ====== ===== ===== ===== ===
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book values.
Short-term investments were valued based on quoted market prices.
Inventory values were estimated based on the current market value of the
inventories less completion costs and less a profit margin for activities
remaining to be completed until the inventory is sold. Valuation
allowances were established for current deferred tax assets in excess of
long-term deferred tax liabilities.
Assumed current liabilities included accounts payable, accrued
compensation and expenses and accrued income taxes. The fair values of
current liabilities generally approximated the historic recorded book
values because of the monetary nature of most of the liabilities.
(2) The value of individual long-term equity investments was based upon
quoted market prices, where available, and when such market prices were
not available an independent appraisal was performed to estimate the fair
values of the individual investments.
(3) We obtained an independent valuation of the acquired property, plant and
equipment. In arriving at the determination of market value for the
assets, the appraisers considered the estimated cost to construct or
acquired comparable property. Machinery and equipment were assessed using
replacement cost estimates reduced by depreciation factors representing
the condition, functionality and operability of the assets. The sales
comparison approach was used for office and data communication equipment.
Land, land improvements, buildings, and building and leasehold
improvements were valued based upon discussions with knowledgeable
personnel.
(footnotes continue on next page)
56
(4) Long-term deferred tax liabilities arose as a result of the excess of the
fair values of inventory, long-term investments, and acquired intangible
assets over their related tax basis. We have $338 million of federal and
state deferred tax assets for which a full valuation allowance has been
established.
(5) We obtained an independent valuation of acquired identified intangibles.
The significant assumptions relating to each category are discussed in
the following paragraphs. Also, these assets are being amortized on the
straight-line basis over their estimated useful life and resultant
amortization is included in amortization of goodwill and other
intangibles.
Trade names--The value of the trade names was based upon discounting to
their net present value the licensing income that would arise by charging
the operating businesses that use the trade names.
Developed technologies--The value of this asset for each operating
business was determined by discounting the expected future cash flows
attributable to all existing technologies which had reached technological
feasiblility, after considering risks relating to: (1) the characteristics
and applications of the technology, (2) existing and future markets, and
(3) life cycles of the technologies. Estimates of future revenues and
expenses used to determine the value of developed technology was
consistent with the historical trends in the industry and expected
outlooks.
Assembled workforces--The value of the assembled work force was determined
by estimating the recruiting, hiring and training costs to replace each
group of existing employees.
In-process research & development--The value of in-process research &
development was based on an evaluation of all devolopmental projects using
the guidance set forth in Interpretation No. 4 of Financial Accounting
Standards Board, or FASB, Statement No. 2, "Accounting for Research and
Development Costs" and FASB Statement No. 86, "Accounting for the Cost of
Computer Software to Be Sold, Leased, or Otherwise Marketed."
The amount was determined by: (1) obtaining management estimates of future
revenues and operating profits associated with exisiting developmental
projects, (2) projecting the cash flows and costs to completion of the
underlying technologies and resultant products, and (3) discounting these
cash flows to their net present value.
Estimates of future revenues and expenses used to determine the value of
in-process research and development were consistent with the historical
trends in the industry and expected outlooks. The entire amount was
charged to operations because related technologies had not reach
technological feasibility and they had no alternative future use.
At the valuation date, HDD's developmental projects focused on increasing
capacity, reducing size and power consumption, improving performance and
reliability, and reducing production costs. These projects were grouped
into three categories. Those included in category one had completed
conceptualization and there was substantial progress in coding, builiding,
simulating and testing the technologies functionality and performance. For
those included in category two, subsystem requirements had been
identified, design plans had been completed, and substantial progress had
been made in coding and/or building the technologies. Those included in
category three had completed design plans and system requirements. Based
upon an analysis of efforts to date, developmental projects in these three
categories were 70%, 50%, and 30% complete, respectively, and were
scheduled for completion throughout the period ending in fiscal 2003 at an
additional estimated cost of $107 million.
At the valuation date, SAN was in the process of developing two next
generation versions of existing technologies, which, based on efforts to
date, were 50% and 75% complete. Activities necessary to convert this
in-process research & development into commercially viable technologies
include the writing and testing of code diagnostic software, design
development testing and system integration. Seagate Technology SAN
Holdings expects resultant products will be successfully developed in
fiscal 2002 at an additional estimated cost of $1 million.
At the valuation date, Crystal Decisions was in the process of developing
three next generation versions of existing technologies which, based on
total man hours and absolute time, were 70% to 85% complete. Activities
necessary to covert this in-process research and development into
commercially viable products include completion of all planning,
designing, prototyping, verifying and testing to establish the products
can meet their design specifications. Crystal Decisions expects resultant
products will be successfully developed in fiscal 2002 at an additional
cost of $28 million.
57
PRIOR ACQUISITIONS
We have entered into a number of business combinations during the three
most recent fiscal years, including the acquisitions of Quinta Corporation and
Eastman Storage Software Management Group in fiscal year 1998 and XIOtech in
fiscal year 2000. In connection with these and other transactions, we have
recognized significant write-offs of in-process research and development. We
are primarily responsible for estimating the fair value of the purchased
research and development in all transactions accounted for under the purchase
method. We summarize below these significant acquisitions.
DATE OF
ACQUISITION ACQUISITION APPLICATIONS
- ----------------------------- -------------- -----------------------------------------------------
Quinta Corporation August 1997 Optically assisted Winchester technology to multiply
the areal density of rigid disc drives
Eastman Software Storage June 1998 Storage management product for Microsoft
Management Group Corporation's Windows NT platform
XIOtech Corporation January 2000 Virtual storage and storage area network solutions
ACQUISITION OF QUINTA CORPORATION
We acquired Quinta Corporation in August 1997. Quinta's research and
development efforts revolve around optically assisted Winchester technology.
Optically assisted Winchester combines traditional magnetic recording
technology with Winchester rigid disc drives and optical recording
capabilities; optical recording technology enables greater data storage
capacity. By integrating advanced optical features with a sophisticated
tracking and delivery system within the read/write head design, we expected
optically assisted Winchester to multiply the areal density of rigid disc
drives. Since the acquisition, we have redirected our efforts so that we are
focused less on the development of a specific product and more on the
advancement of optical technology in general. As such, the spending elements
associated with the development of optical technology are embedded in the
research and development budgets of our product design centers and component
technology organizations. At the present time, we have no immediate plans to
release a storage device which makes specific use of Quinta's optically
assisted Winchester technology. The delay in releasing an optically assisted
Winchester storage device is not expected to materially affect our future
earnings.
In fiscal year 1998, we incurred a one-time write-off of in-process
research and development of $214 million and in fiscal year 1999, we recognized
$78 million for compensation expense related to the acquisition of Quinta.
ACQUISITION OF EASTMAN SOFTWARE STORAGE MANAGEMENT GROUP
We acquired Eastman Software Storage Management Group in June 1998,
through our subsidiary Seagate Software Holdings. Eastman develops a storage
management product for Microsoft's Windows NT platform and its two primary
products are OPEN/stor for Windows NT and AvailHSM for NetWare. Eastman was
included in the contribution of the Network & Storage Management Group, or
NSMG, to VERITAS in May 1999, which we describe below. In fiscal year 1998,
Seagate Software Holdings incurred a one-time write-off of in-process research
and development of $7 million related to the acquisition of Eastman.
ACQUISITION OF XIOTECH CORPORATION
We acquired XIOtech, a provider of virtual storage and storage area
network solutions, in exchange for 8,031,804 shares of our common stock issued
from treasury shares and options with a combined fair value of $359 million in
January 2000. We accounted for this acquisition as a purchase and, accordingly,
the results of operations of XIOtech have been included in our consolidated
financial statements from the date of the acquisition. The purchase price has
been allocated based on the estimated fair market value of net tangible and
intangible assets acquired and in-process research and development costs. As a
result of the acquisition, we incurred a one-time write-off of in-process
research and development of $105 million in fiscal year 2000. Amortization of
goodwill and other intangibles was $20 million in fiscal year 2000, including
$4 million for developed technology
58
contained in cost of sales. Since its acquisition, XIOtech's revenue and
expenses have not been material to our consolidated revenue and expenses.
TRANSACTIONS WITH VERITAS AND OTHER EVENTS
CONTRIBUTION OF NSMG TO VERITAS
On May 28, 1999, Seagate Technology and its subsidiaries, Seagate Software
Holdings and NSMG, closed and consummated an agreement and plan of
reorganization, dated as of October 5, 1998, with VERITAS and VERITAS Operating
Corporation, which we refer to as the software acquisition agreement. That
agreement provided for the contribution by Seagate Technology, Seagate Software
Holdings and other subsidiaries to VERITAS of the outstanding stock of NSMG and
other subsidiaries of Seagate Software Holdings and the assets used primarily
in the network and storage management business of Seagate Software Holdings, in
exchange for the issuance of VERITAS common stock to Seagate Software Holdings
and the offer by VERITAS to grant options to purchase VERITAS common stock to
some Seagate Software Holdings' employees who became employees of VERITAS or
its subsidiaries. As part of this transaction, VERITAS assumed certain
liabilities of the NSMG business. The transaction was structured to qualify as
a tax-free exchange. We accounted for the contribution of the NSMG business to
VERITAS as a non-cash, stock for stock exchange using the fair value of the
assets and liabilities exchanged. After the transaction, Seagate Software
Holdings owned approximately 42% of the outstanding shares, or 155,583,468
shares, of VERITAS.
Because Seagate Technology still owned a portion of the NSMG business
through its ownership of VERITAS, Seagate Technology did not recognize 100% of
the gain on the exchange. The gain recorded was equal to the difference between
58% of the fair value of the VERITAS common stock received and 58% of Seagate
Technology's basis in the NSMG assets and liabilities exchanged. Seagate
Technology accounted for its ongoing investment in VERITAS using the equity
method. The difference between the recorded amount of Seagate Technology's
investment in VERITAS and the amount of its underlying equity in the net assets
of VERITAS was allocated based upon the fair value of the underlying tangible
and intangible assets and liabilities of VERITAS. The intangible assets
included amounts allocated to in-process research and development and resulted
in a $85 million write-off in fiscal year 1999 included in activity related to
equity interest in VERITAS in the accompanying statement of operations.
Intangible assets, including goodwill, had a four year amortization schedule.
Seagate Technology has included in its financial results its share of the
net income or loss of VERITAS, excluding certain NSMG purchase accounting
related amounts recorded by VERITAS, but including Seagate Technology's
amortization of the difference between its recorded investment and the
underlying assets and liabilities of VERITAS. Because of practicality
considerations, the net income or loss of VERITAS has been included in the
results of Seagate Technology on a one quarter lag basis. Thus, the results of
VERITAS for the period from May 29, 1999 to June 30, 1999, the period
subsequent to the contribution of NSMG to VERITAS, and for the period from July
1, 1999 through March 31, 2000 were included in Seagate Technology's results
for the fiscal year ended June 30, 2000. We eliminate from VERITAS' income
(loss) the effect of VERITAS' accounting for the NSMG business contribution,
including VERITAS' amortization expenses related to intangible assets.
Excluding amortization of intangibles of $356 million, the total equity income
recorded by Seagate Technology related to VERITAS in fiscal year 2000 was $30
million.
SEAGATE SOFTWARE HOLDINGS EXCHANGE OFFER
In a transaction separate from but related to the contribution of the NSMG
business to VERITAS, on June 9, 1999, Seagate Technology exchanged 5,275,772
shares of its common stock for 3,267,255 of the outstanding shares of Seagate
Software Holdings common stock owned by employees, directors and consultants of
Seagate Software Holdings. The fair value of the Seagate Software Holdings
shares acquired less the original purchase price paid by the employees was
recorded as compensation expense for those shares outstanding and vested less
than six months. The purchase of Seagate Software Holdings shares outstanding
and vested more than six months
59
was accounted for as the purchase of a minority interest and, accordingly, the
fair value of the shares exchanged was allocated to all of the identifiable
tangible and intangible assets and liabilities of Seagate Software Holdings. In
connection with the acquisition, Seagate Software Holdings recorded the
acquisition of the minority interest and we recorded compensation expense
amounting to approximately $124 million and wrote off purchased research and
development amounting to $2 million in the fourth quarter of fiscal year 1999.
Associated intangible assets and goodwill are being amortized to operations
over four years.
SEAGATE SOFTWARE HOLDINGS REORGANIZATION
On October 20, 1999, Seagate Daylight Merger Corp., a wholly owned
subsidiary of Seagate Technology, was merged with and into Seagate Software
Holdings. Seagate Software Holdings' assets consisted of the assets of the
information management group of Seagate Software Holdings and an investment in
VERITAS common stock that VERITAS acquired under the merger agreement. The
merger was effected on October 20, 1999. As a result of the merger, Seagate
Software Holdings became a wholly owned subsidiary of Seagate Technology. In
connection with the reorganization, Seagate Software Holdings also formed a
wholly owned subsidiary, which we refer to as Crystal Decisions. Seagate
Software Holdings transferred the assets and operations of its information
management group into Crystal Decisions, which is now the operating entity for
this business. In connection with the merger, Seagate Software Holdings
stockholders and optionees received payment in the form of 3.23 shares of
Seagate Technology common stock for each share of Seagate Software Holdings
common stock less any amounts due for the payment of the exercise price for the
options. All outstanding Seagate Software Holdings stock options were
accelerated immediately prior to the merger. Seagate Software Holdings
accounted for the exchange of shares of its common stock as the acquisition of
a minority interest for Seagate Software Holdings common stock outstanding and
vested more than six months held by employees and all stock held by former
employees and consultants. The fair value of the shares of Seagate Technology
common stock issued was $19 million and was recorded as purchase price and
allocated to the assets and liabilities received. During the quarter ended
December 31, 1999, we recorded compensation expense of $284 million, plus $2
million in payroll taxes, related to the purchase of the minority interest in
Seagate Software Holdings.
OTHER EVENTS
In fiscal year 1998, we recorded a non-cash charge of $76 million on a
mark-to-market of the value of foreign exchange hedging contracts.
On November 22, 1999 and March 6, 2000, Seagate Software Holdings sold
18,523,502 and 9,000,000 shares of VERITAS common stock, adjusted for 3 for 2
stock splits, for proceeds of $397 million and $437 million, respectively, net
of underwriting discounts and commissions. Seagate Software Holdings acquired
those shares in connection with the contribution of the NSMG business to
VERITAS in May 1999. The sale of shares of VERITAS common stock by Seagate
Software Holdings in the six months ended December 31, 1999 resulted in pre-tax
gains of $537 million.
In fiscal year 2000, several marketable equity securities held by us,
including securities issued by SanDisk Corporation, Gadzoox Networks, Inc.,
Veeco Instruments, Inc. and LHSP, were marked to market resulting in a $95
million unrealized gain, net of taxes. We record unrealized gains and losses on
the mark to market of investments as a component of accumulated other
comprehensive income and make appropriate adjustments to the value of these
assets. The investments were subject to changes in valuation based upon the
market price of their common stock.
In fiscal year 2000, we sold 10,675,000 shares of SanDisk common stock,
adjusted for a 2 for 1 stock split on February 23, 2000, for proceeds of $681
million, net of underwriting discounts and commissions. The sale of shares of
SanDisk common stock in fiscal year 2000 resulted in a pre-tax gain of $679
million.
In fiscal year 2000, we recognized gains of $231 million on the exchange
of certain investments in equity securities. Specifically, the gain related to
(1) the exchange of shares of stock of Dragon
60
Systems for shares of stock of LHSP in connection with the merger of Dragon
Systems and LHSP and (2) the exchange of shares of stock of CVC, Inc. for
shares of stock of Veeco Instruments, Inc. in connection with the merger of CVC
and Veeco. The shares of stock in LHSP, Gadzoox and Veeco were not acquired by
us under the stock purchase agreement. In addition, we recognized a charge of
$64 million related to the settlement of litigation.
In the six months ended December 29, 2000, on a combined basis, we
recognized gains on the sales of investments in SanDisk common stock and Veeco
of $102 million and $20 million, respectively.
NEW SAC
BASIS OF PRESENTATION
Because we acquired all the operating assets of Seagate Technology as of
November 22, 2000, Seagate Technology is our predecessor. Accordingly,
references to "we", "our" or "us" for events, transactions or regarding
financial information during these periods are references to our predecessor,
Seagate Technology. For comparative purposes, the financial information
presented combines the operations of Seagate Technology from July 1 to November
22, 2000 with our operations as New SAC from November 23, 2000 to December 29,
2000. Although we were incorporated on August 10, 2000, prior to November 23,
2000 our operations were not significant. Financial information for the fiscal
years ended 1998, 1999 and 2000 and for the six-month period ended December 31,
1999 is the historical financial information of Seagate Technology.
OVERVIEW
We are a leading designer, manufacturer and marketer of products for
storage, retrieval and management of electronic data. Businesses, other
organizations and individuals use rigid disc drives as the primary medium for
storing electronic information in computer systems ranging from desktop
computers to data centers delivering information over corporate networks and
the Internet. We produce a broad range of rigid disc drive products and are a
leader in both the enterprise (primarily Internet servers, mainframes and
workstations) and desktop (personal computers or PCs) sectors of the rigid disc
drive industry. According to Dataquest, our shares of unit shipments for the
enterprise and desktop sectors of the rigid disc drive industry, for the
calendar year 2000, were 44.3% and 22.5%, respectively. We also design,
manufacture and market tape drives and intelligent storage solutions and are a
leading provider of business intelligence software. Our advanced research and
development capabilities, combined with our vertically integrated manufacturing
facilities, enable us to be a leader in bringing high quality, next generation
information storage products to market. For the six months ended December 29,
2000, we had combined revenue of approximately $3.46 billion and combined
EBITDA of approximately $272 million. During that period, our rigid disc drive
operations accounted for 94% of our combined revenue and 83% of our combined
gross profit, and our software operations accounted for 2% of our combined
revenue and 12% of our combined gross profit.
We sell our rigid disc drives primarily to major original equipment
manufacturers, or OEMs, and also market to distributors under our globally
recognized brand name. For the twelve months ended December 29, 2000,
approximately 67% of our combined rigid disc drive revenue was from sales to
OEMs, including customers such as Compaq, Dell, EMC, Hewlett Packard, IBM and
Sun Microsystems. We have longstanding relationships with many of these OEM
customers, such as Compaq, our largest customer, which we have served for
approximately 18 years. We also have key relationships with major distributors,
who sell our rigid disc drive products to small OEMs, dealers, system
integrators and retailers in most geographic areas of the world. For the twelve
months ended December 29, 2000, approximately 42% of our combined revenue was
from customers located in North America, approximately 33% was from customers
located in Europe and approximately 25% was from customers located in Asia.
Substantially all of our revenue is denominated in U.S. dollars.
We have three operating segments, rigid disc drives, tape drives and
software. However, only the rigid disc drive and software businesses were
reportable segments under the Statement of
61
Financial Accounting Standards, or SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." For fiscal year 2000, revenue from
rigid disc drive operations was $6.013 billion, revenue from software
operations was $127 million and revenue from other operations was $308 million;
gross profit from rigid disc drive operations was $1.238 billion, gross profit
from software operations was $82 million and gross profit from other operations
was $72 million. For the six months ended December 29, 2000, combined revenue
from rigid disc drive operations was $3.248 billion, combined revenue from
software operations was $77 million and combined revenue from other operations
was $141 million; combined gross profit from rigid disc drive operations was
$364 million, combined gross profit from software operations was $54 million
and combined gross profit from other operations was $52 million. For more
information regarding these segments and related information, see Note 9 to the
audited consolidated financial statements of New SAC and its predecessor
included elsewhere in this prospectus.
RESTRUCTURING ACTIVITIES
FISCAL YEAR 1998 RESTRUCTURING ACTIVITIES
In fiscal year 1998, we recorded restructuring charges of $347 million.
These charges were the result of exiting production of rigid disc drives with a
form factor of less than 3.5 inches for mobile products; discontinuing older
generation rigid disc drive products; closing and selling the Clonmel, Ireland
manufacturing facility; closing and subleasing the San Jose and Moorpark,
California design center facilities; aborting production expansion projects in
Cork, Ireland; and divesting our new manufacturing facility in The Philippines,
which was nearing completion. The restructuring charges consisted of the
following: employee related costs for severance of $56 million; facilities
costs for facilities we were no longer using for current activities, which
included lease termination expenses and residual payments on leases for
facilities of $24 million for facilities in California and Asia and the
write-off or write-down of owned and leased facilities located in California,
The Philippines and Ireland of $54 million; the write-off or write-down of $137
million for excess manufacturing, assembly and test equipment and tooling
formerly used primarily in California, Singapore, Thailand and Ireland; the
write-off of intangibles and other assets, including $9 million for capital
equipment deposits and $2.5 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
restructuring plan; and other costs consisting 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. These restructuring changes resulted in cash
charges except for those related to the write-off or write-down of assets.
FISCAL YEAR 1999 RESTRUCTURING ACTIVITIES
In fiscal year 1999, we recorded restructuring charges of $72 million and
reversed $12 million of restructuring accruals recorded in fiscal year 1998,
resulting in a net restructuring charge of $60 million, of which $35 million
was a non-cash charge. The $12 million reversal was a result of abandoning our
plan to seek an agreement with an external vendor to supply parts currently
manufactured at a facility in Thailand. The $72 million restructuring charge
was a result of steps we took to further improve the efficiency of our
operations. These actions included the following: closure of our microchip
manufacturing facility in Scotland; discontinuance of our read/write head
suspension business located in Malaysia and Minnesota; consolidation of global
customer service operations by relocating those operations from Singapore,
Scotland and Costa Mesa, California to Mexico; and closure of our recording
media substrate facility in Mexico. In connection with the restructuring, we
reduced our work force by approximately 1,250 employees. Our implementation of
the restructuring plan was substantially completed as of March 31, 2000.
62
FISCAL YEAR 2000 RESTRUCTURING ACTIVITIES
In fiscal year 2000, we recorded restructuring charges totaling $218
million and reversed $11 million of our restructuring accruals comprised of $2
million of restructuring reserves recorded in the same period, $5 million of
restructuring reserves recorded in fiscal year 1999 and $4 million of
restructuring reserves recorded in fiscal year 1998, resulting in a net
restructuring charge of $207 million. These charges were a result of a
restructuring plan established to align our global work force and manufacturing
capacity with existing and anticipated future market requirements. These
actions included work force reductions, reductions of excess capacity including
closure of surplus manufacturing facilities or portions of facilities which did
not reduce manufacturing capacity due to efficiency gains, write-offs of excess
equipment and consolidation of operations in our recording media operations,
rigid disc drive assembly and testing facilities, printed circuit board
assembly manufacturing, recording head operations, software operations,
customer service operations, sales and marketing activities, and research and
development activities. The restructuring charges were comprised of the
following: $81 million for the write-off of excess manufacturing, assembly and
test equipment formerly used in Singapore, Thailand and Northern California;
$90 million for employee termination costs; $29 million for the write-off of
owned facilities located in Singapore; $11 million in lease termination
expenses and residual payments on leases; $5 million in renovation costs to
restore facilities in Singapore and Northern California to their pre-lease
condition; and $2 million in contract cancellations associated with one of the
Singapore facilities. These restructuring charges resulted in cash charges
except for those related to write-off of assets and the Singapore contract
cancellations. Prior to this period, there was no indication of permanent
impairment of the assets associated with the closure and consolidation of the
facilities. Under the fiscal year 2000 restructuring plan, we planned to reduce
our work force by approximately 24,000 employees. Approximately 22,000 of the
24,000 employees had been terminated as of December 29, 2000. We estimate that
if we had completed the fiscal year 2000 restructuring activities by the end of
fiscal year 2000, annual salary and depreciation expense would have been
reduced by approximately $151 million and $48 million, respectively. The
implementation of our fiscal year 2000 restructuring plan was substantially
complete by December 29, 2000.
FISCAL YEAR 2001 RESTRUCTURING ACTIVITIES
As part of the transactions, New SAC assumed all the restructuring
liabilities previously recorded by Seagate Technology, including $41 million
related to restructuring activities announced in fiscal 2000 and $3 million
related to restructuring activities announced in fiscal 2001. During the period
from July 1, 2000 to November 22, 2000, Seagate Technology recorded
restructuring charges totaling $20 million. Of the $20 million, $11 million was
a result of a restructuring plan established to continue the alignment of
Seagate Technology's global workforce and manufacturing capacity with existing
and anticipated future market requirements, specifically in its recording head
operations in Thailand. The remaining $9 million consisted of a $3 million
employee termination benefit adjustment to the original estimate related to the
fiscal 2000 restructuring plan and $6 million in additional restructuring
charges for adjustments to original estimates to the fiscal 1998 restructuring
plan. The fiscal 2001 restructuring plan includes workforce reductions,
capacity reductions including closure of facilities or portions of facilities,
write-off of excess equipment and consolidation of operations. The
restructuring charges were comprised of $3 million for employee termination
costs; $6 million for the write-off of owned facilities located in Thailand; $1
million for the write-off of excess manufacturing, assembly and test equipment;
and $1 million in other expenses. Prior to these restructuring activities,
there was no indication of permanent impairment of the assets associated with
the closure and consolidation of facilities.
In connection with the fiscal 2001 restructuring plan, we plan to reduce
our workforce by approximately 2,000 employees, primarily in manufacturing.
Approximately 100 of the 2,000 employees had been terminated as of December 29,
2000. As a result of employee terminations and the write-off of equipment and
facilities in connection with the fiscal 2001 restructuring plan, we
63
estimate that after completion of these restructuring activities, annual salary
and depreciation expense will be reduced by approximately $7 million and $2
million, respectively. However, we expect that reduction in annual salary
expense will be substantially offset by increases of headcount in other
recording head operations facilities.
In March 2001, we announced $54 million of additional restructuring
activities at our Perai and Ipoh, Malaysia disc drive plants and our Oklahoma
City customer service facility. Total restructuring charges included additional
severance of $23 million, lease termination expenses and residual payments on
leases of $17 million, equipment costs of $12 million and other costs of $2
million. We expect these restructuring activities to be complete by the first
half of fiscal 2002. We may implement additional actions pursuant to our
restructuring plans, particularly in light of current economic conditions, and,
if such additional actions are implemented, we anticipate that additional
charges would be taken related to these actions.
RESULTS OF OPERATIONS OF NEW SAC
We list in the table below the consolidated statements of operations data
as a percentage of revenue for Seagate Technology for fiscal years 1998, 1999
and 2000 and the six months ended December 31, 1999 and our combined
consolidated statements of operations data as a percentage of revenue for the
six months ended December 29, 2000. Our operations as New SAC are substantially
identical to those of Seagate Technology prior to the transactions, we have
combined the results of Seagate Technology from July 1, 2000 to November 22,
2000, and our results as New SAC from November 23, 2000 to December 29, 2000,
in the table and the discussions below for easier comparison with the results
of Seagate Technology for the six months ended December 31, 1999. We therefore
refer to the results of operations for the six months ended December 29, 2000
as "combined" in the discussion below.
COMBINED RESULTS OF
NEW SAC AND
SEAGATE TECHNOLOGY SEAGATE TECHNOLOGY
--------------------------------------------------- --------------------
FISCAL YEAR
-------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
1998 1999 2000 DECEMBER 31, 1999 DECEMBER 29, 2000
----------- -------- ---------- ------------------- --------------------
Revenue ...................................... 100% 100% 100% 100% 100%
Cost of sales ................................ 85 76 78 80 88
Gross margin ................................. 15 24 22 20 12
Product development .......................... 9 10 11 11 15
Marketing and administrative ................. 7 8 8 7 17
Amortization of goodwill and other
intangibles ................................. 1 -- 1 -- --
In-process research and
development ................................. 3 -- 2 -- 2
Restructuring ................................ 5 1 3 4 --
Unusual items ................................ -- 1 5 10 --
Income (loss) from operations ................ (10) 4 (8) (12) (22)
Other income (expense), net .................. -- 23 18 12 (29)
Income (loss) before income taxes ............ (10) 27 10 -- (51)
Benefit (provision) for income taxes ......... 2 (10) (4) (2) 2
Net income (loss) ............................ (8)% 17 % 5% (2)% (49)%
64
SIX MONTHS ENDED DECEMBER 29, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999
REVENUE. Combined revenue for the six months ended December 29, 2000 was
$3.466 billion, an increase of 4% when compared with revenue of $3.327 billion
for the six months ended December 31, 1999. The increase in revenue was
primarily due to $0.9 billion related to higher unit sales volumes offset by
$0.8 billion related to price erosion. We expect that price erosion in the data
storage industry will continue for the foreseeable future. Industry competition
and continuing price erosion could adversely affect our results of operations
in any given quarter, and such adverse effects often cannot be anticipated
until late in any given quarter. Furthermore, we believe that our results of
operations could be adversely affected by the declining demand for information
technology products in both the personal storage and enterprise sectors of the
market, which our principal customers have addressed in recent public
statements. Based on these statements we expect that short-term demand for
rigid disc drive and tape drive products will be reduced.
GROSS MARGIN. Combined gross margin as a percentage of revenue for the six
months ended December 29, 2000 was 12%, as compared with gross margin as a
percentage of revenue of 20% for the six months ended December 31, 1999.
Combined gross margin was impacted negatively in the six months ended December
29, 2000 by charges related to the transactions. These charges were primarily
$131 million for the sale of inventories written-up to fair value pursuant to
purchase accounting rules and a compensation charge of $270 million related to
the acceleration of stock options. These two charges reduced the combined gross
margin as a percentage of combined revenue by 12% for the six months ended
December 29, 2000. Excluding items related to the closing of the transactions,
our combined gross margin as a percentage of revenue for the six months ended
December 29, 2000 was 24% as compared with gross margin as a percentage of
revenue of 20% for the six months ended December 31, 1999. This increase in
gross margin as a percentage of revenue from December 31, 1999 was primarily
due to ongoing cost savings as a result of our restructuring activities and our
program to implement operational efficiencies. These efficiencies include
implementation of advanced manufacturing processes resulting in lower average
unit costs per disc drive produced.
PRODUCT DEVELOPMENT EXPENSES. Combined product development expenses for
the six months ended December 29, 2000 were $515 million, an increase of 43%
when compared with product development expenses of $359 million for the six
months ended December 31, 1999. The increase in product development expenses
from the six months ended December 31, 1999 was primarily due to $124 million
in compensation expense related to the acceleration of stock options, $10
million in salaries and related costs, $3 million in occupancy costs, $8
million in depreciation expense, $2 million in information technology expense.
The acceleration of stock options was in connection with the closing of the
transactions. As a percentage of combined revenues, combined product
development expenses increased to 15% in the six months ended December 29, 2000
from 11% for the six months ended December 31, 1999. Excluding those items
related to the closing of the transactions, our combined product development
expenses would have represented 11% of combined revenue for both periods.
MARKETING AND ADMINISTRATIVE EXPENSES. Combined marketing and
administrative expenses for the six months ended December 29, 2000 were $591
million, an increase of 143% when compared with $243 million of marketing and
administrative expenses for the six months ended December 31, 1999. The
increase in marketing and administrative expenses from the six months ended
December 31, 1999 was primarily due to increases of $191 million in
compensation expense related to the acceleration of stock options, $124 million
in transaction related costs, $39 million in salaries and related costs, $21
million in outside services, $7 million in equipment costs, $2 million in
marketing and administrative expenses related to our information management
group software products and services, $4 million in legal expenses, $4 million
in information technology expenses and $1 million in accruals for profit
sharing and management bonuses. These increases were partially offset by
decreases of $26 million in depreciation expense, $14 million in the provision
for bad debts and $13 million in occupancy costs. The $191 million in
compensation expense and the
65
$124 million in transaction related costs were in connection with the closing
of the transactions. As a percentage of combined revenues, combined marketing
and administrative expenses increased to 10% for the six months ended December
29, 2000 from 7% for the six months ended December 31, 1999. Excluding those
items related to the closing of the transactions, our combined marketing and
administrative expenses would have represented 8% of combined revenue for the
six months ended December 29, 2000 compared with 7% of revenue for the six
months ended December 31, 1999.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Combined amortization of
goodwill and other intangibles for the six months ended December 29, 2000 was
$31 million, an increase of 82% when compared with amortization of goodwill and
other intangibles of $17 million for the six months ended December 31, 1999.
The increase in amortization from the six months ended December 31, 1999 was
primarily due to additional amortization related to goodwill and other
intangibles arising from the acquisition of XIOtech Corporation in January 2000
partially offset by reduced amortization of Seagate Technology's investment in
VERITAS that was acquired by VERITAS in the merger in November 2000. We expect
amortization of intangibles as a result of the transactions to be $47 million
annually.
UNUSUAL ITEMS. The $59 million charge to unusual items during the six
months ended December 29, 2000 represents the write-off of in-process research
and development acquired in connection with the transactions.
NET OTHER INCOME (EXPENSE). Combined net other income decreased by $1.426
billion to combined net other expense of $996 million for the six months ended
December 29, 2000 when compared with net other income of $430 million for the
six months ended December 31, 1999. The decrease in net other income from
December 31, 1999, was primarily due to gains on sales of certain investments
in equity securities, previously held by Seagate Technology, of $599 million
and net losses of $32 million on certain equity investments, previously held by
Seagate Technology, in the six months ended December 29, 2000, as well as the
$889 million loss on the sale of Seagate Technology's operating assets to us
offset by a decrease of $84 million in the charge for activity related to
Seagate Technology's former equity interest in VERITAS.
INCOME TAXES. New SAC. We recorded a $21 million provision for income
taxes for the period from November 23, 2000 to December 29, 2000. The $21
million provision for income taxes differs from the benefit from income taxes
that would be derived by applying the federal statutory rate to the loss before
income taxes primarily due to the net effect of nondeductible charges related
to the acquisition of the operating assets of Seagate Technology and the income
generated from our manufacturing plants located in Singapore, Thailand, China
and Malaysia that operate under tax holidays and, accordingly, are not subject
to tax. As a result of the transactions and the ensuing corporate structure, we
are now a foreign parent corporation with various foreign and U.S.
subsidiaries. Certain of our U.S. subsidiaries are expected to incur domestic
operating losses in fiscal 2001 and they will no longer file their federal
income tax returns on a consolidated basis with our U.S. disc drive operations.
We do not expect to realize a tax benefit for these domestic operating losses
in fiscal 2001. We also expect that a substantial portion of our anticipated
income from operations for fiscal 2001 will be generated by our Far East
manufacturing plants located in Singapore, Thailand, China and Malaysia that
currently operate under tax holidays. Excluding items relating to the closing
of the transactions, we anticipate that our projected pro forma effective tax
rate on income from operations for the period beginning November 23, 2000
through June 29, 2001 will approximate 20%.
In connection with the purchase of the operating assets of Seagate
Technology, we recorded
a valuation allowance for deferred tax assets of $338 million. The $338 million
of deferred tax assets subject to the valuation allowance arose primarily as a
result of the excess of tax basis over the fair values of acquired property,
plant and equipment, and liabilities assumed for which we expect to receive tax
deductions in our federal and state returns in future periods. We also recorded
$38 million of deferred tax liabilities as a result of the excess of the fair
market value of inventory, long-term investments, and acquired intangible
assets over their related tax basis. Our realization of the tax
66
benefits for the federal and state deferred tax assets subject to the valuation
allowance will depend primarily on our ability to generate sufficient taxable
income in the United States in future periods, the timing and amount of which
are uncertain. We anticipate that the tax benefits of the deferred tax assets
when realized will first result in an increased adjustment to the amount of
unamortized negative goodwill that has been allocated on a pro rata basis to
the long-lived assets. Any excess tax benefit would then be realized as a
reduction of future income tax expense.
Seagate Technology. Seagate Technology recorded a benefit from income
taxes of $76 million for the period from July 1, 2000 to November 22, 2000. The
recorded benefit from income taxes differs from the benefit from income taxes
that would be derived by applying the federal statutory rate to the loss before
income taxes primarily due to losses recorded in connection with the sale by
Seagate Technology of the operating assets located in the Far East that were
not deductible for U.S. tax purposes and the write-off of deferred tax assets
that could not be recognized in the federal and state tax returns of Seagate
Technology for the taxable year ended November 22, 2000. Excluding those items
relating to the closing of the transactions, various nonrecurring restructuring
charges, activity related to Seagate Technology's equity interest in VERITAS
and sales of SanDisk and Veeco stock, the pro forma effective tax rate used to
record the benefit for income taxes for the period from July 1, 2000 to
November 22, 2000 would have been 28%.
Seagate Technology recorded a provision for income taxes of $70 million
for the six months ended December 31, 1999. The effective tax rate used to
record the provision for income taxes differs from the U.S. statutory rate
primarily due to the net effect of gains from the sales of VERITAS and SanDisk
common stock and activity related to Seagate Technology's equity interest in
VERITAS, and the nondeductible charges associated with the October 1999
acquisition of the minority interest in Crystal Decisions.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JULY 2, 1999
REVENUE. Revenue in fiscal year 2000 was $6.448 billion, 5% lower than
revenue in fiscal year 1999, which was $6.802 billion. The decrease in revenue
from the prior year was due primarily to a continuing decline in the average
unit sales prices of our products as a result of intensely competitive market
conditions and a shift in mix away from our higher priced products. The
decrease in average unit sales price and effect of mix on revenue was partially
offset by a higher level of unit shipments, an increase of 28% as compared to
fiscal year 1999. Our overall average unit sales price on our rigid disc drive
products was $160, $148, $140 and $140 for the four quarters of fiscal year
2000, respectively. Average price erosion from fiscal year 1999 to fiscal year
2000 was approximately 23%.
GROSS MARGIN. Gross margin as a percentage of revenues decreased to 22% in
fiscal year 2000 from 24% in fiscal year 1999. The largest contributing factor
to the decrease in gross margin in fiscal year 2000 was the contribution of
NSMG to VERITAS on May 28, 1999. Excluding NSMG, our gross margin as a
percentage of revenue would have been 22% for fiscal year 1999. In addition,
the decrease in gross margin as a percentage of revenue from the prior year was
a result of price erosion due to intense price competition. This decrease was
offset by cost savings as a result of our restructuring activities and our
program to implement operational efficiencies. These efficiencies include
implementation of advanced manufacturing processes resulting in lower average
unit costs per rigid disc drive produced.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased by
11% to $725 million in fiscal year 2000, compared with $655 million in fiscal
year 1999, primarily due to increases of $70 million in salaries and related
costs, $27 million in depreciation and $2 million in research and development.
These expenses were partially offset by a decrease of $33 million in product
development expenses related to the NSMG business.
67
MARKETING AND ADMINISTRATIVE EXPENSES. Marketing and administrative
expenses decreased by 4% to $515 million in fiscal year 2000, compared with
$534 million in fiscal year 1999, primarily due to decreases of $96 million in
marketing and administrative expenses related to the NSMG business and $23
million in advertising and promotion expenses. These decreases were partially
offset by increases of $36 million in salaries and related costs, $30 million
in outside services, $23 million in the provision for bad debts and $8 million
in marketing and administrative expenses related to our information management
group business software products and services.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles increased by 31% to $51 million in fiscal year 2000,
compared with $39 million in fiscal year 1999, primarily due to additional
amortization of $15 million related to goodwill and intangibles arising from
the acquisition of XIOtech, partially offset by $3 million in write-offs, in
fiscal year 1999, of certain intangible assets related to past acquisitions of
companies, whose value had become permanently impaired.
RESTRUCTURING CHARGES. In fiscal year 2000, we recorded restructuring
charges totaling $218 million and reversed $11 million of our restructuring
accruals comprised of $2 million of restructuring reserves recorded in the same
period, $5 million of restructuring reserves recorded in fiscal year 1999 and
$4 million of restructuring reserves recorded in fiscal year 1998, resulting in
a net restructuring charge of $207 million.
UNUSUAL ITEMS. The $350 million charge to unusual items in fiscal year
2000 consisted of a $286 million compensation charge related to the
reorganization of Seagate Software Holdings and a $64 million charge related to
various legal settlements.
NET OTHER INCOME. Net other income in fiscal year 2000 decreased by 28% to
$1.170 billion in fiscal year 2000, compared with $1.615 billion in fiscal year
1999. The decrease in net other income was primarily due to a one-time gain of
$1.670 billion in fiscal year 1999 on the contribution of our NSMG business to
VERITAS and an increase of $207 million in activity related to our equity
interest in VERITAS. The decrease was partially offset by gains on the sale of
portions of our investments in VERITAS and SanDisk of $537 million and $679
million, respectively, in fiscal year 2000. Additionally, we realized gains
totaling $231 million in the fourth quarter of fiscal year 2000 on the exchange
of our investments in the equity securities of Dragon Systems for those of
LHSP, on the exchange of our investments in the equity securities of CVC for
those of Veeco Instruments and on the exchange of our investments in the equity
securities of iCompression for those of GlobeSpan.
INCOME TAXES. We recorded a $299 million provision for income taxes at an
effective rate of 49% in fiscal year 2000 compared with a $697 million
provision for income taxes at an effective rate of 37% in fiscal year 1999. The
reduction in the provision for income taxes was primarily due to the loss from
operations in fiscal year 2000 and a reduction in fiscal year 2000 in the level
of recorded net gains attributable to SanDisk, VERITAS and other equity
securities. Excluding the tax effects of net non-deductible charges associated
with the acquisition of the minority interest in Crystal Decisions, the
acquisition of XIOtech, the net gain from the sales of SanDisk and VERITAS
common stock and activity related to our equity investment in VERITAS, certain
non-recurring restructuring costs and the effects of our settlement of
litigation with Rodime PLC, the pro forma effective tax rate used to record the
provision for income taxes for the fiscal year ended June 30, 2000 was 28%.
We provided income taxes at the U.S. statutory rate of 35% on
substantially all of our current year foreign earnings in fiscal year 2000
compared with approximately 55% of such earnings in fiscal year 1999 due to
dividends received by us from our foreign subsidiaries. A substantial portion
of our Asia Pacific manufacturing operations at plant locations in China,
Malaysia, Singapore and Thailand operate under various tax holidays which
expire in whole or in part during fiscal 2001 through 2010. The tax holidays
had no impact on net income in fiscal year 2000. The net impact of these tax
holidays was to increase net income by approximately $35 million in fiscal
1999.
During fiscal year 2000, we settled a number of the disputed tax matters
reflected in the statutory notices of deficiencies dated June 27, 1997 and June
12, 1998 that were received from the
68
Internal Revenue Service relative to our taxable years 1991 through 1993 and
Conner Peripherals, Inc.'s taxable years 1991 and 1992, respectively. We
believe that we have meritorious defenses against the remaining asserted
deficiencies and that the likely outcome of a re-determination of these
asserted deficiencies by the U.S. Tax Court will not result in an additional
provision for income taxes.
FISCAL YEAR ENDED JULY 2, 1999 COMPARED TO FISCAL YEAR ENDED JULY 3, 1998
REVENUE. Revenue for fiscal year 1999 was $6.802 billion, approximately
the same as revenue in fiscal year 1998, which was $6.819 billion. A 9%
increase in unit shipments, combined with a shift in mix to our higher priced
products, was offset by a continuing decline in the average unit sales prices
of our products as a result of intensely competitive market conditions. Revenue
decreased to $1.643 billion in the fourth quarter of 1999 from $1.805 billion
in the third quarter of 1999 as a result of price erosion. Our overall average
unit sales price on our rigid disc drive products was $194, $194, $196 and $177
for the four quarters of fiscal year 1999, respectively, and $219, $206, $208,
and $229 for the four quarters of fiscal year 1998, respectively. Average price
erosion across all products from fiscal year 1998 to fiscal year 1999 was 9%.
GROSS MARGIN. Gross margin as a percentage of revenue was 24% for fiscal
year 1999, compared with 15% for fiscal year 1998. The increase in gross margin
as a percentage of revenue was primarily due to cost savings as a result of our
restructuring activities and an intensive program of cost reduction resulting
in lower average unit costs per rigid disc drive produced. Excluding the gross
margin of our Seagate Software, Inc. subsidiary, the products of which
generally have higher gross margins, our gross margins would have been 22% and
11% in fiscal year 1999 and fiscal year 1998, respectively.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses were $655
million for fiscal year 1999, compared with $627 million for fiscal year 1998,
an increase of $28 million, or 4%. The increase in product development expenses
was primarily due to increases of $29 million in salaries and related costs and
$19 million in depreciation partially offset by a $19 million accrual in fiscal
year 1998 for payments to former shareholders of Quinta Corporation for
achieving certain product development milestones.
MARKETING AND ADMINISTRATIVE EXPENSES. Marketing and administrative
expenses were $534 million for fiscal year 1999, compared with $502 million for
fiscal year 1998, an increase of $32 million, or 6%. The increase in marketing
and administrative expenses was primarily due to increases of $28 million
related to our software products and services, including $13 million related to
Crystal Decisions (formerly Seagate Software Information Management Group
Holdings, Inc.), $17 million in salaries and related costs, $8 million in legal
expenses, $7 million in profit sharing accruals and $6 million in depreciation.
These expenses were partially offset by decreases of $27 million in occupancy
costs and $13 million in advertising and promotion expenses. The decrease of
$27 million in occupancy costs from fiscal year 1998 was primarily due to the
closure of certain of our facilities under our January 1998 restructuring
activities.
IN-PROCESS RESEARCH AND DEVELOPMENT. We recorded a $223 million charge for
the write-off of in-process research and development in fiscal year 1998, $214
million of which was primarily a result of the August 1997 acquisition of
Quinta Corporation and $7 million of which was a result of the June 1998
acquisition of Eastman Software.
RESTRUCTURING CHARGES. We recorded restructuring charges of $72 million in
fiscal year 1999, and reversed $12 million of restructuring accruals recorded
in fiscal year 1998, resulting in a net restructuring charge of $60 million. We
recorded restructuring charges of $347 million in fiscal year 1998.
UNUSUAL ITEMS. We recorded a $78 million charge to unusual items in fiscal
year 1999 in connection with an amendment to the purchase agreement for the
acquisition of Quinta Corporation. The $22 million in income in unusual items
in 1998 represents a $22 million reduction of the $153 million charge recorded
in 1997 to settle a lawsuit against us by Amstrad PLC.
69
NET OTHER INCOME. Net other income for fiscal year 1999 was $1.615
billion, compared with $18 million of net other expense for fiscal year 1998,
an increase of $1.633 billion. The increase in net other income was primarily
due to the net gain of $1.670 billion on the contribution of our NSMG business
to VERITAS partially offset by the charge related to our equity investment in
VERITAS of $119 million in the fourth quarter of fiscal year 1999. The net gain
of $1.670 billion consisted of a gain of $1.806 billion net of compensation
expense of $124 million and merger-related expenses of $12 million. In
addition, the increase in net other income was due to $76 million of expenses
related to mark-to-market adjustments in fiscal year 1998 on certain of our
foreign currency forward exchange contracts for the Thai baht and the Malaysian
ringgit that did not recur in fiscal year 1999.
INCOME TAXES. We recorded a $697 million provision for income taxes at an
effective rate of 37% in fiscal year 1999, compared with a $174 million benefit
for income taxes at an effective rate of 25% in fiscal year 1998. The change in
income taxes was primarily due to income from operations in fiscal year 1999
and to income taxes paid on the pre-tax gain of $1.670 billion recorded on the
contribution of our NSMG business to VERITAS. Excluding the effects of the
VERITAS transaction, the non-deductible charges from the Quinta acquisition and
certain non-recurring restructuring costs, the effective tax rate was
approximately 28% in fiscal year 1999.
We provided income taxes at the U.S. statutory rate in fiscal year 1999 on
approximately 55% of our foreign earnings, compared with approximately all of
our foreign earnings in fiscal year 1998. A substantial portion of our Asia
Pacific manufacturing operations at plants located in China, Malaysia,
Singapore and Thailand operate under various tax holidays which expire in whole
or in part during fiscal years 2001 through 2010. The net impact of these tax
holidays was to increase net income by approximately $35 million in fiscal year
1999. The tax holidays had no impact on the net loss in 1998.
We 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. We petitioned the United States Tax
Court on September 24, 1997 for a re-determination of the deficiencies. We
believe that the likely outcome of this matter will not have a material adverse
effect on its financial position or results of operations.
We 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. We
petitioned the United States Tax Court on September 10, 1998 for a
re-determination of the deficiencies. We believe that the likely outcome of
this matter will not have a material adverse effect on our financial position
or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our exposure to market risk for changes in interest
rate risk relates primarily to our investment portfolio and long-term debt
obligations. We do not use derivative financial instruments in our investment
portfolio. We place our investments with high credit quality issuers and, by
policy, limit the amount of credit exposure to any one issuer. We are averse to
principal loss and seek to ensure the safety and preservation of our invested
funds by limiting default risk, market risk and reinvestment risk.
We have both fixed-rate and floating-rate based long-term debt
obligations. Our debt obligations were primarily incurred for general corporate
purposes, including capital expenditures and working capital needs. Also, we
incurred debt to finance our purchase of Seagate Technology's operating assets.
We use swap agreements to exchange our floating interest rate portfolios
for fixed interest rates. In December 2000, we entered into a fixed rate
interest rate swap agreement with a notional amount of $245 million and an
interest rate of 5.43% for a term of 3 years. The maturity date of the swap
matches principal serial maturities on the underlying debt.
70
The table below presents principal (or notional) amounts and related
weighted average interest rates by year of maturity for our investment
portfolio and debt obligations as of December 29, 2000. All investments mature
in three years or less, except for some investments that may mature in more
than three years but whose weighted average maturity is three years or less.
2001
----------
ASSETS
Cash equivalents
Fixed rate $ 620
Average interest rate 6.63%
Short-term investments
Fixed rate 43
Average interest rate 6.74%
Variable rate 75
Average interest rate 6.92%
Total investment securities 738
Average interest rate 6.67%
LONG-TERM DEBT
Fixed rate --
Average interest rate --
Floating rate
Tranche A (LIBOR + 250 bp) 2
8.22%
Tranche B (LIBOR + 300 bp) 3
8.72%
Swap (3 month LIBOR) 245
5.43%
FAIR VALUE
2002 2003 2004 2005 THEREAFTER TOTAL DECEMBER 29, 2000
---------- ---------- ---------- ---------- ------------ ---------- ------------------
(IN MILLIONS)
ASSETS
Cash equivalents
Fixed rate $ -- $ -- $ -- $ -- $ -- $ 620 $ 618
Average interest rate -- -- -- -- -- 6.63% --
Short-term investments
Fixed rate -- -- -- -- -- 43 43
Average interest rate -- -- -- -- -- 6.74%
Variable rate -- -- -- -- -- 75 75
Average interest rate -- -- -- -- -- 6.92%
Total investment securities -- -- -- -- -- 738 736
Average interest rate -- -- -- -- -- 6.67%
LONG-TERM DEBT
Fixed rate -- -- -- -- 210 210 201
Average interest rate -- -- -- -- 12.50% 12.50%
Floating rate
Tranche A (LIBOR + 250 bp) 18 35 45 55 45 200 200
8.22% 8.22% 8.22% 8.22% 8.22% 8.22%
Tranche B (LIBOR + 300 bp) 5 5 5 5 477 500 500
8.72% 8.72% 8.72% 8.72% 8.72% 8.72%
Swap (3 month LIBOR) 245 245
5.43% 5.43%
FOREIGN CURRENCY RISK. We transact business in various foreign countries.
Our primary foreign currency cash flows are in emerging market countries in
Asia and in European countries. During fiscal year 1998, we employed a foreign
currency hedging program using foreign currency forward exchange contracts and
purchased currency options to hedge local currency payment obligations for
payroll, inventory, other operating expenditures and fixed asset purchases in
Malaysia, Northern Ireland, Singapore and Thailand. Under this program,
increases or decreases in our local currency operating expenses and other cash
outflows, as measured in U.S. dollars, partially offset realized gains and
losses on the hedging instruments. The goal of this hedging program was to
economically guarantee or lock in the exchange rates on our foreign currency
cash outflows rather than to eliminate the possibility of short-term earnings
volatility. Because of uncertainty in the southeast Asian foreign currency
markets, beginning in the second quarter of fiscal year 1998, we suspended
purchasing foreign currency forward exchange and option contracts for the
Malaysian ringgit, Singapore dollar and Thai baht. At July 3, 1998, we had
effectively closed out all of our foreign currency forward exchange contracts
by purchasing offsetting contracts. We do not use foreign currency forward
exchange contracts or purchased currency options for trading purposes.
Under our former foreign currency hedging program, gains and losses
related to qualified hedges of firm commitments and anticipated transactions
were deferred and recognized in income or as adjustments of carrying amounts
when the hedged transaction occurred. All other foreign currency hedge
contracts were marked-to-market and unrealized gains and losses were included
in current period net income. Because not all economic hedges qualified as
accounting hedges, certain
71
unrealized gains and losses were recognized in income in advance of the actual
foreign currency cash flows. This mismatch of accounting gains and losses and
foreign currency cash flows was especially pronounced during the first and
second quarters of fiscal year 1998 as a result of the declines in value of the
Malaysian ringgit and Thai baht, relative to the U.S. dollar. This mismatch
resulted in a pre-tax charge of $76 million for fiscal year 1998.
72
SEAGATE TECHNOLOGY HOLDINGS
For the purposes of this section only, "we," "us" and "our" refer to
Seagate Technology Holdings (formerly HDD, an operating business of Seagate
Technology) and its subsidiaries, including Seagate Technology SAN Holdings,
which is discussed in the next section of this management's discussion and
analysis. Seagate Technology Holdings is a subsidiary of New SAC and a
guarantor of the notes.
SELECTED HISTORICAL CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL
INFORMATION OF SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR, HDD, AN
OPERATING BUSINESS OF SEAGATE TECHNOLOGY
We list in the table below selected historical condensed consolidated and
condensed combined financial information of the hard disc drive business, which
we refer to as HDD, an operating business of Seagate Technology, as of the end
of and for each of the last five fiscal years through June 30, 2000, for the
six months ended December 31, 1999 and for the period from July 1, 2000 to
November 22, 2000 and for Seagate Technology Holdings as of the end of and for
the period from November 23, 2000 to December 29, 2000. The operations of
Seagate Technology Holdings are substantially identical to the operations of
HDD before the transactions and HDD is considered to be our predecessor. We
have derived the historical financial information of HDD below as of the end of
and for the fiscal years 1996 and 1997 from unaudited financial statements and
related notes, which are not included in this prospectus. We have derived the
historical financial information of HDD below as of the end of and for fiscal
years 1998, 1999, and 2000 from the audited financial statements and the
related notes of HDD included elsewhere in this prospectus. We have derived the
historical financial information for the six months ended December 31, 1999,
for the period from July 1, 2000 to November 22, 2000 and as of the end of and
for the period from November 23, 2000 to December 29, 2000 from the unaudited
interim consolidated condensed financial statements of Seagate Technology
Holdings and its predecessor, HDD, included elsewhere in this prospectus, which
in our opinion include all adjustments, consisting of only normal recurring
adjustments, which we consider necessary for the fair presentation of our
financial position and results of operations for these periods. Operating
results for the periods from July 1, 2000 to November 22, 2000 and from
November 23, 2000 to December 29, 2000 are not necessarily indicative of
results that may be expected for the entire year or any future period. You
should read the selected historical consolidated financial information below in
conjunction with the discussion below and the financial statements and related
notes of Seagate Technology Holdings and its predecessor, HDD, included
elsewhere in this prospectus.
HDD
------------------------------------------------------
FISCAL YEARS(A)
------------------------------------------------------
JUNE 28, JUNE 27, JULY 3, JULY 2, JUNE 30,
1996 1997 1998 1999 2000
---------- ---------- --------- ----------- ----------
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Revenue ................................. $ 8,158 $ 8,468 $6,245 $ 6,152 $ 6,058
Net income (loss) ....................... 377 905 (531) 214 366
BALANCE SHEET DATA:
Total assets ............................ 5,036 6,572 5,438 5,122 5,818
Long-term debt
(including current portion) ............ 801 703 705 703 704
Ratio of earnings to fixed charges ...... 7.7x 26.9x -- 6.5x 13.4x
Deficiency of earnings to fixed
charges ................................ $ 708
SEAGATE
TECHNOLOGY
HDD HOLDINGS
------------------------------- ---------------------
SIX MONTHS
ENDED JULY 1, 2000 TO NOVEMBER 23, 2000 TO
DECEMBER 31, NOVEMBER 22, DECEMBER 29,
1999 2000 2000
------------- ----------------- ---------------------
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Revenue ................................. $3,117 $2,302 $ 969
Net income (loss) ....................... (57) (405) (141)
BALANCE SHEET DATA:
Total assets ............................ 3,300
Long-term debt
(including current portion) ............ 903
Ratio of earnings to fixed charges ...... -- -- --
Deficiency of earnings to fixed
charges ................................ $ 52 $ 601 $ 126
- ----------
(a) HDD has prepared financial results on a fiscal year of 52 or 53
weeks ending on the Friday closest to June 30 of that year.
Accordingly, fiscal year 1996 ended on June 28, 1996, fiscal year
1997 ended on June 27, 1997, fiscal year 1998 ended on July 3, 1998,
fiscal year 1999 ended on July 2, 1999, and fiscal year 2000 ended
on June 30, 2000. Fiscal years 1996, 1997, 1999 and 2000 were 52
weeks, and fiscal year 1998 was 53 weeks.
73
The following includes a discussion of unusual activities that occurred in the
periods presented above for comparability purposes:
FISCAL YEAR 1998
Fiscal year 1998 includes a $347 million restructuring charge, a $216
million write-off of in-process research and development costs, a $76 million
charge for mark-to-market adjustments on certain of HDD'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.
FISCAL YEAR 1999
Fiscal year 1999 includes a $78 million charge arising out of an amendment
to the purchase agreement for the August 1997 acquisition of Quinta and a $59
million net restructuring charge.
FISCAL YEAR 2000
Fiscal year 2000 includes a $206 million net restructuring charge, a $105
million write-off of in-process research and development incurred in connection
with the acquisition of XIOtech, a $64 million charge for various legal
settlements, a $43 million compensation charge for the reorganization of
Seagate Software Holdings, and a $28 million charge related to employee
separations.
BASIS OF PRESENTATION
Because we acquired all the operating assets of the hard disc drive
business, an operating business of Seagate Technology that we refer to as HDD,
as of November 22, 2000, HDD is our predecessor. Accordingly, references to
"we", "our" or "us" for events, transactions or regarding financial information
during these periods are references to our predecessor, HDD. For comparative
purposes, the financial information presented combines the operations of HDD
from July 1, 2000 to November 22, 2000 with our operations as Seagate
Technology Holdings from November 23, 2000 to December 29, 2000. Although we
were incorporated on August 10, 2000, prior to November 23, 2000 our operations
were not significant. Financial information for the fiscal years ended 1998,
1999 and 2000 and for the six months ended December 31, 1999 is the historical
financial information of HDD.
ALLOCATION OF PURCHASE PRICE TO US PURSUANT TO THE APPLICATION OF PUSH DOWN
ACCOUNTING
The transactions described in this prospectus constituted a purchase
business transaction of Seagate Technology. Under purchase accounting rules,
the net purchase price under this transaction has been allocated to the assets
and liabilities of Seagate Technology and its subsidiaries, including us, based
on their estimated fair values at the date of the transaction. However, the
estimated fair values of identifiable tangible and intangible assets and
liabilities of Seagate Technology and its subsidiaries at the date of the
transactions were greater than the amount paid, resulting in negative goodwill.
The negative goodwill has been allocated to the long-lived tangible and
intangible assets, including our assets, on the basis of relative fair values.
The fair values of tangible and intangible assets, including in-process
research and development, have been determined based upon independent
appraisals.
The accounting for the purchase transaction has been "pushed down" to our
financial statements. Our December 29, 2000 condensed consolidated financial
statements reflect the new basis in our assets and liabilities at that date in
accordance with the pushed down purchase accounting adjustments, followed by
the results of operations and financial position for the period from November
23, 2000 to December 29, 2000.
As a result of the transactions and the push down accounting, our results
of operations following the transactions, particularly the depreciation and
amortization charges, are not necessarily comparable to our results of
operations prior to the transactions.
74
The actual allocation of the amounts may differ from those reflected below
after finalization of the purchase price allocation and post closing
transactions.
The following describes the impact of push down accounting on our results:
Amortization and depreciation -- As a result of purchase price accounting and
the allocation of negative goodwill to the fair value of our long-lived
tangible assets, our capital assets were reduced by approximately $800 million
as compared with the historical balances prior to the transaction.
Consequently, our ongoing depreciation expense will be lower than our
historical expense prior to the transactions. The combined results for the six
months ended December 29, 2000 benefitted by one month of reduced depreciation
and is approximately $15 million less than what it would have been had the
push down adjustments not been made. In addition, we recorded additional
combined amortization expense of approximately $16 million during the six
months ended December 29, 2000 resulting from the recording of incremental
fair value of intangibles in the push down adjustments.
In-process research and development -- We wrote off in-process research and
development of $52 million as an expense during the period from November 23,
2000 through December 29, 2000.
RESULTS OF OPERATIONS
We list in the table below the consolidated statements of operations data
as a percentage of revenue for HDD for fiscal years 1998, 1999 and 2000 and the
six months ended December 31, 1999 and the combined consolidated statements of
operations data for Seagate Technology Holdings and HDD as a percentage of
revenue for the six months ended December 29, 2000. As our operations as
Seagate Technology Holdings are substantially identical to those of HDD prior
to the transactions, we have combined the results of HDD from July 1, 2000 to
November 22, 2000 and our results as Seagate Technology Holdings from November
23, 2000 to December 29, 2000 in the table and the discussions below for easier
comparison with the results of HDD for the six months ended December 31, 1999.
We therefore refer to the results of operations for the six months ended
December 29, 2000 as "combined" in the discussion below.
COMBINED
RESULTS OF
SEAGATE TECHNOLOGY
HDD HOLDINGS AND HDD
-------------------------------------------------- -------------------
FISCAL YEAR
------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED
1998 1999 2000 DECEMBER 31, 1999 DECEMBER 29, 2000
----------- -------- ---------- ------------------ -------------------
Revenue .............................................. 100% 100% 100% 100% 100%
Cost of Sales ........................................ 88 80 80 81 89
--- --- ----- --- ---
Gross Margin ......................................... 12 20 20 19 11
Product development .................................. 9 10 11 11 14
Marketing and administrative ......................... 5 5 7 6 16
Amortization of goodwill and other intangibles ....... -- -- -- -- 1
In-process research and development .................. 3 -- 2 -- --
Restructuring ........................................ 6 1 3 4 1
Unusual items ........................................ -- 1 2 3 2
--- --- ----- --- ---
Income (loss) from operations ........................ (11) 3 (5) (5) (23)
Other income (expense), net .......................... -- 1 15 2 --
--- --- ----- ---- ---
Income (loss) before income taxes .................... (11) 4 10 (3) (23)
Benefit (provision) for income taxes ................. 3 1 (4) 1 --
--- --- ------ ---- ---
Net income (loss) .................................... (8)% 3% 6% (2)% (23)%
==== === ===== ==== ===
75
SIX MONTHS ENDED DECEMBER 29, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999
REVENUE. Combined revenue for the six months ended December 29, 2000 of
Seagate Technology Holdings and its predecessor was $3.271 billion, an increase
of 5% as compared with $3.117 billion for the six months ended December 31,
1999. The increase in combined revenue was primarily due to $900 million
related to higher unit sales volume offset by $800 million related to price
erosion. We expect that price erosion in the data storage industry will
continue for the foreseeable future. Industry competition and continuing price
erosion could adversely affect our results of operations in any given quarter
and such adverse effects often cannot be anticipated until late in any given
quarter. Furthermore, we believe that our results of operations could be
adversely affected by the declining demand for information technology products
in both the personal storage and enterprise sectors of the market, which our
principal customers have addressed in recent public statements. Based on these
statements we expect that short-term demand for rigid disc drive products will
be reduced.
GROSS MARGINS. Combined gross margin as a percentage of revenue for the
six months ended December 29, 2000 was 11%, as compared with gross margins as a
percentage of revenues of 19% for the six months ended December 31, 1999.
Combined gross margin was impacted negatively in the six months ended December
29, 2000 by charges related to the transactions. These charges were primarily
$131 million for the sale of inventories written-up to fair value pursuant to
purchase accounting rules and a compensation charge of $281 million related to
the acceleration of stock options. These two charges reduced the combined gross
margin as a percentage of combined revenue by 13% for the six months ended
December 29, 2000. Excluding those items related to the closing of the
transactions, our combined gross margin as a percentage of revenue for the six
months ended December 29, 2000 was 24%, as compared with 19% for the six months
ended December 31, 1999. The increase in combined gross margin as a percentage
of revenue from all comparable periods was primarily due to ongoing cost
savings as a result of our restructuring activities and program to implement
operational efficiencies. These efficiencies include implementation of advanced
manufacturing processes resulting in lower average unit costs per disc drive
produced.
PRODUCT DEVELOPMENT EXPENSES. Combined product development expenses for
the six months ended December 29, 2000 were $476 million, an increase of 45%
when compared with the $328 million for the six months ended December 31, 1999.
Excluding those items related to the closing of the transactions, our product
development expenses as a percentage of revenue were for the six months ended
December 29, 2000 was 15%, as compared with 11% for the six months ended
December 31, 1999. Including those items related to the closing of the
transactions, the increase in combined product development expenses for the six
months ended December 29, 2000 as compared to the six months ended December 31,
1999 was primarily due to $113 million in compensation expense related to the
acceleration of stock options, $16 million in salaries and related costs, $7
million in occupancy costs, $6 million in depreciation expense, $2 million in
information technology expense and $2 million in accruals for profit sharing
and management bonuses. The acceleration of stock options was in connection
with the closing of the transactions.
MARKETING AND ADMINISTRATIVE EXPENSES. Combined marketing and
administrative expenses for the six months ended December 29, 2000 were $528
million, an increase of 182% when compared with $187 million for the six months
ended December 31, 1999. Excluding those items related to the closing of the
transactions, our marketing and administrative expenses represented 7% of
combined revenue for the six months ended December 29, 2000 compared with 6%
for the six months ended December 31, 1999. Including those items related to
the closing of the transactions, the increase in combined marketing and
administrative expenses from the six months ended December 31, 1999 was
primarily due to increases of $191 million in compensation expense related to
the acceleration of stock options, $124 million in transaction related costs,
$39 million in salaries and related costs, $21 million in outside services, $7
million in equipment costs, $4 million in legal expenses, $4 million in
information technology expenses and $1 million in accruals for profit sharing
76
and management bonuses. These increases were partially offset by decreases of
$26 million in depreciation expense, $14 million in the provision for bad debts
and $13 million in occupancy costs. The $191 million in compensation expense
and the $124 million in transaction related costs were in connection with the
closing of the transactions.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles for the six months ended December 29, 2000 was $25
million, an increase of $16 million when compared with the six months ended
December 31, 1999. The increase in amortization was primarily due to additional
amortization related to goodwill and other intangibles arising from the
acquisition of XIOtech in January 2000.
RESTRUCTURING CHARGES. Fiscal year 2001 restructuring. As a result of the
transactions, we assumed all restructuring liabilities previously recorded by
HDD, including $41 million related to restructuring activities announced in
fiscal 2000 and $3 million related to restructuring activities announced in
fiscal 2001. During the period from July 1, 2000 to November 22, 2000, HDD
recorded restructuring charges totaling $20 million. Of the $20 million, $11
million was a result of a restructuring plan established to continue the
alignment of HDD's global workforce and manufacturing capacity with existing
and anticipated future market requirements, specifically in its recording head
operations in Thailand. The remaining $9 million consisted of a $3 million
employee termination benefit adjustment to original estimate related to the
fiscal 2000 restructuring plan and $6 million in additional restructuring
charges for adjustments to original estimates to the fiscal 1998 restructuring
plan. The fiscal 2001 restructuring plan includes workforce reductions,
capacity reductions including closure of facilities or portions of facilities,
write-off of excess equipment and consolidation of operations. In connection
with the fiscal 2001 restructuring plan, we plan to reduce our workforce by
approximately 2,000 employees, primarily in manufacturing. Approximately 100 of
the 2,000 employees had been terminated as of December 29, 2000. As a result of
employee terminations and the write-off of equipment and facilities in
connection with the fiscal 2001 restructuring plan, we estimate that after
completion of these restructuring activities, annual salary and depreciation
expense will be reduced by approximately $7 million and $2 million,
respectively. However, the reduction in annual salary expense will be
substantially offset by increases of headcount in certain other recording head
operations facilities. We expect the fiscal 2001 restructuring plan will be
substantially complete by September 30, 2001. We may implement additional
actions pursuant to the fiscal 2001 restructuring plan, particularly, in light
of current economic conditions, and, if such additional actions are
implemented, we anticipate that additional charges would be taken related to
these actions.
In March 2001, we announced $54 million of additional restructuring
activities at our Perai and Ipoh, Malaysia disc drive plants and our Oklahoma
City customer service facility. Total restructuring charges included additional
severance of $23 million, facilities costs of $17 million, equipment costs of
$12 million and other costs of $2 million. We expect these restructuring
activities to be complete by the first half of fiscal 2002. We may implement
additional actions pursuant to our restructuring plans, and, if such additional
actions are implemented, we anticipate that additional charges would be taken
related to these actions.
Fiscal year 2000 restructuring. In connection with the fiscal 2000
restructuring plan, an adjustment of $3 million was recorded in the quarter
ended September 29, 2000 as a result of an increase in the estimated number of
employees to be terminated. We now plan to reduce our workforce by
approximately 24,000 employees primarily in manufacturing. Approximately 22,000
of the 24,000 employees had been terminated as of December 29, 2000. As a
result of employee terminations and the write-off of equipment and facilities
in connection with the fiscal 2000 restructuring plan, we estimate that after
completion of these restructuring activities, annual salary and depreciation
expense will be reduced by approximately $151 million and $40 million,
respectively. The fiscal 2000 restructuring plan was substantially complete as
of December 29, 2000. In connection with the restructuring plan implemented in
fiscal 1998, HDD revised its original lease termination cost estimates on
certain of its facilities and recorded an additional $6 million in
restructuring charges.
77
The restructuring activities undertaken in the six months ended December
29, 2000 are a continuation of a broader plan to further consolidate worldwide
operations. These activities are designed to further integrate our
manufacturing processes and should give rise to significant reductions in
worldwide facilities and headcount.
UNUSUAL ITEMS. The $50 million charge to unusual items during the six
months ended December 29, 2000 represents the write-off of in-process research
and development acquired in connection with the transactions
NET OTHER INCOME (EXPENSE). Combined net other income decreased by $86
million to combined net other expense of $9 million for the six months ended
December 29, 2000, when compared with net other income of $77 million for the
six months ended December 31, 1999. The decrease in combined net other income
was primarily due to gains on sales of certain investments in equity
securities, previously held by HDD, of $62 million in the six months ended
December 31, 1999 and net losses of $16 million on certain equity investments,
previously held by HDD, in the six months ended December 29, 2000.
INCOME TAXES. Seagate Technology Holdings. We recorded a $20 million
provision for income taxes for the period November 23, 2000 to December 29,
2000. The $20 million provision for income taxes differs from the benefit from
income taxes that would be derived by applying the federal statutory rate to
the loss before income taxes primarily due to the net effect of nondeductible
charges related to the acquisition of the operating assets of Seagate
Technology in the recording of a valuation allowance for deferred tax assets
and the income generated from our manufacturing plants located in Singapore,
Thailand, China and Malaysia that operate under tax holidays and, accordingly,
are not subject to tax. As a result of the transactions and the ensuing
corporate structure, we are now a foreign holding company with various foreign
and U.S. subsidiaries. Certain of our U.S. subsidiaries are expected to incur
domestic operating losses in fiscal 2001 and they will no longer file their
federal income tax returns on a consolidated basis. We do not expect to realize
a tax benefit for these domestic operating losses in fiscal 2001. We also
expect that a substantial portion of our anticipated income from operations for
fiscal 2001 will be generated by our Far East manufacturing plants located in
Singapore, Thailand, China and Malaysia that currently operate under tax
holidays. Excluding items relating to the closing of the transactions, we
anticipate that our projected pro forma effective tax rate on income from
operations for the period beginning November 23, 2000 through June 29, 2001
will approximate 20%.
In connection with the purchase of the operating assets of Seagate
Technology, we recorded a $316 million valuation allowance for deferred tax
assets. The $316 million of deferred tax assets subject to the valuation
allowance arose primarily as a result of the excess of tax basis over the fair
values of acquired property, plant and equipment, and liabilities assumed for
which we expect to receive tax deductions in our federal and state returns in
future periods. We also recorded $36 million of deferred tax liabilities as a
result of the excess of the fair market value of inventory, long-term
investments and acquired intangible assets over their related tax bases. Our
realization of the tax benefits for the federal and state deferred tax assets
subject to the valuation allowance will depend primarily on our ability to
generate sufficient taxable income in the United States in future periods, the
timing and amount of which are uncertain. We anticipate that the tax benefits
of the deferred tax assets when realized, will first result in an increased
adjustment to the amount of unamortized negative goodwill that has been
allocated on a pro rata basis to the long-lived assets. Any excess tax benefit
would then be realized as a reduction of future income tax expense.
HDD. HDD recorded a benefit from income taxes of $206 million for the
period from July 1, 2000 to November 22, 2000. The recorded benefit from income
taxes in each period differs from the benefit from income taxes that would be
derived by applying the federal statutory rate to the loss before income taxes
primarily due to certain losses recorded in connection with the sale by HDD of
the operating assets located in the Far East that were not deductible for U.S.
tax purposes.
HDD recorded a benefit for income taxes of $23 million for the six months
ended December 31, 1999. The effective tax rate used to record the benefit for
income taxes differed from the U.S. statutory rate primarily due to the
nondeductible charges associated with the October 1999 acquisition of the
minority interest in Crystal Decisions and other acquisition related items.
78
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JULY 2, 1999
REVENUE. Revenue in fiscal year 2000 was $6.058 billion, 2% lower than
revenue in fiscal year 1999 of $6.152 billion. The decrease in revenue from the
prior year was due primarily to a continuing decline in the average unit sales
prices of our products as a result of intensely competitive market conditions
and a shift in mix away from our higher priced products. The decrease in
average unit sales price and effect of mix on revenue was partially offset by a
higher level of unit shipments, an increase of 28% as compared to 1999. HDD
overall average unit sales prices on disc drive products was $160, $148, $140
and $140 for the four quarters of fiscal 2000, respectively. Average price
erosion from fiscal year 1999 to fiscal year 2000 was approximately 23%. We
expect that price erosion in the data storage industry will continue for the
foreseeable future. This competition and continuing price erosion may adversely
affect our results of operations in any given quarter and such an adverse
effect often cannot be anticipated until late in any given quarter.
GROSS MARGIN. Gross margin was 20% of revenue in fiscal year 2000 and 20%
of revenue in fiscal year 1999. In fiscal year 2000, gross margin as a
percentage of revenue was negatively affected as a result of price erosion due
to intense price competition, as discussed in the paragraph above. However,
this was offset by cost savings as a result of our restructuring activities and
our program to implement operational efficiencies. These efficiencies include
implementation of advanced manufacturing processes resulting in lower average
unit costs per disc drive produced.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses were $663
million in fiscal year 2000, an increase of 17% compared with fiscal year 1999
product development expenses of $566 million. This increase was primarily due
to increases of $66 million in salaries and related costs, $33 million in
depreciation and $2 million in occupancy costs. These expenses were partially
offset by decreases of $4 million in equipment expense and $3 million in
recruitment and relocation costs.
MARKETING AND ADMINISTRATIVE EXPENSES. Marketing and administrative
expenses were $409 million in fiscal year 2000 or an increase of $92 million or
29%, compared with fiscal year 1999 marketing and administrative expenses of
$317 million. This increase was primarily due to increases of $36 million in
salaries and related costs, $30 million in outside services and $23 million in
the provision for bad debts.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $33 million for fiscal year 2000 as compared to $20
million for fiscal year 1999, representing an increase of $13 million or 65%.
This increase was primarily due to additional amortization of $15 million
related to goodwill and intangibles arising from the acquisition of XIOtech
partially offset by $1.5 million in write-offs in fiscal year 1999 of certain
intangible assets related to past acquisitions of companies whose value had
become permanently impaired.
On January 28, 2000, Seagate Technology acquired XIOtech for 8,031,804
shares of Seagate Technology common stock, issued from treasury shares and
options, with a combined fair value of $359 million. This acquisition was
accounted for as a purchase. The results of operations of XIOtech have been
included in the combined financial statements from the date of acquisition
under the push down accounting rules. The purchase price was allocated based on
the estimated fair value of net tangible and intangible assets acquired as well
as in-process research and development costs. As a result of the acquisition,
we incurred a one-time write-off of in-process research and development of $105
million. Goodwill and other intangibles arising from the acquisition are being
amortized on a straight-line basis over periods ranging from four months to
seven years. Amortization of goodwill and other intangibles was $20 million in
fiscal year 2000, including $4 million for developed technology included in
cost of sales. XIOtech's revenue and expenses were immaterial to HDD's combined
revenue and expenses.
RESTRUCTURING CHARGES. In fiscal year 2000, we recorded restructuring
charges of $216 million, net of $2 million of reversals of amounts recorded in
the same period, $5 million of restructuring accruals recorded in fiscal 1999
and $3 million of restructuring accruals recorded in fiscal 1998, resulting in
a net restructuring charge of $206 million. The $206 million restructuring
charge was a
79
result of a restructuring plan established to align our global workforce and
manufacturing capacity with existing and anticipated future market requirements
and necessitated by our improved productivity and operating efficiencies. These
actions include workforce reductions, capacity reductions including closure of
facilities or portions of facilities, write-off of excess equipment and
consolidation of operations in our recording media operations, disc drive
assembly and test facilities, printed circuit board assembly manufacturing,
recording head operations, software operations, customer service operations,
sales and marketing activities and research and development activities. In
connection with the fiscal 2000 restructuring plan, we plan to reduce our
workforce by approximately 23,000 employees primarily in manufacturing.
Approximately 18,300 of the 23,000 employees had been terminated as of June 30,
2000. As a result of employee terminations and the write-off of equipment and
facilities in connection with the restructuring charges recorded during the
year ended June 30, 2000 related to the fiscal 2000 restructuring plan, we
estimate that after the completion of these restructuring activities, annual
salary and depreciation expense will be reduced by approximately $151 million
and $40 million, respectively. We anticipate that the implementation of the
fiscal 2000 restructuring plan will be substantially complete by December 29,
2000. In connection with the restructuring plan implemented in fiscal 1999,
HDD's planned workforce reduction had been completed as of March 31, 2000 and
the other restructuring activities were substantially complete as of March 31,
2000.
UNUSUAL ITEMS. The $107 million charge to unusual items in fiscal year
2000 consisted of a $43 million compensation charge related to HDD employees
who held Seagate Software Holdings stock in connection with the reorganization
of Seagate Software Holdings and a $64 million charge related to various legal
settlements.
NET OTHER INCOME. Net other income in fiscal year 2000 was $926 million,
an increase of $862 million compared with $64 million for fiscal year 1999. The
increase was primarily due to a gain on the sale of portions of our investment
in SanDisk of $679 million in fiscal 2000 as well as gains on the exchange of
certain investments in equity securities of $199 million in fiscal year 2000.
INCOME TAXES. We recorded a provision for income taxes of $275 million for
the fiscal year ended June 30, 2000 compared to a provision for income taxes of
$61 million for the fiscal year ended July 2, 1999. The effective tax rate used
to record the provision for income taxes for the fiscal year ended June 30,
2000 differed from the U.S. federal statutory rate primarily due to in-process
research and development expenses that were not deductible for tax purposes,
partially offset by the benefit related to research and development tax
credits. The effective tax rate used to record the provision for income taxes
for the fiscal year ended July 2, 1999 differed from the U.S. federal statutory
rate primarily due to the tax benefit from permanently reinvested earnings in
certain foreign subsidiaries, partially offset by in-process research and
development expenses that were not deductible for tax purposes.
We provided income taxes at the U.S. federal statutory rate of 35% on
substantially all of our current year foreign earnings for the fiscal year
ended June 30, 2000 compared to approximately 55% of such earnings for the
fiscal year ended July 2, 1999. A substantial portion of our Asia Pacific
manufacturing operations at plant locations in China, Singapore, Malaysia and
Thailand operate under various tax holidays, which expire in whole or in part
during fiscal years 2001 through 2010. The tax holidays had no impact on net
income in the fiscal year ended June 30, 2000. The net impact of these tax
holidays was to increase net income by approximately $34 million in fiscal year
ended July 2, 1999. Cumulative undistributed earnings of our Asia Pacific
subsidiaries for which no income taxes have been provided aggregated
approximately $1.631 billion at June 30, 2000. These earnings are considered
under the laws of relevant jurisdictions to be permanently invested in non-U.S.
operations. Additional federal and state taxes of approximately $584 million
would have to be provided if these earnings were repatriated to the United
States in the fiscal year ended June 30, 2000.
80
FISCAL YEAR ENDED JULY 2, 1999 COMPARED TO FISCAL YEAR ENDED JULY 3, 1998
REVENUE. Revenue in fiscal year 1999 was $6.152 billion, as compared to
$6.245 billion for fiscal year 1998, representing a decrease of $93 million or
1%. A higher level of unit shipments, an increase of 9% as compared to fiscal
1998, combined with a shift in mix to higher priced products was offset by a
continuing decline in the average unit sales prices of our products as a result
of intensely competitive market conditions. Our overall average unit sales
price on disc drive products was $194, $194, $196 and $177 for the four
quarters of fiscal year 1999, respectively. Average price erosion from fiscal
year 1998 to fiscal year 1999 was 9%.
GROSS MARGIN. Gross margin as a percentage of revenue was 20% in fiscal
year 1999, as compared with 12% in fiscal year 1998. The increase in gross
margin as a percentage of revenue in fiscal year 1999 was primarily due to cost
savings as a result of our restructuring activities and an intensive program of
cost reduction resulting in lower average unit costs per disc produced.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses in fiscal year
1999 were $566 million, an increase of $11 million or 2%, as compared with
product development expenses of $555 million in fiscal year 1998. This increase
was primarily due to increases of $18 milion in salaries and related costs and
$12 million in depreciation. These increases were partially offset by a $19
million accrual in fiscal year 1998 for payments to former shareholders of
Quinta for achievement of certain product development milestones.
MARKETING AND ADMINISTRATIVE EXPENSES. Marketing and administrative
expenses were $317 million in fiscal year 1999, an increase of $9 million or
3%, compared with marketing and administrative expenses of $308 million in
fiscal year 1998. This increase was primarily due to increases of $15 million
in salaries and related costs, $8 million in legal settlement expenses, $6
million in profit sharing accruals and $5 million in depreciation. These
expenses were partially offset by decreases of $17 million in occupancy costs
and $8 million in advertising and promotion expenses.
IN-PROCESS RESEARCH AND DEVELOPMENT. The $216 million charge for the
write-off of in-process research and development in fiscal year 1998 was a
result of the August 1997 acquisition of Quinta.
RESTRUCTURING CHARGES. In fiscal year 1999, we recorded restructuring
charges of $71 million and reversed $12 million of restructuring accruals
recorded in fiscal year 1998, resulting in a net restructuring charge of $59
million. The $12 million reversal was a result of abandoning our plan to seek
an agreement with an external vendor to supply parts currently manufactured at
a facility in Thailand. The $71 million restructuring charge was a result of
steps we are taking to further improve the efficiency of our operations. These
actions included closure of our microchip manufacturing facility in Scotland;
discontinuance of our recording head suspension business located in Malaysia
and Minnesota; consolidation of global customer service operations by
relocating such operations in Singapore and Scotland to Mexico; and closure of
our recording media substrate facility in Mexico. In connection with this
restructuring, our workforce was reduced by approximately 1,250 employees. Our
implementation of the restructuring plan was substantially complete as of March
31, 2000.
UNUSUAL ITEMS. The $78 million charge to unusual items in fiscal year 1999
was in connection with an amendment to the purchase agreement for the August
1997 acquisition of Quinta. The $22 million in income in unusual items in 1998
represents a $22 million reduction of the $153 million charge recorded in 1997
to settle a lawsuit against Seagate Technology by Amstrad PLC.
NET OTHER INCOME (EXPENSE). Net other income was $64 million in fiscal
year 1999 as compared to net other expense of $19 million in fiscal year 1998,
an increase of $83 million. The increase in net other income was primarily due
to $76 million of expenses related to mark-to-market adjustments in fiscal year
1998 on certain of our foreign currency forward exchange contracts for the Thai
baht and the Malaysian ringgit.
INCOME TAXES. We recorded a provision for income taxes of $61 million for
the fiscal year ended July 2, 1999 compared to a benefit for income taxes of
$191 million for the fiscal year ended
81
July 3, 1998. The effective tax rate used to record the provision for income
taxes for the fiscal year ended July 2, 1999 differed from the U.S. federal
statutory rate primarily due to the tax benefit from permanently reinvested
earnings of certain foreign subsidiaries, partially offset by in-process
research and development expenses that were not deductible for tax purposes.
The effective tax rate used to record the benefit for income taxes for the
fiscal year ended July 3, 1998 differed from the U.S. federal statutory rate
primarily due to in-process research and development expenses that were not
deductible for tax purposes.
We provided income taxes at the U.S. federal statutory rate of 35% on
approximately 55% of our current year foreign earnings for the fiscal year
ended July 2, 1999 compared to substantially all of such earnings for the
fiscal year ended July 3, 1998. A substantial portion of our Asia Pacific
manufacturing operations at plant locations in China, Singapore, Malaysia and
Thailand operate under various tax holidays, which expire in whole or in part
during fiscal years 2001 through 2010. The net impact of these tax holidays was
to increase net income by approximately $34 million in the fiscal year ended
July 2, 1999. The tax holidays had no impact on the net loss in the fiscal year
ended July 3, 1998.
OTHER
We record unrealized gains and losses on the mark-to-market of our
investments as a component of accumulated other comprehensive income. As of
June 30, 2000 and July 2, 1999, total accumulated other comprehensive income
(loss) was $86 million and $(7) million, respectively. During fiscal year 2000,
several marketable equity securities held by us, including SanDisk Corporation,
Gadzoox, Veeco, and LHSP, were included in this mark-to-market calculation
resulting in a $95 million unrealized gain, net of taxes. No similar amounts
were recorded in fiscal year 1999. In July 2000, we sold our remaining
investment in SanDisk for net proceeds of approximately $105 million. In
November 2000, the remaining investments were contributed to VERITAS in
connection with the transactions and thus no future effects of changes in
valuation will occur related to these investments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio and long-term debt
obligations. We do not use derivative financial instruments in our investment
portfolio. We place our investments with high credit quality issuers and, by
policy, limit the amount of credit exposure to any one issuer. We are averse to
principal loss and ensure the safety and preservation of our invested funds by
limiting default risk, market risk and reinvestment risk.
We mitigate default risk by investing in only high credit quality
securities and by positioning our 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.
We have both fixed-rate and floating-rate based long-term debt
obligations. We primarily enter into debt obligations to support general
corporate purposes, including capital expenditures and working capital needs.
Also, we incurred debt to finance our purchase of HDD's operating assets. We
use derivative financial instruments to hedge our floating-rate long-term debt
obligations as required by the senior credit facility.
The table below presents principal (or notional) amounts and related
weighted average interest rates by year of maturity for our investment
portfolio and debt obligations as of December 29, 2000. All investments mature,
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.
82
FAIR VALUE
DECEMBER 29,
2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000
---------- ---------- ---------- ---------- ---------- ------------ ---------- -------------
(IN MILLIONS)
ASSETS
Cash equivalents
Fixed rate ..................... $ 620 $ -- $ -- $ -- $ -- $ -- $ 620 $618
Average interest rate .......... 6.63% -- -- -- -- -- 6.63%
Short-term investments
Fixed rate ..................... 43 -- -- -- -- -- 43 43
Average interest rate .......... 6.74% -- -- -- -- -- 6.74%
Variable rate ................... 75 -- -- -- -- -- 75 75
Average interest rate .......... 6.92% -- -- -- -- -- 6.92%
Total investment securities ..... 738 -- -- -- -- -- 738 736
Average interest rate .......... 6.67% -- -- -- -- -- 6.67%
LONG-TERM DEBT
Fixed rate ...................... -- -- -- -- -- 210 210 201
Average interest rate .......... -- -- -- -- -- 12.50% 12.50%
Floating rate
Tranche A (LIBOR + 250 bp) ..... 2 18 35 45 55 45 200 200
8.22% 8.22% 8.22% 8.22% 8.22% 8.22% 8.22%
Tranche B (LIBOR + 300 bp) ..... 3 5 5 5 5 477 500 500
8.72% 8.72% 8.72% 8.72% 8.72% 8.72% 8.72%
Swap (3 month LIBOR) ........... 245 245 245
5.43% 5.43% 5.43%
FOREIGN CURRENCY RISK. We transact business in various foreign countries.
Our primary foreign currency cash flows are in emerging market countries in
Asia and in European countries. During fiscal year 1998, we employed a foreign
currency hedging program using foreign currency forward exchange contracts and
purchased currency options to hedge local currency payment obligations for
payroll, inventory, other operating expenditures and fixed asset purchases in
Malaysia, Northern Ireland, Singapore and Thailand. Under this program,
increases or decreases in our local currency operating expenses and other cash
outflows, as measured in U.S. dollars, partially offset realized gains and
losses on the hedging instruments. The goal of this hedging program was to
economically guarantee or lock in the exchange rates on our foreign currency
cash outflows rather than to eliminate the possibility of short-term earnings
volatility. Because of uncertainty in the southeast Asian foreign currency
markets, beginning in the second quarter of fiscal year 1998, we suspended
purchasing foreign currency forward exchange and option contracts for the
Malaysian ringgit, Singapore dollar and Thai baht. At July 3, 1998, we had
effectively closed out all of our foreign currency forward exchange contracts
by purchasing offsetting contracts. We do not use foreign currency forward
contracts or purchased currency options for trading purposes.
Under our former foreign currency hedging program, gains and losses
related to qualified hedges of firm commitments and anticipated transactions
were deferred and recognized in income or as adjustments of carrying amounts
when the hedged transaction occurred. All other foreign currency hedge
contracts were marked to market and unrealized gains and losses were included
in current period net income. Because not all economic hedges qualified as
accounting hedges, certain unrealized gains and losses were recognized in
income in advance of the actual foreign currency cash flows. This mismatch of
accounting gains and losses and foreign currency cash flows was especially
pronounced during the first and second quarters of fiscal year 1998 as a result
of the declines in value of the Malaysian ringgit and Thai baht, relative to
the U.S. dollar. This mismatch resulted in a pre-tax charge of $76 million for
fiscal year 1998.
83
SEAGATE TECHNOLOGY SAN HOLDINGS
For the purposes of this section only, "we," "us" and "our" refer to
Seagate Technology SAN Holdings (the successor to XIOtech Corporation) and its
subsidiaries. Seagate Technology SAN Holdings is an indirect subsidiary of New
SAC, a direct subsidiary of Seagate Technology Holdings and a guarantor of the
notes.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF SEAGATE TECHNOLOGY
SAN HOLDING AND ITS PREDECESSORS, SAN AND XIOTECH CORPORATION
We list in the table below selected historical consolidated financial
information of XIOtech Corporation (XIOtech), prior to its acquisition by
Seagate Technology as of the end of and for the period from its inception
(October 5, 1995) to December 31, 1995, as of the end of and for each of the
four years in the period ended December 31, 1999, and as of the end of and for
the six month period ended December 31, 1999 and for the period from January 1,
1999 to January 28, 2000. We also list in the table below selected historical
consolidated financial information of XIOtech, subsequent to its acquisition by
Seagate Technology (prior to the Transactions) as of the end of and for the
period from January 29, 2000 to June 30, 2000 and for the period from July 1,
2000 to November 22, 2000 and for Seagate Technology SAN Holdings as of the end
of and for the period from November 23, 2000 to December 29, 2000. We consider
XIOtech, prior to its acquisition by Seagate Technology, to be the
pre-predecessor, and we consider XIOtech, subsequent to its acquisition by
Seagate Technology but before the transactions to be the predecessor. We have
derived the historical financial information below as of the end of and for the
period from October 5, 1995 (date of inception) to December 31, 1995 and for
the fiscal year 1996 from audited financial statements and related notes which
are not included in this prospectus. We have derived the historical financial
information below as of the end of and for the fiscal years 1997, 1998, and
1999, and as of June 30, 2000 and for the periods from January 1, 2000 to
January 28, 2000 and January 29, 2000 to June 30, 2000 from the audited
financial statements and the related notes of XIOtech included elsewhere in
this prospectus. We have derived the historical financial information as of the
end of and for the six months ended December 31, 1999, and for the periods from
July 1, 2000 to November 22, 2000 and as of the end of and for the period from
November 23, 2000 to December 29, 2000 from the unaudited interim consolidated
condensed financial statements of Seagate Technology SAN Holdings and its
predecessors, included elsewhere in this prospectus, which in our opinion
include all adjustments, consisting only of normal recurring adjustments, which
we consider necessary for the fair presentation of our financial position and
results of operations for these periods. Operating results for the periods from
July 1, 2000 to November 22, 2000 and from November 23, 2000 to December 29,
2000 are not necessarily indicative of results that may be expected for the
entire year or any future period. You should read the selected historical
consolidated financial information below in conjunction with the discussion
below and the financial statements and related notes of Seagate Technology SAN
Holdings and its predecessors, included elsewhere in this prospectus.
PRE-PREDECESSOR
-----------------------------------------------------------------------------------------------
PERIOD FROM
INCEPTION FISCAL YEAR ENDED DECEMBER 31,
OCTOBER 5, 1995 - ---------------------------------------------------- JANUARY 1, 2000 -
DECEMBER 31, 1995 1996 1997 1998 1999 JANUARY 28, 2000
------------------- ----------- ----------- ----------- ---------- ------------------
(IN THOUSANDS)
STATEMENT OF
OPERATIONS DATA:
Revenue .................. $ -- $ $ $ 1,542 $ 10,727 $ 430
-- --
Net loss ................. (66) (1,302) (3,100) (5,750) (5,217) (880)
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets ............. 834 323 3,942 8,888 16,860
Long term obligations
and redeemable
preferred stock ......... -- -- 6,947 18,100 30,106
84
(Table continued)
SEAGATE
TECHNOLOGY SAN
PREDECESSOR PRE-PREDECESSOR PREDECESSOR HOLDINGS
--------------------- ------------------- ---------------------- ---------------------
JANUARY 29, 2000 - SIX MONTH ENDED JULY 1, 2000 - NOVEMBER 23, 2000 -
JUNE 30, 2000(A)(B) DECEMBER 31, 1999 NOVEMBER 22, 2000(A) DECEMBER 29, 2000(C)
--------------------- ------------------- ---------------------- ---------------------
(IN THOUSANDS)
STATEMENT OF
OPERATIONS DATA:
Revenue .................. $ 12,739 $ 6,675 $ 20,588 $ 11,183
Net Loss ................. (126,895) (2,649) (32,613) (28,092)
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets ............. 260,838 16,860 62,244
Long term obligations
and redeemable
preferred stock ......... -- 30,106 25,403
- ----------
(a) Prior to Seagate Technology's acquisition of XIOtech on January 28,
2000, XIOtech had reported financial results on a fiscal year ending
on December 31 of that year. Beginning on January 28, 2000, XIOtech,
as a result of the acquisition by Seagate Technology became a wholly
owned subsidiary of Seagate Technology and changed its fiscal year
to a 52 or 53 week year ending on the Friday closest to June 30 of
that year.
(b) Results include write-off of in-process research and development
that represents a portion of the purchase price of XIOtech by
Seagate Technology. The allocated amount was written off in the
period the acquisition closed because we could not be assured that
the technologies under development would achieve technological
feasibility. We recorded charges related to the write-off of
in-process research and development in the period from January 29,
2000 to June 30, 2000 of $104,844.
(c) Results include write-off of in-process research and development
that represents a portion of the purchase price of XIOtech by
Seagate Technology SAN Holdings. The allocated amount was written
off in the period the acquisition closed because we could not be
assured that the technologies under development would achieve
technological feasibility. We recorded charges related to the
write-off of in-process research and development in the period from
November 23, 2000 to December 29, 2000 of $25,027.
OVERVIEW
Seagate Technology SAN Holdings is wholly owned, on an outstanding shares
basis, by Seagate Technology Holdings. Seagate Technology Holdings is itself a
wholly owned subsidiary, on an outstanding shares basis, of New SAC. The
operating results discussed below for the period from November 23, 2000 to
December 29, 2000 represent the results of Seagate Technology SAN Holdings
after its acquisition of XIOtech as a result of the transactions. The results
of Seagate Technology SAN Holdings prior to November 23, 2000 were not
material. Operating results presented below for the periods from January 28,
2000 to November 22, 2000 represent the results of XIOtech while it was a
wholly owned subsidiary of Seagate Technology. XIOtech is considered the
predecessor company during this period. Operating results for periods prior to
January 28, 2000 represent the results of XIOtech as an independent privately
held company prior to its acquisition by Seagate Technology. XIOtech is
considered the pre-predecessor company prior to January 28, 2000.
Prior to Seagate Technology's acquisition of XIOtech on January 28, 2000,
XIOtech had reported its financial results on a calendar year basis ending on
December 31 each year. Beginning on January 28, 2000, XIOtech, changed its
fiscal year end to conform with Seagate Technology's fiscal year end of 52 or
53 weeks per year ending on the Friday closest to June 30.
We began shipping product in the second half of calendar year 1998. Prior
to that time, we were a development stage company. The overall growth in
revenue and operating activities since the initial introduction of product
relates to the acceptance of the initial storage area network product into the
market place, the development and strengthening of the sales and distribution
capabilities and a
85
broadening and success of the new product offering. A direct sales force
services domestic distribution of our products while an increasing network of
distributors provides sales coverage internationally. In connection with our
growth, our employee base has grown from approximately 50 in 1998 to
approximately 350 as of December 29, 2000.
BUSINESS COMBINATIONS
ACQUISITION BY SEAGATE TECHNOLOGY
Prior to January 28, 2000, XIOtech operated as a privately held
independent company. On January 28, 2000, XIOtech was acquired by Seagate
Technology for 8,031,774 shares of Seagate Technology common stock issued from
treasury shares and options with an aggregate total value of $359 million. This
acquisition was accounted for as a purchase by Seagate Technology and,
accordingly, the financial position, results of operations and cash flows of
XIOtech for periods from January 28, 2000 through November 22, 2000 reflect a
step-up in the basis of the assets and liabilities of XIOtech to reflect the
purchase price paid by Seagate Technology. The purchase price was allocated to
the assets and liabilities of XIOtech based on the estimated fair market value
of net tangible and intangible assets acquired and in-process research and
development costs. As a result of the acquisition by Seagate Technology,
XIOtech recorded a one-time write-off of $105 million related to in-process
research and development costs. The purchased intangible assets were amortized
on a straight-line basis over their estimated useful lives ranging from four
months to seven years.
ACQUISITION BY SEAGATE TECHNOLOGY SAN HOLDINGS AND NEW SAC
From January 28, 2000 until November 22, 2000, XIOtech operated as wholly
owned subsidiary of Seagate Technology. On November 22, 2000, as a result of
the stock purchase agreement, XIOtech was acquired by Seagate Technology SAN
Holdings in a series of transactions involving the acquisition of all the
operating assets and liabilities of Seagate Technology by New SAC. Seagate
Technology SAN Holdings is a subsidiary of Seagate Technology Holdings. Seagate
Technology Holdings itself is a subsidiary of New SAC. Seagate Technology SAN
Holdings had no operations prior to its acquisition of XIOtech.
The acquisition of the operating assets and liabilities of Seagate
Technology by New SAC was accounted for as a purchase by New SAC. Accordingly,
the financial position, results of operations and cash flows of Seagate
Technology SAN Holdings for the period subsequent to November 22, 2000, reflect
a new basis in accounting based on the purchase price paid by New SAC and the
allocation of the purchase price to the fair values of all the assets and
liabilities acquired, including those relating to the hard disc drive business
the storage area networks business, the removable storage systems business, the
software business, and the investment company business. However, the estimated
fair values of identifiable tangible and intangible assets and liabilities
acquired from Seagate Technology at the date of the transaction were greater
than the amount paid, resulting in negative goodwill. The negative goodwill was
allocated to long-lived assets on the basis of relative fair value and reduced
the recorded amounts, including the amounts recorded for the long-lived assets
of XIOtech acquired by Seagate Technology SAN Holdings, by 46 percent. The fair
values of tangible and intangible assets, including in-process research and
development, were determined based upon independent appraisals. As a result of
the acquisition by New SAC, Seagate Technology SAN Holdings recorded a one-time
write-off of $25 million related to in-process research and development costs.
The purchased intangible assets are being amortized on a straight-line basis
over their estimated useful lives ranging from one to five years.
BASIS OF PRESENTATION
As described above, prior to January 28, 2000, XIOtech operated as an
independent privately held company, and for the period from January 29, 2000 to
November 22, 2000, XIOtech was a wholly owned subsidiary of Seagate Technology.
Accordingly, references to "we", "our", or "us" for
86
events, transactions or regarding financial information during these periods
are references to our predecessor, XIOtech. The accounting basis in the assets
and liabilities was adjusted on January 29, 2000 as a result of the acquisition
of XIOtech by Seagate Technology, and adjusted again on November 22, 2000 as a
result of the acquisition of XIOtech by Seagate Technology SAN Holdings.
Accordingly, the historical operating results of Seagate Technology SAN
Holdings and its predecessor, XIOtech, are not necessarily comparable because
of the different accounting basis in assets and liabilities, particularly
amounts relating to depreciation and amortization charges.
RESULTS OF OPERATIONS
We list in the table below our consolidated or combined statements of
operations as a percentage of revenue for the six-months ended December 31,
1999, December 29, 2000, June 30, 1999 and June 30, 2000 and the years ended
1997, 1998 and 1999. For comparative purposes, the operating results for the
six months ended June 30, 2000 represent the operating results of XIOtech for
the period from January 1, 2000 to January 28, 2000 prior to its acquisition by
Seagate Technology, combined with the operating results of XIOtech for the
period from January 29, 2000 to June 30, 2000 after its acquisition by Seagate
Technology. The operating results for the six months ended June 30, 1999 and
December 31, 1999 and the fiscal years ended December 31, 1997, 1998, and 1999,
represent the historical operating results of XIOtech as an independent
privately held company prior to its acquisition by Seagate Technology. The
operating results for the six months ended December 31, 2000 represent the
operating results of XIOtech as a subsidiary of Seagate Technology for the
period from July 1, 2000 to November 22, 2000 combined with the operating
results of Seagate Technology SAN Holdings for the period from November 23,
2000 to December 29, 2000.
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
FISCAL YEAR JUNE 30 JUNE 29, DECEMBER 31, DECEMBER 29,
------------------------ ------------ ------------ -------------- -------------
1998 1999 1999 2000 1999 2000
----------- ---------- ------------ ------------ -------------- -------------
Revenue 100% 100% 100% 100% 100% 100%
Cost of Sales 121 56 65 67 51 48
--- --- --- --- --- ---
Gross margin (21) 44 35 33 49 52
Product development 132 20 24 13 17 13
Marketing and administrative 236 76 77 120 74 110
Amortization of goodwill and
intangible assets -- -- -- 128 -- 43
In-process research and
development -- -- -- 796 -- 79
--- --- --- --- --- ---
(Loss) from operations (389) (52) (66) (1,024) (42) (193)
---- --- --- ------ --- ----
Interest Income 16 3 3 1 3 1
---- --- --- ------ --- ----
Loss before income taxes (373) (49) (63) (1,023) (39) (192)
Benefit for income taxes -- -- -- 53 -- 29
---- --- --- ------ --- ----
Net Loss (373)% (49)% (63)% (970)% (39)% (163)%
==== === === ====== === ====
The 1997 percentages are not reflected above as there were no revenues in
1997.
SIX MONTHS ENDED DECEMBER 29, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999
REVENUE. Our revenue is derived primarily from the sale of storage area
network systems. Total revenue for the six months ended December 29, 2000 was
$32 million, an increase of 376% compared to $7 million for the six months
ended December 31, 1999. The increase in revenue is a result of higher unit
shipments resulting from an expansion in our customer base and the growing
acceptance of our products in the domestic and international markets we serve.
The expansion of our customer base is a result of growth in our domestic sales
force and the development of an international distribution network.
Nevertheless, we believe these positive factors will be offset by current
economic conditions.
87
GROSS MARGIN. Gross margin as a percentage of revenue was 52% for the six
months ended December 29, 2000 compared to 49% for the six months ended
December 31, 1999. This increase was primarily a result of improved operational
cost efficiencies gained by higher unit shipments, offset by the sale of
inventories on hand at November 22, 2000 that were written-up to estimated fair
value as a result of purchase accounting. The write-up to our inventories as a
result of purchase accounting approximated $2.4 million, of which approximately
$2.1 million was sold in the period ended December 29, 2000. The remainder is
expected to be sold in the quarter ended March 30, 2001. Gross margin for the
six months ended December 29, 2000 was also negatively impacted by the
amortization of intangibles in the amount of $3.6 million. These charges had
the effect of reducing our gross margin by 18% in the six months ended December
29, 2000.
PRODUCT DEVELOPMENT. Product development expenses for the six months ended
December 29, 2000 was $4.0 million, an increase of 264% from $1.1 million for
the six months ended December 31, 1999. These expenses represented 13% of
revenue for the six months ended December 29, 2000 compared with 17% for the
six months ended December 31, 1999. The increase in expenses from the same
period in the prior year was primarily related to increased engineering
headcount, facility costs and other allocable costs, primarily benefits and
recruiting costs, as we pursued our growth strategy and emphasized product
design and development, increased salaries and compensation for existing
engineers, and increased prototyping expenses for the design and testing for
new products. We expect that research and development costs will increase in
absolute dollars in future periods as we develop new products, engage in other
product development initiatives and increase the number of our product
development personnel.
MARKETING AND ADMINISTRATIVE. Marketing and administrative expenses for
the six months ended December 29, 2000 were $34.9 million, an increase of 598%
when compared to marketing and administrative expenses of $5.0 million for the
six months ended December 31, 1999. These expenses represented 110% of revenue
for the six months ended December 29, 2000, compared with 74% for the six
months ended December 31, 1999. The increase in marketing and administrative
expenses from the same period in the prior year was primarily due to hiring of
additional personnel and a resulting increase in salaries and related facility
and other allocable expenses to support our overall growth.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $13.8 million in the six months ended December 29,
2000. This amortization of goodwill and intangible assets is the result of the
acquisition of XIOtech by Seagate Technology in January 2000 and the
acquisition of XIOtech by Seagate Technology SAN Holdings in November 2000. As
a result of the negative goodwill allocation we expect that the amortization of
intangibles of Seagate Technology SAN Holdings will negatively impact gross
margin by approximately $1.4 million annually through November 2004. There was
no amortization of goodwill and intangibles for the six months ended December
31, 1999.
IN-PROCESS RESEARCH AND DEVELOPMENT. We recorded a $25.0 million charge
for the write-off of in-process research and development in the six months
ended December 29, 2000 based on the results of an independent valuation
performed as of the date that XIOtech was purchased by Seagate Technology SAN
Holdings in November 2000.
INTEREST INCOME. Interest income for the six months ended December 29,
2000 was $0.3 million, an increase of 50% when compared to $0.2 million for the
six months ended December 31, 1999. This increase reflects higher average
invested cash balances in the period ended December 29, 2000.
INCOME TAXES. The federal tax allocation agreement XIOtech had entered
into with Seagate Technology was terminated on November 22, 2000 and we will no
longer file federal income tax returns on a consolidated basis with Seagate
Technology or U.S. affiliates of New SAC. We will enter into a state tax
allocation agreement with affiliates of New SAC, as applicable. Therefore, the
U.S. affiliates of New SAC will not benefit from nor will they reimburse us
pursuant to the tax allocation agreement for federal tax losses we sustain
subsequent to consummation of the transactions. In prior
88
periods, we have received substantial cash payments for our tax losses utilized
by Seagate Technology that we have used to reduce our obligation due to New SAC
or its predecessor under the revolving loan agreement. As a result of the
termination of the tax allocation agreement we may not be able to convert any
future tax losses into cash.
We recorded a benefit for income taxes of $9.0 million for the six months
ended December 29, 2000 compared to no provision for income taxes for the six
months ended December 31, 1999. The benefit for income taxes was recorded to
recognize the benefit of federal tax losses utilized by Seagate Technology in
its consolidated federal income tax returns for the period ended November 22,
2000, and state tax losses for combined state income tax filings for the six
months ended December 29, 2000, pursuant to the tax allocation agreement. The
effective tax rate used to record the benefit for income taxes for the period
ended December 29, 2000 differed from the statutory rate primarily due to
amortization of goodwill that was not deductible for tax purposes and the
recording of a valuation allowance related to deferred tax assets that are more
likely than not unrealizable subsequent to the SAC transactions. At December
29, 2000, our net deferred tax assets have been fully offset by a valuation
allowance. The expected benefit for income taxes for the six months ended
December 31, 1999 derived by applying the federal statutory rate to the net
loss of $2.6 million was fully offset by a valuation allowance for deferred tax
assets because we were not filing our tax returns on a consolidated or combined
basis with Seagate Technology.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
REVENUE. Total revenue for the six months ended June 30, 2000 was $13.2
million, an increase of 222% compared to $4.1 million for the six months ended
June 30, 1999. The increase in revenue is the result of higher unit shipments
reflecting increased market presence, sales force growth and an expanded
international distribution system.
GROSS MARGIN. Gross margin as a percentage of revenue was 33% for the six
months ended June 30, 2000 compared to 35% for the six months ended June 30,
1999. This increase was primarily due to a higher level of unit shipments as
stated above combined with increased operational efficiencies offset by
amortization of intangibles in the six months ended June 30, 2000 of $3.5
million. This amortization had the effect of reducing gross margin by 26.3% in
the six months ended June 30, 2000.
PRODUCT DEVELOPMENT. Product development expenses for the six months ended
June 30, 2000 were $1.7 million, an increase of 70% from $1.0 million for the
six months ended June 30, 1999. These expenses represented 13% of revenue for
the six months ended June 30, 2000 compared with 24% for the six months ended
June 30, 1999. The decrease as a percentage of revenue primarily relates to a
more than threefold increase in revenue growth, a result of increased market
presence, sales force growth and an expanded distribution system.
MARKETING AND ADMINISTRATIVE. Marketing and administrative expenses for
the six months ended June 30, 2000 were $15.8 million, an increase of 410% from
$3.1 million for the six months ended June 30, 1999. These expenses represented
120% of revenue for the six months ended June 30, 2000 compared with 77% for
the six months ended June 30, 1999. This increase consisted primarily of
salaries and related compensation expenses. The increase reflects the growth of
the sales force and distribution network in support of our sales growth
objectives.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $16.9 million in the six months ended June 30, 2000.
There was no amortization of goodwill and intangibles for the six months ended
June 30, 1999. The amortization of goodwill and intangibles in 2000 is the
result of the acquisition of XIOtech by Seagate Technology in January 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT. We recorded a charge of $104.8
million for the write-off of in-process research and development in the six
months ended June 30, 2000 based on the results of an independent valuation
performed as of the date that XIOtech was purchased by Seagate Technology in
January 2000.
89
INTEREST INCOME. Interest income for the six months ended June 30, 2000
was $0.2 million, an increase of $0.1 million when compared to the six months
ended June 30, 1999. This increase in interest income reflects higher average
invested cash balances as a result of additional cash invested in our business
by Seagate in January 2000.
INCOME TAXES. We recorded a benefit for income taxes of $7.0 million for
the six months ended June 30, 2000 compared to no provision for income taxes
for the six months ended June 30, 1999. The benefit for income taxes was
recorded to recognize the benefit of tax losses utilized by Seagate Technology
in its consolidated federal and certain combined and consolidated state income
tax returns for the year ended June 30, 2000 pursuant to the tax allocation
agreement. We became a member of Seagate Technology's consolidated or combined
tax return group upon our acquisition by Seagate Technology on January 28,
2000. The effective tax rate used to record the benefit for income taxes for
the period ended June 30, 2000 differed from the statutory rate due primarily
to amortization of goodwill and the write-off of in-process research and
development in the period that were not deductible for tax purposes. The
expected benefit for income taxes for the six months ended June 30, 1999
derived by applying the federal statutory rate to the net loss of $2.6 million
was fully offset by a valuation allowance for deferred tax assets because we
were not filing our tax returns on a consolidated or combined basis with
Seagate Technology.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
REVENUE. Total revenue for the fiscal year ended December 31, 1999 was
$10.7 million compared to $1.5 million for the fiscal year ended December 31,
1998, an increase of 613%. Our first product shipments occurred in the second
half of 1998 and we emerged from the development stage. Revenue grew due to
increased market penetration and presence, sales force growth and an expanded
distribution system.
GROSS MARGIN. Gross margin as a percentage of revenue was 44% for the
fiscal year ended December 31, 1999 compared to a negative gross margin of 21%
for the fiscal year ended December 31, 1998. The product first became available
for sale in the second half of 1998. In 1999, the product was available for
sale for the entire twelve months generating a more efficient utilization of
resources resulting in an improved gross margin.
PRODUCT DEVELOPMENT. Product development expenses for the fiscal year
ended December 31, 1999 were $2.1 million, an increase of 5% from $2.0 million
for the fiscal year ended December 31, 1998. These expenses represented 20% of
revenue for the fiscal year ended December 31, 1999, compared to 132% for the
prior year. The difference in the relationship to revenue was a result of
higher revenue dollars in 1999 and less emphasis placed on product development
and more on selling as we completed developing the first generation product
during the first half of the year and focused on selling during the second half
of the year.
MARKETING AND ADMINISTRATIVE. Marketing and administrative expenses for
the fiscal year ended December 31, 1999 were $8.1 million, an increase of 125%
from $3.6 million for the fiscal year ended December 31, 1998. These expenses
represented 76% of revenue for the year ended December 31, 1999 compared with
236% for the prior year. These expenses consist primarily of salaries and
related compensation expenses and facilities costs. The increase reflects the
growth of our support systems, sales force and distribution network in support
of our sales growth objectives.
INTEREST INCOME. Interest income was $300,000 for the fiscal year ended
December 31, 1999, an increase of 20% from $250,000 for the fiscal year ended
December 31, 1998. This income reflects earnings on the investment of cash
received from venture capital financing. The increase reflects a larger average
invested cash balance in 1999 versus 1998.
INCOME TAXES. We did not record a provision for income taxes for the
fiscal years ended December 31, 1999 and December 31, 1998 due to net operating
losses. At December 31, 1999 and December 31, 1998, our net deferred tax assets
were fully offset by a valuation allowance.
90
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
REVENUE. Prior to 1998, our product was in its development stage and
unavailable for sale. Total revenue for the fiscal year ended December 31, 1998
was $1.5 million.
GROSS MARGIN. Gross margin of negative 21% for the fiscal year ended
December 31, 1998 is reflective of the first sales for the company, for which
manufacturing efficiencies had not been reached.
PRODUCT DEVELOPMENT. Product development expenses for the fiscal year
ended December 31, 1998 were $2.0 million, a decrease of $0.1 million, or 7%,
over the fiscal year ended December 31, 1997. These expenses consist primarily
of salaries and related compensation expenses and prototyping expenses related
to the design and testing of our products. The decrease in product development
expenses from December 31, 1997 to December 31, 1998 reflects initial product
development and testing during our early years.
MARKETING AND ADMINISTRATIVE. Marketing and administrative expenses for
the fiscal year ended December 31, 1998 were $3.6 million, an increase of $2.6
million, or 260%, over the fiscal year ended December 31, 1997. These expenses
consisted primarily of salaries and related compensation expenses and
facilities costs. The increase reflects the growth of support systems and the
initial start up of the sales force and distribution network.
INTEREST INCOME. Interest income of $0.2 million for the fiscal year ended
December 31, 1998 was relatively consistent with interest income for the fiscal
year ended December 31, 1997. This income reflects earnings on the investment
of cash received from venture capital financing.
INCOME TAXES. We did not record a provision for income taxes for the
fiscal years ended December 31, 1998 and December 31, 1997 due to net operating
losses. At December 31, 1998 and December 31, 1997, our net deferred tax assets
were fully offset by a valuation allowance.
OTHER
Storage Computer Corporation has filed suit alleging that one of our
products infringes its patent. See "Legal Proceedings -- Securities Class
Actions."
91
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
For the purposes of this section only, "we," "us" and "our" refer to
Seagate Removable Storage Solutions Holdings (formerly RSS) and its
subsidiaries. Seagate Removable Storage Solutions Holdings is a subsidiary of
New SAC and a guarantor of the notes.
SELECTED HISTORICAL CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL
INFORMATION OF SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS
PREDECESSOR, RSS, AN OPERATING BUSINESS OF SEAGATE TECHNOLOGY
We list in the table below selected historical condensed consolidated and
condensed combined financial information of the removable storage solutions
business, which we refer to as RSS, an operating business of Seagate
Technology, as of the end of and for each of the last five fiscal years through
June 30, 2000, for the six months ended December 31, 1999 and for the period
from July 1, 2000 to November 22, 2000 and for Seagate Removable Storage
Solutions Holdings as of the end of and for the period from November 23, 2000
to December 29, 2000. The operations of Seagate Removable Storage Solutions
Holdings are substantially identical to the operations of RSS before the
transactions, and RSS is considered to be our predecessor. We have derived the
historical financial information of RSS below as of the end of and for the
fiscal years 1996 and 1997 from unaudited financial statements and related
notes, which are not included in this prospectus. We have derived the
historical financial information of RSS below as of the end of and for fiscal
years 1998, 1999 and 2000 from the audited financial statements and the related
notes of RSS included elsewhere in this prospectus. We have derived the
historical financial information for the six months ended December 31, 1999,
for the period from July 1, 2000 to November 22, 2000 and as of the end of and
for the period from November 23, 2000 to December 29, 2000 from the unaudited
interim condensed consolidated financial statements of Seagate Removable
Storage Solutions Holdings and its predecessor, RSS, included elsewhere in this
prospectus, which in our opinion include all adjustments, consisting only of
normal recurring adjustments, which we consider necessary for the fair
presentation of our financial position and results of operations for these
periods. Operating results for the periods from July 1, 2000 to November 22,
2000 and from November 23, 2000 to December 29, 2000 are not necessarily
indicative of results that may be expected for the entire year or any future
period. You should read the selected historical consolidated financial
information below in conjunction with the discussion below and the financial
statements and related notes of Seagate Removable Storage Solutions Holdings
and its predecessor, RSS, included elsewhere in this prospectus.
RSS
--------------------------------------------------------------------------
FISCAL YEAR (A)
----------------------------------------------------------- SIX MONTHS
ENDED
DECEMBER 31,
1996 1997 1998 1999 2000 1999
----------- ----------- ----------- ----------- ----------- --------------
(IN THOUSANDS)
STATEMENT OF
OPERATIONS DATA:
Revenue ................. $ 405,954 $397,213 $286,086 $314,006 $262,814 $152,071
Income (loss) from
operations ............. (10,211) 6,081 2,162 25,932 12,095 14,189
BALANCE SHEET DATA:
Total assets ............ 140,332 96,720 83,578 78,334 65,638
Long term
obligations
(including current
portion of
long-term debt) ........ -- 405 -- -- 333
SEAGATE REMOVABLE
STORAGE SOLUTIONS
RSS HOLDINGS
-------------- ------------------
JULY 1, 2000 NOVEMBER 23, 2000
TO TO
NOVEMBER 22, DECEMBER 29,
2000 2000
-------------- ------------------
(IN THOUSANDS)
STATEMENT OF
OPERATIONS DATA:
Revenue ................. $ 89,987 $ 28,371
Income (loss) from
operations ............. (23,441) (5,873)
BALANCE SHEET DATA:
Total assets ............ 87,528
Long term
obligations
(including current
portion of
long-term debt) ........ 667
- ----------
(a) RSS has prepared financial results on a fiscal year of 52 or 53
weeks ending on the Friday closest to June 30 of that year.
Accordingly, fiscal year 1996 ended on June 28, 1996, fiscal year
1997 ended on June 27, 1997, fiscal year 1998 ended on July 3, 1998,
fiscal year 1999 ended on July 2, 1999, and fiscal year 2000 ended
on June 30, 2000. Fiscal years 1996, 1997, 1999 and 2000 were 52
weeks, and fiscal year 1998 was 53 weeks.
92
BASIS OF PRESENTATION
Because we acquired all the operating assets of the removable storage
solutions business, an operating business of Seagate Technology that we refer
to as RSS, as of November 22, 2000, RSS is our predecessor. Accordingly,
references to "we", "our" or "us" for events, transactions or regarding
financial information during these periods are references to our predecessor,
RSS. For comparative purposes, the financial information presented combines the
operations of RSS from July 1, 2000 to November 22, 2000 with our operations as
Seagate Technology Holdings from November 23, 2000 to December 29, 2000.
Although we were incorporated on August 10, 2000, prior to November 23, 2000
our operations were not significant. Financial information for the fiscal years
ended 1998, 1999 and 2000 and for the six months ended December 31, 1999 is the
historical financial information of RSS.
ALLOCATION OF PURCHASE PRICE TO US PURSUANT TO THE APPLICATION OF PUSH DOWN
ACCOUNTING
The transactions described in this prospectus constituted a purchase
business transaction of Seagate Technology. Under purchase accounting rules,
the net purchase price under this transaction has been allocated to the assets
and liabilities of Seagate Technology and its subsidiaries, including us, based
on their estimated fair values at the date of the transaction. However, the
estimated fair values of identifiable tangible and intangible assets and
liabilities of Seagate Technology and its subsidiaries at the date of the
transactions were greater than the amount paid, resulting in negative goodwill.
The negative goodwill has been allocated to the long-lived tangible and
intangible assets, including our assets, on the basis of relative fair values.
The fair values of tangible and intangible assets have been determined based
upon independent appraisals.
The accounting for the purchase transaction has been pushed down to our
financial statements. Our December 29, 2000 condensed consolidated financial
statements reflect the new basis in our assets and liabilities at that date in
accordance with the pushed down purchase accounting adjustments, followed by
the results of operations and financial position for the period from November
23, 2000 to December 29, 2000.
As a result of the transactions and the push down accounting, our results
of operations following the transactions, particularly the depreciation and
amortization charges, are not necessarily comparable to the results of
operations prior to the transactions.
The actual allocation of the amounts may differ from those reflected below
after finalization of the purchase price allocation and post closing
transactions.
The following describes the impact of push down accounting on our results:
AMORTIZATION AND DEPRECIATION. As a result of the allocation of negative
goodwill to our long-lived tangible assets, our capital assets were reduced by
$8.1 million. Consequently, depreciation expense for the combined results in
the six months ended December 29, 2000 is approximately $245,000 less than what
it would have been had the push down adjustments not been made. In addition, we
recorded additional combined amortization expense of approximately $400,000
during the six months ended December 29, 2000 resulting from the recording of
incremental fair value of intangibles in the push down adjustments.
RESULTS OF OPERATIONS
We list in the table below the consolidated statements of operations data
as a percentage of revenue for RSS for fiscal years 1998, 1999 and 2000 and the
six months ended December 31, 1999 and the combined consolidated statements of
operations data as a percentage of revenue for Seagate Removable Storage
Solutions Holdings for the six months ended December 29, 2000. In the six
months ended December 29, 2000, we operated as RSS, an operating business of
Seagate Technology, and from November 23, 2000 to December 29, 2000, we
operated as Seagate Removable Storage Solutions Holdings, a stand alone
company. As our operations as Seagate Removable Storage Solutions Holdings are
substantially identical to those of RSS prior to the
93
transactions, we have combined the results of RSS from July 1, 2000 to November
22, 2000 and the results of Seagate Removable Storage Solutions Holdings from
November 23, 2000 to December 29, 2000 in the table and the discussions below
for easier comparison with the results of RSS for the six months ended December
31, 1999. We therefore refer to the results of operations for the six months
ended December 29, 2000 as "combined" in the discussion below.
COMBINED RESULTS
OF SEAGATE REMOVABLE
STORAGE SOLUTIONS
RSS HOLDINGS AND RSS
------------------------------------------------- ---------------------
SIX MONTHS SIX MONTHS
FISCAL YEAR ENDED ENDED
-------------------------------- DECEMBER 31, DECEMBER 29,
1998 1999 2000 1999 2000
-------- --------- --------- -------------- ---------------------
Revenue ......................... 100% 100% 100% 100% 100%
Cost of revenue ................. 80 72 74 71 89
--- ----- ----- ----- ---
Gross margin .................... 20 28 26 29 11
Product development ............. 9 11 14 12 21
Marketing and administrative..... 9 7 7 8 13
Amortization of goodwill &
other intangibles .............. 1 1 -- -- --
Restructuring ................... -- -- -- -- 1
--- ----- ----- ----- ---
Income (loss) from
operations ..................... 1 9 5 9 (24)
Other income (expense), net...... -- -- 1 -- 1
--- ----- ----- ----- ---
Income (loss) before income
taxes .......................... 1 9 6 9 (23)
Benefit (provision) for income
taxes .......................... 0 (3) (2) (3) 8
--- ----- ----- ----- ---
Net income (loss) ............... 1% 6% 4% 6% (15)%
=== ===== ===== ===== ===
SIX MONTHS ENDED DECEMBER 29, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999
REVENUE. Combined revenue decreased by 22% from $152.1 million for the six
months ended December 31, 1999 to $118.4 million for the six months ended
December 29, 2000. Tape drive shipments decreased by 34% from approximately
487,000 units for the six months ended December 31, 1999 to 319,000 units for
the six months ended December 29, 2000.
The reduction in tape drive shipments in the six months ended December 29,
2000 compared to the six months ended December 31, 1999 is attributed to
reduced shipments of our Scorpion DAT tape drives to our major customers. This
trend is combined with a movement away from the use of low end tape drive
products for backing up data on desk top computers which resulted in a decrease
in shipments of our Travan tape drives of approximately 70%. We believe our
reduced shipments resulted from a migration by users in the desktop PC market
to alternative technologies such as CD ROM or DVD type products.
During the six months ended December 31, 1999, the sales force was
reorganized so as to combine tape and disc personnel. The effects of this
change were felt throughout the remainder of the fiscal year ended June 30,
2000 and into the period ended December 29, 2000 as tape products received less
emphasis by the sales force, compounding the downturn in demand already noted
above and further depressing revenue. A sales vice president and several key
regional sales personnel have now been dedicated to us. Management believes
that these actions will result in a more focused sales force and provide
opportunities for improving our revenue. Nevertheless these positive factors
may be offset by current economic conditions.
GROSS MARGIN. Combined gross margin decreased by $32 million to $12.6
million for the six months ended December 29, 2000 from $44.6 million for the
comparable period in 1999. Gross margin as a percent of revenue decreased from
29% for the six months ended December 31, 1999 to 11% for the six months ended
December 29, 2000. The December 29, 2000 period includes
94
one-time charges of $2.7 million for compensation expense related to the
acceleration of options to purchase Seagate Technology stock in connection with
the transactions and $7.9 million revaluation of higher inventory values
related to purchase accounting for the transactions. Excluding these one-time
charges, the gross margin for the December 29, 2000 period would have been
$23.5 million and 20%. The balance of the decrease in gross margin of
approximately $20.1 million is primarily a result of the lower unit volumes, a
higher proportion of revenue from lower margin OEM customers versus higher
margin sales through the distribution channel, lower repair costs in the six
months ended December 31, 1999, the level of fixed costs remaining in the
business and significant startup expenses incurred during the six months ended
December 29, 2000 associated with the launch of the linear tape open, or LTO
product.
PRODUCT DEVELOPMENT EXPENSES. Combined product development expenses
increased by 40% to $25.0 million for the six months ended December 29, 2000
from $17.8 million for the comparable period in 1999. The increase was due to a
one-time charge for compensation expense related to the acceleration of options
to purchase Seagate Technology stock related to the transactions. Without the
one-time charge there would have been a decrease of 8% from the year earlier
period as spending on LTO product development dropped off as the product
transitioned into manufacturing.
MARKETING AND ADMINISTRATIVE EXPENSES. Combined marketing and
administrative expenses increased by 34% to $15.8 million for the six months
ended December 29, 2000 from $11.8 million for the six months ended December
31, 1999. The increase was primarily due to the one-time charge for
compensation expense recorded for the acceleration of vesting of options to
purchase Seagate Technology stock in connection with the transactions. Without
the one-time charge, expenses for the six months ended December 29, 2000 would
have been lower by 2% or $11.6 million. The decrease in other spending was from
lower advertising expenses, and the reorganization of the sales force resulting
in reduced overall headcount, in the six months ended December 29, 2000.
RESTRUCTURING CHARGES. During the six months ended December 29, 2000, we
recorded restructuring charges of $0.8 million compared to $0.4 million for the
six months ended December 31, 1999. Restructuring charges recorded in the six
months ended December 29, 2000 were primarily severance payments to employees
terminated due to management actions taken to reduce headcount and lower
expenses in the Costa Mesa tape drive operation and in the Santa Maria tape
head operation. Restructuring charges recorded in the six months ended December
31, 1999 were primarily for severance payments related to the sales force
reorganization discussed in marketing and administrative expenses above.
NET OTHER INCOME. Net other income for the six months ended December 29,
2000 increased by $0.8 million compared with the six months ended December 31,
1999. The increase in net other income was primarily due to the net gain of
$0.9 million in foreign exchange transaction gains.
INCOME TAXES
The federal tax allocation agreement between Seagate Removable Storage
Solutions LLC and Seagate Technology was terminated on November 22, 2000, and
we will no longer file federal income tax returns on a consolidated basis with
Seagate Technology or U.S. affiliates of New SAC. We will enter into a state
tax allocation agreement with affiliates of New SAC, as applicable. Therefore,
the U.S. affiliates of New SAC will not benefit from nor will they reimburse us
pursuant to the tax allocation agreement for federal tax losses we sustain
subsequent to consummation of the transactions. In prior periods, we recorded
substantial intercompany receivables for our tax losses utilized by Seagate
Technology that have been netted against the Seagate Technology's business
equity interest in Seagate Removable Storage Solutions LLC. As a result of the
termination of the tax allocation agreement, we may not be able to convert any
future tax losses into cash.
We recorded a benefit for income taxes of $9.5 million for the six months
ended December 29, 2000 compared to a provision for income taxes of $4.9
million for the six months ended December 31, 1999. The benefit for income
taxes was recorded to recognize the benefit of federal
95
tax losses utilized by Seagate Technology in its consolidated federal income
tax return for the period ended November 22, 2000, and state tax losses for
combined state income tax filings for the six months ended December 29, 2000,
pursuant to the tax allocation agreement. The effective tax rate used to record
the benefit for income taxes for the six months ended December 29, 2000
differed from the U.S. federal statutory rate primarily due to the recording of
a valuation allowance related to deferred tax assets that are more likely than
not unrealizable subsequent to the transactions. At December 29, 2000, our net
deferred tax assets were fully offset by a valuation allowance due to the
termination of the federal tax allocation agreement with Seagate Technology and
uncertainties regarding our ability to forecast future taxable income. The
effective tax rate used to record the provision for income taxes for the six
months ended December 31, 1999 differed from the U.S. federal statutory rate
primarily due to the tax benefit from research and development tax credits.
We provided income taxes at the U.S. federal statutory rate of 35% on
approximately 72% of our current year foreign earnings for the six months ended
December 29, 2000 compared to substantially all of such earnings for the six
months ended December 31, 1999. A substantial portion of our Asia Pacific
manufacturing operations at plant locations in Singapore and Malaysia operate
under various tax holidays, which expire in whole or in part during fiscal
years 2001 through 2010. The net impact of these tax holidays was to increase
net income by approximately $0.3 million in the six months ended December 29,
2000. The tax holidays had no impact on net income in the six months ended
December 31, 1999.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JULY 2, 1999
REVENUE. Revenue in fiscal year 2000 was $262.8 million, 16% lower than
revenue of $314.0 million in fiscal year 1999. The decrease in revenue from the
prior year was due primarily to a reduction in tape drive shipments and overall
lower average selling prices. Tape drive unit shipments in fiscal 2000 were
approximately 816,000 compared to 912,000 in fiscal 1999.
The reduction in tape drive shipments in fiscal 2000 is attributable to
lower server shipments by our major customers resulting in a decrease in
shipments of our Scorpion DAT tape drives. This trend, combined with a movement
away from the use of low end tape drive products for backing up data on desk
top computers, resulted in a decrease in shipments of our Travan tape drives.
We believe that in the desk top PC market users began migrating to alternative
technologies such as CD ROM or DVD type products.
During the six months ended December 31, 1999 the sales force was
reorganized so as to combine tape and disc personnel. The effects of this
change were felt throughout the remainder of the fiscal year ended June 30,
2000, compounding the downturn in demand already noted above and further
depressing results. Management believes that actions enacted since the fiscal
year ended June 30, 2000 will result in a more effective and cost efficient
sales operation.
GROSS MARGIN. Gross margin as a percentage of revenue was 26% for fiscal
year 2000 compared with 28% for fiscal year 1999. The decrease in gross margin
as a percentage of revenue was primarily due to the lower overall average unit
selling prices, combined with the lower volume shipments, leaving fixed costs
to be spread over fewer units in fiscal year 2000 compared with fiscal year
1999.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased 4% to
$37.4 million for the fiscal year 2000 from $36.1 million for fiscal year 1999.
The increase was primarily due to a need for more engineering resources and
prototype materials required to complete the development work on the LTO
project. Average engineering headcount increased approximately 15% from fiscal
year 1999 to fiscal year 2000. In addition, approximately $0.6 million was paid
to an outside engineering firm to develop firmware code to allow high-speed
Fibre-Channel interface capability for the LTO product.
MARKETING AND ADMINISTRATIVE EXPENSES. Marketing and Administrative
expenses decreased by 19% to $18.6 million for fiscal year 2000 from $22.9
million for fiscal year 1999. The decrease was due to significant reductions in
advertising and other discretionary spending over the period, in
96
an effort to offset the increase in required engineering spending on the LTO
development and the decrease in revenue and gross profit. Approximately $4.1
million of the decrease was due to a one-time reversal of excess advertising
expense accruals. During the second fiscal quarter of 2000, the RSS sales force
was combined with the hard disc drive division sales force and a reduction in
headcount of approximately 40 salespersons from the combined sales force
resulted. A corresponding reduction in RSS selling expense was realized over
the balance of fiscal year 2000 from this reorganization.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles decreased in fiscal year 2000 by $2.3 million, or 73%,
compared with fiscal year 1999, primarily due to the write-off of $1 million of
remaining intangibles related to the acquisition of Santa Marin Tape Heads
business in 1995.
RESTRUCTURING CHARGES. In fiscal year 2000, we recorded restructuring
charges totaling $0.6 million, primarily for severance payments related to the
reorganization of the sales force into a combined tape and disc sales force
resulting in a net reduction of approximately 40 salespersons.
NET OTHER INCOME. Net other income in fiscal year 2000 increased by
approximately $1.6 million compared with fiscal year 1999. Other income
(expense) is comprised primarily of royalty income, foreign exchange gains or
losses and expenses incurred by the partnership between IBM, Hewlett Packard
and RSS, which we refer to as TPCs, related to the mutual development,
promotion and compliance verification of the jointly owned LTO format. Net
other income in fiscal year 2000 consisted of $0.8 million income from Travan
royalty payments, $0.1 million of interest income offset by $1.2 million of TPC
expenses and foreign exchange gains of $1.9 million, a net of $1.6 million of
other income for the period. Other income/expense in fiscal 1999 consisted of
$0.8 million of Travan royalty income and $0.1 million of interest income which
was offset by approximately $0.3 million of TPC expenses and foreign exchange
losses of $0.6 million which netted to zero in fiscal 1999.
INCOME TAXES. We recorded a provision for income taxes of $4.4 million for
the fiscal year ended June 30, 2000 compared to a provision for income taxes of
$9.6 million for the fiscal year ended July 2, 1999. The effective tax rate
used to record the benefit for income taxes for the fiscal year ended June 30,
2000 differed from the U.S. federal statutory rate primarily due to the tax
benefit realized from research and development tax credits. The effective tax
rate used to record the provision for income taxes for the fiscal year ended
July 2, 1999 differed from the U.S. federal statutory rate, primarily due to
the tax benefit from research and development tax credits and permanently
reinvested earnings in certain foreign subsidiaries, partially offset by
amortization of goodwill that is not deductible for tax purposes.
We provided income taxes at the U.S. federal statutory rate of 35% on
substantially all of our current year foreign earnings for the fiscal year
ended June 30, 2000 compared to approximately 68% of such earnings for the
fiscal year ended July 2, 1999. A substantial portion of our Asia Pacific
manufacturing operations at plant locations in Singapore and Malaysia operate
under various tax holidays, which expire in whole or in part during fiscal 2001
through 2010. The tax holidays had no impact on net income in the fiscal year
ended June 30, 2000. The net impact of these tax holidays was to increase net
income approximately $.7 million in the fiscal year ended July 2, 1999.
FISCAL YEAR ENDED JULY 2, 1999 COMPARED TO FISCAL YEAR ENDED JULY 3, 1998
REVENUE. Revenue for fiscal year 1999 was $314.0 million compared to
$286.1 million in fiscal 1998, an increase of 9.8% from 1998 to 1999. The
increase in revenue from the prior year was due primarily to an increase in
tape drive shipments to two major OEM customers. Unit shipments increased from
809,000 in fiscal 1998 to 912,000 in fiscal 1999, an increase of 13% from 1998
to 1999. Part of the increase in tape drive revenue in fiscal 1999 was offset
by a decrease in tape head revenue from fiscal 1998 to 1999 of $9.9 million.
GROSS MARGIN. Gross margin as a percentage of revenue was 28% for fiscal
year 1999 compared with 20% for fiscal 1998. The increase in gross margin as a
percentage of revenue was primarily due to the increased volume of tape drive
shipments in fiscal 1999 resulting in lower
97
average unit costs, lower repair expenses in fiscal 1999, and a mix shift of
$9.9 million in tape heads with no gross margin to tape drives at an average
gross margin of 23%.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased 44%
to $36.1 million for fiscal year 1999 from $25.0 million for the comparable
period in 1998. Increased spending was primarily due to adding additional
resources in the tape drive engineering organization required for continued
development work on the LTO program and to complete development work on the
DDS4 drive. Engineering spending in the tape head organization increased from
$2.2 million in fiscal year 1998 to $4.4 million in fiscal year 1999 due to
increased efforts to develop an LTO head. Average engineering headcount
increased 28% from fiscal year 1998 to 1999.
MARKETING AND ADMINISTRATIVE EXPENSES. Marketing and administrative
expenses decreased by 15% to $23.0 million for fiscal year 1999 from $27.2
million for fiscal year 1998. The decrease was due to significant reductions in
advertising and other discretionary spending over the period in an effort to
offset the increase in required engineering spending on the LTO development.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles increased from $2.2 million in fiscal year 1998 to $3.2
million in fiscal year 1999, an increase of $1.0 million compared with fiscal
year 1998. The increase was primarily due to a decision late in fiscal year
1999 to write-off the remaining $1 million balance of intangible assets still
on the books from the Conner acquisition of the tape drive business in 1996.
RESTRUCTURING CHARGES. In fiscal year 1999 and 1998, we recorded
restructuring charges of $0.7 million and $0.7 million, respectively, primarily
for severance payments to employees terminated due to management actions taken
to reduce headcount and lower expenses in the Costa Mesa tape drive operation
and in the Santa Maria tape head operation.
NET OTHER INCOME. Net other income in fiscal year 1999 decreased by $0.9
million compared with fiscal year 1998. Other income (expense) is comprised
primarily of royalty income, foreign exchange gains or losses and expenses
incurred by the partnership between IBM, Hewlett Packard and Seagate (known as
the TPCs) related to the mutual development, promotion and compliance
verification of the jointly owned LTO format. Other income (expense) in fiscal
1999 consisted of $0.8 million of Travan royalty income and $0.1 million of
interest income which was offset by approximately $0.4 million of TPC expenses
and foreign exchange losses of $0.6 million which netted to zero. Other income
(expense) in fiscal 1998 consisted primarily of approximately $0.8 million of
royalty payments from a Travan license agreement.
INCOME TAXES. We recorded a provision for income taxes of $9.6 million for
the fiscal year ended July 2, 1999, compared to a provision for income taxes of
$1.6 million for the fiscal year ended July 3, 1998. The effective tax rate
used to record the benefit for income taxes for the fiscal year ended July 2,
1999 differed from the U.S. federal statutory rate primarily due to the tax
benefit realized from research and development tax credits and permanently
reinvested earnings of certain foreign subsidiaries, partially offset by
amortization of goodwill that is not deductible for tax purposes. The effective
tax rate used to record the provision for income taxes for the fiscal year
ended July 3, 1998 differed from the U.S. federal statutory rate primarily due
to the tax benefit from research and development tax credits, partially offset
by amortization of goodwill that is not deductible for tax purposes.
We provided income taxes at the U.S. federal statutory rate of 35% on
approximately 68% of our current year foreign earnings for the fiscal year
ended July 2, 1999, compared to substantially all of such earnings for the
fiscal year ended July 3, 1998. A substantial portion of our Asia Pacific
manufacturing operations at plant locations in Singapore and Malaysia operate
under various tax holidays, which expire in whole or in part during fiscal 2001
through 2010. The net impact of these tax holidays was to increase net income
by approximately $0.7 million in the fiscal year ended July 2, 1999. The tax
holidays had no impact on net income in the fiscal year ended July 3, 1998.
98
CRYSTAL DECISIONS
For the purposes of this section only, "we," "us" and "our" refer to
Crystal Decisions (formerly Seagate Software Information Management Group
Holdings, Inc.) and its subsidiaries. Crystal Decisions is a subsidiary of New
SAC and a guarantor of the notes.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF CRYSTAL DECISIONS,
INC. (FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
We list in the table below selected historical, consolidated and combined
financial information of Crystal Decisions as of the end of and for each of the
last five fiscal years ended June 30, 2000, for the six months ended December
31, 1999, and as of the end of and for the six months ended December 29, 2000.
We have derived the historical financial information of Crystal Decisions below
as of the end of and for the fiscal years 1996 and 1997 from unaudited
financial statements and related notes of Crystal Decisions, which are not
included in this prospectus. We have derived the historical financial
information of Crystal Decisions as of the end of and for the fiscal years
1998, 1999, and 2000 from the audited financial statements and the related
notes of Crystal Decisions included elsewhere in this prospectus. We have
derived the historical financial information for the six months ended December
31, 1999 and as of the end of and for the six month period ended December 29,
2000 from the unaudited interim consolidated condensed financial statements of
Crystal Decisions included elsewhere in this prospectus, which in our opinion
include all adjustments, consisting only of normal recurring adjustments, which
we consider necessary for the fair presentation of our financial position and
results of operations for these periods. Operating results for the six months
ended December 29, 2000 are not necessarily indicative of results that may be
expected for the entire year or any future period. The selected historical
consolidated financial information below should be read in conjunction with the
discussion below and the financial statements and related notes of Crystal
Decisions included elsewhere in this prospectus.
FISCAL YEAR SIX MONTHS SIX MONTHS
---------------------------------------------------------------- ENDED ENDED
DECEMBER 31, DECEMBER 29,
1996 1997 1998 1999 (1) 2000 (2) 1999 2000
------------ ------------ ----------- ------------ ------------- -------------- -------------
(IN THOUSANDS)
STATEMENT OF
OPERATIONS DATA:
Revenue .................... $ 23,843 $ 74,534 $115,952 $ 141,757 $ 126,518 $ 58,175 $ 77,048
(Loss) from operations ..... (36,152) (20,207) (4,993) (98,957) (276,237) (265,484) (14,113)
BALANCE SHEET DATA:
Total assets ............... 64,344 53,854 63,569 79,820 71,280 83,189 92,737
- ----------
(1) The net loss for fiscal 1999 includes unusual items of approximately
$87,000 described below in "-- The June 1999 Seagate Technology Exchange
Offer."
(2) The net loss for fiscal 2000 includes unusual items of approximately
$243,000 described below in "-- The October 1999 Seagate Technology
Exchange of Shares."
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OVERVIEW
We develop, market and support an integrated product line of end user
enterprise software products, which enable business users, developers and
information technology professionals to access, analyze, report on and
distribute enterprise information. We believe our products meet an extensive
range of data-based business needs commonly described as enterprise reporting,
enterprise business intelligence, enterprise portals, developer reporting
tools, analytic application development and packaged analytic applications. Our
primary market is North America where our products are sold through a direct
sales force and indirect sales channels, such as distributors and OEM
relationships. Outside North America, our products are sold through a direct
sales force, distributors and OEMs.
As of November 22, 2000, we became a majority owned subsidiary of Seagate
Software (Cayman) Holdings, which is a wholly owned subsidiary of New SAC.
Prior to November 22, 2000, we were a majority owned subsidiary of Seagate
Software Holdings, a Delaware corporation and wholly owned subsidiary of
Seagate Technology. The outstanding minority interests in our capital stock
amounted to approximately 12.8% and 10.5% on a fully diluted basis as of
December 29, 2000 and June 30, 2000, respectively. The minority interests
consisted of our common stock and options to purchase our common stock issued
pursuant to our 1999 and 2000 Stock Option Plans to certain employees and
directors of us, our subsidiaries and our affiliated companies.
On November 22, 2000, New SAC, through Seagate Software (Cayman) Holdings,
acquired 75,001,000 shares of our common stock under the terms of a stock
purchase agreement. As a result of the transaction, Seagate Software (Cayman)
Holdings held 99.6% of our actual outstanding capital stock as of December 29,
2000. This transaction resulted in a change in control of us. Seagate Software
(Cayman) Holdings did not purchase shares of our common stock that are
outstanding as a result of the exercise of options to purchase these shares
under our 1999 and 2000 Stock Option Plans. Our minority stockholders continue
to hold their interests in common stock. In addition, the outstanding
unexercised options granted under our 1999 and 2000 Stock Option Plans continue
to remain outstanding.
Under SEC rules and regulations, because more than 95% of our capital
stock was acquired and a change of ownership occurred, we have restated all our
assets and liabilities as of November 22, 2000 on a push down accounting basis
in the accompanying financial statements, presented as of December 29, 2000.
Accordingly, results of operations prior to November 22, 2000 and the
comparative information presented do not reflect these adjustments.
A majority of our assets, along with various other assets of Seagate
Technology, are now pledged as a guarantee for debt issued to finance the
transactions described in this prospectus.
The federal tax allocation agreement we had with Seagate Technology was
terminated on November 22, 2000, and we will no longer file federal income tax
returns on a consolidated basis with Seagate Technology.
We rely on a revolving loan with Seagate Technology LLC, which is a wholly
owned subsidiary of New SAC, to fund a portion of our operating cash needs. The
revolving loan agreement continued in effect subsequent to the closing of the
transactions on November 22, 2000 and expires on July 4, 2001.
PRIOR ORGANIZATIONAL EVENTS
In August 1999, we were formed to acquire Seagate Software Holdings'
information management business. On November 16, 1999, Seagate Software
Holdings contributed the information management business to us in exchange for
75,000,000 shares of common stock. Prior to November 16, 1999, Seagate Software
Holdings entered into two separate share exchange transactions with Seagate
Technology. The first transaction, the June 1999 Seagate Technology Exchange
Offer, relates to an offer Seagate Technology made to the optionees and
stockholders of Seagate Software Holdings to exchange shares of Seagate
Software Holdings common stock for
100
shares of Seagate Technology common stock. The June 1999 Seagate Technology
Exchange Offer was made at the time of the contribution of the NSMG business to
VERITAS. The second exchange transaction, the October 1999 Seagate Technology
Exchange of Shares, was the result of a reorganization of Seagate Software
Holdings. This reorganization resulted in Seagate Software Holdings becoming a
wholly owned subsidiary of Seagate Technology and the minority stockholders of
Seagate Software Holdings receiving Seagate Technology common stock for their
Seagate Software Holdings common stock and options. Each of the June and
October exchanges resulted in Seagate Software Holdings recording compensation
expense for stock options and shares held less than six months and purchase
accounting where shares were held by minority stockholders longer than six
months. A portion of the amount of excess purchase price and compensation
expense was allocated to us, as explained below.
THE JUNE 1999 SEAGATE TECHNOLOGY EXCHANGE OFFER
On May 28, 1999, Seagate Software Holdings contributed its NSMG business
and related assets and liabilities to VERITAS in exchange for shares of VERITAS
common stock. In a separate but related transaction on June 9, 1999, Seagate
Technology exchanged 5,275,772 shares of Seagate Technology common stock for
3,267,255 shares of Seagate Software Holdings common stock owned by employees,
directors and consultants of Seagate Software Holdings and its parent and
subsidiaries. The exchange ratio was determined based on the estimated value of
Seagate Software Holdings common stock divided by the fair market value of
Seagate Technology common stock.
The estimated value of Seagate Software Holdings common stock exchanged
into Seagate Technology common stock was determined based upon the sum of the
fair value of the NSMG business, as measured by the fair value of the shares
received from VERITAS, plus the estimated fair value of the information
management business of Seagate Software Holdings as determined by the Seagate
Software Holding's Board of Directors, plus the assumed proceeds from the
exercise of all outstanding Seagate Software Holdings stock options, divided by
the number of fully converted shares of Seagate Software Holdings. The Board of
Directors of Seagate Software Holdings consulted with financial advisors and
considered a number of factors in determining the estimated fair value of the
information management business, including historical and projected revenues,
earnings and cash flows, as well as other factors.
Seagate Software Holdings recorded the acquisition of its common stock by
Seagate Technology as an acquisition of the minority interest by Seagate
Technology. Seagate Software Holdings accounted for the exchange of shares of
its common stock outstanding and vested more than six months as the purchase of
a minority interest and, accordingly, the fair value of the shares exchanged of
$51.8 million was allocated to all the identifiable tangible and intangible
assets and liabilities of Seagate Software Holdings. For those shares
outstanding and vested less than six months, the fair value of the shares
purchased less the original purchase price paid by the employees was recorded
as compensation expense, as this constitutes an early settlement of an award of
stock or grant of an option. Compensation expense associated with the issuance
of Seagate Technology shares amounted to approximately $102.5 million, plus
$630,000 of employer portion of payroll taxes.
Related to the June 1999 Seagate Technology Exchange Offer, Seagate
Software Holdings recorded additional compensation expense of $8.6 million for
the purchase of unvested stock options held by various continuing employees.
This amount was not considered a capital contribution from Seagate Technology.
In addition, Seagate Software Holdings recorded compensation expense amounting
to $12.7 million for accelerated vesting on certain stock options for its
former chief executive officer and several other employees, each of whom became
employees of VERITAS.
Our consolidated and combined statement of operations for fiscal 1999
includes an allocation of compensation expense arising from the June 1999
Seagate Technology Exchange Offer attributable to us. Compensation expense was
allocated to us on the basis of employees specifically identified with our
business who participated in the exchange and for those employees of Seagate
Software Holdings and Seagate Technology who performed services for us, on the
basis of time estimates.
101
Accordingly, we recorded $77.5 million of the $102.5 million of total
compensation expense as a capital contribution from Seagate Technology. In
addition, both the $630,000 relating to the employer portion of payroll taxes
and the $8.6 million compensation expense for the purchase of unvested stock
options relate to certain of our continuing employees and therefore both
amounts were reflected as expenses for fiscal 1999. We did not allocate any of
the $12.7 million compensation expense that arose from the accelerated vesting
on certain stock options for employees who became employees of VERITAS because
the compensation expense was not attributable to our employees.
Our consolidated and combined financial statements for fiscal 1999 also
include an allocation of $5.4 million of the $51.8 million purchase price
allocation described above. The allocation to us was based on the fair value of
our assets relative to Seagate Software Holdings. We consulted with financial
advisors and considered a number of factors in determining our estimated fair
value, including historical and projected revenues, earnings and cash flows, as
well as other factors.
The allocation of the purchase price to our intangible assets as of June
9, 1999 was as follows:
Developed technologies ...................... $ 686,000
Trademark ................................... 158,000
Assembled workforce ......................... 207,000
In-process research and development ......... 109,000
Goodwill .................................... 4,700,000
Deferred tax liability ...................... (412,000)
----------
Total purchase price allocated .............. $5,448,000
==========
METHODOLOGY
The excess purchase price attributable to us was allocated to intangible
and tangible assets based on their fair market values for our company on a
stand-alone basis in accordance with the provisions of APB Opinion Nos. 16 and
17.
Our tangible net assets principally include cash, intercompany loan
receivables and payables, accounts receivable, other current assets and capital
assets. Liabilities principally include accounts payable, accrued employee
compensation and other accrued liabilities.
To estimate the value of the developed technologies, we discounted the
expected future cash flows attributable to all existing technology, taking into
account risks related to the characteristics and applications of the
technology, existing and future markets and assessments of the life cycle stage
of the technology.
We estimated the value of trademarks by considering, among other factors,
the assumption that in lieu of ownership of a trademark, a company would be
willing to pay a royalty in order to exploit the related benefits of such
trademark.
We estimated the value of the assembled workforce as the costs to replace
the existing employees, including recruiting, hiring and training costs for
each category of employee.
We charged the value allocated to projects identified as in-process
technology for the minority interest acquired to expense. These write-offs were
necessary because the acquired technologies had not reached technological
feasibility at the date of purchase and had no future alternative uses. We
expect that the acquired in-process research and development will be
successfully developed, but we cannot assure that commercial viability of these
products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities necessary to establish that the product can be produced to meet its
design specifications, including functions, features and technical performance
requirements. We estimated the value of our purchased in-process technology as
the projected net cash flows related to such products, including costs to
complete the development of the technology
102
and the future revenues to be earned upon commercialization of the products,
excluding revenues attributable to future development efforts. We then
discounted these cash flows back to their net present value. The projected net
cash flows from such projects were based on our estimates of revenues and
operating profits related to such projects.
Goodwill is calculated as the residual difference between the estimated
amount of excess purchase price allocated to us and the values assigned to
identifiable tangible and intangible assets and liabilities.
THE OCTOBER 1999 SEAGATE TECHNOLOGY EXCHANGE OF SHARES
On October 20, 1999, the minority stockholders of Seagate Software
Holdings approved the merger of Seagate Daylight Merger Corp., a wholly owned
subsidiary of Seagate Technology, with and into Seagate Software Holdings.
Seagate Software Holdings assets consisted of the assets of the information
management business and its investment in the common stock of VERITAS. The
merger was effected on October 20, 1999. Upon the closing of the merger,
Seagate Software Holdings became a wholly owned subsidiary of Seagate
Technology. All outstanding options to purchase Seagate Software Holdings
common stock were accelerated immediately prior to the merger. In connection
with the merger, Seagate Software Holdings minority stockholders and optionees
received payment in the form of 3.23 shares of Seagate Technology's common
stock per share of Seagate Software Holdings common stock, less any amounts due
for the payment of the exercise price of unexercised options. Seagate
Technology issued 9,124,046 shares of its common stock from treasury shares to
optionees and minority stockholders of Seagate Software Holdings in connection
with the merger.
Seagate Technology accounted for the exchange of shares of its common
stock as the acquisition of a minority interest for Seagate Software Holdings
common stock outstanding and vested more than six months held by employees and
all stock held by former employees and consultants. The fair value of the
shares of Seagate Technology issued was $19.4 million and was recorded as
purchase price and allocated to all the identifiable tangible and intangible
assets and liabilities of Seagate Software Holdings. Seagate Technology
accounted for the exchange of shares of its common stock for stock options in
Seagate Software Holdings held by employees and stock held and vested by
employees less than six months as the settlement of an earlier stock award.
Seagate Technology recorded compensation expense of $283.6 million, plus $2.1
million of the employer's portion of payroll taxes, related to the purchase of
the minority interest in Seagate Software Holdings.
Our consolidated and combined statement of operations for fiscal 2000
includes an allocation of compensation expense arising from the October 1999
Seagate Technology exchange of shares attributable to us. Compensation expense
was allocated to us on the basis of employees specifically identified with our
business and for those employees that performed services for us on the basis of
time estimates. Accordingly, we recorded $239.6 million of the $283.6 million
compensation expense related to the October 1999 Seagate Technology Exchange of
Shares as a capital contribution from Seagate Technology. In addition, the $2.1
million of payroll taxes paid in relation to our employees was recorded as an
expense for fiscal 2000.
In addition, $877,000 of legal and accounting costs were incurred by us in
connection with our recapitalization and reorganization.
Our consolidated and combined financial statements for fiscal 2000 also
include an allocation of $1.2 million of the $19.4 million purchase price
allocation described above. The allocation was based on the fair value of our
assets relative to the fair value of Seagate Software Holdings. We consulted
with financial advisors and considered a number of factors in determining our
estimated fair value, including historical and projected revenues, earnings and
cash flows, as well as other factors.
103
The allocation of the purchase price to our intangible assets as at
October 20, 1999 was as follows:
Developed technologies ...................... $ 156,000
Trademark ................................... 36,000
Assembled workforce ......................... 47,000
In-process research and development ......... 25,000
Goodwill .................................... 1,071,000
Deferred tax liability ...................... (94,000)
----------
Total purchase price allocated .............. $1,241,000
==========
The excess purchase price attributable to us was allocated to intangible
and tangible assets based on their fair market values in the same manner
described above for the June 1999 Seagate Technology Exchange Offer.
REVENUE RECOGNITION
We derive most of our revenues from the sale of licenses for our software
products. We also generate revenues from services that support our products
such as technical support, training, consulting and maintenance.
We recognize revenues in accordance with Statement of Position, or SOP,
97-2, "Software Revenue Recognition," as amended by SOP 98-4 "Deferral of the
Effective Date of a Provision of SOP 97-2" and by SOP 98-9 "Modification of SOP
97-2, Software Revenue Recognition with Respect to Certain Transactions." These
amendments deferred and then clarified, respectively, the specification of what
was considered vendor specific objective evidence, or VSOE, of fair value for
the various elements in a multiple element arrangement. We adopted the
provisions of SOP 97-2 and SOP 98-4 as of the beginning of fiscal year 1999 and
adopted SOP 98-9 as of the beginning of fiscal year 2000.
SOP 97-2 requires that the total arrangement fee from software
arrangements that include rights to multiple software products, post contract
customer support and/or other services be allocated to each element of the
arrangement based on their relative fair values. Under SOP 97-2, the
determination of fair value is based on VSOE. Fair value is established for
each element based on its individual sales prices consistent with our pricing
strategy. Our pricing strategy is established by our pricing group, consisting
of representatives from our marketing, sales, finance and product development
departments.
We typically can establish VSOE for all elements of our multi-element
arrangements, and accordingly, revenues are allocated to the individual
elements on the basis of VSOE. During the second quarter of fiscal year 2001,
we adopted a new sales model that limits the sale of certain software license
products sold on an individual basis and, as a result, are not able to
establish sufficient VSOE for these license products. As a result, when these
products are included in bundled arrangements with technical support and
maintenance services, we now apply the residual method of accounting as
specified in SOP 98-9 such that the total fair value of the undelivered
elements, as indicated by VSOE, is deferred and subsequently recognized in
accordance with SOP 97-2 and the difference between the total arrangement fee
and the amount deferred for the undelivered elements is accounted for as
revenue related to the delivered elements. The impact on revenues of applying
the residual method of accounting for the six months ended December 29, 2000
was not material. Although not typical, some OEM arrangements contain end-user
maintenance elements for which VSOE has not been established as sufficient
evidence of consistent pricing and renewal rates have not been present. In such
arrangements, we have recognized the arrangement fee ratably over the
maintenance period in accordance with the provisions set forth in SOP 97-2.
We generally recognize licensing revenues, whether sold directly or
through resellers, upon product delivery, provided persuasive evidence of an
arrangement exists, fees are fixed or
104
determinable and the resulting receivable is deemed collectible by management.
In instances where payments are subject to extended payment terms, we do not
recognize revenues until the date payments become due. When an acceptance
period is specified in an arrangement, we recognize revenues upon the earlier
of customer acceptance or the expiration of the acceptance period.
Our policy is not to recognize revenues on sales to distributors or
resellers if resale contingencies exist. Some of the factors that we consider
in determining the existence of resale contingencies include payment terms,
collectibility and our history with the distributor or reseller. We recognize
revenues when these contingencies are resolved and the criteria for revenue
recognition in SOP 97-2 are met.
We recognize revenues for sales to distributors and resellers with rights
of returns when the criteria for recognizing revenues, as outlined in SFAS 48,
are met. However, we make estimates of future returns and reduce the revenues
and related receivables accordingly by the amount of our estimates.
Where rights of return exist and the criteria of SFAS 48 are not met, we
do not recognize revenues until such time as all of the criteria are met. We
consider factors including historical experience, nature of the product, fixed
or determinable fees, arms length contract terms, the level of inventory in the
distribution channels and the ability to reasonably estimate returns.
We recognize revenues from technical support and maintenance ratably over
the term of the arrangement, generally one year. We recognize revenues from
training and consulting as the services are performed.
Where our software arrangements require us to provide consulting services
for significant production, modification or customization of software, or where
these services are essential to the functionality of the software, we recognize
revenues in accordance with the provisions of SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts." In
these arrangements, we recognize both the licensing revenues and consulting
services revenues on the percentage of completion method based on cost inputs.
ALLOCATION OF PURCHASE PRICE TO US PURSUANT TO THE APPLICATION OF PUSH DOWN
ACCOUNTING
The transactions described in this prospectus constituted a purchase
business transaction of Seagate Technology and resulted in a change in control
of us. Under purchase accounting rules, the net purchase price under this
transaction has been allocated to the assets and liabilities of Seagate
Technology and its subsidiaries, including us, based on their estimated fair
values at the date of the transaction. However, the estimated fair values of
identifiable tangible and intangible assets and liabilities of Seagate
Technology and subsidiaries at the date of the transactions were greater than
the amount paid, resulting in negative goodwill. The negative goodwill has been
allocated to the long-lived tangible and intangible assets, including our
assets, on the basis of relative fair values. The fair values of tangible and
intangible assets, including in-process research and development, have been
determined based upon independent appraisals.
The accounting for the purchase transaction has been pushed down to our
financial statements. Our December 29, 2000 consolidated and combined condensed
financial statements reflect our historical results of operations and financial
position up to the date of the transaction, November 22, 2000, and the
restatement of assets and liabilities at that date to reflect the pushed down
purchase accounting adjustments, followed by our results of operations and
financial position for the period from November 23, 2000 to December 29, 2000,
reflecting the effects of restated balances from the date of the transactions.
As a result of the transactions and the push down accounting, our results
of operations following the transactions, particularly the depreciation and
amortization charges, are not necessarily comparable to our results of
operations prior to the transactions.
The actual allocation of the amounts may differ from those reflected below
after finalization of the purchase price allocation and post closing
transactions.
105
The following describes the impact of push down accounting on our results:
Revenue -- Deferred revenue was revalued at the transaction date and reduced
by $1.3 million. Consequently, revenues were lower by $300,000 during the
six months ended December 29, 2000 than the amount that would have been
recorded had the push down adjustments not been made.
Amortization and depreciation -- As a result of the allocation of negative
goodwill to our long-lived tangible assets, our capital assets were reduced
by $4.3 million. Consequently, depreciation expense for the six months ended
December 29, 2000 is approximately $224,000 less than what it would have
been had the push down adjustments not been made. In addition, we recorded
additional amortization expense of approximately $473,000 during the six
months ended December 29, 2000 resulting from the recording of incremental
fair value of intangibles in the push down adjustments.
In-process research and development -- We wrote off in-process research and
development of $7.1 million as an expense during the six months ended
December 29, 2000.
RESULTS OF OPERATIONS
We list in the table below our consolidated statements of operations data
as a percentage of revenues for the fiscal years 1998, 1999 and 2000, the six
months ended December 31, 1999 and the six months ended December 29, 2000. In
the six months ended December 29, 2000, we operated until November 22, 2000 as
an indirect subsidiary of Seagate Technology and after November 22, 2000 as an
indirect subsidiary of New SAC. In the table and the discussion below, we have
combined our operations from July 1, 2000 to November 22, 2000 under Seagate
Technology and our operations from November 23, 2000 to December 29, 2000 under
New SAC for easier comparison with the results for the six months ended
December 31, 1999.
SIX MONTHS SIX MONTHS
FISCAL YEAR ENDED ENDED
------------------------------ DECEMBER 29, DECEMBER 31,
1998 1999 2000 1999 2000
Revenues: -------- -------- -------- -------------- -------------
Licensing revenues ........................ 70% 65% 59% 54% 63%
Maintenance, support and services
revenues ................................ 30 35 41 46 37
-- -- -- -- --
Total revenues .......................... 100 100 100 100 100
=== === === === ===
Cost of revenues:
Cost of licensing revenues ................ 3 3 3 3 3
Cost of maintenance, support and
services revenues ....................... 23 25 31 36 26
Amortization of developed technologies..... 5 3 -- -- 1
Write-off of developed technologies ....... -- 3 -- -- --
--- --- --- --- ---
Total cost of revenues .................. 31 34 34 39 30
Gross profit margin ........................ 69 66 66 61 70
--- --- --- --- ---
Operating expenses:
Sales and marketing ....................... 44 46 52 56 45
Research and development .................. 14 15 20 22 18
General and administrative ................ 13 10 17 17 12
Amortization of goodwill and other
intangibles ............................. 3 3 2 3 1
Write-off of in-process research and
development ............................. -- -- -- -- 9
Unusual items ............................. -- 61 192 417 2
Restructuring costs ....................... -- -- 1 2 1
--- --- --- --- ---
Total operating expenses ................ 74% 135% 284% 517% 88%
=== === === === ===
106
SIX MONTHS ENDED DECEMBER 29, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999
REVENUES
Total revenues increased by 32% from $58.2 million for the six months
ended December 31, 1999 to $77.0 million for the six months ended December 29,
2000. The increase in total revenues was primarily attributable to increased
productivity of our sales force, which resulted in increases in licensing
revenues and maintenance, support and services revenues.
We adopted a new sales model during the six months ended December 29,
2000, which has resulted in our applying the residual method of accounting for
certain multi-element arrangements as specified in SOP 98-9. The impact of
applying the residual method of accounting was not material for the six months
ended December 29, 2000.
During the six months ended December 29, 2000 and December 31, 1999,
revenues from a third-party customer, Ingram Micro, Inc., accounted for more
than 10% of our consolidated revenues for a total of $16.5 million and $11.0
million, respectively.
LICENSING REVENUES. Licensing revenues consist of license fees for our
products. Licensing revenues increased 55% from $31.4 million for the six
months ended December 31, 1999 to $48.5 million for the six months ended
December 29, 2000. The increase in licensing revenues was primarily
attributable to increased productivity of our sales force and an overall
increase in our direct sales force, resulting in an increase in our customer
base, as well as additional sales to our existing customers. The increase in
licensing revenues compared to the prior period is also a result of increased
sales of an upgraded and enhanced version of Crystal Reports, one of our
products released in February 2000.
MAINTENANCE, SUPPORT AND SERVICES REVENUES. Our maintenance, support and
services revenues were comprised of revenues from technical support, training
activities, consulting services and maintenance related to licenses of our
products. Maintenance, support and services revenues increased by 6% from $26.8
million for the six months ended December 31, 1999 to $28.5 million for the six
months ended December 29, 2000. The increase in maintenance, support and
services revenues was attributable to our higher cumulative installed customer
base, which resulted in increased sales of maintenance agreements and training
and consulting services.
Licensing revenues as a percentage of total revenues, which increased from
53% for the six months ended December 31, 1999 to 63% for the six months ended
December 29, 2000, grew in comparison to maintenance, support, and services
revenues as a percentage of total revenues, which decreased from 46% for the
six months ended December 31, 1999 to 37% for the six months ended December 29,
2000, primarily due to the acquisition of new customers with related licensing
revenues and related deferral of post contract services.
Revenues by geographic location were as follows:
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 29,
1999 2000
-------------- -------------
(IN THOUSANDS)
United States .......... $ 37,262 $ 53,959
Europe ................. 14,065 14,170
Other .................. 6,848 8,919
-------- --------
Total revenues ......... $ 58,175 $ 77,048
======== ========
Revenues from sales in Europe and other regions outside of the United
States represented 36% and 30% of total revenues for the six months ended
December 31, 1999 and December 29, 2000, respectively. Sales in Europe and
other regions outside of the United States declined as a
107
percentage of total revenues because sales productivity increased more
significantly in the United States for the six months ended December 29, 2000
compared to Europe and other regions outside of the United States. To date,
seasonal reductions in business activity in the summer months in Europe and
certain other regions have not had a material impact on our operating results.
A majority of our revenues are denominated in U.S. dollars, the currency
in which we report our operating results. We also collect a portion of our
revenues in currencies other than U.S. dollars such as Canadian Dollars, German
Marks, British Pounds Sterling, French Francs, Australian Dollars and Japanese
Yen. We expect a portion of our revenues to be denominated and collected in the
Euro in the future. For the six months ended December 29, 2000, approximately
4% of our revenues were denominated and collected in currencies that will, in
the future, be denominated and collected in the Euro. To date, the foreign
exchange gains and losses on transactions and revenues reported by our foreign
subsidiaries have not been significant nor have any costs related to the Euro
conversion. In addition, since most of our foreign operations conduct business
in their local currency, our earnings are not significantly impacted by
fluctuations in exchange rates. Translation adjustments from consolidation of
such foreign operations are presented within comprehensive income.
COST OF REVENUES
Cost of revenues increased by 1% from $22.5 million, or 39% of total
revenues, for the six months ended December 31, 1999 to $22.7 million, or 29%
of total revenues, for the six months ended December 29, 2000. The slight
absolute dollar increase in cost of revenues is attributable to an increase in
the amortization of developed technologies as a result of push down accounting.
Excluding the effect of the increase in amortization of developed technologies,
the cost of revenues was relatively unchanged. Our gross margins, as a
percentage of revenue, have increased from 61% for the six months ended
December 31, 1999 to 70% for the six months ended December 29, 2000. The
increase in our gross margins is largely attributable to a corporate-wide
initiative to manage costs, while supporting revenue growth. For the six months
ended December 29, 2000, our revenues increased 32% compared to the six months
ended December 31, 1999 while our number of employees grew by approximately
10%.
COST OF LICENSING REVENUES. Cost of licensing revenues consists primarily
of materials, packaging and distribution of software, related fulfillment
personnel and third party royalties. Cost of licensing revenues increased by
36% from $1.6 million, or 5% of licensing revenues, for the six months ended
December 31, 1999 to $2.2 million, or 5% of licensing revenues, for the six
months ended December 29, 2000. The absolute dollar increase in cost of
licensing revenues is due primarily to the increased volume of shipments during
the applicable periods. We expect cost of licensing revenues to increase in
absolute dollars and as a percentage of revenues in future periods, and to vary
as a percentage of revenues from licensing revenues because of costs incurred
with new product releases, increased order fulfillment costs, costs related to
new packaging of our products and printing costs associated with revised
documentation materials.
COST OF MAINTENANCE, SUPPORT AND SERVICES REVENUES. Cost of maintenance,
support and services revenues consists of personnel and related overhead costs
for technical support, training, consulting, maintenance services and the cost
of materials delivered with enhancement releases. Cost of maintenance, support
and services revenues decreased by 4% from $20.8 million, or 78% of
maintenance, support and services revenues for the six months ended December
31, 1999 to $20.0 million, or 70% of maintenance, support and services
revenues, for the six months ended December 29, 2000. The decline in cost of
maintenance, support and services revenues as a percentage of maintenance,
support and services revenues is primarily attributable to an increased use of
company personnel rather than sub-contracted consultants to perform our
services. Cost of maintenance, support and services revenues may vary between
periods because of the mix of services we provide and the extent to which we
use outside consultants to assist us.
AMORTIZATION OF DEVELOPED TECHNOLOGIES. Amortization of developed
technologies increased by $418,000 from $93,000, or less than 1% of revenues,
for the six months ended December 31, 1999 to $511,000, or 1% of revenues, for
the six months ended December 29, 2000. The increase in
108
amortization of developed technologies is attributable to the push down of the
net fair value of our intangibles assets of $29.4 million acquired by New SAC
on November 22, 2000, which included $15.2 million related to developed
technology. Since November 22, 2000 developed technology is being amortized
over its estimated remaining useful life of three years.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses include salaries,
commissions and bonuses earned by sales and marketing personnel, advertising
and product promotional activities and related facilities and other costs.
Sales and marketing expenses increased 7% from $32.4 million, or 56% of total
revenues for the six months ended December 31, 1999 to $34.8 million, or 45% of
total revenues, for the six months ended December 29, 2000. The absolute dollar
increase in sales and marketing expenses was primarily due to the expansion of
our sales force. The decrease as a percentage of revenues was primarily
attributable to the increase in productivity of our sales force and the
resultant increase in revenues. In addition, there was an approximately
$104,000 reduction in depreciation included in sales and marketing related to
the allocation and push down of negative goodwill to the fair values of our
tangible long-lived assets and intangible assets acquired by New SAC effective
November 22, 2000. We expect the reduction in depreciation expense included in
sales and marketing expenses to continue for the average remaining useful lives
of tangible long-lived assets acquired of 1 to 2 years. We expect this
reduction to be offset over time by depreciation expense on future capital
additions. In addition, we expect sales and marketing expenses to increase in
absolute dollars and to vary as a percentage of revenues as we continue to
increase our direct sales force and promote our products and services.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel and related costs associated with the development of new
products, the enhancement and localization of existing products, quality
assurance and testing. Research and development expenses increased 7% from
$12.8 million, or 22% of total revenues, for the six months ended December 31,
1999 to $13.8 million, or 18% of total revenues, for the six months ended
December 29, 2000. In addition, there was an approximately $66,000 reduction in
depreciation included in research and development expenses related to the
allocation and push down of negative goodwill to the fair values of our
tangible long-lived assets acquired by New SAC effective November 22, 2000. We
expect the reduction in depreciation expense included in research and
development expenses to continue for the average remaining useful lives of
tangible long-lived assets acquired of 1 to 2 years. We expect this reduction
to be offset over time by depreciation expense on future capital additions. The
increases in research and development expenses in absolute dollars were
primarily due to increases in personnel and related expenses. We expect
research and development expenses to continue to increase in absolute dollars
as we continue to invest in our products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs for finance, legal, human resources, information
systems and other administrative costs. General and administrative expenses
decreased 5% from $10.0 million, or 17% of total revenues for the six months
ended December 31, 1999 to $9.5 million, or 12% of total revenues for the six
months ended December 29, 2000. The decrease was primarily attributable to a
decline in bad debt expense because of a reduced accounts receivable balance
and significantly improved days sales outstanding. This decline is partially
offset by increases in personnel and other costs related to meeting our public
reporting requirements. We expect general and administration expenses to vary
in absolute dollars and as a percentage of revenues as we continue to develop.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles decreased 58% from $2.0 million, or 3% of total revenues,
for the six months ended December 31, 1999 to $844,000, or 1% of total
revenues, for the six months ended December 29, 2000. The decrease in
amortization of goodwill and other intangibles was attributable to intangible
assets that were fully amortized by the end of the six month period ended
December 31, 1999.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT. Write-off of in-process
research and development was $7.1 million, or 9% of total revenues, for the six
months ended December 29,
109
2000. As part of the push down of the purchase price allocation of the
transactions, the net fair value of in-process research and development, as
determined by an independent valuation, was $7.1 million.
As the basis for identifying the in-process research and development, our
developmental projects were evaluated in the context of FASB Interpretation 4
and paragraph 11 of FASB Statement No. 2 and FASB Statement No. 86. This
write-off of in-process research and development during the six months ended
December 29, 2000 was necessary because the acquired technologies have not yet
reached technological feasibility and have no future alternative uses.
At the valuation date, we were in the process of developing three next
generation versions of existing technologies which were estimated to be about
85%, 70%, and 75% complete based on total man-hours and absolute time. We
expect these three projects to be completed in fiscal 2002, at an estimated
cost of $20 million. The nature of the efforts required to develop the
purchased in-process research and development into commercially viable products
principally relates to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
product can be produced to meet its design specifications, including functions,
features and technical performance requirements. We expect that the acquired
in-process research and development will be successfully developed, but we
cannot ensure that commercial viability of these products will be achieved.
The value of the purchased in-process research and development was
determined by estimating the projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned on commercialization of the products. These cash flows
were then discounted back to their net present value. The projected net cash
flows from such projects were based on management's estimates of revenues and
operating profits related to these projects.
UNUSUAL ITEMS. Unusual items for the six months ended December 29, 2000 of
approximately $1.9 million, or 2% of total revenues, consisted of the push down
of compensation expense attributable to our employees arising from the
acceleration and net exercise of Seagate Technology options held by our
employees on November 22, 2000. Unusual items for the six months ended December
31, 1999 of $242.6 million, or 417% of total revenues, consisted of the
compensation expense and associated expenses attributable to our employees
related to the October 1999 Seagate Technology Exchange of Shares.
RESTRUCTURING COSTS. Restructuring costs were $573,000, representing 1% of
total revenues, for the six months ended December 29, 2000. The charges relate
to the closure of eight offices in Europe and are part of a restructuring plan
announced in September 2000 to consolidate the European sales organization into
fewer office locations. The charges primarily comprised costs related to the
termination of office leases and other related office closure costs, as well as
severance and benefits due to nine sales and marketing employees who were
terminated in September 2000. At December 29, 2000, $375,000 was included in
accrued expenses and is expected to be paid by the end of fiscal 2001.
Management believes that this restructuring is not significant and it will not
have a material impact on our future revenues, operating costs or operating
results.
Restructuring costs were $1.3 million, representing 2% of total revenues,
for the six months ended December 31, 1999. The charges resulted from a
company-wide restructuring plan announced in October 1999 to realign resources
to better manage and control our business. The charges were comprised of
severance and benefits paid to approximately 125 employees from various
locations and departments, including direct sales force personnel, who were
terminated on October 23, 1999. The decline in our direct sales force as part
of this restructuring contributed to the decline in revenues during fiscal 2000
compared to fiscal 1999. The restructuring charges were paid during fiscal 2000
and no amounts were outstanding as of June 30, 2000. We believe there are no
further restructuring liabilities related to this plan. In addition, we believe
that the future benefit of this plan, while not quantifiable, is a more focused
and productive company. Any benefits in the form of cost reductions because of
reduced salaries were realized by the end of fiscal 2000 and are not expected
to continue.
110
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net consists of interest income,
interest expense and net foreign currency exchange gains or losses. Interest
and other income (expense), net, increased from expense of $1.3 million for the
six months ended December 31, 1999 to income of $1.1 million for the six months
ended December 29, 2000. Interest and other income (expense), net fluctuates on
a year-to-year basis depending on fluctuations in Seagate Technology LLC's
in-house portfolio rate, LIBOR, our net outstanding loan balance with Seagate
Technology and, for the net foreign currency gains or losses, changes in
foreign currency exchange rates. Interest is computed on the outstanding loan
balance from Seagate Technology on a monthly basis at LIBOR plus 2% per annum.
The outstanding loan balance fluctuates depending on working capital required
to fund operations, offset by or in addition to amounts due or receivable from
Seagate Technology under a tax allocation agreement we have with Seagate
Technology. Interest income and expense fluctuate from year to year because of
fluctuations in the net outstanding loan balance during the year. The net
foreign currency exchange gain or loss represents the impact of foreign
currency fluctuations on the translation of foreign currency transactions into
U.S. dollars and varies depending upon currency exchange rates.
INCOME TAXES
The federal tax allocation agreement Crystal Decisions had with Seagate
Technology was terminated on November 22, 2000, and the Company will no longer
file federal income tax returns on a consolidated basis with Seagate
Technology. The Company will enter into a state tax allocation agreement with
affiliates of New SAC, as applicable. Therefore, Seagate Technology will not
benefit from nor will it reimburse the Company pursuant to the tax allocation
agreement for federal tax losses the Company sustains subsequent to
consummation of the transactions. In prior periods, the Company has received
substantial cash payments from its tax losses utilized by Seagate Technology,
which it has used to reduce its obligations to Seagate Technology under the
revolving loan agreement. As a result of the termination of the tax allocation
agreement with Seagate Technology, the Company may not be able to convert any
future tax losses into cash.
The income tax benefit recorded by the Company for the six months ended
December 29, 2000 of $2.5 million includes $4.0 million of tax benefit recorded
pursuant to the tax allocation agreement through November 22, 2000 offset by
other income tax expenses. The effective tax rate used to record the income tax
benefit for the six months ended December 29, 2000 differs from the U.S.
federal statutory rate primarily due to an increase in the valuation allowance
for U.S. deferred tax assets arising subsequent to the termination of the tax
allocation agreement on November 22, 2000 and push-down accounting charges that
are nondeductible in foreign jurisdictions. The effective tax rate used to
record the income tax benefit for the six months ended December 31, 1999 was
less than the U.S. federal statutory rate primarily due to nondeductible
expenses incurred in foreign jurisdictions in connection with the October 1999
recapitalization and reorganization of Crystal Decisions, including the October
1999 Seagate Exchange of Shares.
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JULY 2, 1999 AND
FISCAL YEAR ENDED JULY 3, 1998
REVENUES
Total revenues decreased 11% to $126.5 million in fiscal 2000 from $141.8
million in fiscal 1999 and increased 22% in fiscal 1999 from $116.0 million in
fiscal 1998. In each year presented, a majority of our revenues were derived
from license fees for our products. The decline in revenues in fiscal 2000 was
due to a decline in licensing revenues. We also derive revenues from technical
support, training activities, consulting services and maintenance related to
the licensing of our products. The increase in revenues in fiscal 1999 as
compared to fiscal 1998 was a result of increases in licensing revenues and
maintenance, support and services revenues.
In fiscal 2000, fiscal 1999 and fiscal 1998, revenues from a third-party
customer, Ingram, accounted for more than 10% of consolidated revenues for a
total of $25.3 million, $18.3 million and $16.8 million, respectively.
111
As a percentage of total revenues, our sales returns and allowances
decreased to 1% in fiscal 2000 from 1.5% in fiscal 1999 and 2% in fiscal 1998.
The decrease is primarily attributable to decreased distributor returns
reflecting the maturity of our products.
LICENSING REVENUES. Licensing revenues decreased 19% to $74.2 million, or
59% of revenues, in fiscal 2000 from $92.0 million, or 65% of revenues, in
fiscal 1999 and increased 13% in fiscal 1999 from $81.2 million, or 70% of
revenues, in fiscal 1998. The decline in fiscal 2000 was primarily attributable
to significant voluntary and involuntary turnover of our direct sales force in
the first half of the year. The time spent hiring and training new sales
personnel resulted in lower productivity of the sales force in fiscal 2000 than
prior years. This resulted in a decline in license sales of our direct sales
dependent products, such as Seagate Info and Seagate Holos. We rebuilt our
direct sales force throughout the year to near fiscal 1999 levels and intend to
continue to invest in this area in fiscal 2001. The absolute dollar increase in
fiscal 1999 license revenues was due primarily to increased sales of Crystal
Reports and Seagate Info and an expansion of our direct and indirect sales
channels. Our direct sales include corporate licensing and other direct sales
to users while our indirect sales include distribution and OEM sales.
MAINTENANCE, SUPPORT AND SERVICES REVENUES. Maintenance, support and
services revenues increased 5% to $52.3 million in fiscal 2000 from $49.7
million in fiscal 1999 and increased 43% in fiscal 1999 from $34.7 million in
fiscal 1998. As a percentage of total revenues, maintenance, support and
services revenues increased to 41% of total revenues in fiscal 2000 from 35% in
fiscal 1999 and 30% of total revenues in fiscal 1998. The year-over-year
increases in maintenance, support and services revenues were attributable to
the higher cumulative installed customer base, which resulted in increased
sales of maintenance agreements and training and consulting services. We expect
revenues from maintenance, support and services to continue to grow as our
installed base of customers expands.
Revenues by geographic location were as follows:
FISCAL YEAR
------------------------------------------
1998 1999 2000
------------ ------------ ------------
(IN THOUSANDS)
Revenues by geography:
United States ......... $ 78,932 $ 86,945 $ 83,080
Europe ................ 25,760 38,625 28,570
Other ................. 11,260 16,187 14,868
--------- --------- ---------
$ 115,952 $ 141,757 $ 126,518
========= ========= =========
Revenues from sales in Europe and other regions outside of the United
States represented 34%, 39% and 32% of total revenues for the fiscal years
ended 2000, 1999 and 1998, respectively. Combined revenues from sales in Europe
and other regions outside of the United States declined in total by 21% to
$43.4 million in fiscal 2000 from $54.8 million in fiscal 1999 because the
turnover in our direct sales force was greater in Europe than in the United
States. Revenues from sales in Europe and other regions outside of the United
States increased by 48% in fiscal 1999 from $37.0 million in fiscal 1998
because of the expansion of our direct and indirect sales channels in Europe
and other regions outside of the United States during fiscal 1999. To date,
seasonal reductions in business activity in the summer months in Europe and
certain other regions have not had a material impact on our operating results.
COST OF REVENUES
Cost of revenues decreased 10% to $44.0 million in fiscal 2000 from $48.7
million in fiscal 1999 and increased 36% in fiscal 1999 from $35.8 million in
fiscal 1998. As a percentage of total revenues, cost of revenues was 34% in
fiscal 2000, 34% in fiscal 1999 and 31% in fiscal 1998. The absolute dollar
decrease in cost of revenues in fiscal 2000 was a result of a $9.0 million
decline in amortization and write-off of developed technologies, offset by
increased salaries and benefit
112
expenses related to increased technical support and professional services
personnel. The increase in cost of revenues in fiscal 1999 compared to fiscal
1998 was a result of increases in technical support and consulting personnel to
support revenues growth, and an increase in amortization and write-off of
developed technologies in fiscal 1999. Our gross margins, as a percentage of
total revenues, decreased from 69% for fiscal 1998 to 66% of total revenues for
both fiscal 1999 and fiscal 2000 in response to increases in maintenance,
support and service revenues which generally have lower margins than licensing
revenues.
COST OF LICENSING REVENUES. The cost of licensing revenues decreased 3% to
$4.1 million in fiscal 2000 from $4.2 million in fiscal 1999, but increased 31%
in fiscal 1999 from $3.2 million in fiscal 1998. As a percentage of licensing
revenues, cost of licensing revenues increased to 6% in fiscal 2000 from 5% in
fiscal 1999 and 4% in fiscal 1998. The increased cost of licensing revenues as
a percentage of licensing revenues in fiscal 2000 was due in part to a
write-down of obsolete product materials. The increase in cost of licensing
revenues in absolute dollars in fiscal 1999 as compared to fiscal 1998 was due
primarily to the increased volume of shipments during the year.
COST OF MAINTENANCE, SUPPORT AND SERVICES REVENUES. The cost of
maintenance, support and services revenues increased 13% to $39.7 million in
fiscal 2000 from $35.2 million in fiscal 1999 and increased 33% in fiscal 1999
from $26.4 million in fiscal 1998. The increases in both periods were primarily
due to expansion of our professional services workforce to support the growth
in training and consulting revenues and an increased number of technical
support representatives. As a percentage of maintenance, support and services
revenues, cost of maintenance, support and services revenues were 76% in fiscal
2000, 71% in fiscal 1999 and 76% in fiscal 1998. The percentage increase in
fiscal 2000 was due to increases in maintenance, support and services personnel
and related salaries and benefits. The percentage decrease in fiscal 1999
compared to fiscal 1998 was due to increased maintenance, support and services
revenues in fiscal 1999.
AMORTIZATION AND WRITE-OFF OF DEVELOPED TECHNOLOGIES. Amortization and
write-off of developed technologies decreased 98% to $198,000 in fiscal 2000
from $9.2 million in fiscal 1999, but increased 51% in fiscal 1999 from $6.1
million in fiscal 1998. As a percentage of total revenues, amortization and
write-off of developed technologies were zero in fiscal 2000, 6% in fiscal 1999
and 5% in fiscal 1998. The decrease in the amortization and write-off of
developed technologies in fiscal 2000 was primarily attributable to intangible
assets that were fully amortized during fiscal 1999 and a $4.7 million
write-off of various developed technologies that occurred during fiscal 1999.
The increase in the amortization and write-off of developed technologies in
fiscal 1999 compared to fiscal 1998 was primarily due to the $4.7 million
write-off of certain developed technologies.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased 1% to $66.1
million in fiscal 2000 from $65.5 million in fiscal 1999 and increased 29% in
fiscal 1999 from $50.7 million in fiscal 1998. As a percent of total revenues,
sales and marketing expenses increased to 52% in fiscal 2000 from 46% in fiscal
1999 and 44% in fiscal 1998. The increases in sales and marketing expenses were
primarily due to the rebuilding and expansion of our sales force and increases
in marketing and promotion, including a free offer product campaign for Crystal
Analysis and Seagate Info that was launched in late fiscal 1999 and continued
throughout fiscal 2000. During the free offer product campaign, we provided
former and potential customers, unconditionally, with a limited number of
licenses for each promotional product free of charge, with no related purchase
obligations or rights for additional products. As this campaign was strictly a
marketing strategy and was not directly or indirectly connected with revenues
or products and services to be provided to those receiving the free products,
we expensed the cost of the program as incurred. Additionally, in fiscal 1999
these expenses included allocations from Seagate Technology for the
proportional cost of television and newspaper advertisements. The increase in
sales and marketing expenses as a percentage of revenues in fiscal 2000 was a
result of the decline in productivity of the direct sales force due to the
turnover of the direct sales force. We expect sales and marketing expenses to
increase in fiscal 2001 as we continue to expand our sales force.
113
RESEARCH AND DEVELOPMENT. Research and development expenses increased 17%
to $24.9 million in fiscal 2000 from $21.2 million in fiscal 1999 and increased
31% in fiscal 1999 from $16.2 million in fiscal 1998. As a percentage of total
revenues, research and development expenses increased to 20% in fiscal 2000
from 15% in fiscal 1999 and 14% in fiscal 1998. The increases in research and
development expenses were primarily due to increases in personnel and related
expenses and occupancy costs for fiscal 2000 and fiscal 1999, partially offset
by reductions in localization and equipment expenses during fiscal 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
51% to $20.9 million in fiscal 2000 from $13.8 million in fiscal 1999 and
decreased 8% in fiscal 1999 from $15.1 million in fiscal 1998. As a percent of
total revenues, general and administrative expenses increased to 17% in fiscal
2000 from 10% in fiscal 1999 and decreased in fiscal 1999 from 13% in fiscal
1998. The increase in general and administrative expenses in fiscal 2000 was
primarily attributable to increases in personnel costs, increased legal and
accounting expenses associated with increased public reporting requirements
during fiscal 2000 and an increase in bad debt expenses. The decrease in fiscal
1999 as compared to fiscal 1998 was primarily due to a provision for a legal
action against us in fiscal 1998, partially offset by lower salaries and
benefits and overhead costs in fiscal 1998 compared to fiscal 1999.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles decreased 36% to $3.0 million in fiscal 2000 from $4.8
million in fiscal 1999 and increased 51% in fiscal 1999 from $3.2 million in
fiscal 1998. As a percentage of total revenues, amortization of goodwill and
other intangibles decreased to 2% in fiscal 2000 from 3% in each of fiscal 1999
and fiscal 1998. The decrease in amortization of goodwill and other intangibles
in fiscal 2000 was attributable to intangible assets that were fully amortized
in fiscal 1999. The absolute dollar increase in fiscal 1999 compared to fiscal
1998 was primarily due to a write-off of the carrying value of intangibles of
$1.5 million in fiscal 1999 due to asset values that had become impaired.
UNUSUAL ITEMS. Unusual items represented the compensation expense and
associated expenses attributable to our employees related to the June 1999
Seagate Technology Exchange Offer and the October 1999 Seagate Technology
Exchange of Shares. Unusual items amounted to $242.6 million in fiscal 2000 and
$86.7 million in fiscal 1999. There were no unusual items in fiscal 1998. As a
percent of total revenues, unusual items increased to 192% in fiscal 2000 from
61% in fiscal 1999.
Unusual items in fiscal 2000 were a result of the October 1999 Seagate
Technology Exchange of Shares. In connection with the merger of Seagate
Daylight Merger Corp. with and into Seagate Software Holdings, Seagate Software
Holdings' minority stockholders and optionees received payment in the form of
3.23 shares of Seagate Technology common stock per share of Seagate Software
Holdings common stock, less any amounts due for the payment of the exercise
price of unexercised options. Seagate Technology accounted for the exchange of
shares of its common stock for stock options in Seagate Software Holdings held
by employees and stock held by employees and vested less than six months as the
settlement of an earlier stock award. Seagate Technology recorded compensation
expense of $283.6 million, plus $2.1 million of employer portion of payroll
taxes related to the purchase of a minority interest in Seagate Software
Holdings. Of the $283.6 million of compensation expense, $239.6 million of
compensation expense was allocated to us on the basis of employees specifically
identified with our business and employees that performed services for us on
the basis of time estimates. In addition, the $2.1 million of the employer
portion of payroll taxes paid related to our employees and therefore we
recorded it as an expense. We also incurred legal and accounting costs of
$877,000 with respect to this transaction.
Unusual items in fiscal 1999 were a result of the June 1999 Seagate
Technology Exchange Offer. Seagate Technology exchanged shares of its common
stock for shares of Seagate Software Holdings common stock owned by employees,
directors and consultants of Seagate Software Holdings and its parent and
subsidiaries. For those shares outstanding and vested less than six months,
Seagate Software Holdings recorded compensation expense of $102.5 million,
which was
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equal to the fair value of the shares purchased less the original purchase
price paid by the employees, plus $630,000 of employer portion of payroll
taxes. Of the $102.5 million of compensation expense, Seagate Software Holdings
allocated $77.5 million of compensation expense to us on the basis of employees
specifically identified with our business and employees that performed services
for us on the basis of time estimates. In addition, the $630,000 of employer
portion of payroll taxes paid, related to our employees and therefore we
recorded it as an expense. We also expensed the $8.6 million of compensation
expense for the purchase of unvested stock options related to certain of our
continuing employees.
We established new non-compensatory stock option plans in fiscal 2000 for
participation by our employees, directors and consultants. We did not record
any compensation expense under these plans in fiscal 2000.
RESTRUCTURING COSTS. Restructuring charges were $1.3 million in fiscal
2000, representing 1% of total revenues. The charges resulted from a
company-wide restructuring plan announced in October 1999 to realign resources
to better manage and control our business. The charges were comprised of
severance and benefits paid to approximately 125 employees from various
locations and departments, including direct sales force personnel, who were
terminated on October 23, 1999. The decline in our direct sales force as part
of this restructuring contributed to the decline in revenues during fiscal 2000
compared to fiscal 1999. The restructuring charges were paid during fiscal 2000
and no amounts were outstanding as of June 30, 2000. Any benefits in the form
of cost reductions because of reduced salary costs have been realized during
the year and are not expected to continue.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net consists of interest income,
interest expense and net foreign currency exchange gain. Interest and other
income (expense), net decreased 64% to $20,000 in fiscal 2000 from $56,000 in
fiscal 1999 and decreased 90% in fiscal 1999 from $534,000 in fiscal 1998.
Interest and other income (expense), net fluctuates on a year-to year basis
depending on fluctuations in Seagate Technology's in-house portfolio yield,
LIBOR, our net outstanding loan balance with Seagate Technology and foreign
currency exchange rates. Interest is computed on the outstanding loan balance
from Seagate Technology on a monthly basis at LIBOR plus 2% per annum. The
outstanding loan balance fluctuates depending on working capital required to
fund operations, offset by or in addition to amounts due or receivable from
Seagate Technology under a tax allocation agreement we have with Seagate
Technology. Interest income and expense fluctuate from year to year because of
fluctuations in the net outstanding loan balance during the year. The net
foreign currency exchange gain or loss represents the impact of foreign
currency fluctuations on the translation of foreign currency transactions into
U.S. dollars and varies depending upon currency exchange rates.
INCOME TAXES
We recorded a $55.1 million benefit from income taxes at an effective rate
of 20% in fiscal year 2000 compared with a $2.5 million benefit from income
taxes at an effective rate of 3% in fiscal year 1999, and with an $8.8 million
provision for income taxes at an effective rate of 197% in fiscal year 1998.
The effective rate used to record the benefit from income taxes in fiscal year
2000 was less than the U.S. federal statutory tax rate primarily due to
non-deductible compensation expense for certain employees related to the
October 1999 Seagate Technology Exchange of Shares and foreign tax rates that
were in excess of the U.S. federal statutory tax rate. The effective rate used
to record the benefit from income taxes in fiscal year 1999 was less than the
U.S. federal statutory tax rate primarily due to non-deductible compensation
expense for certain employees associated with the June 1999 Seagate Technology
Exchange Offer and increases in the valuation allowance for deferred tax
assets. The effective rate used to record the provision for income taxes in
fiscal year 1998 was greater than the U.S. federal statutory tax rate,
primarily due to increases in the valuation allowance for deferred tax assets
and due to foreign tax rates that were in excess of the U.S. federal statutory
tax rate.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates and
foreign currency exchange rates.
INTEREST RATE RISK. As of December 29, 2000 our cash balances were mostly
held by our foreign operations. The remainder of our cash balances are
centrally managed by New SAC. If cash from operations is not sufficient to fund
working capital and operating activities, Seagate Technology LLC provides
financing to us through a revolving loan agreement. The revolving loan
agreement provides for maximum outstanding borrowings of up to $60.0 million
and was renewed on July 4, 2000. As of December 29, 2000 and June 30, 2000, the
revolving loan balance was a net receivable from Seagate Technology and its
affiliates of $31.3 million and $25.7 million, respectively. Beginning in
fiscal 2001, we earned interest income on a monthly basis on net receivable
balances outstanding at a rate calculated to be Seagate Technology LLC's
in-house portfolio yield (an average of 7.67% for the six months ended December
29, 2000) and were charged interest expense on a monthly basis on net amounts
payable at LIBOR plus 2% (8.63% for the six months ended December 29, 2000).
During fiscal 2000, we paid or earned interest at LIBOR plus 2% per annum on
net outstanding balances payable or receivable. The average rate of interest
was 7.85% for the year ended June 30, 2000. Our interest income or expense,
therefore, will fluctuate depending on fluctuations in Seagate Technology LLC's
in-house portfolio yield, LIBOR and fluctuations in the amounts borrowed from
Seagate Technology to fund working capital and operating activities. Net
interest income of $830,000 and net interest expense of $1,089,000 were
incurred on the net receivable/loan balance for the six months ended December
29, 2000 and six months ended December 31, 1999, respectively.
FOREIGN CURRENCY RISK. A majority of our sales are in the United States
and therefore are recorded in U.S. dollars, the currency in which we report our
operating results. We conduct a portion of our business in currencies other
than the U.S. dollar. The functional currency of most of our foreign operations
is the local currency. In such cases, assets and liabilities recorded in
foreign currencies are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are charged or
credited to other comprehensive income. Revenues and expenses are translated at
average rates of exchange prevailing during the year. Gains and losses on
foreign currency transactions are included in other expenses. For those foreign
operations whose functional currency is the U.S. dollar, financial results are
translated using a combination of current and historical exchange rates and any
translation adjustments are included in net earnings, along with all
transaction gains and losses for the period. Historically, we have generated
revenues and incurred a significant proportion of our expenses in Canadian
Dollars, Deutsche Marks, British Pounds Sterling, French Francs, Australian
Dollars and Japanese Yen and we expect to generate a portion of our revenues
and expenses in the Euro in the future. Certain European Union member states
have fixed the value of their respective national currencies to the Euro, and
our results of operations are affected by the U.S. dollar to Euro exchange
rate. Since the adoption of the Euro in January 1999, the overall trend for the
Euro has been a devaluation compared to the U.S. dollar. During the six months
ended December 29, 2000, approximately 4% of our revenues were denominated in
currencies for which a fixed value to the Euro has been established.
Historically, none of our foreign operations have significant transactions in
the Euro; however, we anticipate implementing Euro-based transactions before
July 2001. To date, the foreign exchange gains and losses on transactions and
revenues reported by our foreign subsidiaries have not been significant. In
addition, since most of our foreign operations conduct business in their local
currency, our earnings are not significantly impacted by fluctuations in
exchange rates. Translation adjustments from consolidation of such foreign
operations are presented within comprehensive income. However, we cannot
provide any assurance that foreign currency denominated transactions will
continue to be insignificant as revenues from the foreign operations increase
or if there are significant exchange rate fluctuations. We cannot predict the
effect of exchange rate fluctuations upon our future operating results. For the
six months ended December 29, 2000, we did not engage in a foreign currency
hedging program to reduce any exposure we may have had. For the six months
ended December 29, 2000, a combined variation of 10% of the exchange rates of
the main currencies in
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which we conduct business, the Canadian Dollar, the Australian Dollar, the
Euro, the British Pound Sterling and the Japanese Yen, would have generated a
combined 1% variation of our revenues, offset by a 5% combined variation of
expenses.
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ADDITIONAL DISCUSSION -- RELEVANT TO ALL OF NEW SAC,
SEAGATE TECHNOLOGY HOLDINGS, SEAGATE TECHNOLOGY SAN HOLDINGS,
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND CRYSTAL DECISIONS
EFFECT OF ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138. SFAS 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS 133 until fiscal years beginning after June
15, 2000. We adopted SFAS 133, 137 and 138 on July 1, 2000. This adoption had
no impact on our consolidated and combined results of operations, financial
position and cash flows.
In December 1999, the Securities and Exchange Commission issued SAB 101
"Revenue Recognition in Financial Statements." SAB 101 provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements.
SAB 101, will become effective for us for the fiscal year ending June 2001, was
effective for years beginning after December 15, 1999. SAB 101 is not expected
to have a significant effect on our consolidated results of operations,
financial position, or cash flows.
In March 2000, the FASB issued FIN No. 44, "Accounting for Certain
Transactions Involving Stock Compensation -- an Interpretation of APB Opinion
No. 25," or FIN 44. FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a noncompensatory plan; the accounting consequences of
various modifications to the terms of the previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 was effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either December
15, 1998 or January 12, 2000. The application of FIN 44 did not have a material
impact on our results of operations, financial position, or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Following the closing of the transactions, our principal liquidity
requirements are to service our debt and meet our working capital, research and
development and capital expenditure needs. As a result of the transactions that
closed on November 22, 2000, we are significantly leveraged. As of December 29,
2000, we had outstanding $904 million in aggregate debt, excluding unused
commitments, with approximately $144 million of additional borrowing capacity
available under the senior credit facilities and total shareholders' equity of
$759 million. For fiscal year 2000 and the six months ended December 29, 2000,
our ratio of earnings to fixed charges, would have been 2.8 to 1 and 5.0 to 1,
respectively on a pro forma basis. As a result, our liquidity requirements have
significantly increased, primarily due to increased debt service obligations.
For fiscal year 2000 and the six months ended December 29, 2000, our interest
expense on a combined basis was $52 million and $34 million, respectively. We
believe that cash flow from operating activities, together with our existing
cash and borrowings available under the senior credit facilities, will be
sufficient to fund our currently anticipated capital, debt service and working
capital and research and development requirements for at least the next two
fiscal years. Following this period, our ability to fund these requirements and
to comply with the financial covenants under our debt agreements will depend on
our future operations, performance and cash flow. These are subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond our control. In addition, as part of our strategy, we
intend to selectively pursue strategic alliances, acquisitions and investments
that are complementary to our business. Any material future acquisitions,
alliances or investments will likely require additional capital.
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In connection with the transactions, Seagate Technology redeemed its
senior notes and senior debentures, with interest rates ranging from 7.125% to
7.875%, and $700 million aggregate principal amount and Seagate Technology
International, a limited liability company organized under the laws of the
Cayman Islands, and one of our wholly-owned subsidiaries, issued $210 million
principal amount 12.5% senior subordinated notes due 2007 in a private offering
and borrowed $200 million and $500 million under term loans that mature from
March 31, 2001 to September 30, 2006. The proceeds from the sale of the notes
and term loans, together with bank borrowings and equity contributions were
used to fund the payment of the purchase price under the stock purchase
agreement and to pay related fees and expenses.
At November 22, 2000, Seagate Technology's cash and cash equivalents
totaled $2.144 billion. This balance was acquired by VERITAS in the merger
transaction. At June 30, 2000, Seagate Technology's cash and cash equivalents
totaled $875 million. The increase of $1.269 billion between June 30, 2000 and
November 22, 2000 was primarily a result of $1.016 billion in cash received
from maturities and sales of short-term investments in excess of purchases of
short-term investments, $918 million for the sale of Seagate Technology's
operating assets to New SAC and $105 million provided by operating activities.
This increase was partially offset by $812 million for repayment of long-term
debt. New SAC was incorporated on August 10, 2000, but operating activities did
not commence until November 23, 2000. At December 29, 2000, our cash, cash
equivalents and short-term investments totaled $850 million. The issuance of
long-term debt, net of issuance costs, of $860 million and short-term
investments acquired, of $118 million was partially offset by cash paid for
Seagate Technology's operating assets, net of cash acquired, of $918 million
and $89 million of cash used in operating activities.
Until required for other purposes, our cash and cash equivalents are
maintained in highly liquid investments with remaining maturities of 90 days or
less at the time of purchase. Our short-term investments consist primarily of
readily marketable debt securities with remaining maturities of more than 90
days at the time of purchase.
As of December 29, 2000, we had committed lines of credit of $200 million
that can be used for standby letters of credit or bankers' guarantees. At
December 29, 2000, $56 million of these lines of credit were utilized.
In fiscal 2001, we invested approximately $238 million in property and
equipment through November 22, 2000, and we invested $43 million through
December 29, 2000. We anticipate investments of approximately $300 million in
property and equipment for the remainder of fiscal 2001. We plan to finance
these investments from existing cash balances and cash flows from operations.
The combined $281 million year-to-date investment comprised: $143 million for
manufacturing facilities and equipment related to our subassembly and disc
drive final assembly and test facilities in the United States, Asia Pacific and
the United Kingdom; $66 million for our manufacturing facilities and equipment
for the recording head operations in the United States, Northern Ireland,
Thailand and Malaysia; $33 million to upgrade the capabilities of our thin-film
media operations in the United States, Singapore and Northern Ireland; and $39
million for other purposes.
We expect to incur debt attributable to two sale/leaseback transactions
which we expect to enter into by the end of fiscal year 2001 for our Longmont,
Colorado and Shakopee, Minnesota research and development facilities. We expect
that the debt attributable to these sale/leaseback transactions will be up to
$120 million.
We believe that our cash balances together with cash flows from operations
and our borrowing capacity will be sufficient to meet our working capital needs
for the foreseeable future.
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INDUSTRY
The amount of data stored and accessed electronically has been growing due
to several factors which we believe will continue in the future. These factors
principally include the expansion of the Internet, the increased volume of
shared information made possible by the growth of high speed broadband
communications, the development of sophisticated software applications to
generate and manage increasing volumes of data and the development of new
consumer applications incorporating high quality audio and video data, which
require a substantially greater amount of storage capacity than text data.
Rigid disc drives are the primary devices used for storing, managing and
protecting electronic data. Storing, managing and protecting electronic data
has become increasingly important to most businesses and large organizations
and, we believe, will continue to be important to them in the future. According
to Dataquest, the total storage capacity of all rigid disc drives shipped has
grown by more than 114.8% on a compound basis each year between 1996 and 2000
and the annual total storage capacity of all rigid disc drives to be shipped is
expected to grow at a compound annual rate of approximately 113.9% between 2001
and 2005.
o THE INTERNET. The Internet has had a substantial impact on businesses
worldwide. Its expansion has created access to new information at
accelerated rates. Numerous companies have installed sophisticated
websites, corporate intranets and e-mail systems as critical parts of
their information technology systems, all of which require substantial
storage capacity. In the emerging field of e-commerce, we expect that the
volume of data of various kinds that will be distributed over the Internet
among businesses' networked computer systems will grow rapidly to handle
interactive, simultaneous exchanges of information among businesses and
their customers and suppliers.
o BROADBAND COMMUNICATIONS. The proliferation of high-speed, worldwide
communications networks has substantially increased the amount of
electronic information which is delivered and stored. New Internet-based
businesses, such as application service providers and web hosting
services, have emerged to deliver high performance applications over the
Internet using broadband communications. Broadband connectivity will also
facilitate the proliferation of highly data intensive applications,
including video conferencing. High-speed communications enhances the need
for high performance information storage.
o SOPHISTICATED SOFTWARE APPLICATIONS. Many businesses and other
applications have implemented sophisticated software, such as enterprise
resource planning, e-mail, intranets and supply chain management tools,
that are used on a daily basis to manage their operations. These
applications generate substantial amounts of data, including text, video
and voice data.
o NEW CONSUMER APPLICATIONS. New types of data, such as graphic images and
high-fidelity audio and video, are being converted into digital format
that create a need for greater storage capacity. Emerging consumer
devices, such as MP3 players, digital video recorders and next-generation
television set top boxes, retrieve audio and video data through an
Internet connection and store the data locally on the device for playback.
These devices and other emerging applications, such as video conferencing,
voice recognition and natural language processing, are highly data
intensive.
We primarily compete in the rigid disc drive sector of the information
storage industry and also participate in the tape drive, intelligent storage
solutions, consumer information storage devices through our recently formed
joint venture with CacheVision and business intelligence software sectors. We
provide a summary of each below.
RIGID DISC DRIVES. Rigid disc drives comprise the largest sector of the
information storage industry and are the leading medium for storing electronic
data. Compared to other storage media, rigid disc drives offer a combination of
high performance, as measured by storage/retrieval access times and data
transfer rates, reliability and cost-per-megabyte of storage. Frequent
improvements and incremental innovation in rigid disc drive technology have
contributed to widespread use of rigid disc drives compared to alternative data
storage devices such as semiconductor-based memory, tape storage and optical
storage. Rigid disc drives are integrated in various products in the following
three main markets:
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o ENTERPRISE. The enterprise market includes Internet and e-commerce
servers, mainframes, workstations, network file and enterprise/department
servers and RAIDs, each of which use rigid disc drives as their primary
storage medium. RAIDs are devices that combine multiple small rigid disc
drives into an array that results in performance equal to or exceeding a
single high performance rigid disc drive. Applications that run on
enterprise systems are characterized by compute-intensive and
data-intensive solutions, such as network management, large database
management systems, scientific applications and small to medium-sized
business applications such as materials requirement planning, payroll,
general ledger systems and related management reports. Enterprise systems
typically require rigid disc drive storage capacities of 18 gigabytes and
greater per drive, average seek times of 8 milliseconds or less and
rotation speeds of 7,200 rpm to 15,000 rpm. Due to the leading edge
characteristics required by end-users of enterprise systems, manufacturers
of these systems compete on the basis of performance and price. The
enterprise market is characterized by higher value-added products than
those that prevail in the desktop market. Dataquest estimates that total
unit shipments of enterprise class rigid disc drives will grow at a
compound annual rate of 5.4%, from 22.2 million in 1999 to 30.5 million in
2005.
o DESKTOP COMPUTERS. The desktop market includes all desktop or deskside
PCs, which are used in a number of environments, ranging from homes to
small and large businesses. The PC is in the process of evolving from a
traditional computing device into a computing and communications
appliance. Desktop rigid disc drives are the primary storage devices in
substantially all desktop PCs and, we expect, will be increasingly used in
non-PC environments, such as new consumer audio and video applications.
Dataquest estimates that total unit shipments of desktop class rigid disc
drives will grow at a compound annual rate of 15.4%, from 130.2 million in
1999 to 307.9 million in 2005.
o MOBILE COMPUTING. The mobile computing market includes portable notebook
and laptop PCs, hand-held computers and personal digital assistants, which
may use 1.0 inch, 1.8 inch or 2.5 inch rigid disc drives, and require
rigid disc drives with low power consumption and high durability.
Dataquest estimates that total unit shipments of rigid disc drives in this
market will grow at a compound annual rate of 17.9%, from 22 million in
1999 to 59.2 million in 2006. Although we no longer manufacture products
for the mobile computing market, we will continue our research and
development in this area and may reenter the market at a future date.
The rigid disc drive market is characterized by frequent technological
change and resulting short product life cycles, increasing manufacturing
efficiencies for a given product over time, price erosion, capital intensive
manufacturing processes and consolidation among manufacturers. In response to
customer demand and innovation by manufacturers, rigid disc drives have been
subject to frequent technological change. Product cycles have been as short as
six months, with most of the innovation centering around increasing areal
density through refinements in key components, such as read/write heads and
recording media. Areal density is a measure of storage capacity per square inch
on the recording surface of a disc and represents the number of bits of
information on a linear inch of the recording track, specified in bits per
inch, multiplied by the number of recording tracks on a radial inch of the
disc. Areal densities have increased dramatically to offer higher performance,
more cost-effective rigid disc drives. At the same time, greater manufacturing
efficiencies and cost improvements and competition within the rigid disc drive
industry have caused the average selling prices of rigid disc drives to
decrease.
In response to customer demand for high quality, high volume and low cost
rigid disc drives as subsystems for their computer and data communications
equipment, manufacturers of rigid disc drives have had to develop large, in
some cases global, production facilities with highly developed technological
capability and internal controls. As a result, these manufacturing processes
are capital intensive. Due to the factors discussed above, the industry has
undergone consolidation. According to Dataquest, there were 58 rigid disc drive
manufacturers in 1988 and only 10 that shipped significant product volumes in
2000. At the same time, unit shipment volume increased from 15.8 million rigid
disc drives in 1988 to 199.6 million rigid disc drives in 2000.
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TAPE DRIVES. Tape drives use removable tape cartridges that store and
protect large volumes of data inexpensively and reliably. Tape drives take
longer to retrieve data than rigid disc drives and, therefore, are generally
used to store less frequently used data. Tape drives are used in both
enterprise and desktop computer systems needing dedicated backup storage that
combines high capacity, portability, low cost and reliability. The tape drive
sector is mature and is characterized by increasing competition from
alternative and next generation technologies. An example of a next generation
technology is linear tape-open, an open tape architecture for midrange and
enterprise-class servers.
INTELLIGENT STORAGE SOLUTIONS. The growth of e-commerce data and the need
for complex storage solutions have spurred the evolution of new storage and
data management technologies. These new solutions combine high performance
storage products, comprised principally of rigid disc drives, with
sophisticated software and communications technologies. We expect that the
market for these solutions will grow rapidly and will result in greater
opportunities for the sale of rigid disc drives. Intelligent storage solutions
include the following:
o STORAGE AREA NETWORKS. Increasingly, businesses require large volumes of
information stored on networks to be transferred at high speeds either for
use with high performance software applications or for back-up purposes.
To achieve this higher performance, businesses are offloading some network
traffic to dedicated storage area networks, or SANs. SANs are a networking
architecture that allows data to move efficiently and reliably between
multiple storage devices and servers through a local area network. SANs
connect a network of servers to a network of storage devices, reducing
bottlenecks and increasing users' access to stored data. SANs require new
generations of data communications equipment and data storage devices,
which principally use rigid disc drives, to service the high data
availability needs of enterprises. Dataquest estimates that the sales of
external storage units used in SANs will grow at a compound annual rate of
136% from $370 million in 1998 to $27.1 billion in 2003.
o NETWORK ATTACHED STORAGE. We believe that there is a trend away from the
use of server attached storage to network attached storage, or NAS. In a
server attached storage device, network information is primarily stored on
rigid disc drives attached to general purpose servers. NAS is a storage
architecture featuring an intelligent device that combines an array of
rigid disc drives with some basic server functions which are specialized
for storing and serving data files. NAS devices reduce demands on servers
and are often a lower-cost alternative to buying general purpose servers
or adding rigid disc drives to existing servers. Dataquest estimates that
sales of NAS devices will grow at a compound annual rate of 65% from $591
million in 1999 to $7.3 billion in 2004.
CONSUMER INFORMATION STORAGE DEVICES. High performance computing and
communications functions and, increasingly, rigid disc drives are being
incorporated into consumer appliances such as video games, digital video
recorders and advanced television set-top boxes. In addition, faster
connections to the Internet and increased broadband capacity have stimulated
consumers to download greater amounts of text, video and audio data. These
trends have expanded the market for rigid disc drives for use in new consumer
and entertainment appliances. These trends have also created the potential for
new consumer storage devices, such as a media tank, which enables consumers to
store data downloaded from the Internet or other sources in a centralized
location.
BUSINESS INTELLIGENCE SOFTWARE. Business intelligence software provides
users with the ability to access and analyze information, which is typically
contained in a data warehouse, by using technologies such as enterprise
reporting, on-line analytical processing, statistical analysis, forecasting and
data searching.
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BUSINESS
OUR COMPANY
We are a leading designer, manufacturer and marketer of products for
storage, retrieval and management of electronic data on computer and data
communications systems. Businesses, other organizations and individuals use
rigid disc drives as the primary medium for storing electronic information in
computer systems ranging from desktop computers to data centers delivering
information over corporate networks and the Internet. We produce a broad range
of rigid disc drive products and are a leader in both the enterprise (primarily
Internet servers, mainframes and workstations) and desktop (personal computers,
or PCs) sectors of the rigid disc drive industry. According to Dataquest, our
shares of unit shipments for the enterprise and desktop sectors of the rigid
disc drive industry, for calendar 2000, were 44.3% and 22.5%, respectively. We
also design, manufacture and market tape drives and intelligent storage
solutions and are a leading provider of business intelligence software. Our
advanced research and development capabilities, combined with our vertically
integrated manufacturing facilities, enable us to be a leader in bringing high
quality, next generation information storage products to market. For the six
months ended December 29, 2000, we generated combined revenue of approximately
$3.46 billion and combined EBITDA of approximately $492 million. Our rigid disc
drive operations accounted for 94% of our combined revenue and 76% of our
combined gross profit for the six months ended December 29, 2000.
We sell our rigid disc drives primarily to major OEMs, and also market to
distributors under our globally recognized brand name. For the twelve months
ended December 29, 2000, approximately 67% of our rigid disc drive revenue was
from sales to OEMs, including customers such as Compaq, Dell, EMC, Hewlett
Packard, International Business Machines and Sun Microsystems. We have
longstanding relationships with many of these OEM customers, such as Compaq,
our largest customer, which we have served for approximately 18 years. We also
have key relationships with major distributors, who sell our rigid disc drive
products to small OEMs, dealers, system integrators and retailers in most
geographic areas of the world. For the twelve months ended December 29, 2000,
approximately 42% of our revenue was from customers located in North America,
approximately 33% was from customers located in Europe and approximately 25%
was from customers located in Asia. Substantially all of our revenue is
denominated in U.S. dollars.
COMPETITIVE STRENGTHS
According to Dataquest, we were the world's largest manufacturer of rigid
disc drives during calendar 2000, with a market share of 21.5% of all rigid
disc drive units shipped during that period. We expect to remain one of the
largest manufacturers of rigid disc drives for the foreseeable future. We
believe our leadership position is largely the result of our ability to deliver
high quality product performance and reliability at low cost. We believe that
the following competitive strengths enable us to consistently meet the needs of
our customers.
TECHNOLOGICAL LEADERSHIP. We believe that we invest substantially more in
research and development than any of our independent competitors. Our size and
market leadership enable us to make these investments over a broad product
portfolio and to make timely improvements in product and component design,
manufacturing techniques and efficiency. We have a long history of investing in
future technologies, introducing innovative products to the market and
increasing the capacity and performance of our products. For example, since
1989, we have been first to market with 5,400-rpm technology (our Elite
families), 7,200-rpm technology (our Barracuda families) and 10,000-rpm
technology (our Cheetah families). In June 2000, we became the first drive
maker to introduce and ship 15,000-rpm technology with our 18GB Cheetah X15
drives.
LOW COST PRODUCER. We believe that our ability to manufacture high volumes
of rigid disc drives with rapid integration of design changes, together with
the size and scale of our vertically integrated operations, give us important
cost advantages over most of our competitors. In four of the last five calendar
years, we believe that we have maintained the highest gross profit margin of
any
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manufacturer which produces rigid disc drives as a stand alone product rather
than as a product integrated in complete computer or other systems. We are
engaged, and expect in the future to engage, in cost reduction programs,
primarily involving manufacturing facility reductions, work force reductions
and increased use of automation and other manufacturing efficiencies.
CONTROL OVER CRITICAL COMPONENTS. We internally design and/or manufacture
several of the critical components of rigid disc drives that are essential to
increasing performance and storage capacity. For example, we internally design
and manufacture at least 80% of the read/write heads and recording media that
we require in any given quarter and assemble almost all of our printed circuit
boards. This vertical integration enables us to accelerate our time to market
with new products and to offer greater value to our customers by reducing
costs, controlling quality and ensuring availability of these components. We
believe that we are the only vertically integrated independent manufacturer
with research and design capability.
BROAD PRODUCT OFFERING. We produce a broad range of enterprise and desktop
rigid disc drive products. Our broad product range contributes to our market
leadership and enables us to leverage our research and development efforts,
global distribution channels and manufacturing capacity. We design and develop
our product lines to meet the precise and changing requirements of our
customers. We also build upon our disc drive expertise to deliver new products
in high growth areas such as intelligent storage solutions and consumer storage
devices, which use rigid disc drives as their primary storage medium.
LONGSTANDING CUSTOMER RELATIONSHIPS. Our rigid disc drives are essential
components of the personal computers, workstations, mainframe computers and
Internet storage access and networking products manufactured by our customers.
Our customers include many of the leading computer OEMs and distributors that
sell our products in most geographic areas of the world. We have longstanding
relationships with nearly all of the leading OEM customers for enterprise
products and, according to Dataquest, during calendar year 2000 we had a 44.3%
market share of unit shipments of enterprise rigid disc drives. In addition, we
have longstanding relationships with most of the leading OEM customers for
desktop products. We collaborate with many of our OEM customers in developing
new and advanced storage solutions for their next generation products.
EXPERIENCED MANAGEMENT TEAM. Our seven most senior executive officers have
an average of 18 years of experience in the information storage industry. Our
management team has successfully implemented manufacturing efficiency plans
resulting in increased unit production per employee and has facilitated the
acquisition and integration of complementary businesses, technologies and
strategic component manufacturers. These executive officers, together with
other officers, beneficially own approximately 21% of our outstanding ordinary
shares on a fully diluted basis.
BUSINESS STRATEGY
To maintain our position as a leading manufacturer of rigid disc drives
and to meet the growing unit volume and efficiency requirements of our
customers, we intend to pursue the following business strategies.
LEAD TECHNOLOGICAL INNOVATION. We intend to continue investing in
technology, reducing costs and accelerating our time to market with new
products to strengthen our market position. Through our commitment to research
and development, we plan to continue to be an innovator in the design of new
rigid disc drive and component technologies. Additionally, we intend to
continue to leverage our vertically integrated operations to accelerate
advancements in technology and to reduce manufacturing costs. For example, we
introduced the low-cost U-Series rigid disc drive product family, which targets
the market for desktop PCs costing less than $1,000. As evidence of our ability
to lead technological innovation during calendar year 2000, we were the market
share leader in the desktop and enterprise storage sectors of the rigid disc
drive industry, according to Dataquest.
CAPITALIZE ON EMERGING INFORMATION STORAGE DEMAND. We believe that the
growth of electronic data will create the need for higher volumes of
information storage products with greater
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storage and other capabilities. We intend to leverage our leadership in the
rigid disc drive industry to provide intelligent storage solutions for a wide
range of commercial and consumer applications. We expect the demand for
intelligent storage solutions, such as NAS and SAN devices, which use rigid
disc drives as their primary storage medium, will increase as the need for
greater network storage capacity expands. We believe that the increase in
demand for these products will provide us with additional opportunities for
rigid disc drive sales and will offer us greater opportunities for product
differentiation and increased profit. We will also continue to target potential
rigid disc drive customers in growth industries, such as consumer and
entertainment appliances, Internet access and networking. We have shipped rigid
disc drives for consumer electronic products, such as our U-Series drives which
provide the storage capacity to enable users to pause, rewind and replay live
television programming.
EXPAND RELATIONSHIPS WITH CUSTOMERS. We intend to increase the strength
and broaden the scope of our customer relationships by expanding our design and
engineering services. Our goal is to leverage our design and engineering
capabilities, together with our vertical integration, to become an integrated
part of our customers' supply chains. To implement this strategy, we intend to
continue to collaborate with our major customers at the design and development
stage of next generation products and to seek to add value to their end-user
applications. In addition, we have located just-in-time inventory centers near
many of our largest customers' production facilities and have placed design
engineers on-site with several of our largest OEM customers.
INCREASE MANUFACTURING EFFICIENCY AND FLEXIBILITY. We expect that our
ongoing manufacturing and efficiency programs will significantly reduce our
physical plant and head count expenses while increasing productivity.
Restructuring activities in fiscal years 1998 through 2000 included closures of
some facilities, personnel reductions and deployment of more efficient
manufacturing processes. From the beginning of fiscal year 1999 to the end of
fiscal year 2000, we reduced the number of our manufacturing employees by
approximately 6,000, or 35%, while increasing our unit shipments of rigid disc
drives by 28% in fiscal year 2000 compared to fiscal year 1999. For fiscal year
2001, we plan to reduce our workforce by approximately 2,000 employees,
primarily in manufacturing, and also plan capacity reductions, including
closures of facilities or portions of facilities. Our objective is to implement
greater integration of our manufacturing processes to allow us to manufacture
any of our rigid disc drive models at any of our manufacturing facilities. We
believe that these ongoing efficiency activities and the scale of our global
operations will permit us to maintain our position as a low cost, high quality
manufacturer.
CONTINUE TO PURSUE ALLIANCES, ACQUISITIONS AND INVESTMENTS. We will
continue to evaluate and selectively pursue strategic alliances, acquisitions
and investments that are complementary to our business. We will continue to
seek opportunities that provide us with enhanced technological expertise, new
markets for rigid disc drive sales, a stronger product portfolio, increased
market share, next generation products and a diversification of risk. For
example, in July 2000, we and Thomson Multimedia, one of the world's largest
manufacturers of consumer electronic products, formed CacheVision, a joint
venture, to target the growing market for consumer and entertainment appliances
with integrated storage devices.
OVERVIEW OF RIGID DISC DRIVE TECHNOLOGY
Rigid disc drives are used in a broad range of computer systems to manage,
store and protect digital information.
All rigid disc drives incorporate the same basic technology although
individual products vary. One or more rigid discs are attached to a spindle
assembly powered by a spindle motor that rotates the discs at a high constant
speed around a hub. The discs, or recording media, are the components on which
data is stored and from which it is retrieved. Each disc typically consists of
a substrate of finely machined aluminum or glass with a magnetic layer of a
thin-film metallic material. Read/write heads, mounted on an arm assembly
similar in concept to that of a record player, fly extremely close to each disc
surface and record data on and retrieve it from concentric tracks in the
magnetic layers of the rotating discs. The read/write heads are mounted
vertically on an e-block assembly. The e-block and the recording media are
mounted inside a metal casing, called the base casting. Upon instructions
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from the drive's electronic circuitry, a head positioning mechanism, or
actuator, guides the heads to the selected track of a disc where the data is
recorded or retrieved. Application specific integrated circuits, or ASICs, and
ancillary electronic control chips are collectively mounted on printed circuit
boards. The disc drive communicates with the host computer through an internal
controller, or interface. Rigid disc drive manufacturers typically use one or
more of several industry standard interfaces, such as advanced technology
architecture, or ATA, and fiber channel.
Rigid disc drive performance is commonly assessed by five key
characteristics:
o storage capacity, commonly expressed in megabytes, gigabytes or
terabytes, which is the amount of data that can be stored on the disc;
o spindle rotation speed, commonly expressed in revolutions per minute,
which has an effect on speed of access to data;
o interface transfer rate, commonly expressed in megabytes per second,
which is the rate at which data moves between the rigid disc drive and
the computer controller;
o average seek time, commonly expressed in milliseconds, which is the time
needed to position the heads over a selected track on the disc surface;
and
o media data transfer rate, commonly expressed in megabytes per second,
which is the rate at which data is transferred to and from the disc.
Areal density is a measure of storage capacity per square inch on the
recording surface of a disc. Current areal densities are sufficient to meet the
requirements of most applications today. We expect, however, the long-term
demand for increased drive capacities to increase at an accelerating rate, as
audio and visual data require many multiples of the storage capacity of simple
text. We have pursued, and expect to continue to pursue, a range of
technologies to increase areal densities across the entire range of our
products to increase drive capacities and to allow the elimination of
components at a stated capacity as areal density increases, thus reducing
costs.
PRODUCTS
RIGID DISC DRIVES
We offer a broad range of rigid disc drive products for both the
enterprise and desktop sectors of the rigid disc drive industry. We offer more
than one product within each product family and differentiate products on the
basis of price/performance and form factor, or the dimensions of the rigid disc
drive. Because of rapid advancements in rigid disc drive technology, product
life cycles have been as short as six months. To address this issue, we
introduce new products and enhancements to our product families as we develop
new technology. We list in the table below our main rigid disc drive products.
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ENTERPRISE RIGID DISC DRIVE PRODUCTS
- --------------------------------------------------------------------------------
FISCAL QUARTER STORAGE
PRODUCT NAME INTRODUCED CAPACITY ROTATION SPEED INTERFACE
- ---------------- ---------------- ---------------- ---------------- --------------
Barracuda 18LP 3rd Qtr. 1999 18.0 gigabytes 7,200 rpm fiber channel
Barracuda 36 4th Qtr. 1999 36.0 gigabytes 7,200 rpm fiber channel
Barracuda 50 4th Qtr. 1999 50.0 gigabytes 7,200 rpm fiber channel
Barracuda 18XL 2nd Qtr. 2000 18.0 gigabytes 7,200 rpm fiber channel
Cheetah 18LP 4th Qtr. 1999 18.0 gigabytes 10,000 rpm fiber channel
Cheetah 36 1st Qtr. 2000 36.0 gigabytes 10,000 rpm fiber channel
Cheetah 18XL 4th Qtr. 2000 18.0 gigabytes 10,000 rpm fiber channel
Cheetah 36LP 3rd Qtr. 2000 36.0 gigabytes 10,000 rpm fiber channel
Cheetah X15 4th Qtr. 2000 18.0 gigabytes 15,000 rpm fiber channel
Cheetah 73 3rd Qtr. 2000 73.0 gigabytes 10,000 rpm fiber channel
DESKTOP RIGID DISC DRIVE PRODUCTS
- --------------------------------------------------------------------------------
FISCAL QUARTER STORAGE
PRODUCT NAME INTRODUCED CAPACITY ROTATION SPEED INTERFACE
- ---------------------- ---------------- ------------------------------------- ---------------- ----------
U-8 Series 2nd Qtr. 2000 4.3, 8.4, 13.0 and 17.2 gigabytes 5,400 rpm ATA
U-10 Series 3rd Qtr. 2000 10.1, 15.2 and 20.3 gigabytes 5,400 rpm ATA
U-5 Series 1st Qtr. 2001 15.0, 20.0, 30.0 and 40.0 gigabytes 5,400 rpm ATA
Barracuda ATA:
Barracuda ATA 28040 1st Qtr. 2000 28.0 gigabytes 7,200 rpm ATA
Barracuda ATA 20430 1st Qtr. 2000 20.4 gigabytes 7,200 rpm ATA
Barracuda ATA 13620 1st Qtr. 2000 13.6 gigabytes 7,200 rpm ATA
Barracuda ATA 10220 1st Qtr. 2000 10.2 gigabytes 7,200 rpm ATA
Barracuda ATA 6810 1st Qtr. 2000 6.8 gigabytes 7,200 rpm ATA
- ---------------------- ---------------- ------------------------------------- ---------------- ----------
BARRACUDA FAMILY. Commercial uses for Barracuda rigid disc drives include
high-performance desktop PCs and workstations, mainframes and supercomputers,
network file servers and digital audio and video image processing.
CHEETAH FAMILY. Commercial uses for Cheetah rigid disc drives include
Internet and e-commerce servers, data mining and data warehousing, mainframes
and supercomputers, department/enterprise servers and workstations, transaction
processing, professional video and graphics and medical imaging.
U-SERIES FAMILY. Commercial uses for the U-series rigid disc drives
include entry-level desktop PCs running popular office applications,
entry-level PCs for government and education environments and desktop PCs
connected to a mainframe server. Consumer uses for the U-Series family include
entry-level PCs, home PCs purchased as second or third systems and discounted
PCs sold in conjunction with an Internet service provider or other service
provider. The U-Series family of rigid disc drives are also used in new market
uses, including television set-top boxes, printers, copiers and arcade and
other dedicated gaming uses.
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BARRACUDA ATA FAMILY. Commercial and consumer uses for the Barracuda ATA
family include desktop PCs used in businesses and consumer PCs used for gaming,
other entertainment applications, digital photo and video editing, viewing and
capturing television images and advanced spreadsheet modeling and graphics.
TAPE DRIVES
Tape drives use removable tape cartridges that store and protect large
volumes of data inexpensively and reliably. Tape drives take longer to retrieve
data than rigid disc drives and, therefore, are generally used to store less
frequently used data. We produce a broad range of tape drive products for a
wide range of enterprise and desktop systems. In addition, we, Hewlett-Packard
and IBM created linear tape-open technology, an open tape architecture that we
expect will meet the growing storage demands of midrange to enterprise-class
servers with up to 200 gigabytes of data storage capacity per cartridge. For
fiscal year 2000 and the six months ended December 29, 2000, tape drive revenue
was $263 million and $118 million, respectively. For fiscal year 2000 and the
six months ended December 29, 2000, tape drive gross profit was $70 million and
$13 million, respectively.
BUSINESS INTELLIGENCE SOFTWARE
Crystal Decisions, one of our majority-owned subsidiaries, develops and
markets software products and provides related services enabling business users
and information technology professionals to store, access and manage enterprise
information. Crystal Decisions' product family is designed as an integrated
platform that enables access, analysis, interpretation and distribution of data
to allow its customers to make business decisions. The products are used for
creating, implementing and deploying enterprise information solutions in an
application, on a desktop or across an organization. Crystal Decisions products
are designed to work in the most current e-business architectures and for
flexible deployment using the Internet. Our business intelligence software
products include Seagate Info, Crystal Reports, Crystal Analysis and Seagate
Holos. For fiscal year 2000 and the combined six months ended December 29,
2000, software revenue was $127 million and $77 million. For fiscal year 2000
and the six months ended December 29, 2000, software gross profit was $83
million and $54 million.
INTERNET, E-COMMERCE AND NEXT GENERATION STORAGE PRODUCTS
As an extension of our core rigid disc drive business, to address Internet
and e-commerce opportunities and to anticipate next generation storage
products, we have taken the following steps:
o INTELLIGENT STORAGE SOLUTIONS GROUP. In fiscal year 1999, we formed our
Intelligent Storage Solutions Group, which focuses on developing products
for new network devices, the Internet, high-performance servers and other
information-centric computing applications. These solutions combine
hardware, software and services to provide new products for our existing
OEM and strategic distributor customers and address the needs of emerging
markets for storage and storage-related applications. We expect the demand
for intelligent storage solutions, such as SAN and NAS, to grow as the
need for greater network storage capacity increases. As a result, we are
expanding our presence in these sectors. In January 2000, we acquired
XIOtech, a provider of virtual storage and storage area network solutions,
to strengthen our capabilities in intelligent storage solutions. XIOtech
is focused on designing solutions for information appliances,
application-based servers and storage services to benefit users by
delivering a greater range of online services, high networked-computing
performance and a reduced information technology cost structure. Our
intelligent storage operations did not contribute materially to our
consolidated revenue or EBITDA in fiscal year 2000 and the six months
ended December 29, 2000.
o CACHEVISION. In July 2000, we formed CacheVision as a joint venture with
Thomson Multimedia, one of the world's largest manufacturers of consumer
electronics. Following the formation of CacheVision and the contribution
by us and Thomson multimedia of $6 million, we and Thomson multimedia
agreed to contribute to CacheVision an additional $9.25 million each
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in three consecutive payments and, if necessary, make optional additional
capital contributions. We expect our total capital contributions to
CacheVision to be approximately $20 million. As of February 28, 2001, we
had invested $9 million in the joint venture, for a 50% equity interest,
without giving effect to the issuance of options to employees. We expect
that CacheVision will combine our product development expertise and
Thomson multiMedia's technological expertise and marketing presence to
develop cost-efficient, time-to-market integrated systems to be
incorporated into consumer and entertainment appliances for home consumer
electronics, for which we believe there is a growing market. Specifically,
we expect CacheVision will design, develop and customize consumer
electronics systems that will combine technologies, such as rigid disc
drives, compression hardware and software, analog to digital conversion
and interface connectivity, to enable CacheVision's OEM customers to
deliver what we believe will be tested, reliable and optimal consumer
solutions to the market more quickly. We expect to sell rigid disc drive
products to CacheVision as an OEM customer.
o SEAGATE TECHNOLOGY INVESTMENTS HOLDINGS. Through our Seagate Technology
Investments Holdings subsidiary, we promote the development of next
generation storage technologies. Seagate Technology Investments Holdings
acts as a venture fund by providing seed capital and early round financing
to software, services and hardware companies creating and developing
complementary technologies in storage-intensive applications. For example,
in July 2000, we and our subsidiary, Quinta, made minority equity
investments in Iolon, a private venture-financed company, by contributing
some of our optical technology for use in telecommunications switching
applications. As of February 28, 2001, Seagate Technology Investments
Holdings has made total investments of approximately $45 million in 9
companies, including CacheVision.
MARKETING AND CUSTOMERS
We sell our rigid disc and tape drive products primarily to OEMs and
distributors. OEM customers incorporate our rigid disc drives into computer
systems for resale. Distributors typically sell our rigid disc drives to small
OEMs, dealers, system integrators and other resellers. Shipments to OEMs were
approximately 65%, 67% and 70% of our rigid disc drive revenue in fiscal years
1999 and 2000 and the six months ended December 29, 2000, respectively.
Shipments to distributors were approximately 35%, 33% and 30% of our rigid disc
drive revenue in fiscal years 1999 and 2000 and the six months ended December
29, 2000, respectively. Sales to Compaq accounted for approximately 17% of our
revenue in each of the two fiscal years 1999 and 2000 and in the six months
ended December 29, 2000, and sales to EMC Corporation accounted for
approximately 14% of our revenue for the six months ended December 29, 2000. No
other customer accounted for 10% or more of revenue in fiscal years 1999 or
2000 or the six months ended December 29, 2000.
OEM customers typically enter into purchase agreements with us. These
agreements provide for pricing, volume discounts, order lead times, product
support obligations and other terms and conditions. The term of these
agreements is usually 12 to 24 months, although product support obligations
generally extend substantially beyond this period. These master agreements
typically do not commit the customer to buy any minium quantity of products.
Deliveries are scheduled only after receipt of purchase orders. In addition,
with limited lead time, customers may cancel or defer most purchase orders
without significant penalty. Anticipated orders from many of our customers have
in the past failed to materialize or OEM delivery schedules have been deferred
or altered as a result of changes in their business needs.
In the third quarter of fiscal year 1999, we launched our distribution
partnership program, under which we selected five key distributors,
predominately in North America, with which we intended to jointly develop
marketing programs targeted at value-added resellers, other resellers and
systems integrators. Shipments to these key distributors are on a consignment
basis whereby our inventory held by these distributors is still owned by us and
our revenue recognition is delayed until the product is used by the distributor
to fill an end-user order.
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Our distributors outside North America generally enter into non-exclusive
agreements for the redistribution of our products. They typically furnish us
with a non-binding indication of their near-term requirements and product
deliveries are generally scheduled based on a weekly confirmation by the
distributor of its requirements for that week. The agreements typically provide
the distributors with price protection with respect to their inventory of our
rigid disc drives at the time of a reduction by us in our selling price for the
rigid disc drives and also provide limited rights to return the product.
In June 2000, together with Hitachi, IBM, LG Electronics, Lucent
Technologies, Nortel Networks and Solectron, we invested in and founded
e2open.com, an e-marketplace initiative where members can trade components and
manage their supply chains online. We and the other founders of e2open.com are
obligated to make capital contributions of up to $12.5 million in exchange for
additional units of e2open.com. Through e2open.com, we are exploring
alternative methods of marketing through electronic marketing.
SERVICE AND WARRANTY
We warrant our rigid disc drive and tape drive products against defects in
design, material and workmanship generally for one to five years depending upon
the capacity category of the rigid disc drive or tape drive. Our higher
capacity products are warranted for longer periods. Our products are
refurbished or repaired at our facilities located in Oklahoma, Malaysia, Mexico
and Singapore.
SALES OFFICES
We maintain sales offices throughout the United States and in Australia,
China, England, France, Germany, Ireland, Japan, Singapore, Spain, Sweden and
Taiwan. Foreign sales are subject to foreign exchange controls and other
restrictions, including, in the case of some countries, approval by the Office
of Export Administration of the U.S. Department of Commerce and other United
States governmental agencies.
BACKLOG
Our order backlog as of June 30, 2000 was approximately $1.2 billion. A
significant portion of our shipments are made through just-in-time inventory
locations. Under this arrangement, our customers consume products as needed,
without committing to purchase specified volumes of product from us. Because
our backlog includes only those orders for which a delivery schedule has been
specified by the customer, we believe that the amount of our backlog for orders
of our products may be misleadingly low.
MANUFACTURING
Our business objectives require us to establish manufacturing capacity in
anticipation of market demand. The key elements of our manufacturing strategy
are as follows:
o high-volume and low-cost assembly and testing;
o vertical integration through the design and/or manufacturing of some of
the critical components for our products to allow us to maintain control
as much as possible over the cost, quality and availability of these
components; and
o the establishment and maintenance of key vendor relationships.
Succeeding in the highly competitive rigid disc drive industry requires that we
manufacture significant volumes of high-quality rigid disc drives at low per
unit costs. To accomplish this, we must rapidly achieve high manufacturing
efficiency and obtain uninterrupted access to high-quality components in
required volumes at competitive prices.
Manufacturing of our rigid disc drives is a complex process, requiring a
"clean room" environment, the assembly of precision components within narrow
tolerances and extensive testing to ensure reliability. The first step in the
manufacture of a rigid disc drive is the assembly of the actuator
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arm, read/write heads, discs and spindle motor in a housing to form the
head-disc assembly. The production of the head-disc assembly involves a
combination of manual and semi-automated processes. After the head-disc
assembly is produced, a pattern is magnetically recorded on the disc surfaces.
Printed circuit boards are then mated to the head-disc assembly and the
completed unit is tested prior to packaging and shipment. Final assembly and
test operations of our rigid disc drives occur primarily at facilities located
in China, Malaysia, Singapore and, in the United States, in Minnesota and
Oklahoma. We perform subassembly and component manufacturing operations at our
facilities in Indonesia, Malaysia, Mexico, Northern Ireland, Singapore,
Thailand and, in the United States, in California and Minnesota. In addition,
third parties manufacture and assemble components for us in various Asian
countries, including China, Japan, Korea, Malaysia, The Philippines, Singapore,
Taiwan and Thailand, and in Europe and the United States.
The cost, quality and availability of some components for rigid disc
drives and other information storage products are critical to the successful
manufacture of these products. Particularly important components include
read/write heads, recording media, ASICs, spindle motors, printed circuit
boards, and resistors. Our design capabilities and vertical integration have
allowed us to design, assemble and/or manufacture some of these components,
namely read/write heads, recording media, printed circuit boards, spindle
motors and ASICs, as we describe below.
o READ/WRITE HEADS. We perform all primary stages of design and
manufacture of read/write heads at our facilities. Although the percentage
of our requirements for read/write heads that we produce internally varies
from quarter to quarter, in each quarter we purchase up to 20% of our
read/write heads from third party suppliers to afford us access to the
widest possible technology. We plan to continue to manufacture at least
80% of our read/write head requirements for each quarter.
o RECORDING MEDIA. We purchase aluminum substrate blanks for recording
media production from third parties, mainly in Japan. These blanks are
machined, plated and polished to produce finished substrates at our plant
in Northern Ireland. Although the percentage of our requirements for
recording media that we produce internally varies from quarter to quarter,
in each quarter we purchase up to 20% of our recording media requirements
from third party suppliers in Asia and the United States. We plan to
continue to manufacture at least 80% of our recording media requirements
for each quarter.
o PRINTED CIRCUIT BOARDS. We assemble substantially all of the printed
circuit boards we use to manufacture rigid disc drives. Printed circuit
boards are the boards that contain the electronic circuitry and ASICs that
provide the electronic controls of the rigid disc drive and on which the
head-disc assembly is mounted. We assemble printed circuit boards at our
facilities in Indonesia, Malaysia and Singapore.
o SPINDLE MOTORS. We design all of our spindle motors and purchase them
principally from outside vendors in Asia.
o ASICS. We participate in the design of many of the ASICs used for motor
and actuator control used in our rigid disc drive products, such as
interface controllers, read/write channels and pre-amplifiers. We do not
manufacture any ASICs but, rather, buy them from third party suppliers.
We purchase the components for our products that we do not manufacture
internally from outside suppliers. Some of these components, such as the
read/write heads and recording media which we do not manufacture, ASICs,
spindle motors and printed circuit boards, we purchase from either sole
suppliers or a limited number of suppliers. In the past, we have experienced
increased costs and production delays when we were unable to obtain sufficient
quantities of some components and have been forced to pay higher prices for
some components that were in short supply in the industry in general. For
example, in the fourth quarter of fiscal year 2000 and in the first quarter of
fiscal year 2001, we and other rigid disc drive manufacturers experienced
shortages and delays in the receipt of ASICs, a critical component in the
manufacture of rigid disc drives which we believe
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was caused by a consolidation among the manufacturers of these components and
the use of ASIC manufacturing capacity to produce semiconductor chips for other
applications, including wireless communications devices. Based on current
information, we believe that this shortage has abated and further believe that
the shortage of ASICs in the fourth quarter of fiscal year 2000 and in the
first quarter of 2001 did not have a material adverse effect on our financial
condition or results of operations. However, if there is further consolidation
among ASIC manufacturers or any other factors should cause us to experience
renewed shortages or delays in the receipt of ASICs in the future, our
financial condition and results of operations, as well as those of our
competitors, could be materially adversely affected. In addition, Maxtor's
recent acquisition of Quantum's disc drive operations may enable Maxtor to
obtain a proportionately greater supply of critical components from third-party
manufacturers than we may be able to because of the increased size and
negotiating leverage of Maxtor, which could adversely affect our ability to
source a sufficient number of these components for our operations. See "Risk
Factors -- Risks Related to Our Business -- Dependence on Supply of
Components."
Because of the significant fixed costs associated with the manufacture of
our products and components and the competition and the price erosion in our
industry, we must continue to produce and sell our rigid disc drives in
significant volume, continue to lower manufacturing costs, carefully monitor
inventory levels and increase the availability and sourcing of product
components. During the past three years, we have undertaken extensive efforts
to centralize and rationalize our manufacturing operations, including the
closure of facilities and reductions in our work force. In the future, we plan
to continue to evaluate the availability and sourcing of components and our
manufacturing processes as well as the desirability of transferring volume
production of rigid disc drives and related components between facilities,
including transferring production overseas to countries where labor costs and
other manufacturing costs are significantly lower than in the United States,
principally China, Indonesia, Malaysia, Singapore and Thailand. In addition,
from time to time, we support our vendors' production efforts by making
advances or loans to them to finance capital expenditures relating to the
manufacture of components to be sold to us.
COMPETITION
The rigid disc drive industry is intensely competitive, with manufacturers
competing for a limited number of major customers. The principal competitive
factors in the rigid disc drive market are product quality and reliability,
form factor, storage capacity, price per unit, price per megabyte, production
volume capability and responsiveness to customer preferences and demands. We
believe that our products are generally competitive as to these factors. We
summarize below our principal competitors, the effect of competition on price
erosion for our products and product life cycles and technology.
PRINCIPAL COMPETITORS
We have experienced and expect to continue to experience intense
competition from a number of domestic and foreign companies, some of which have
greater financial and other resources than us. These competitors include the
other independent rigid disc drive manufacturers and large integrated
manufacturers, such as:
INTEGRATED INDEPENDENT
- ---------------------------------------------------- ----------------------------
Fujitsu Limited Maxtor Corporation
International Business Machines Corporation Western Digital Corporation
NEC Corporation
Samsung Electronics Co. Ltd.
Toshiba Corporation
The term "independent" in this context refers to manufacturers that
primarily produce rigid disc drives as a stand-alone product, and the term
"integrated" refers to manufacturers that produce complete computer or other
systems which contain rigid disc drives or other information storage
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products. Integrated manufacturers are formidable competitors because they have
the ability to determine pricing for complete systems without regard to the
margins on individual components. Because components other than rigid disc
drives generally contribute a greater portion of the operating margin on a
complete computer system than do rigid disc drives, integrated manufacturers do
not necessarily need to realize a profit on the rigid disc drives included in a
computer system and, as a result, may be willing to sell rigid disc drives to
third parties at very low margins. Many integrated manufacturers are also
formidable competitors because they have more substantial resources and greater
access to customers than we do. We also face indirect competition from present
and potential customers, including several of the computer manufacturers listed
above, that evaluate whether to manufacture their own rigid disc drives and
other information storage products or purchase them from outside sources. These
manufacturers also sell rigid disc drives to third parties, which results in
direct competition with us. In addition, Maxtor's recent acquisition of
Quantum's disc drive operations makes Maxtor the largest manufacturer of rigid
disc drives in terms of the units of rigid disc drives shipped, according to
Dataquest, and may make it a more formidable competitor.
We also compete with manufacturers of products that use alternative data
storage and retrieval technologies. Products using alternative technologies
could be a significant source of competition. For example, high-speed
semiconductor memory could compete with our products in the future.
Semiconductor memory is much faster than rigid disc drives, but currently is
volatile, or subject to loss of data in the event of power failure, and much
more costly. Flash EE prom, a nonvolatile semiconductor memory, is currently
much more costly and, while it has higher read performance than rigid disc
drives, it has lower write performance. Flash EE prom could become competitive
in the near future for applications requiring less storage capacity, such as
that for less than 200 megabytes, than is required in traditional markets for
our products. The introduction of products using alternative technologies could
be a significant source of competition.
PRICE EROSION
Even during periods when demand is stable, the rigid disc drive industry
is intensely competitive and vendors experience price erosion over the life of
a product. Historically, our competitors have offered new or existing products
at lower prices as part of a strategy to gain or retain market share and
customers. We expect these practices to occur again in the future. We also
expect that price erosion in the rigid disc drive industry will continue for
the foreseeable future. To remain competitive, we believe it will be necessary
to continue to reduce our prices. Our establishment of production facilities in
China, Malaysia, Singapore and Thailand have been directed toward achieving
cost reductions.
PRODUCT LIFE CYCLES AND CHANGING TECHNOLOGY
Competition and changing customer preference and demand in the rigid disc
drive industry have also shortened product life cycles and caused an
acceleration in the development and introduction of new technology. We believe
that our future success will depend upon our ability to develop, manufacture
and market products of high quality and reliability which meet changing user
needs and which successfully anticipate or respond to changes in technology and
standards on a cost-effective and timely basis.
RESEARCH AND DEVELOPMENT
We believe that our success depends on our ability to develop products
that meet changing user needs and to anticipate and respond to changes in
technology on a cost-effective and timely basis. Accordingly, we are committed
to developing new component technologies and new products and to continually
evaluating alternative technologies. During fiscal years 1999 and 2000 we spent
$655 million and $725 million on product development. Including product
development allocated compensation expense related to the transactions, we had
combined product development expenses of $504 million for the six months ended
December 29, 2000. We develop new rigid disc drive products and the processes
to produce them at four locations: Longmont, Colorado; Oklahoma City, Oklahoma;
Shakopee, Minnesota; and Singapore.
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Our goal is to bring new products to market through predictable and
repeatable methodologies. In addition, we believe that vertical integration in
strategic technologies is a key competitive advantage to maintaining a
leadership position in the information storage industry. As a result, we also
conduct component research and development. Our major emphasis is on obtaining
higher capacity, reduced size and power consumption, improved performance and
reliability and reduced cost. This research and development is conducted in
four main areas: read/write heads, recording media, spindle motors and ASICs.
We have established the following dedicated research groups:
o SEAGATE RESEARCH. Seagate Research concentrates on extending the limits
of magnetic and optical recording and exploring alternative data storage
technologies.
o ADVANCED CONCEPTS GROUP. The Advanced Concepts Group focuses our disc
drive and component research efforts into three areas that specialize in
developing and staging advanced technologies for future data storage
products. The three areas are recording subsystems including read/write
heads and recording media, market specific product technology, and
technology geared towards new business opportunities. The primary mission
of the Advanced Concepts Group is to ensure timely availability of mature
component and subsystem technologies for our product development teams and
allow us to leverage and coordinate those technologies across products.
o ADVANCED MANUFACTURING GROUP. The Advanced Manufacturing Group
concentrates on best-in-class operational performance. This group focuses
the efforts of the process development groups within our company on one
process capable of building all of our rigid disc drives on any of our
rigid disc drive assembly lines. In addition, the group focuses on
benchmarking best-in-class performance, evaluation of new materials and
state of the art process control systems. We believe that our future
success is linked to our ability to reduce supply lines, respond to demand
changes, and ultimately provide the highest quality products to our
customers.
PATENTS AND LICENSES
We have approximately 1,495 U.S. patents and 648 patents issued in various
foreign jurisdictions, as well as approximately 1,161 U.S. and 1,146 foreign
patent applications pending. Due to the rapid technological change that
characterizes the information storage industry, we believe that the improvement
of existing products, reliance upon trade secret law, the protection of
unpatented proprietary know-how and development of new products are generally
more important than patent protection in establishing and maintaining a
competitive advantage. Nevertheless, we believe that patents are valuable to
our business and intend to continue our efforts to obtain patents, where
available, in connection with our research and development program.
The information storage industry is characterized by significant
litigation relating to patent and other intellectual property rights. Because
of rapid technological development in the information storage industry, some of
our products have been, and in the future could be, alleged to infringe
existing patents of third parties. From time to time, we receive claims that
our products infringe patents of third parties. Although we have been able to
resolve some such claims or potential claims by obtaining licenses or rights
under the patents in question without a material adverse affect on us, other
such claims have resulted in adverse decisions or settlements. In addition,
other claims are pending which if resolved unfavorably to us could have a
material adverse effect on our business. See "-- Legal Proceedings." The costs
of engaging in intellectual property litigation may be substantial regardless
of the validity of the claim or the outcome. We have patent cross-licenses with
a number of companies in the computer industry. Additionally, we have
agreements in principle with other major rigid disc drive companies. Some of
our license agreements have change of control or anti-assignment provisions
which provide that the licenses would terminate upon closing of the
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transactions. As of March 31, 2001, no licenses were terminated due to the
transactions. We intend to enter into replacement licenses, although we cannot
assure you that we will be able to do so. See "Risk Factors -- Potential Loss
of Material Licensed Technology."
EMPLOYEES
As of March 31, 2001, we employed approximately 56,000 persons worldwide.
As of March 31, 2001, approximately 44,000 of our employees were located in our
Asia Pacific operations. In addition, we make use of supplemental employees,
principally in manufacturing, who are hired on an as-needed basis. We believe
that our future success will depend in part on our ability to attract and
retain qualified employees at all levels. We believe that our employee
relations are good.
FACILITIES
We have executive offices in Scotts Valley, California. Our principal
manufacturing facilities are located in Malaysia, Northern Ireland, China,
Singapore, Thailand and, in the United States, in California, Minnesota and
Oklahoma. A portion of our facilities are occupied under leases which expire at
various times through 2015. The following is a summary of square footage owned
or leased by us as of December 29, 2000 for the categories listed in the
columns below.
MANUFACTURING
PRODUCT AND
ADMINISTRATIVE DEVELOPMENT WAREHOUSE TOTAL
---------------- ------------- -------------- ---------------
NORTH AMERICA
California
Central California ................ 12,800 1,030 16,768 30,598
Northern California ............... 387,319 284,521 228,136 899,976
Southern California ............... 33,700 -- 347,890 381,590
Colorado ............................ 11,608 333,774 -- 345,382
Minnesota ........................... 142,340 414,644 773,675 1,330,659
Oklahoma ............................ 87,082 110,097 240,841 438,020
Northeastern states ................. 8,881 226 -- 9,107
Southeastern states ................. 26,773 -- -- 26,773
Other U.S. states ................... 13,797 65,584 11,427 90,808
Canada and Mexico ................... 114,963 59,879 417,126 591,968
------- ------- ------- ---------
Total North America .............. 839,263 1,269,755 2,035,863 4,144,881
======= ========= ========= =========
EUROPE
England ............................. 28,602 18,444 3,972 51,018
Ireland ............................. 1,200 -- -- 1,200
Northern Ireland .................... 68,200 4,900 494,900 568,000
Netherlands ......................... 28,955 -- 92,234 121,189
Scotland ............................ -- -- 42,824 42,824
Other European countries ............ 44,578 -- -- 44,578
------- --------- --------- ---------
Total Europe ..................... 171,535 23,344 633,930 828,809
------- --------- --------- ---------
ASIA
China ............................... 25,972 -- 197,476 223,448
Malaysia ............................ 183,486 -- 1,257,796 1,441,282
Singapore ........................... 273,317 35,519 1,126,769 1,435,605
Thailand ............................ 145,888 -- 1,059,174 1,205,062
Other Pacific Rim countries ......... 47,495 -- 48,047 95,542
------- --------- --------- ---------
Total Asia ....................... 676,158 35,519 3,689,262 4,400,939
------- --------- --------- ---------
Total ............................ 1,686,956 1,328,618 6,359,055 9,374,629*
========= ========= ========= =========
- ----------
(*) Includes 7,273,780 square feet owned by us and 5,037,364 square feet leased
by us but excludes 2,936,515 square feet of property that is unoccupied,
subleased or under construction.
ENVIRONMENTAL MATTERS
Our operations are subject to comprehensive U.S. and foreign laws and
regulations relating to the protection of the environment, including those
governing discharges of pollutants into the air and
135
water, the management and disposal of hazardous substances and wastes and the
cleanup of contaminated sites. Some of our operations require environmental
permits and controls to prevent and reduce air and water pollution, and these
permits are subject to modification, renewal and revocation by issuing
authorities.
We believe that our operations are currently in substantial compliance
with all environmental laws, regulations and permits. We incur operating and
capital costs on an ongoing basis to comply with environmental laws. We spent
approximately $8 million and $18 million on these matters in fiscal years 1999
and 2000, respectively, and expect to spend similar amounts in fiscal year
2001. However, additional operating costs and capital expenditures could be
incurred if additional or more stringent requirements relevant to our
operations are imposed.
Some environmental laws, such as the U.S. federal superfund law and
similar state statutes, can impose liability for the entire cost of cleanup of
contaminated sites upon any of the current or former site owners or operators
or upon parties who sent waste to these sites, regardless of whether the owner
or operator owned the site at the time of the release of hazardous substances
or the lawfulness of the original disposal activity. We have been identified as
a potentially responsible party at a number of superfund sites. Generally,
where there are multiple potentially responsible parties, liability has been
apportioned based on the type and amount of hazardous substances disposed of by
each party at the site and the number of financially viable parties. We cannot
assure you that this will be the method of apportioning liability with respect
to any particular site. While our ultimate costs in connection with these sites
is difficult to predict, based on our current estimates of cleanup costs and
our expected allocation of these costs, we do not expect costs in connection
with these superfund sites to be material.
Many of our current and former sites have a history of commercial and
industrial operations, including the use of hazardous substances. Groundwater
and soil contamination resulting from historical operations has been identified
at some of our current and former facilities. For example, at our former Omaha,
Nebraska facility, under a consent order with the U.S. Environmental Protection
Agency, we are addressing soil and groundwater contaminated with chlorinated
solvents, which extends off-site beneath several neighboring commercial and
industrial properties.
LEGAL PROCEEDINGS
SECURITIES CLASS ACTIONS
Following our announcement of the transactions, a number of our
stockholders filed lawsuits against us, the individual members of our board of
directors, some of our executive officers, VERITAS and Silver Lake. The
complaints filed in Delaware were consolidated into one action on April 18,
2000. On May 22, 2000, the Delaware Chancery Court certified the Delaware
action as a class action. The Delaware plaintiffs filed an amended complaint
and moved for a preliminary injunction on September 11, 2000. In California,
three complaints were filed in Santa Clara County Superior Court and two
complaints were filed in Santa Cruz County Superior Court. The complaints in
both jurisdictions all essentially allege that the members of our board of
directors breached their fiduciary duties to our shareholders by entering into
the transactions. The complaints also allege that the directors and executive
officers have conflicting financial interests and did not secure the highest
possible price for our shares. All the complaints were styled as class actions,
and sought to enjoin the transactions and secure damages from all defendants.
Between March 30 and October 27, 2000, one of the California complaints was
voluntarily dismissed and the others were coordinated in Santa Clara County. On
October 13, 2000, a Memorandum of Understanding, or MOU, was signed regarding
settlement with all defendants on behalf of the shareholder class. The
shareholders approved the transactions on November 21, 2000 and the
transactions closed on November 22, 2000. After the transactions closed in
November 2000, three of the remaining California actions were dismissed with
prejudice.
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A final stipulation of settlement was executed in early January 2001. The
Delaware Chancery Court approved the settlement and entered an order of
judgment on April 12, 2001. If no appeal is filed within 30 days, the judgment
will be final. The primary elements of the stipulation of settlement are the
following:
o We and the investor group agreed to increase the cash purchase price
under the stock purchase agreement by $50 million. This amount:
- was funded by the investor group on the closing of the transactions
into an escrow account held by VERITAS, pending its distribution to our
shareholders, if specified conditions are satisfied as discussed below;
- will be paid to our shareholders as additional consideration if the
order of judgment by the Delaware Chancery Court is not appealed and
becomes final and the Delaware lawsuit and the California lawsuits are
dismissed with prejudice; and
- plus interest, will be returned to us in the event that VERITAS
determines, in its reasonable judgment, that the conditions to the
release of the amount have become incapable of being satisfied.
o We paid into an escrow account $15.25 million in attorneys' fees awarded
to plaintiffs' counsel by the Delaware Chancery Court. That amount will be
paid from escrow to plaintiffs' counsel when the judgment is final.
o The merger agreement was amended to (1) reduce the maximum amount that
may be required to be held in escrow to cover our potential tax
liabilities from $300 million to $150 million, and (2) change some
provisions regarding VERITAS' payment of the consideration for the merger.
INTELLECTUAL PROPERTY LITIGATION
Papst Licensing, GmbH -- Papst has given us notice that it believes
various of our former Conner Peripherals, Inc. rigid disc drives infringe
several of its patents covering the use of spindle motors in rigid disc drives.
We believe that the accused former Conner disc drives do not infringe any valid
and/or enforceable claims of the Papst patents. We believe that subsequent to
the merger with Conner, our earlier paid-up license under Papst's patents
extinguished any ongoing liability. We also believe we enjoy the benefit of
licenses granted by Papst to motor vendors of Conner. After closing of the
transactions, Papst indicated that it could not consent to the assignment of
the 1993 Papst-Seagate license to the new entity until it receives further
information about the new business structure and that any of our drives would
be assumed to be unlicensed. We are providing Papst with additional information
regarding the new business structure.
Convolve, Inc. -- On July 13, 2000, Convolve, Inc., and Massachusetts
Institute of Technology filed a lawsuit, captioned Convolve, Inc. and
Massachusetts Institute of Technology v. Compaq Computer Corp. and Seagate
Technology, Inc. against Compaq Computer Corporation and Seagate Technology in
the U.S. District Court for the Southern District of New York. It alleged
patent infringement, misappropriation of trade secrets, breach of contract,
tortious interference with contract and fraud relating to Convolve's Input
Shaping (Registered Trademark) and Quick and QuietTM technology. The
plaintiffs claim their technology is incorporated in our sound barrier
technology, which was publicly announced on June 7, 2000. The complaint seeks
injunctive relief, $800 million in compensatory damages and punitive damages.
We answered the complaint on August 2, 2000 and filed cross-claims for
declaratory judgment that two Convolve/MIT patents are invalid and not
infringed and that we own any intellectual property based on the information
that we disclosed to Convolve. Plaintiffs' motion for expedited discovery was
denied by the court. The court ordered plaintiffs to identify their trade
secrets to defendants before discovery can begin. Convolve served a trade
secrets disclosure on August 4, 2000, and Seagate Technology has challenged
that disclosure as not containing any trade secrets. The court will appoint a
Special Master to review the trade secret issues, and the parties have
presented candidates to the court. We believe this matter is without merit and
intend to defend it vigorously.
137
Storage Computer Corporation -- On March 22, 2001, Storage Computer
Corporation filed suit in the U.S. District Court for the Northern District of
Texas, Civil Action No. 3-01CV0555-M, entitled Storage Computer Corporation v.
XIOtech Corporation and Seagate Technology, Inc. The complaint alleges that
XIOtech's MAGNITUDETM product infringes U.S. Patent No. 5,893,919 and that
Seagate Technology induces infringement of the patent by promoting and
marketing XIOtech's MAGNITUDETM product, particularly through a hyperlink on
Seagate Technology's internet website to XIOtech's internet website. The
plaintiff alleges willful infringement and seeks unspecified damages and an
injunction. We have engaged counsel and are evaluating the claims.
LABOR LITIGATION
White -- On March 15, 2000 Royston White filed a breach of contract action
against Seagate Technology in Oklahoma State Court. The complaint is styled as
a class action, and White, as the sole named defendant, alleges that some 600
former employees have been damaged through breach of separation and release
agreements entered into in connection with a work force reduction. Discovery is
ongoing and a trial date has not yet been set. We have filed a summary judgment
motion, although the court has not set a hearing date yet. We believe we have
substantive defenses and will pursue such defenses vigorously.
OTHER MATTERS
We are involved in a number of other judicial and administrative
proceedings incidental to our business. Although occasional adverse decisions
or settlements may occur, we believe that the final disposition of such matters
will not have a material adverse effect on our financial position or results of
operations.
138
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and members of our board of directors and their
ages and positions are as follows:
NAME AGE POSITION
David J. Roux ............... 44 Chairman of the Board of Directors and Director
Stephen J. Luczo ............ 44 Chief Executive Officer and Director
William D. Watkins .......... 48 President, Chief Operating Officer and Director
Charles C. Pope ............. 46 Executive Vice President, Finance and Chief
Financial Officer
William L. Hudson ........... 48 Senior Vice President, General Counsel and
Corporate Secretary
Donald L. Waite ............. 68 Executive Vice President and Chief Administrative
Officer
Jeremy Tennenbaum ........... 46 Executive Vice President, Business and Corporate
Development
David Bonderman ............. 58 Director
James G. Coulter ............ 41 Director
James A. Davidson ........... 41 Director
Glenn H. Hutchins ........... 45 Director
David F. Marquardt .......... 52 Director
John W. Thompson ............ 51 Director
Mr. Roux became the Chairman of our board of directors on the closing of
the transactions. Mr. Roux is a founder and managing member of Silver Lake
Partners, a private equity firm founded in January 1999. From February 1998 to
November 1998, he served as the Chief Executive Officer and President of
Liberate Technologies, a software platform provider. From September 1994 until
December 1998, Mr. Roux held various management positions with Oracle
Corporation, a software provider for information management, most recently as
Executive Vice President of Corporate Development. Before joining Oracle, Mr.
Roux served as Senior Vice President of Marketing and Business Development at
Central Point Software, a software provider, from April 1992 to July 1994. Mr.
Roux currently serves as Chairman of the board of directors of Liberate
Technologies and is also a member of the boards of directors of
SubmitOrder.com, Inc. and Xoriant Corporation.
Mr. Luczo became a member of our board of directors on the closing of the
transactions. Mr. Luczo joined us in October 1993 as Senior Vice President of
Corporate Development. In March 1995, he was appointed Executive Vice President
of Corporate Development and Chief Operating Officer of Seagate Software
Holdings. In July 1997, he was appointed Chairman of the board of directors of
Seagate Software Holdings. In September 1997, Mr. Luczo was promoted to
President and Chief Operating Officer of Seagate Technology and, in July 1998,
he was promoted to Chief Executive Officer. Mr. Luczo resigned from the office
of President of Seagate Technology, and Mr. Watkins was elected to that office
in May 2000. Prior to joining us, Mr. Luczo was Senior Managing Director of the
Global Technology Group of Bears, Stearns & Co. Inc., an investment banking
firm, from February 1992 to October 1993. He serves as a member of the boards
of directors of VERITAS Software Corporation and e2open.com.
Mr. Watkins became a member of our board of directors on the closing of
the transactions. Mr. Watkins, our President, Chief Operating Officer and
Director, joined us as Executive Vice President of our Recording Media Group in
February 1996 with our merger with Conner Peripherals Inc. In October 1997, Mr.
Watkins took on additional responsibility as Executive Vice President of the
Disc Drive Operations and, in August 1998, he was appointed to the position of
Chief Operating Officer, with responsibility for our disc drive manufacturing,
recording media and recording head operations. Prior to joining us, he was
President and General Manager of the Disc Division at Conner
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Peripherals Inc., an information storage solutions company, from January 1990
until December 1992. In January 1993, Mr. Watkins was promoted to Senior Vice
President of Manufacturing Operations at Conner Peripherals Inc. Mr. Watkins is
a member of the boards of directors of Iolon, Inc., CacheVision, Inc. and
Candescent Technologies Corporation.
Mr. Pope, our Executive Vice President of Finance since April 1999 and our
Chief Financial Officer since February 1998, joined us as Director of Budgets
and Analysis in 1985 with our acquisition of Grenex, Inc. From January 1997 to
April 1999, Mr. Pope was our Senior Vice President of Finance. He has held a
variety of positions in his 14-year executive experience with us, including as
Director of Finance of the Thailand operations, Vice President of Finance of
the Asia Pacific operations, Vice President of Finance and Treasurer of Seagate
Technology, Vice President and General Manager of Seagate Magnetics and, most
recently, Senior Vice President of Finance of the Storage Products Group.
Mr. Waite, our Executive Vice President and Chief Administrative Officer
since 1998, joined us as our Vice President and Chief Financial Officer in
1983. He was promoted to Senior Vice President in 1984. Prior to joining us,
Mr. Waite was Chief Financial Officer of Measurex Corporation and Memorex
Corporation. After beginning his professional career with Arthur Andersen, Mr.
Waite spent 12 years with Bell & Howell and, most recently, held the position
of Vice President and Chief Financial Officer. Mr. Waite is a member of the
board of directors of California Micro Devices Corporation.
Mr. Tennenbaum, our Executive Vice President of Business and Corporate
Development, joined us in January 2001. Prior to joining us, Mr. Tennenbaum
worked as vice president of Wellington Management Company for nine years. Prior
to Wellington, Mr. Tennenbaum worked as a new business specialist in corporate
finance at Salomon Brothers.
Mr. Hudson, our Senior Vice President, General Counsel and Corporate
Secretary, joined us in January 2000. Prior to joining us, Mr. Hudson was a
partner of the law firm Gibson Dunn & Crutcher, LLP from August 1997 to
December 1999 and, from October 1984 to July 1997, he was a partner of the law
firm Brobeck, Phleger & Harrison, LLP.
Mr. Bonderman became a member of our board of directors on the closing of
the transactions. Mr. Bonderman is a principal of Texas Pacific Group, a
private investment firm he co-founded in 1993. Prior to forming Texas Pacific
Group, Mr. Bonderman was Chief Operating Officer and Chief Investment Officer
of Robert M. Bass Group, now doing business as Keystone Inc., a private
investment firm, from 1983 to August 1992. Mr. Bonderman is a member of the
boards of directors of Bell & Howell Company, Continental Airlines, Inc.,
Co-Star Realty Information Group, Denbury Resources Inc., Ducati Motorcycles
S.p.A., J. Crew Group, Inc., Korea First Bank, Magellan Health Services, Inc.,
ON Semiconductor Corporation, Oxford Health Plans, Inc., Paradyne Networks,
Inc., Ryanair plc, Washington Mutual, Inc. and a number of private companies.
Mr. Coulter became a member of our board of directors on the closing of
the transactions. Mr. Coulter is a principal of the Texas Pacific Group, a
private investment firm he co-funded in 1993. From 1986 to 1992, Mr. Coulter
was a Vice President of Keystone, Inc. From 1986 to 1988, Mr. Coulter was also
associated with SPO Partners, an investment firm that focuses on public market
and private minority investments. Mr. Coulter is a member of the boards of
directors of Genesis Health Ventures, Inc., GlobeSpan, Inc., J. Crew Group,
Inc., Northwest Airlines Inc., Oxford Health Plans, Inc., Zhone Technologies,
Inc. and a number of private companies.
Mr. Davidson became a member of our board of directors on the closing of
the transactions. Mr. Davidson is a founder and managing member of Silver Lake
Partners, a private equity firm founded in January 1999. From June 1990 to
January 1999, Mr. Davidson was an investment banker with Hambrecht & Quist LLC,
most recently serving as a Managing Director and Head of Technology Investment
Banking. He is also a member of the boards of directors of Cabletron Systems,
Inc. and a number of private companies.
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Mr. Hutchins became a member of our board of directors on the closing of
the transactions. Mr. Hutchins is a founder and managing member of Silver Lake
Partners, a private equity firm founded in January 1999. From 1994 to 1999, Mr.
Hutchins was a Senior Managing Director of The Blackstone Group L.P., where he
focused on its private equity investing. Mr. Hutchins is a member of the boards
of directors of Gartner Group, Inc., Datek Online Holdings, Island ECN and
CARE, Inc.
Mr. Marquardt became a member of our board of directors on the closing of
the transactions. Mr. Marquardt was a co-founder of August Capital, a
California based venture capital firm, in 1995. Prior to August Capital, Mr.
Marquardt was a partner of Technology Venture Investors, a venture capital firm
which he co-founded in 1980. Mr. Marquardt is a member of the boards of
directors of Microsoft Corporation, Netopia, Inc., Tumbleweed Communications
Corp. and a number of private companies.
Mr. Thompson became a member of our board of directors on the closing of
the transactions. Mr. Thompson is Chairman of the Board of Directors, President
and Chief Executive Officer of Symantec Corporation, an Internet security
technology provider. Before joining Symantac in April 1999, Mr. Thompson held
various executive and management positions with International Business Machines
Corporation, an information technology provider, since 1971. Mr. Thompson is a
member of the boards of directors of NiSource, Inc., Parago, Inc. and United
Parcel Service Inc.
Our rigid disc drive business is also managed, in addition to the
executive officers listed above, by the following officers:
o Brian S. Dexheimer, Executive Vice President, Worldwide Sales,
Marketing, Product Line Management and Customer Service Operations;
o Townsend H. Porter, Jr., Executive Vice President, Product Technology
Development and Chief Technology Officer; and
o David Wickersham, Executive Vice President, Global Disc Drive
Operations.
Officers are elected annually by the board of directors and serve at the
discretion of the board of directors. Except as described under "Certain
Relationships and Related Transactions -- Shareholders Agreement," there are no
arrangements or understandings between any member of our board of directors or
executive officer or any other person under which that person was elected or
appointed to his position.
BOARD OF DIRECTORS COMPENSATION
All members of our board of directors will be reimbursed for their
reasonable out-of-pocket expenses incurred in attending meetings of the board
of directors and its committees but will receive no other compensation or fees
for their service. These provisions are subject to change by our board of
directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors, and each of the boards of directors of Seagate
Technology Holdings and Seagate Removable Storage Solutions Holdings, has a
compensation committee, an audit committee and an executive committee. The
composition, function and duties for these committees are as follows:
COMPENSATION COMMITTEE
The compensation committee for each of these three companies is to consist
of at least three members of the board of directors, of which one is a
non-management member designated by Silver Lake Partners and one is a
non-management member designated by Texas Pacific Group. The chief executive
officer of the company is to participate in the committee as an ex officio
member. The compensation committee is responsible for:
141
o reviewing the company's policies and procedures on attracting,
retaining, developing and motivating personnel for senior management
positions;
o developing, approving and recommending to the board of directors the
compensation plans for the company's directors, chief executive officer
and senior management members; and
o approving and authorizing awards under the company's long-term incentive
plans.
AUDIT COMMITTEE
The audit committee of each of these three companies is to consist of at
least three non-management members of the board of directors, of which one is
designated by Silver Lake Partners and one is designated by Texas Pacific
Group. According to the audit committee charter, all members of the audit
committees are to be financially literate and independent of the management of
the company. Furthermore, they are to be appointed and removed by the
non-management members of the board of directors. An audit committee member is
considered to be independent if the member does not have a relationship that
may interfere with exercising his or her independence from the management of
the company. The audit committee is responsible for:
o reviewing the company's financial statements with the management and the
independent auditors;
o selecting and confirming the independence of the company's independent
auditors;
o meeting with the independent auditors to review the auditors' audit
results, reports and recommendations;
o monitoring the company's policies and procedures for the review of
expenses and perquisites of selected members of senior management;
o performing reviews, investigations or oversight responsibilities
required by the board of directors, such as investment policies, and
budgetary measures;
o addressing conflicts of interest and unethical, questionable or illegal
activities by the company's employees; and
o periodically reviewing legal matters with the company's general counsel.
EXECUTIVE COMMITTEE
The executive committee of each of these three companies is to consist of
at least four members of the board of directors, of which one is to be a
non-management member designated by Silver Lake Partners and one is to be a
non-management member designated by Texas Pacific Group. The chief executive
officer of the company will serve as the chairman of the committee until a new
chairman is selected. The compensation committee is responsible for:
o reviewing and managing the company's business and affairs, including the
issuance of the company's capital stock, provided that the committee may
not authorize transactions that are not in the company's ordinary course
of business and involve consideration of more than $25 million;
o reviewing and monitoring the company's corporate governance issues; and
o reviewing the company's strategic planning process, proposed
acquisitions, investments, organization and management succession.
142
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
We list in the following table information regarding the compensation of
our Chief Executive Officer and President, the former Chief Executive Officer
of Seagate Technology and the four most highly compensated executive officers
of New SAC and its subsidiaries, to whom we refer, together with the current
and former chief executive officers, as the named officers, whose compensation
each exceeded $100,000 in the fiscal year ended June 30, 2000. This table does
not include any options or restricted shares granted after the end of fiscal
year 2000 including those granted in connection with and following the
transactions that closed on November 22, 2000.
ANNUAL COMPENSATION
--------------------------------------------------------------
OTHER
FISCAL ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------- -------- ----------- --------------------- -------------------
Stephen J. Luczo (2) ................ 2000 $907,814 $ 1,100,000 (6) $ 20,584
Chief Executive Officer and 1999 $834,434 $ 850,000 (7) $ 247,344(8)
President of Seagate 1998 $618,272 -- $ 19,804
Technology and Chairman
of the Board of Directors of
Crystal Decisions
Alan F. Shugart (3) ................. 2000 $750,000 -- $ 387,000(9)
Former Chairman of the 1999 $750,000 -- $ 597,275(9)
Board of Directors and 1998 $750,000 -- $ 13,919
Former Chief Executive
Officer of Seagate
Technology
William D. Watkins (4) .............. 2000 $676,938 $ 850,000 (6) $ 15,085
President and Chief 1999 $605,787 $ 575,000 (7) $ 61,505
Operating Officer 1998 $500,011 -- $ 13,922
Bernardo A. Carballo (5) ............ 2000 $575,016 $ 400,000 (6) $ 23,272
Former Executive Vice President,
Worldwide Sales, 1999 $560,592 $ 295,000 (7) $ 259,665(10)
Marketing, Product Line 1998 $500,011 -- $ 67,735
Management and Customer
Service Operations
Donald L. Waite ..................... 2000 $500,011 $ 400,000 (6) $ 9,090
Executive Vice President and 1999 $500,011 $ 300,000 (7) $ 233,001(11)
Chief Administrative Officer 1998 $500,011 $ $ 12,121
Townsend H. Porter, Jr. ............. 2000 $500,011 $ 350,000 (6) $ 35,204(12)
Executive Vice President, 1999 $415,390 $ 250,000 (7) --
Product, Technology 1998 $396,138 -- --
Development and Chief
Technical Officer
LONG-TERM COMPENSATION AWARDS
--------------------------------------------------------
SECURITIES UNDERLYING
OPTIONS GRANTED
(#) (1)
----------------------------------
RESTRICTED SEAGATE
STOCK SEAGATE SOFTWARE CRYSTAL
NAME AND PRINCIPAL POSITION AWARDS TECHNOLOGY HOLDINGS DECISIONS
- ------------------------------------- --------------------- ------------ ---------- ----------
Stephen J. Luczo (2) ................ -- -- 275,000
Chief Executive Officer and -- 1,100,000 --
President of Seagate $ 2,974,150(13) 450,000 150,000 --
Technology and Chairman
of the Board of Directors of
Crystal Decisions
Alan F. Shugart (3) ................. -- -- -- --
Former Chairman of the -- -- -- --
Board of Directors and -- 290,000 70,000 --
Former Chief Executive
Officer of Seagate
Technology
William D. Watkins (4) .............. -- -- -- --
President and Chief $ 1,079,600(14) 480,000 -- --
Operating Officer -- 225,000 -- --
Bernardo A. Carballo (5) ............ -- -- -- --
Former Executive Vice President,
Worldwide Sales, -- 260,000 -- --
Marketing, Product Line -- 140,000 -- --
Management and Customer
Service Operations
Donald L. Waite ..................... -- -- 50,000
Executive Vice President and -- 260,000 -- --
Chief Administrative Officer -- 120,000 -- --
Townsend H. Porter, Jr. ............. -- -- -- --
Executive Vice President, -- 260,000 -- --
Product, Technology -- 195,000 -- --
Development and Chief
Technical Officer
- ----------
(1) The stock options listed in the table above include (a) options to
purchase Seagate Technology common stock, a portion of which was exchanged
by Messrs. Luczo, Watkins, Waite and Porter under the rollover agreement
relating to the management rollover and a portion of which were exchanged
for cash and VERITAS common stock in connection with the merger, and (b)
options to purchase Seagate Software Holdings and Crystal Decisions common
stock. The options to purchase Crystal Decisions common stock and shares
of Crystal Decisions common stock that have been granted prior to the
closing of the transactions remained outstanding following the closing of
the transactions. For more information, see "-- Employment and Other
Agreements -- Option Plans -- 1999 Stock Option Plan and 2000 Stock Option
Plan of Crystal Decisions." For more information regarding the rollover
agreement, see "The Transactions -- Overview -- Management Group."
(2) Mr. Luczo was President of Seagate Technology until May 2000.
(footnotes continue on next page)
143
(3) In connection with Mr. Shugart's departure as our Chief Executive Officer
on July 19, 1998, we entered into a separation agreement and release with
Mr. Shugart, under which he agreed to provide us with consulting services
during the three-year period ending July 19, 2001. In consideration for
these services, we agreed to pay Mr. Shugart $750,000 per year during the
same three-year period.
(4) Mr. Watkins became President of Seagate Technology in May 2000.
(5) Mr. Carballo resigned as Executive Vice President effective July 31, 2000.
(6) These payments under Seagate Technology's performance-based executive
compensation plan were earned in fiscal year 2000 and paid in fiscal year
2001.
(7) These payments under Seagate Technology's performance-based executive
compensation plan were earned in fiscal year 1999 and paid in fiscal year
2000.
(8) Includes deferred payments of $216,672 under Seagate Technology's
performance-based executive compensation plan earned in fiscal year 1999.
(9) Represents deferred payments under Seagate Technology's performance-based
executive compensation plan earned in fiscal year 1999 and paid in fiscal
year 2000.
(10) Includes deferred payments of $245,650 under Seagate Technology's
performance-based executive compensation plan earned in fiscal year 1999.
(11) Includes deferred payments of $214,075 under Seagate Technology's
performance-based executive compensation plan earned in fiscal year 1999.
(12) Includes a travel allowance of $22,391 and car allowance/benefit of
$12,813.
(13) Under Seagate Technology's executive stock plan, in September 1997,
Seagate Technology granted rights to purchase 85,000 shares of Seagate
Technology common stock at an exercise price of $0.01 per share to Mr.
Luczo. Mr. Luczo exercised these rights in November 1997. The amount
shown in the table represents the dollar value, net of the consideration
paid, of the award of restricted stock, calculated by multiplying the
closing market price of our common stock on the date of grant by the
number of shares awarded. As of September 29, 2000, Mr. Luczo held
238,000 unvested shares of Seagate Technology common stock having a value
of $16,422,000 based upon the fair market value of the common stock on
September 29, 2000 of $69.00 per share. These shares were either vested
on the closing of the transactions contemplated by the merger agreement
and exchanged for the related merger consideration or were rolled into
the deferred compensation account that was established for Mr. Luczo.
(14) Under Seagate Technology's executive stock plan, Seagate Technology
granted rights to purchase 40,000 shares of its common stock at an
exercise price of $0.01 per share to Mr. Watkins in August 1998. Mr.
Watkins exercised these rights in November 1998. The amount shown in the
table represents the dollar value, net of the consideration paid, of the
award of restricted stock, calculated by multiplying the closing market
price of Seagate Technology's common stock on the date of grant by the
number of shares awarded. As of September 29, 2000, Mr. Watkins held
183,724 unvested shares of stock having a value of $12,676,956 based upon
the fair market value of the common stock on September 29, 2000 of $69.00
per share. These shares were either vested on the closing of the
transactions contemplated by the merger agreement and exchanged for the
related merger consideration or were rolled into the deferred
compensation account that was established for Mr. Watkins.
144
OPTION GRANTS IN FISCAL YEAR 2000
No stock options to purchase Seagate Technology's common stock were
granted in fiscal year 2000. The following table provides information
concerning each grant of options to purchase Crystal Decisions' common stock
made during fiscal year 2000 to the named officers:
INDIVIDUAL GRANTS
-----------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM (1)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME (#) (2) FISCAL YEAR ($/SH) (3) DATE 5% 10%
- -------------------------- ------------ -------------- ------------ ------------ ----------- -------------
Stephen J. Luczo ......... 100,000 1.0524 $ 4.00 11/18/2009 $251,558 $ 637,497
175,000 1.8417 $ 4.00 11/18/2009 $440,226 $1,115,620
Donald L. Waite .......... 50,000 .5262 $ 4.00 11/18/2009 $125,779 $ 318,748
(1) Potential realizable value was based on the assumption that the common
stock of Crystal Decisions appreciates at the annual rate shown,
compounded annually, from the date of grant until the expiration of the
ten year option term, without giving effect to the transactions. These
amounts were calculated based on the requirements promulgated by the SEC
and do not reflect the estimate of future price growth.
(2) Represents options to purchase shares of Crystal Decisions common stock
granted in fiscal year 2000. Options representing 25% of the shares
issuable upon the exercise of all options granted on any date in fiscal
year 2000 vest on the first anniversary of the date of grant. Options to
purchase the remaining 75% of shares vest over the next three years
according to a monthly schedule providing for the vesting of options.
(3) There is no public trading market for shares of Crystal Decisions common
stock. On each date of grant, the board of directors of Crystal Decisions
determined the fair market value of a share of Crystal Decisions common
stock to be no greater than $4 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
We list in the table below information regarding the exercise of options
to purchase Seagate Technology common stock and options to purchase Crystal
Decisions common stock in fiscal year 2000 by the named officers listed in the
table above, under "-- Compensation of Executive Officers -- Summary
Compensation Table," and the value of options held by these individuals at the
end of the fiscal year ended June 30, 2000.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 2000 JUNE 30, 2000 (2)
------------------------------- ------------------------------
SHARES
ACQUIRED ON VALUE
EXERCISE (#) REALIZED (1)
SEAGATE SEAGATE EXERCISABLE/ EXERCISABLE/ EXERCISABLE/ EXERCISABLE/
TECHNOLOGY/ TECHNOLOGY/ UNEXERCISABLE UNEXERCISABLE UNEXERCISABLE UNEXERCISABLE
CRYSTAL CRYSTAL SEAGATE CRYSTAL SEAGATE CRYSTAL
NAME DECISIONS DECISIONS TECHNOLOGY DECISIONS TECHNOLOGY DECISIONS
- -------------------------------- -------------- ------------- --------------- --------------- --------------- --------------
Stephen J. Luczo ............... 0/ $ 0/ 672,500/ 0/ $20,226,406/ $0/
145,211 $12,538,278 1,125,000 275,000 $ 35,163,281 $ 0
Alan F. Shugart ................ 375,000/ $6,666,250/ 95,000/ 0/ $ 3,076,250/ $0/
0 $ 0 95,000 0 $ 1,955,625 $ 0
William D. Watkins ............. 0/ $ 0/ 436,884/ 0/ $11,898,029/ $0/
5,000 $ 454,079 480,000 0 $ 15,107,344 $ 0
Bernardo A. Carballo ........... 30,000/ $ 555,938/ 489,500/ 0/ $18,216,781/ $0/
5,000 $ 454,079 300,000 0 $ 9,716,719 $ 0
Donald L. Waite ................ 0/ $ 0/ 290,000/ 0/ $ 7,769,219/ $0/
0 $ 0 300,000 50,000 $ 9,716,719 $ 0
Townsend H. Porter Jr. ......... 0/ $ 0/ 220,000/ 0/ $ 5,491,563/ $0/
12,250 $ 1,080,494 320,000 0 $ 10,312,500 $ 0
145
- ----------
(1) Market value of Seagate Technology common stock or Crystal Decisions's
common stock, as the case may be, on the exercise date minus the exercise
price.
(2) Market value of Seagate Technology common stock or Crystal Decisions's
common stock, as the case may be, at June 30, 2000, which in the case of
Seagate Technology was $55.00, minus the exercise price. No public market
exists for the common stock of Crystal Decisions. The fair market value
of Crystal Decisions common stock on June 30, 2000 as determined by the
Crystal Decisions board of directors, was $4.00 per share.
EMPLOYMENT AND OTHER AGREEMENTS
EMPLOYMENT AGREEMENTS
In connection with the transactions, we and each of Messrs. Luczo,
Watkins, Pope, Porter, Waite and other senior executives of Seagate Technology
entered into an employment agreement on February 2, 2001. Each of the
employment agreements has a three-year term, subject to automatic, successive
one year renewals after that first term.
We and each of these officers have agreed that, under the employment
agreements, the officers have the respective titles and positions as follows:
o Mr. Luczo serves as (1) Chief Executive Officer of New SAC, Seagate
Technology Holdings and Seagate Removable Storage Solutions Holdings and
(2) Chief Executive Officer, President and Chief Operating Officer of
Seagate Software (Cayman) Holdings;
o Mr. Pope serves as Executive Vice President of Finance and Chief
Financial Officer of New SAC, Seagate Technology Holdings, Seagate
Removable Storage Solutions Holdings and Seagate Software (Cayman)
Holdings;
o Mr. Watkins serves as President and Chief Operating Officer of New SAC
and Seagate Technology Holdings;
o Mr. Porter serves as Executive Vice President of Product Technology
Development and Chief Technical Officer of Seagate Technology LLC; and
o Mr. Waite serves as (1) Executive Vice President and Chief Technology
Officer of New SAC, Seagate Technology Holdings and Seagate Software
(Cayman) Holdings and (2) President and Chief Operating Officer of Seagate
Removable Storage Solutions Holdings.
We list below a chart showing these executives' initial base salaries and
maximum possible bonuses if specified target performance goals are met under
these employment agreements.
EXECUTIVE BASE SALARY TARGET BONUS
- -------------------------------- ------------- --------------------
Stephen J. Luczo ............ $1,000,000 125% of Base Salary
William D. Watkins .......... $ 850,000 125% of Base Salary
Charles C. Pope ............. $ 550,000 100% of Base Salary
Townsend H. Porter .......... $ 500,000 100% of Base Salary
Donald L. Waite ............. $ 500,000 100% of Base Salary
An executive may elect to defer the payment of all or a portion of his
bonus. The executives also will be entitled to participate in employee benefits
programs comparable, in the aggregate, to those employee benefit programs made
available to senior executives of Seagate Technology immediately prior to the
closing of the transactions. These programs will include health, life and
disability insurance and retirement and fringe benefits.
Under the employment agreements, in the event an executive's employment is
terminated by us without cause or by the executive with good reason, as each
term is defined in the employment agreements, the executive will receive,
subject to compliance with the restrictive covenants described below, the
following:
146
o continued payment of base salary and target bonus and
o continued participation in their employer's health, dental and life
insurance programs,
for one to two years and, in the case of Mr. Luczo, two to three years
following the termination of employment, depending on when the termination
occurs.
In addition, under the management retention agreements, which are
summarized below, if the executive's employment is terminated by their employer
without cause or by the executive with good reason within two years following
the closing of the transactions, the executive will be entitled to the
additional severance benefits under these management retention agreements.
Under the employment agreements, the executives will be subject to
customary confidentiality and nondisclosure covenants and noncompete and
nonsolicitation covenants during the term of employment and for the period in
which the executive would receive severance in the event that the executive's
employment is terminated.
MANAGEMENT RETENTION AGREEMENTS
Between November 2, 1998 and December 1, 1999, Seagate Technology entered
into management retention agreements with Messrs. Luczo, Watkins, Pope, Porter,
Waite and a number of other key executive officers. The management retention
agreements provide that Seagate Technology may terminate the executive's
employment at any time with or without cause. The management retention
agreements also provide that, if within 24 months following a change of
control, as defined in the management retention agreements, an executive's
employment is:
o involuntarily terminated by Seagate Technology other than for cause, as
defined in the management retention agreements;
o voluntarily terminated by the employee for good reason, as defined in
the management retention agreements;
o terminated due to the executive's disability or death, as defined in the
management retention agreements,
then the executive would be entitled to receive the following severance
benefits:
o a cash payment equal to between 150% and 300% of the executive's annual
compensation, with annual compensation defined to be the sum of the
executive's annual salary at the highest rate in effect during the
immediately preceding 12 months and the highest annual bonus awarded
during the past three fiscal years;
o acceleration of vesting of the unvested portion of the executive's
outstanding stock options;
o acceleration of vesting of a percentage of the executive's restricted
Seagate Technology common stock, which is determined by dividing the
number of months that have elapsed from the restricted stock grant date to
the date of employment termination by the number of months between the
grant date and the date when all restricted shares would otherwise have
vested based on the executive's continued employment with Seagate
Technology;
o continued coverage in Seagate Technology's health, dental and life
insurance coverage at Seagate Technology's expense for the executive, and
the executive's dependents if the dependents were covered immediately
prior to the executive's termination, until either three years, in the
case of Messrs. Luczo and Watkins, or two years, in the case of other
executives, from the date of termination or the date that the executive
and his dependents became covered under another employer's group health,
dental or life insurance plans that provide comparable coverage and
benefits;
o a bonus payment equal to a pro rata share, based on the number of days
elapsed during the fiscal year in which termination occurs, of the
executive's targeted bonus under Seagate Technology's executive bonus plan
for the fiscal year in which termination occurs; and
147
o at the executive's option, the executive may purchase the automobile
owned by Seagate Technology in his possession at the vehicle's wholesale
Kelly Blue Book value.
The management retention agreements also provide that if, on the effective
date of a change of control, a successor to Seagate Technology fails to assume
any stock option or restricted stock held by the executive, all of the unvested
portion of any stock option issued by Seagate Technology or an affiliate to the
executive will automatically become fully vested and all of the executive's
unvested restricted shares will vest pro rata as of the change of control.
In addition, some management retention agreements require Seagate
Technology to pay the excise tax, as well as the federal, state and excise tax
on Seagate Technology's payment for the excise tax, on any benefit received
under the management retention agreements if that benefit were to qualify as a
"parachute payment" within the meaning of section 280G and would be subject to
the excise tax imposed by Section 4999, in each case, of the Internal Revenue
Code of 1986.
In consideration of the payments to be made by Seagate Technology under
the management retention agreements, each executive agreed to customary
non-compete and non-solicitation agreements.
At the closing of the transactions, we assumed all obligations and
liabilities under the management retention agreements. In consideration of
these assumptions, Messrs. Luczo, Watkins, Pope, Porter, Waite and several
other executives of Seagate Technology agreed to the following modifications of
their management retention agreements:
o the closing of the transactions will be deemed to be a change of
control, as defined in these agreements, for purposes of the management
retention agreements, provided, that no further transactions will
constitute a change of control;
o the transactions will not constitute a termination of employment for
purposes of the management retention agreements;
o modification of the definition of good reason; and
o the provisions relating to the accelerated vesting of restricted shares
of New SAC and options to purchase these shares will apply only to
restricted shares of New SAC and options to purchase these shares granted
to Messrs. Luczo, Watkins, Pope, Porter and Waite in substitution for
restricted shares of Seagate Technology and unvested stock options to
acquire Seagate Technology common stock in connection with the management
rollover, as described below.
ROLLOVER AGREEMENTS AND DEFERRED COMPENSATION PLANS
By the closing of the transactions, we and each of the members of the
management group entered into a rollover agreement. Under these rollover
agreements, members of the management group with titles of senior vice
president or higher agreed to defer, or roll, at least 50%, and other members
of the management group agreed to defer, or roll, at least 25%, of their shares
of Seagate Technology common stock and options to purchase these shares into
(1) deferred compensation that was credited to deferred compensation accounts
established and maintained by either Seagate Technology HDD Holdings or Seagate
Technology SAN Holdings and (2) our ordinary and preferred shares.
The value of the rolled securities was approximately $184 million. The
rolled securities were exchanged on the closing of the transactions for
deferred compensation, representing approximately 97.4% of the value of the
rolled securities, our preferred shares, representing approximately 2.6% of the
value of the rolled securities, and our ordinary shares, representing the
portion of the total ordinary shares that will be outstanding equal to the
value of the rolled securities divided by the sum of the cash contributions by
the sponsor group plus the value of the rolled securities. In addition, members
of the management group contributed approximately $41 million in cash in
exchange for our ordinary and preferred shares.
148
The companies establishing the deferred compensation accounts established
and maintain them as separate book entry accounts. The value of each deferred
compensation account may decrease if the fair market value of our ordinary and
preferred shares decreases.
The deferred compensation accounts will vest as follows:
o According to each plan's vesting schedule:
-- one-third of the account will vest on the first anniversary of the
closing of the transactions;
-- one-third will vest proportionately each month over the next 18 months;
and
-- the final one-third will vest on the date that is 30 months after that
first anniversary of the closing of the transactions.
o The companies establishing the deferred compensation plans may
accelerate the vesting of all or a portion of a deferred compensation
account at any time.
o The unvested portion of a deferred compensation account will vest on the
participant's termination of employment. But, if the employment is
terminated for cause or the participant resigns without good reason, as
these terms are defined in the deferred compensation plans, then any
unvested portion will be forfeited.
If a change of control of the subsidiary sponsoring a deferred
compensation plan occurs, and the successor (which, in the case of a sale or
disposition of assets, means the acquiror of the assets) assumes the
obligations under the deferred compensation plan, then:
o the deferred compensation account of each participant will be
recalculated to equal the lesser of (A) the deferral amount less the
distribution made to the participant and (B) the fair market value of Suez
Acquisition Company immediately prior to the change of control multiplied
by the deferral percentage;
o the deferred compensation account of each participant will be paid if
and when such account vests in accordance with the vesting provision of
the deferred compensation plan; and
o the payment of each deferred compensation account will be made in
cash.
In the event a change of control occurs whereby (A) a sale or distribution
of all of the assets of the subsidiary to any person or entity (other than us
or any of our subsidiaries or any plan or trust established by any of the
foregoing) occurs or (B) a person or group (other than us or any of our
subsidiaries or any plan or trust established by any of the foregoing) becomes
the beneficial owner of 100% of the capital stock of the subsidiary sponsoring
the plan, the payments under the deferred compensation plan will only be
subject to the subordination provisions of the deferred compensation plan to
the extent the plan sponsor is subject to the prior obligations.
In the event of a sale of substantially all of our assets or a liquidation
of us, all outstanding account balances will become fully vested, and following
the distributions to the sponsor group and a payment to the participant
pursuant to these distributions as provided in the deferred compensation plan,
the plan will terminate and all remaining balances in each participant's
deferred compensation account will be forfeited without consideration.
The subsidiaries sponsoring the deferred compensation plans will make
distributions to the participants, when vested, only when the sponsor group
receives distributions or returns on their initial cash contributions to us in
proportion to these distributions. These companies may make the distributions,
at their option, in cash or the same securities or other property distributed
to the sponsor group, with a fair market value equal to the amount of the
account distributed. Until a change of control of the company sponsoring the
plan, if any of these companies has insufficient assets to make the
distributions, it may demand that we loan or contribute all or a portion of the
amount needed to it, limited by its net worth. If a change of control occurs,
then the participants will be entitled to either a payment in cash or
securities, subject to restrictions in agreements governing the financing of us
or the subsidiary in question.
Regardless of the above provisions, our and our subsidiaries' obligations
under the deferred compensation plans to make any distribution or other payment
to the participants are expressly subordinated in right of payment to the prior
payment in full in cash of (1) all obligations under the
149
senior credit facilities, whether as primary obligor or as a guarantor, and (2)
all obligations under the notes and the indenture, whether as primary obligor
or as a guarantor. Until the payment in full of the amounts listed in clauses
(1) and (2) above and the termination of the commitments under the senior
credit facilities, we and our subsidiaries may not make any payments under
these deferred compensation plans unless permitted by the terms of the senior
credit facilities and the indenture.
NEW SAC 2000 RESTRICTED SHARE PLAN
At the closing of the transactions, our board of directors adopted our
2000 restricted share plan. The plan provides for the grant of restricted
ordinary and preferred shares as incentive compensation. We will not make
grants under the plan after the tenth anniversary of the effective date of the
plan, which may be adjusted for customary anti-dilutive effects. Grant
recipients under the plan will be required to become a party to the management
shareholders' agreement and will be subject to other customary terms specified
in the plan. The compensation committee of our board of directors will
administer the plan. During the period determined by the compensation committee
up to ten years from the date of a grant, participants will not be permitted to
sell, transfer or otherwise dispose of restricted shares awarded under the
plan, except as modified by the compensation committee in the event of a change
in control. Plan participants will have, regarding the shares granted under the
plan, all of the rights of a shareholder, including the right to vote the
shares and receive dividends and other distributions including during the
restricted period referred to above. If a participant's employment terminates
for any reason during that restricted period, the participant will be required
to forfeit the restricted shares subject to modification by the compensation
committee.
As of the closing of the transactions, under the rollover agreements, we
granted Messrs. Luczo, Watkins, Pope, Porter, Waite and some of our other
officers and senior employees, our ordinary shares. According to the restricted
stock agreements, these shares will vest as follows:
o one-third of the shares will vest on the first anniversary of the
closing of the transactions;
o one-third will vest proportionately each month over the next 18 months;
and
o the final one-third will vest on the date which is 30 months after the
closing of the transactions.
NEW SAC 2001 RESTRICTED SHARE PLAN
On February 2, 2001, our board of directors approved the 2001 restricted
share plan. Unlike the 2000 restricted share plan, the 2001 restricted share
plan only provides for the grant of restricted ordinary shares and does not
provide for the grant of restricted preferred shares. Moreover, according to
the restricted share agreements that accompany the 2001 restricted share plan,
shares granted under the plan will become transferable according to the
following vesting schedule:
o 1/4 of the shares will vest on the first anniversary of the date of
grant; and
o 1/48 of the shares will vest each month after the first anniversary of
the date of grant.
Generally, if a senior manager who is participating in the plan terminates
his employment during the restricted period, the senior manager will forfeit
his unvested shares. That participant, however, would not forfeit his unvested
shares if:
o he terminates his employment for good reason;
o he is terminated without cause; or
o his employment is terminated because we sell or dispose of the entity
that employs him.
Under any of these three circumstances, the senior manager's unvested
shares will vest and will become free of transfer restrictions. The restricted
share agreement for senior managers describes what the terms "good reason" and
"cause" mean when these terms are used in the agreement.
With regard to other employees participating in the plan, if the employee
participant terminates his employment during the restricted period, he will
forfeit his unvested shares. The employee
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participant, however, will not forfeit his unvested shares if he is terminated
without cause within two years following a change in control; instead, his
unvested shares will vest and will become free of transfer restrictions. The
restricted share agreement for the employee participants describes what the
term "cause" means, and the restricted share plan describes what the term
"change in control" means as those terms are applied to the employee
participants.
Other than as discussed above, the provisions of the 2001 restricted share
plan are identical to those of the 2000 restricted share plan.
DIRECTOR AND OFFICER INDEMNIFICATION AND INSURANCE
Under the stock purchase agreement, we agreed to the following:
o to fulfill the indemnification obligations of Seagate Technology and all
of its subsidiaries acquired by us to their respective directors and
officers under Seagate Technology's charter documents and any
indemnification agreements between Seagate Technology or any of these
subsidiaries and their respective directors and officers;
o to include exculpation and indemnification clauses in its charter
documents that are at least as favorable to the covered persons as the
indemnification and exculpation clauses in Seagate Technology's
certificate of incorporation and bylaws in effect on the date of the stock
purchase agreement; and
o to use our best efforts to maintain the directors' and officers'
liability insurance policies currently maintained by Seagate Technology
for six years following the closing of the stock purchase, provided that
we will not be required to spend more than 150% of the annual premium
currently paid for the policy to maintain it during that six year period.
Under the merger agreement, VERITAS agreed to the following:
o to fulfill and honor in all respects the obligations of Seagate
Technology under any indemnification agreements between Seagate Technology
and any of it directors and officers in effect prior to the date of the
merger agreement, but only to the extent that the obligations under the
indemnification agreements relate to approval and adoption of the merger;
o for a period of six years after the merger, VERITAS will cause Seagate
Technology to maintain the indemnification obligations, and the
exculpation, expense advancement and elimination of liability provisions,
contained in Seagate Technology's certificate of incorporation and bylaws
immediately prior to the merger to the extent that the provisions apply to
the adoption and approval of the merger;
o for six years after the merger, VERITAS will not permit Seagate
Technology to amend, repeal or otherwise modify these provisions in a
manner that adversely affects the rights of any directors, officers,
employees or agents of Seagate Technology, except as otherwise required by
applicable law; and
o VERITAS will use its commercially reasonable efforts to maintain in
effect, for a period of six years following the merger, a policy of
directors' and officers' liability insurance for the benefit of the
directors and officers of Seagate Technology who are currently covered
under Seagate Technology's directors' and officers' liability insurance on
terms that are comparable to those of Seagate Technology's current
directors' and officers' insurance coverage.
OPTION PLANS
1999 Stock Option Plan and 2000 Stock Option Plan of Crystal Decisions
Following the closing of the transactions, the Crystal Decisions 1999
stock option plan and 2000 stock option plan continued and options granted
under them and shares that were issued following the exercise of options
granted under them remained outstanding.
151
Each of the plans provides for grants of incentive stock options to
employees, including officers and employee directors, and nonstatutory stock
options to employees and consultants, including nonemployee directors of
Crystal Decisions and its parent and subsidiary companies.
The term of the options granted under these plans is listed in the
individual option agreements that Crystal Decisions enters into with the
recipient of the grant. Under each of the plans, the term of an incentive stock
option may not exceed ten years and, in the case of an incentive stock option
granted to an optionee who owns more than 10% of the voting power of all
classes of stock of Crystal Decisions at the time of grant, the term of an
option may not exceed five years. The plans have these additional provisions
regarding the terms of the grants:
o Under the 1999 plan, options granted under the 1999 plan are granted at
fair market value and vest over 48 months, with one-fourth vesting upon
completion of one year from the date of the initial grant and the
remaining options vesting at the rate of 1/48th per month after that.
o Under the 2000 plan, options granted under the 2000 plan are granted at
fair market value and become fully vested and exercisable immediately
prior to a merger or asset sale, excluding the transactions, or on the
date upon which an initial public offering is declared effective by the
SEC.
In addition, in the event of a merger or the sale of substantially all of
Crystal Decisions' assets, any option that is not assumed or substituted for by
a successor entity will fully vest, and then, if not exercised during the
specified notice period, will terminate upon the expiration of such period.
The compensation committee of the board of directors of Crystal Decisions
administers the plans and determines the optionees and the terms of options
granted, including the exercise price, number of shares subject to the option
and the exercisability of the option.
The 1999 plan will terminate in November 2009, unless the board of
directors of Crystal Decisions terminates it sooner. The maximum number of
shares that may be issued subject to grants of options under this plan is 22.5
million shares. As of June 30, 2000, Crystal Decisions had issued 1,050 shares
of common stock upon the exercise of options granted under the 1999 plan and
had 8,626,879 options to purchase shares of Crystal Decisions common stock
outstanding.
The 2000 Plan will terminate in June 2010, unless the board of directors
of Crystal Decisions terminates it sooner. The maximum number of shares that
may be issued subject to grants of options under this plan is 200,000 shares.
As of June 30, 2000, Crystal Decisions had granted 161,450 options to purchase
shares of Crystal Decisions common stock. However, no shares had been issued
upon the exercise of options under the 2000 plan. Crystal Decisions has adopted
versions of the 1999 plan for its U.K. and Canadian participants. The U.K.
version differs from the 1999 plan in that it covers a more limited group of
eligible optionees and in some other respects.
We own all of the outstanding share capital of Seagate Software (Cayman)
Holdings, which owns approximately 99.6% of the outstanding share capital of
Crystal Decisions.
Other Stock Option Plans
On February 2, 2001, the boards of directors of Seagate Technology
Holdings and Seagate Removable Storage Solutions Holdings adopted stock option
plans for the grant of options to purchase their ordinary shares.
These plans provide for grants of non-qualified and incentive stock
options to key employees, directors and consultants of these subsidiaries and
their affiliates. These plans are administered by the board of directors of
each subsidiary or any committee or sub-committee designated to administer it.
The boards or committees that administer the plans will determine the
participants and the terms of options granted, including the exercise price,
number of shares subject to the option and the exercisability of them. Options
granted under these plans will be subject to the management shareholders
agreement, which is summarized under "Certain Relationships and Related
Transactions -- Management Shareholders Agreement."
152
The boards or committees that administer the plans determine the price of
the options granted under the plans at the time of grant. The board or
committees also establish the vesting schedules for the options, provided that
the boards or committees may not set a vesting schedule that is more
restrictive than 20% per year.
If a transaction occurs that would have a dilutive effect on the value of
the options granted under the plans, the boards or committees that will
administer the plans will have, in their sole discretion, the right to make a
substitution or adjustment, as they deem to be equitable, regarding the number
or kind of shares or other securities issued or reserved for issuance pursuant
to the plans or pursuant to outstanding options, the option price and/or any
other affected terms of the options.
In the event of a change in control, the boards or committees
administering the plans, may, in their sole discretion, take action, as they
deems necessary or desirable regarding any option, including the following:
o acceleration of the vesting of an option;
o the payment of a cash amount in exchange for the cancellation of an
option equal to the product of (a) the excess, if any, of the fair market
value per share at the time over the option price multiplied by (b) the
number of shares then subject to the option; and
o requiring the assumption of the outstanding options by the successor
activity or the issuance of substitute options or other equity based
awards that will substantially preserve the value, rights and benefits of
any affected options previously granted.
If the option is not assumed, substituted, cashed-out or otherwise continued
following the change in control, the plans provide that the option will become
immediately vested and exercisable immediately prior to the change in control.
The board of directors of Seagate Technology SAN Holdings is also expected
to adopt a stock option plan in fiscal 2001.
The indenture limits the maximum number of shares of common stock that may
be issued pursuant to exercises of options under the stock option plan of:
o Seagate Technology Holdings to 20% of its total outstanding shares of
common stock on a fully-diluted basis;
o Seagate Removable Storage Solutions Holdings to 25% of its total
outstanding shares of common stock on a fully-diluted basis; and
o Seagate Technology SAN Holdings to 20% of its total outstanding shares
of common stock on a fully-diluted basis.
153
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 29, 2000, New SAC indirectly owned all of the outstanding
share capital of the Issuer and all of the outstanding share capital of the
subsidiary guarantors, with the exception of less than 1% of the shares of
Crystal Decisions that are held by employees and were purchased under the 1999
and 2000 Crystal Decisions Stock Option Plans.
We provide below information concerning the beneficial ownership of the
outstanding ordinary and preferred shares of us by the following:
o each person known to us is the beneficial owner of 5% or more of our
outstanding ordinary or preferred shares;
o each of our executive officers and members of our board of directors who
owns our outstanding ordinary or preferred shares; and
o the officers and members of our board of directors as a group.
The number and percentage of our shares beneficially owned are reported on
the basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the regulations, a person is considered to be a
"beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of that security, or
"investment power," which includes the power to dispose of or to direct the
disposition of that security. A person is also considered to be a beneficial
owner of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Under these regulations, more than one person may be
considered a beneficial owner of the same securities and a person may be
considered to be a beneficial owner of securities as to which he has no
economic interest.
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER ORDINARY SHARES (a) ORDINARY SHARES PREFERRED SHARES (a) PREFERRED SHARES
- ------------------------------------------- --------------------- ----------------- ---------------------- -----------------
5% HOLDERS: (In millions) (In millions)
Affiliates of Silver Lake
Partners, L.P. (b) ....................... 3.82 34.7% 3.82 41.5%
c/o Silver Lake Partners, L.P.
2725 Sand Hill Road
Menlo Park, California 94025
2.52 22.9% 2.52 27.4%
TPG SAC Advisors Corp. ....................
c/o Texas Pacific Group
301 Commerce Street -- Suite 3300
Fort Worth, Texas 76102 ..................
1.3 11.8% 1.3 14.1%
August Capital III, L.P. ..................
2480 Sand Hill Road -- Suite 101
Menlo Park, California 94025
0.75 6.8% 0.75 8.1%
Chase Equity Associates, L.P. (c) .........
50 California Street -- Suite 2940
San Francisco, California 94111
Affiliates of The Goldman Sachs
0.25 2.3% 0.25 2.7%
Group, Inc. (d) ..........................
85 Broad Street
New York, New York 10004
EXECUTIVE OFFICERS AND MEMBERS OF THE
BOARD OF DIRECTORS:
Stephen J. Luczo (e) ...................... 0.41 3.8% * *
William D. Watkins (e) .................... 0.14 1.2% * *
Charles C. Pope (e) ....................... * * * *
Townsend H. Porter, Jr. (e) ............... * * * *
Donald L. Waite (e) ....................... * * * *
* Represents less than 1%.
(table continues and footnotes appear on next page)
154
NAME AND ADDRESS OF NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER ORDINARY SHARES (a) ORDINARY SHARES PREFERRED SHARES (b) PREFERRED SHARES
- ----------------------------------- --------------------- ----------------- ---------------------- -----------------
(IN MILLIONS) (IN MILLIONS)
William L. Hudson (e) ............. * * * *
David Bonderman (f) ............... -- -- -- --
James G. Coulter (f) .............. -- -- -- --
James A. Davidson (g) ............. -- -- -- --
Glenn H. Hutchins (g) ............. -- -- -- --
David F. Marquardt (h) ............ -- -- -- --
David J. Roux (g) ................. -- -- -- --
John W. Thompson (e) .............. * * * *
ALL OFFICERS AND MEMBERS OF THE
BOARD OF DIRECTORS AS A GROUP
(13 PERSONS): .................... 0.98 8.9% * *
- ----------
* Represents less than 1%
(a) Each member of the sponsor group and each member of the management
group owns ordinary shares, par value $0.0001 per share, with voting
rights and preferred shares, liquidation preference $0.0001 per
share, of us and some members of the sponsor group own ordinary
shares, par value $0.0001 per share, without voting rights. The
voting ordinary shares are the only class of our outstanding share
capital that have voting rights. Under our organizational documents,
the non-voting ordinary shares are convertible at any time, at the
option of their holders, into voting ordinary shares. In addition,
we have made and may in the future make grants of ordinary shares
under New SAC's 2001 restricted share plan. Moreover, each of
Seagate Technology Holdings, Seagate Technology SAN Holdings,
Seagate Removable Storage Solutions Holdings and Crystal Decisions
may in the future grant its employees options to purchase its
ordinary shares under new or existing share option plans. Crystal
Decisions currently has options outstanding under its 1999 and 2000
Stock Option Plans. For more information, see "Management --
Employment and Other Agreements -- New SAC 2001 Restricted Share
Plan" and "-- Option Plans."
(b) The affiliates of Silver Lake Partners, L.P. that own our ordinary
and preferred shares are Silver Lake Partners Caymans, L.P., Silver
Lake Investors Caymans, L.P. and Silver Lake Investors Technology
Caymans, L.P. In addition, the affiliates of Integral Capital
Partners own directly our ordinary and preferred shares and own
indirectly, through their investment in these investment funds of
Silver Lake Partners, L.P. our ordinary and preferred shares, which
together represent more than a 5% interest in our ordinary shares.
(c) Chase Capital Partners is the sole general partner of Chase Equity
Associates, L.P.
(d) The affiliates of The Goldman Sachs Group, Inc. that own our
ordinary and preferred shares are GS Capital Partners III, L.P., GS
Capital Partners III Offshore, L.P., Goldman Sachs & Co. Verwaltungs
GmbH, Stone Street Fund 2000, L.P. and Bridge Street Special
Opportunities Fund 2000, L.P., which we refer to collectively as the
Goldman funds. The Goldman Sachs Group, Inc. and Goldman, Sachs &
Co., Inc. may be deemed to own beneficially and indirectly the
ordinary and preferred shares that the Goldman funds will own.
Affiliates of The Goldman Sachs Group, Inc. and Goldman, Sachs &
Co., Inc. are the general partner, managing general partner or
investment manager of the Goldman funds and an investment committee
of Goldman, Sachs & Co., Inc. have voting and dispositive authority
over the ordinary and preferred shares to be owned by the Goldman
funds. The Goldman Sachs Group, Inc. and Goldman, Sachs & Co., Inc.
each disclaim beneficial ownership of these ordinary and preferred
shares that are owned by the Goldman funds to the extent
attributable to partnership interests in them held by persons other
than The Goldman Sachs Group, Inc. and its affiliates.
(e) The business address of each of these individuals is our address at
920 Disc Drive, Scotts Valley, California 95067-0360.
(footnotes continue on next page)
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(f) Messrs. Bonderman and Coulter are shareholders of TPG SAC Advisors
Corp., which is the sole general partner of TPG SAC GenPar, L.P.,
which is the sole general partner of SAC Investments, L.P., which
own our ordinary and preferred shares. Messrs. Bonderman and Coulter
are also shareholders of each of TPG Advisors III, Inc. and T3
Advisors, Inc., each of which control the investment funds which are
the limited partners of SAC Investments, L.P. In addition, David
Bonderman, James G. Coulter, Justin T. Chang, John W. Marren and
William S. Price are principals of Texas Pacific Group and are
shareholders of TPG SAC Advisors Corp. As a result of the above,
each of these individuals may be deemed to share beneficial
ownership of the shares owned by SAC Investments, L.P. Each of them
disclaims this beneficial ownership. The business address of each of
the individuals is c/o TPG SAC Advisors Corp at the address listed
in the table.
(g) Messrs. Davidson, Hutchins and Roux are (1) Managing Directors of
Silver Lake (Offshore) AIV GP Ltd., which is the sole general
partner of Silver Lake Technology Associates Caymans, L.P., which is
the sole general partner of each of Silver Lake Technology
Associates Caymans, L.P., Silver Lake Investors Caymans, L.P. and
Silver Lake Technology Investors Caymans, L.P., which we refer to as
the Silver Lake funds, which own our ordinary and preferred shares
and (2) limited partners of Silver Lake Technology Associates
Caymans, L.P. Messrs. Hutchins and Roux are also limited partners of
Silver Lake Technology Associates Caymans, L.P. In addition, each of
Messrs. Davidson, Hutchins and Roux are founders and partners of
Silver Lake Partners, L.P., an affiliate of each of the Silver Lake
funds. As a result of the above, Messrs Davidon, Hutchins and Roux
may be deemed to share beneficial ownership of the shares to be
owned by the Silver Lake funds. Each of them disclaims this
beneficial ownership. The business address of each of these
individuals is c/o Silver Lake Partners, L.P. at the address listed
in the table.
(h) Mr. Marquardt is an Investment Member of August Capital Management,
L.L.C., which is the sole general partner of August Capital III,
L.P. As a result, he may be deemed to share beneficial ownership of
August Capital III, L.P.'s ownership of our ordinary and preferred
shares. He disclaims this beneficial ownership. The business address
of Mr. Marquardt is c/o August Capital Management, L.L.C. at the
address listed in the table.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SHAREHOLDERS AGREEMENT
As of November 22, 2000, the date of the closing of the transactions, we
entered into a shareholders agreement with the sponsor group. The shareholders
agreement provides for our corporate governance following the closing of the
transactions, preemptive rights, transfer restrictions and registration rights
relating to our shares and related matters. We summarize the principal terms of
the shareholders agreement below.
CORPORATE GOVERNANCE
The board of directors consists of nine members. Under the shareholders
agreement, these members are designated as follows:
o Silver Lake Partners have the right to designate three members, who
initially are James A. Davidson, Glenn H. Hutchins and David J. Roux;
o Texas Pacific Group has the right to designate two members, who
initially are David Bonderman and James G. Coulter;
o an executive officer of New SAC reasonably acceptable to a majority of
the board of directors, who initially is William D. Watkins;
o one member is designated by, but cannot be a partner, controlling person
or employee of, Silver Lake Partners, subject to approval by Texas Pacific
Group and is reasonably acceptable to a majority of the board of
directors, who initially is John Thompson;
o one member is the chief executive officer of New SAC, who is Stephen J.
Luczo; and
o the final member, David F. Marquardt, was chosen by the above directors.
The shareholders agreement provides that the consent of seven members of
our board of directors is required to be able to take the following actions:
o voluntarily commence a bankruptcy proceeding;
o merge or consolidate with any other entity if either the book value of
the assets of that entity would exceed $100 million or the fair market
value of the consideration to be paid would exceed $100 million;
o sell or transfer, directly or indirectly, any assets, in one or a series
of related transactions, if either the book value of the assets would
exceed $100 million or the fair market value of the consideration to be
received would exceed $100 million;
o enter into any contract or become obligated to engage in any transaction
or series of related transactions with Silver Lake Partners, Texas Pacific
Group, August Capital or any of their affiliates involving more than $1
million in any calendar year, provided that any of these contracts or
transactions will be required to be on an arm's length basis regardless of
its size;
o authorize, issue or sell any share capital, options, warrants or rights
to acquire our share capital, other than issuances of share capital to
members of management and options to purchase share capital issued with
the approval of our board of directors;
o pay dividends on or redeem any shares of our share capital or any
warrants, options or rights to purchase these shares or other of our
equity securities, other than purchases from employees pursuant to
employee benefit plans or arrangements; and
o amend, modify or repeal any provisions of our memorandum and articles of
association.
The consent of eight members of the board of directors is also required to
increase or decrease the number of members of the board of directors. In
addition, the consent of seven members of the
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board of directors is required for the exercise of the drag-along rights
described below. Also, consent of at least five directors, with no management
directors participating, is required to terminate our chief executive officer
or appoint a replacement for that position.
PREEMPTIVE RIGHTS
The sponsor group members have preemptive rights allowing them to acquire
for cash, in proportion to their respective shareholdings, additional
securities proposed to be issued and sold by us, excluding shares issued upon
exercise of outstanding options granted under employee benefit plans or similar
arrangements. If a shareholder fails to exercise its preemptive rights, we have
the right to close the sale of these additional securities.
TRANSFER RESTRICTIONS; TAG-ALONG RIGHTS; DRAG-ALONG RIGHTS
No party to the shareholders agreement is permitted to sell, transfer or
otherwise dispose of any of our shares, until the earlier of November 22, 2003
or 180 days after an initial public offering, without the prior consent of both
Silver Lake Partners and Texas Pacific Group, except for customary exceptions
for transfers to affiliates, heirs, beneficiaries, spouses and lineal
descendants, among others. After the third anniversary of the closing of the
transactions, each member of the sponsor group will have a right of first offer
to acquire any shares proposed to be sold or otherwise transferred by another
member of the sponsor group and any third party buyer will be subject to
approval of the board of directors, excluding those members affiliated with the
transferring shareholder. Each member of the sponsor group and member of the
management group has customary tag-along rights, which are the rights to
include its shares, on the same terms and conditions, in any sale by a member
of the sponsor group to a third party, on a proportional basis based on
relative ownership levels at that time.
In addition, after the earlier of November 22, 2003 or 180 days after an
initial public offering, if any shareholder or shareholders representing a
majority of our then outstanding ordinary shares receives an offer from a third
party to purchase a majority of the outstanding shares, then the shareholder or
shareholders will have the right to cause the other shareholders to join the
sale, on the same terms and conditions. Similarly, the majority shareholder or
shareholders have similar rights to cause the other shareholders to vote in
favor of mergers, consolidations or similar business combinations.
REGISTRATION RIGHTS
Subject to specified limitations, we agreed in the shareholders agreement
to include our shares owned by the members of the sponsor group, on a
proportional basis, in any public offering, other than the initial public
offering of our shares, through piggyback registration rights and to undertake
a registered offering of shares upon demand by any member of the sponsor group
through their demand registration rights. Under the shareholders agreement, at
any time after the earlier of the 180th day following the initial public
offering or the fourth anniversary of the closing of the transactions, members
of the sponsor group holding at least 20% of our outstanding shares will have
three demand registration rights and members of the sponsor group holding at
least 10% of our outstanding shares will have one demand registration right.
The sponsor group will have unlimited piggyback registration rights in any
public offering other than the initial public offering. We have agreed to pay
all registration expenses relating to these registrations. We will agree to
indemnify the sellers of securities pursuant to any registration described
above.
TERMINATION
The shareholders agreement will terminate when 50% or more of our shares
have been sold or distributed to the public or are actively traded on a
national securities exchange.
MANAGEMENT SHAREHOLDERS AGREEMENT
On the closing of the transactions, we entered into a management
shareholders agreement with members of the management group. After the closing
of the transactions, other senior officers and
158
employees of New SAC who were granted shares or options to purchase shares,
were required to join the management shareholders agreement. We refer to the
members of the management group and these other persons as management
shareholders.
TRANSFER RESTRICTIONS
Under the management shareholders agreement, each management shareholder
agreed, subject to customary exceptions, not to transfer any of our shares
acquired in connection with the transactions prior to the earliest of:
o the sale of at least 15% of the outstanding ordinary shares in an
initial public offering or pursuant to a public offering which results in
gross proceeds to us of at least $250 million, which we refer to as a
qualified public offering;
o a change of control, as defined in the management shareholders
agreement; and
o the fifth anniversary of the closing of the transactions regarding
several specified management shareholders and the second anniversary of
the closing of the transactions regarding other management shareholders,
which we refer to collectively as the lapse date.
TAG-ALONG RIGHTS
Prior to a qualified public offering, management shareholders will have
the tag-along rights that are provided in the shareholders agreement, which we
describe under "-- Shareholders Agreement -- Transfer Restrictions; Tag-Along
Rights; Drag-Along Rights," but only regarding their unrestricted and vested
ordinary shares.
DRAG-ALONG RIGHTS
If any member of the sponsor group holding, in the aggregate, at least a
majority of our outstanding ordinary shares receives an offer from a third
party to purchase at least a majority of the outstanding ordinary shares,
management shareholders will be required to transfer a percentage of their
preferred and vested ordinary shares equal to that being sold by that member of
the sponsor group.
RIGHT OF FIRST REFUSAL
If, following the earlier of a qualified public offering, change of
control and the appropriate anniversary of the closing of the transactions, but
prior to an initial public offering, a management shareholder receives an offer
from a third party to purchase any of his unrestricted and vested ordinary or
preferred shares, we will have the right of first refusal to purchase all of
these shares on substantially the same terms and conditions as the initial
offer from the third party.
CALL RIGHTS
If the employment of a management shareholder terminates for any reason
prior to the lapse date, we will have the option, for 60 days, to purchase any
ordinary or preferred shares held by that individual.
If we do not exercise our option within the 60 day period, then the
members of the sponsor group and the management shareholders who are our senior
managers will have that same call right. If more than one member of the sponsor
group or management shareholder seeks to exercise its call rights, then each
will be allowed to purchase the shares of the terminated employee according to
its or his proportionate ownership of the ordinary or preferred shares at that
time. The purchase price of any purchase under these call rights provisions
will be as follows:
159
o in the case of a termination for cause, as defined in the management
shareholders agreement, the purchase price will be the lower of (1) the
fair market value of the shares, as defined in the management
shareholders agreement, and (2) the original cost at which the shares
were acquired or their liquidation preference, as applicable;
o in the case of a termination without cause or for good reason of a
member of the management group which becomes a management shareholder the
purchase price will be the higher of (1) the fair market value of the
shares and (2) the original cost at which the shares were acquired or
their liquidation preference, as applicable; and
o in the case of a termination for any other reason other than as
described above, the purchase price will be the fair market value of the
shares.
PIGGYBACK REGISTRATION RIGHTS
Each management shareholder will have the piggyback registration rights
contained in the shareholders agreement, as summarized under "-- Shareholders
Agreement -- Registration Rights." In addition, after both an initial public
offering of ordinary shares and the sale by the sponsor group to third parties
of 15% or more of its ordinary shares, management shareholders will have the
demand registration rights as provided in the shareholders agreement as
summarized under "-- Shareholders Agreement -- Registration Rights."
OTHER MATTERS
The management shareholders agreement will terminate when at least 50% of
the number of our issued and outstanding ordinary shares have been sold or
distributed to the public or are actively traded on a national securities
exchange or interdealer quotation system, provided that piggyback rights will
survive the termination of the agreement until all shares held by the
management shareholders are registered, sold or eligible for transfer to the
public.
MONITORING, CONSULTING AND FINANCIAL SERVICE FEES
On the closing of the transactions, we paid the sponsor group a consulting
and financial advisory fee of $40 million. In addition, we agreed to pay an
annual fee of $2 million to Silver Lake, Texas Pacific Group and August Capital
in exchange for the monitoring, management, business strategy, consulting and
financial services that they provide. Silver Lake, Texas Pacific Group and
August Capital will share the $2 million annual fee among themselves in the
manner provided in the shareholders agreement. Silver Lake owns approximately
35% of our outstanding ordinary shares. Texas Pacific Group owns approximately
23% of our outstanding ordinary shares. August Capital owns approximately 12%
of our outstanding ordinary shares.
SPECIAL DIRECTOR COMPENSATION
In connection with the closing of the transactions contemplated by the
stock purchase agreement and the merger agreement, the board of directors of
Seagate Technology paid $100,000 to each of Lawrence Perlman and Gary B.
Filler, the co-chairmen of the Seagate Technology board of directors at the
time of the approval of the stock purchase agreement and the merger agreement,
as compensation for their additional supervisory efforts in connection with
these agreements. In addition, Seagate Technology's board of directors agreed
to pay an additional $75,000 to each of Messrs. Perlman and Filler, payable in
three $25,000 monthly installments commencing in October 2000, for ongoing
supervisory efforts in connection with the closing of the transactions. Messrs.
Perlman and Filler each also received a payment of $2,000 per week during the
pendency of the stock purchase and the merger.
In addition, we issued 1,000 ordinary shares to one of our directors, John
Thompson, under the New SAC 2001 restricted share plan.
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OTHER RELATED MATTERS
Shortly after the transactions, in November 2000, we made interest-free
payments on behalf of a number of our employees for state and federal taxes
payable by them in connection with the early exercise of options. All relevant
employees have since reimbursed us for these advances. In particular, payments
were made on behalf of Stephen J. Luczo in the amount of $1,672,327, William D.
Watkins in the amount of $452,265, Charles C. Pope in the amount of $467,892,
William L. Hudson in the amount of $108,048, Brian S. Dexheimer in the amount
of $291,541, Townsend H. Porter in the amount of $338,323, Donald L. Waite in
the amount of $359,402 and David A. Wickersham in the amount of $200,908. Each
of these individuals repaid us at some point between December 19, 2000 and
January 5, 2001.
In addition, in connection with the transactions that closed on November
22, 2000, we entered into transactions relating to the following agreements and
benefit and compensation plans:
o employment agreements and management retention agreements with our
senior management team;
o rollover agreements and related deferred compensation plans;
o grants to some employees under the New SAC 2000 and New SAC 2001
restricted stock plans;
o grants under stock option plans of Crystal Decisions; and
o an assumption of indemnification and insurance obligations of Seagate
Technology regarding our directors and officers.
In addition, we have adopted stock option plans at Seagate Technology Holdings
and Seagate Removable Storage Solutions Holdings and we expect options to be
issued under these plans in the future. We also expect to adopt a stock option
plan at Seagate Technology SAN Holdings during fiscal 2001. We describe the
principal terms of these agreements and plans under "The Transactions" and
"Management -- Employment and Other Agreements."
INDEMNIFICATION AGREEMENT
In connection with the stock purchase agreement and the merger agreement,
on March 29, 2000, we entered into an indemnification agreement with Seagate
Technology and VERITAS. Under the indemnification agreement, we and our
subsidiaries have jointly and severally agreed to indemnify Seagate Technology
and VERITAS and their affiliates from and against losses, claims, damages,
fines, expenses and other costs, including reasonable attorneys' fees and
disbursements, relating to:
o all liabilities, other than designated liabilities, which are described
below, and liabilities relating to taxes, for which we have agreed to
indemnify Seagate Technology and VERITAS and their affiliates arising out
of the ownership, operations or conduct by Seagate Technology and its
predecessors or affiliates, other than VERITAS and its subsidiaries, of
their businesses, properties, assets or liabilities on or prior to the
closing of the transactions;
o all liabilities, other than designated liabilities, arising out of the
ownership, operations or conduct by us or any of our subsidiaries of our
businesses, properties, assets or liabilities after the closing of the
transactions;
o the enforcement by Seagate Technology and VERITAS and their affiliates
of their rights under the indemnification agreement;
o any breach by us of our agreements contained in the indemnification
agreement, the stock purchase agreement or other agreements relating to
the indemnification agreement or the stock purchase agreement to which we
are a party;
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o all liabilities for taxes of Seagate Technology and the portion of
Seagate Software Holdings that was not sold to VERITAS relating to periods
ending on the closing of the transactions; and
o all liabilities for taxes, whenever arising, of the subsidiaries sold to
us or attributable to the assets of Seagate Technology transferred to
these subsidiaries.
The term designated liabilities refers to liabilities that we will not
assume in connection with the stock purchase. These liabilities include:
o all liabilities relating to the shares of common stock of VERITAS owned
by Seagate Software Holdings, and the shares of Gadzoox Networks and LHSP
owned by Seagate Technology;
o all liabilities arising from the closing of the transactions
contemplated by the merger agreement and the other transactions under the
merger agreement;
o all obligations of Seagate Technology to VERITAS regarding the software
business that Seagate Technology sold to VERITAS in May 1999 in exchange
for shares of VERITAS common stock;
o all employee benefit plans of Seagate Technology that will not be
assumed by us; and
o all liabilities relating to Seagate Technology's employee stock purchase
plan.
Seagate Technology, VERITAS and their affiliates have agreed to indemnify
us and our subsidiaries from and against all losses, claims, damages, fines,
expenses and other costs, including reasonable attorneys' fees and
disbursements, suffered by us or our subsidiaries relating to:
o the designated liabilities;
o the ownership, operations or conduct by Seagate Technology or Crystal
Decisions of their businesses, properties, assets or liabilities after the
closing of the transactions contemplated by the merger agreement;
o the enforcement by us and our subsidiaries of our rights under the
indemnification agreement;
o any breach by VERITAS of its agreements, obligations, covenants,
representations or warranties contained in the indemnification agreement,
the merger agreement or other agreements entered into by VERITAS in
connection with the indemnification agreement or the merger agreement;
o all taxes of Seagate Technology for which we are not obligated to
indemnify VERITAS and its affiliates as described in the last two bullet
points of the second preceding paragraph of this section; and
o any taxes payable by VERITAS or its affiliates arising out of the breach
by VERITAS of any of its representations or covenants in the
indemnification agreement.
On the closing of the transactions, VERITAS deposited $150 million of cash
into an escrow account. The escrow agreement permits us to withdraw all or a
portion of the escrowed funds, to satisfy tax liabilities which we assumed and
which will become liable, if at all, on completion of the tax audits of Seagate
Technology for those taxable periods beginning on or after July 1, 1999 and
ending on or before the closing of the transactions contemplated by the merger
agreement. The amount required to be deposited was reduced from $300 million to
$150 million as a result of the memorandum entered into on October 13, 2000
relating to the shareholder litigation, as described under "Business -- Legal
Proceedings -- Securities Class Actions."
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DESCRIPTION OF THE SENIOR CREDIT FACILITIES
We summarize below the principal terms of the agreements that govern the
senior credit facilities. For further information regarding the terms and
provisions of these senior credit facilities, please refer to the agreements
themselves which we have filed as exhibits to the registration statement of
which this prospectus is a part.
OVERVIEW
On the closing of the transactions, the Issuer and Seagate Technology (US)
Holdings, Inc., which we refer to collectively as the "borrowers," entered into
the senior credit facilities with a syndicate of banks and other financial
institutions led by The Chase Manhattan Bank, as administrative agent and an
issuing bank, and Goldman Sachs Credit Partners L.P., as a documentation agent,
The Bank of Nova Scotia as a documentation agent, and Merrill Lynch Capital
Corporation, as a documentation agent. The senior credit facilities provide
senior secured financing of up to $900 million, consisting of:
o a $200 million revolving credit facility for general corporate purposes,
with a sublimit of $100 million for letters of credit, which will
terminate on November 22, 2005;
o a $200 million term loan A facility maturing on November 22, 2005; and
o a $500 million term loan B facility maturing on November 22, 2006.
As of December 29, 2000, there were no loans outstanding under the revolving
credit facility. At that time, approximately $144 million of the revolving
credit facility was available because approximately $56 million of existing
letters of credit was outstanding and reduced availability under it. We drew the
full amount of the term loan A facility and the term loan B facility on the
closing of the transactions. The Issuer borrowed $600 million of the term loan
facilities and Seagate Technology (US) Holdings, Inc. borrowed $100 million of
the term loan facilities.
The borrowers' obligations under the senior credit facilities are
guaranteed on a senior basis by New SAC and the Issuer (in respect of the
obligations of Seagate Technology (US) Holdings, Inc. only) and the same
subsidiaries of the Issuer and of us which will be guaranteeing the Issuer's
obligations under the notes. In addition, borrowings under the senior credit
facilities are secured by the following:
o substantially all of the real and personal property that is located in
the Cayman Islands, the Netherlands, Northern Ireland, Scotland, Singapore
and the United States and that is owned by the Issuer and each of our other
existing subsidiaries that guaranteed the senior credit facility;
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o some real property located in Thailand;
o some personal property located in the United Kingdom; and
o a pledge of the capital stock held by the Issuer or any guarantor of the
borrowers and each of our other subsidiaries which is organized under the
laws of the Cayman Islands, Northern Ireland, Scotland, Singapore and the
United States and some other subsidiaries, other than various
insignificant subsidiaries.
In addition, borrowings under the senior credit facilities will be secured by
substantially all the real and personal property of any newly formed subsidiary
of ours organized under the laws of the above jurisdictions (other than various
insignificant subsidiaries), or of another jurisdiction if the newly formed
subsidiary accounts for 10% or more of our consolidated assets or EBITDA, and
all the capital stock in our subsidiaries held directly by such newly formed
subsidiary.
INTEREST RATES AND FEES
The revolving credit facility, the term loan A facility and the term loan
B facility initially bear interest, subject to performance-based stepdowns
applicable to the revolving credit facility and the term loan A facility, at a
rate equal to:
o in the case of the revolving credit facility and the term loan A
facility, LIBOR plus 2.50% or, at our option, 1.50% plus the greater of
(1) the prime rate of The Chase Manhattan Bank and (2) the federal funds
rate plus 0.50%; or
o in the case of the term loan B facility, LIBOR plus 3.00% or, at our
option, 2.00% plus the greater of (1) the prime rate of The Chase Manhattan
Bank and (2) the federal funds rate plus 0.50%.
In addition to paying interest on outstanding principal under the senior
credit facilities, the borrowers are required to pay a commitment fee to the
lenders under the revolving credit facility in respect of the unused
commitments thereunder at a rate equal to 0.50% per year.
AMORTIZATION SCHEDULE AND PREPAYMENTS
Principal amounts outstanding under the revolving credit facility will be
due and payable in full at maturity, five years from the date of the closing of
the senior credit facilities. The amortization schedule for the term loan A
facility and the term loan B facility for the borrowers contemplates
semi-annual payments until the maturity of each facility. We list below the
amortization for each facility for each borrower on an annual basis.
SEAGATE TECHNOLOGY (US)
ISSUER HOLDINGS, INC.
------------------------------- ----------------------------
TERM LOAN A TERM LOAN B TERM LOAN A TERM LOAN B
YEAR AFTER CLOSING FACILITY FACILITY FACILITY FACILITY
- --------------------------- --------------- --------------- ------------- --------------
1 ......................... $ 4,285,500 $ 4,285,500 $ 714,500 $ 714,500
2 ......................... 25,713,000 4,285,500 4,287,000 714,500
3 ......................... 34,284,000 4,285,500 5,716,000 714,500
4 ......................... 42,855,000 4,285,500 7,145,000 714,500
5 ......................... 64,282,500 4,285,500 10,717,500 714,500
6 ......................... 0 407,122,500 0 67,877,500
------------ ------------ ----------- -----------
TOTAL ................. $171,420,000 $428,550,000 $28,580,000 $71,450,000
============ ============ =========== ===========
The term loans are subject to mandatory prepayment with, in general:
o 100% of the proceeds of specified asset sales that are not reinvested in
the business within a one-year period;
o 75%, subject to performance-based stepdowns, of the excess cash flow, as
defined in the senior credit facilities, of us and our subsidiaries; and
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o 75% of the proceeds of specified debt incurrences.
We will not be required to make, however, mandatory prepayments of the term
loans with the proceeds of some asset sales in circumstances specified in the
agreement governing the senior credit facilities, including the following
principal exceptions:
o the issuance and sale by Seagate Technology Holdings of its equity
interests pursuant to an initial public offering and, following an initial
public offering, pursuant to any other offering;
o following an initial public offering by Seagate Technology Holdings, the
sale by us of equity interests in Seagate Technology Holdings for cash or
publicly traded equity securities;
o the issuance and sale by Seagate Technology HDD Holdings of equity
interests pursuant to an initial public offering and, following an initial
public offering, pursuant to any other offering;
o subsequent to an initial public offering of Seagate Technology HDD
Holdings, the sale by Seagate Technology Holdings of equity interests in
Seagate Technology HDD Holdings for cash or publicly traded equity
securities;
o specified sales of equity interests in the designated subsidiaries or of
all or substantially all the assets of the designated subsidiaries; and
o specified sales of equity interests in, or all or substantially all of
the assets of, some subsidiaries of Seagate Technology Investment Holdings
LLC, and specified sales of assets received as consideration for these
equity interests or assets.
The agreement governing the senior credit facilities requires that the proceeds
of the asset sales referred to above must be retained to fund our operations,
subject to specified permitted exceptions, including the following:
o proceeds received in connection with asset sales described under the
second and fourth bullet points listed above may be distributed to the
sponsor group if no default or event of default under the senior credit
facilities has occurred and is continuing or would result from the
distribution;
o so long as the long-term senior unsecured debt of either the Issuer or
Seagate Technology HDD Holdings is rated investment grade by both Moody's
Investors Service, Inc. and Standard and Poor's Rating Service, the
borrowers under the senior credit facilities have repaid 50% of the term
loan facilities and some financial ratios are met, proceeds received in
connection with asset sales described under the fifth bullet point listed
above may be distributed to the sponsor group to the extent these proceeds
are in excess of the sponsor group's historical investment in the relevant
subsidiary if no default or event of default under the senior credit
facilities has occurred and is continuing or would result from the
distribution; and
o proceeds received in connection with asset sales described under the
final bullet point listed above may be distributed to the sponsor group to
the extent these proceeds are in excess of the sponsor group's historical
investment in the relevant subsidiary if no default or event of default
under the senior credit facilities has occurred and is continuing or would
result from the distribution.
We may voluntarily repay outstanding loans under the senior credit
facilities without penalty, other than breakage costs.
COVENANTS AND OTHER MATTERS
The agreements governing the senior credit facilities contain a number of
covenants that, among other things, restrict the ability of the borrowers, us
and our other subsidiaries to:
o dispose of assets;
o incur additional debt or issue preferred stock;
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o incur guarantee obligations;
o repay other debt;
o make specified restricted payments and dividends;
o create liens on assets;
o make investments, loans or advances;
o engage in mergers or consolidations;
o engage to any material extent in businesses other than our current
businesses;
o make capital expenditures;
o enter into sale and leaseback transactions; or
o engage in certain transactions with affiliates.
In addition, under the senior credit facilities, we are required to comply with
specified financial covenants, including:
o a minimum interest coverage ratio;
o a minimum ratio of adjusted earnings to fixed charges; and
o a maximum net leverage ratio.
The senior credit facilities also contain customary representations and
warranties, affirmative covenants and events of default, including cross
default, material judgments and change in control.
The commitment of the lenders to provide financing to the borrowers under
the senior credit facilities was subject to a number of conditions, including
our depositing at the closing of the transactions $750 million in cash and
permitted investments into one or more locations where that cash and permitted
investments were subject to a security interest securing the senior credit
facilities.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Issuer has entered into an exchange and registration rights agreement
with the initial purchasers of the outstanding notes in which it agreed, under
specified circumstances, to file a registration statement relating to an offer
to exchange the outstanding notes for exchange notes. The Issuer also agreed to
use its reasonable best efforts to cause such offer to be consummated within
300 days following the original issue of the outstanding notes. The exchange
notes will have terms substantially identical to the outstanding notes except
that the exchange notes will not contain terms with respect to transfer
restrictions, registration rights and liquidated damages for failure to observe
specified obligations in the exchange and registration rights agreement. The
outstanding notes were issued on November 22, 2000.
Under the circumstances set forth below, the Issuer will use its
reasonable best efforts to cause the SEC to declare effective a shelf
registration statement with respect to the resale of the outstanding notes and
keep the statement effective for up to two years after the effective date of
the shelf registration statement. These circumstances include:
o if any changes in law or applicable interpretations of the law by the
staff of the SEC do not permit the Issuer to effect the exchange offer as
contemplated by the exchange and registration rights agreement;
o if any outstanding notes validly tendered in the exchange offer are not
exchanged for exchange notes within 300 days after the original issue of
the outstanding notes;
o if any initial purchaser of the outstanding notes so requests, but only
with respect to any outstanding notes not eligible to be exchanged for
exchange notes in the exchange offer and held by it following the
consummation of the exchange offer;
o if any applicable law or interpretation does not permit any holder of
the outstanding notes to participate in the exchange offer;
o if any holder that participates in the exchange offer does not receive
freely transferable exchange notes in exchange for tendered outstanding
notes; or
o if the Issuer so elects.
If the Issuer fails to comply with specified obligations under the
exchange and registration rights agreement, it will be required to pay
liquidated damages to holders of the outstanding notes. Please see "Exchange
and Registration Rights Agreement" for more details regarding the exchange and
registration rights agreement.
Each holder of outstanding notes that wishes to exchange such outstanding
notes for transferable exchange notes in the exchange offer will be required to
make the following representations:
o any exchange notes will be acquired in the ordinary course of its
business;
o such holder has no arrangement with any person to participate in the
distribution of the exchange notes; and
o such holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of the Issuer or if it is an affiliate, that it will
comply with applicable registration and prospectus delivery requirements
of the Securities Act.
RESALE OF EXCHANGE NOTES
Based on interpretations of the SEC staff set forth in no action letters
issued to unrelated third parties, the Issuer believes that exchange notes
issued under the exchange offer in exchange for outstanding notes may be
offered for resale, resold and otherwise transferred by any exchange note
holder without compliance with the registration and prospectus delivery
provisions of the Securities Act, if:
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o such holder is not an "affiliate" as defined in Rule 405 under the
Securities Act, of the Issuer, or if such holder is an "affiliate," that
it will comply with the applicable registration and prospectus delivery
requirements of the Securities Act;
o such exchange notes are acquired in the ordinary course of the holder's
business; and
o the holder does not intend to participate in the distribution of such
exchange notes.
Any holder who tenders in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
o cannot rely on the position of the staff of the SEC enunciated in "Exxon
Capital Holdings Corporation" or similar interpretive letters; and
o must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, for the resale or for
other retransfer of exchange notes only as specifically set forth in this
prospectus. With regard to broker-dealers, only broker-dealers that acquired
the outstanding notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives exchange notes for its own account in exchange for outstanding notes,
where such outstanding notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the exchange notes.
Please see "Plan of Distribution" for more details regarding the transfer
of exchange notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, the Issuer will accept for exchange any
outstanding notes properly tendered and not withdrawn prior to the expiration
date. The Issuer will issue $1,000 principal amount of exchange notes in
exchange for each $1,000 principal amount of outstanding notes surrendered
under the exchange offer. Outstanding notes may be tendered only in integral
multiples of $1,000.
The form and terms of the exchange notes will be substantially identical
to the form and terms of the outstanding notes except the exchange notes will
be registered under the Securities Act, will not bear legends restricting their
transfer and will not provide for any liquidated damages upon failure of the
Issuer to fulfill its obligations under the exchange and registration rights
agreement to file, and cause to be effective, a registration statement. The
exchange notes will evidence the same debt as the outstanding notes. The
exchange notes will be issued under and entitled to the benefits of the same
indenture that authorized the issuance of the outstanding notes. Consequently,
both series will be treated as a single class of debt securities under that
indenture. For a description of the indenture, see "Description of the Notes"
below.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
As of the date of this prospectus, $210 million aggregate principal amount
of the outstanding notes are outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of outstanding notes.
There will be no fixed record date for determining registered holders of
outstanding notes entitled to participate in the exchange offer.
Holders do not have any appraisal rights or dissenters' rights under the
indenture in connection with the exchange offer. The Issuer intends to conduct
the exchange offer in accordance with the provisions of the exchange and
registration rights agreement, the applicable requirements of the Securities
Act and the Securities Exchange Act of 1934 and the rules and regulations of
the SEC. Outstanding notes that are not tendered for exchange in the exchange
offer will remain outstanding and continue to accrue interest and will be
entitled to the rights and benefits such holders have under the indenture
relating to the outstanding notes.
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The Issuer will be deemed to have accepted for exchange properly tendered
outstanding notes when it has given written notice or oral notice that is later
confirmed in writing of the acceptance to the exchange agent. The exchange
agent will act as agent for the tendering holders for the purposes of receiving
the exchange notes from the Issuer and delivering exchange notes to such
holders. Subject to the terms of the exchange and registration rights
agreement, the Issuer expressly reserves the right to amend or terminate the
exchange offer, and not to accept for exchange any outstanding notes not
previously accepted for exchange, upon the occurrence of any of the conditions
specified below under "-- Certain Conditions to the Exchange Offer."
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. The Issuer will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the exchange
offer.
It is important that you read the section "-- Fees and Expenses" below for
more details regarding fees and expenses incurred in the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time on ,
2001, unless in its sole discretion, the Issuer extends it.
In order to extend the exchange offer, the Issuer will give the exchange
agent written notice or oral notice that is later confirmed in writing of any
extension. The Issuer will notify the registered holders of outstanding notes
of the extension no later than 9:00 a.m., New York City time, on the business
day after the previously scheduled expiration date.
The Issuer reserves the right, in its sole discretion:
o to delay accepting for exchange any outstanding notes;
o to extend the exchange offer or to terminate the exchange offer and to
refuse to accept outstanding notes not previously accepted if any of the
conditions set forth below under "-- Certain Conditions to the Exchange
Offer" have not been satisfied, by giving written notice or oral notice
that is later confirmed in writing of such delay, extension or termination
to the exchange agent; or
o subject to the terms of the exchange and registration rights agreement,
to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of outstanding notes. If the Issuer amends the exchange
offer in a manner that it determines to constitute a material change, it will
promptly disclose such amendment in a manner reasonably calculated to inform
the holders of outstanding notes of such amendment.
Without limiting the manner in which it may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the exchange offer, the Issuer shall have no obligation to publish,
advertise, or otherwise communicate any such public announcement, other than by
making a timely release to a financial news service.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, the Issuer will not be
required to accept for exchange, or exchange any exchange notes for, any
outstanding notes, and it may terminate the exchange offer as provided in this
prospectus before accepting any outstanding notes for exchange if in its
reasonable judgment:
o the exchange notes to be received will not be tradable by the holder,
without restriction under the Securities Act, the Securities Exchange Act
of 1934 and without material restrictions under the blue sky or securities
laws of substantially all of the states of the United States;
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o the exchange offer, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the staff of the SEC; or
o any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange offer
that, in the Issuer's judgment, would reasonably be expected to impair the
ability of the Issuer to proceed with the exchange offer.
In addition, the Issuer will not be obligated to accept for exchange the
outstanding notes of any holder that has not made to the Issuer:
o the representations described under "-- Purpose and Effect of the
Exchange Offer," "-- Procedures for Tendering" and "Plan of Distribution";
and
o such other representations as may be reasonably necessary under
applicable SEC rules, regulations or interpretations to make available to
it an appropriate form for registration of the exchange notes under the
Securities Act.
The Issuer expressly reserves the right, at any time or at various times,
to extend the period of time during which the exchange offer is open.
Consequently, the Issuer may delay acceptance of any outstanding notes by
giving oral or written notice of such extension to their holders. During any
such extensions, all outstanding notes previously tendered will remain subject
to the exchange offer, and the Issuer may accept them for exchange. The Issuer
will return any outstanding notes that it does not accept for exchange for any
reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
The Issuer expressly reserves the right to amend or terminate the exchange
offer, and to reject for exchange any outstanding notes not previously accepted
for exchange, upon the occurrence of any of the conditions of the exchange
offer specified above. The Issuer will give oral or written notice of any
extension, amendment, non-acceptance or termination to the holders of the
outstanding notes as promptly as practicable. In the case of any extension,
such notice will be issued no later than 9:00 a.m., New York City time, on the
business day after the previously scheduled expiration date.
These conditions are for the sole benefit of the Issuer and the Issuer may
assert them regardless of the circumstances that may give rise to them or waive
them in whole or in part at any or at various times in its sole discretion. If
the Issuer fails at any time to exercise any of the foregoing rights, this
failure will not constitute a waiver of such right. Each such right will be
deemed an ongoing right that the Issuer may assert at any time or at various
times.
In addition, the Issuer will not accept for exchange any outstanding notes
tendered, and will not issue exchange notes in exchange for any such
outstanding notes, if at such time any stop order will be threatened or in
effect with respect to the registration statement of which this prospectus
constitutes a part or the qualification of the indenture under the Trust
Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of outstanding notes may tender such outstanding notes in
the exchange offer. To tender in the exchange offer, a holder must:
o complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or deliver
such letter of transmittal or facsimile to the exchange agent prior to the
expiration date; or
o comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
o the exchange agent must receive outstanding notes along with the letter
of transmittal; or
o the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such outstanding notes into the
exchange agent's account at DTC according to the procedures for book-entry
transfer described below or a properly transmitted agent's message; or
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o the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "-- Exchange Agent" prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between such holder and the Issuer in accordance
with the terms and subject to the conditions set forth in this prospectus and
in the letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mailing these items, the Issuer recommends that holders
use an overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or outstanding notes to
the Issuer. Holders may request their respective brokers, dealers, commercial
banks, trust companies or other nominees to effect the above transactions for
them.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered holder promptly and instruct it
to tender on the owner's behalf. If such beneficial owner wishes to tender on
its own behalf, it must, prior to completing and executing the letter of
transmittal and delivering its outstanding notes, either:
o make appropriate arrangements to register ownership of the outstanding
notes in such owner's name; or
o obtain a properly completed bond power from the registered holder of
outstanding notes.
The transfer of registered ownership may take considerable time and may
not be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or another "eligible institution" within the meaning of Rule
17Ad-15 under the Exchange Act, unless the outstanding notes tendered pursuant
thereto are tendered:
o by a registered holder who has not competed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter of
transmittal; or
o for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes listed on the outstanding notes,
such outstanding notes must be endorsed or accompanied by a properly completed
bond power. The bond power must be signed by the registered holder as the
registered holder's name appears on the outstanding notes and an eligible
institution must guarantee the signature on the bond power.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by the
Issuer, they should also submit evidence satisfactory to the Issuer of their
authority to deliver the letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so
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by causing DTC to transfer the outstanding notes to the exchange agent in
accordance with its procedures for transfer. DTC will then send an agent's
message to the exchange agent. The term "agent's message" means a message
transmitted by DTC, received by the exchange agent and forming part of the
book-entry confirmation, to the effect that:
o DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering outstanding notes that
are the subject of such book-entry confirmation;
o such participant has received and agrees to be bound by the terms of the
letter of transmittal (or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery); and
o the agreement may be enforced against such participant.
The Issuer will determine in its sole discretion all questions as to the
validity, form, eligibility (including time of receipt), acceptance of tendered
outstanding notes and withdrawal of tendered outstanding notes. The Issuer's
determination will be final and binding. The Issuer reserves the absolute right
to reject any outstanding notes not properly tendered or any outstanding notes
the acceptance of which would, in the opinion of the Issuer's counsel, be
unlawful. The Issuer also reserves the right to waive any defects,
irregularities or conditions of tender as to particular outstanding notes. The
Issuer's interpretation of the terms and conditions of the exchange offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured within such time as
the Issuer shall determine. Although the Issuer intends to notify holders of
defects or irregularities with respect to tenders of outstanding notes, neither
the Issuer, the exchange agent nor any other person will incur any liability
for failure to give such notification. Tenders of outstanding notes will not be
deemed made until such defects or irregularities have been cured or waived. Any
outstanding notes received by the exchange agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned to the exchange agent without cost to the tendering holder,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In all cases, the Issuer will issue exchange notes for outstanding notes
that it has accepted for exchange under the exchange offer only after the
exchange agent timely receives:
o outstanding notes or a timely book-entry confirmation of such
outstanding notes into the exchange agent's account at DTC; and
o a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
By signing the letter of transmittal, each tendering holder of outstanding
notes will represent to the Issuer that, among other things:
o any exchange notes that the holder receives will be acquired in the
ordinary course of its business;
o the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the exchange notes;
o if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the exchange notes;
o if the holder is a broker-dealer that will receive exchange notes for
its own account in exchange for outstanding notes that were acquired as a
result of market-making activities, that it will deliver a prospectus, as
required by law, in connection with any resale of such exchange notes; and
o the holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of the Issuer or, if the holder is an affiliate, it will
comply with any applicable registration and prospectus delivery
requirements of the Securities Act.
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BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the outstanding notes at DTC for purposes of the exchange offer
promptly after the date of this prospectus; and any financial institution
participating in DTC's system may make book-entry delivery of outstanding notes
by causing DTC to transfer such outstanding notes into the exchange agent's
account at DTC in accordance with DTC's procedures for transfer. Holders of
outstanding notes who are unable to deliver confirmation of the book-entry
tender of their outstanding notes into the exchange agent's account at DTC or
all other documents required by the letter of transmittal to the exchange agent
on or prior to the expiration date must tender their outstanding notes
according to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver their outstanding
notes, the letter of transmittal or any other required documents to the
exchange agent or comply with the applicable procedures under DTC's Automated
Tender Offer Program prior to the expiration date may tender if:
o the tender is made through an eligible institution;
o prior to the expiration date, the exchange agent receives from such
eligible institution either a properly completed and duly executed notice
of guaranteed delivery (by facsimile transmission, mail or hand delivery)
or a properly transmitted agent's message and notice of guaranteed
delivery:
--setting forth the name and address of the holder, the registered
number(s) of such outstanding notes and the principal amount of
outstanding notes tendered;
--stating that the tender is being made thereby; and
--guaranteeing that, within three New York Stock Exchange trading days
after the expiration date, the letter of transmittal, or facsimile of
the letter of transmittal, together with the outstanding notes or a
book-entry confirmation, and any other documents required by the letter
of transmittal will be deposited by the eligible institution with the
exchange agent; and
o the exchange agent receives such properly completed and executed letter
of transmittal, or facsimile of the letter of transmittal, as well as all
tendered outstanding notes in proper form for transfer or a book-entry
confirmation, and all other documents required by the letter of
transmittal, within three New York State Exchange trading days after the
expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will
be sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of outstanding
notes may withdraw their tenders at any time prior to the expiration date.
For a withdrawal to be effective:
o the exchange agent must receive a written notice by telegram, telex,
facsimile transmission or letter of withdrawal at one of the addresses set
forth below under "-- Exchange Agent," or
o holders must comply with the appropriate procedures of DTC's automated
tender offer program system.
Any such notice of withdrawal must:
o specify the name of the person who tendered the outstanding notes to be
withdrawn;
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o identify the outstanding notes to be withdrawn, including the principal
amount of such outstanding notes; and
o where certificates for outstanding notes have been transmitted, specify
the name in which such outstanding notes were registered, if different
from that of the withdrawing holder.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing holder must also submit:
o the serial numbers of the particular certificates to be withdrawn; and
o a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution.
If outstanding notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn
outstanding notes and otherwise comply with the procedures of such facility.
The Issuer will determine all questions as to the validity, form and
eligibility, including time of receipt, of such notices, and our determination
shall be final and binding on all parties. The Issuer will deem any outstanding
notes so withdrawn not to have been validly tendered for exchange for purposes
of the exchange offer. Any outstanding notes that have been tendered for
exchange but that are not exchanged for any reason will be returned to their
holder without cost to the holder, or, in the case of outstanding notes
tendered by book-entry transfer into the exchange agent's account at DTC
according to the procedures described above the outstanding notes will be
credited to an account maintained with DTC for outstanding notes, as soon as
practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn outstanding notes may be retendered by
following one of the procedures described under "-- Procedures for Tendering"
above at any time on or prior to the expiration date.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:
By Registered or Certified Mail: Facsimile Transmission Number: By Hand or Over Night Delivery
(Eligible Institutions Only)
The Bank of New York Attention: The Bank of New York
101 Barclay Street, Floor 7E Reorganization Unit 7E 101 Barclay Street
New York, New York 10286 (212) 815-6339 Corporate Trust Services Window
Attention: Carolle Montreuil Confirmation by telephone: Ground Level
Reorganization Unit, 7E (212) 815-5920 New York, New York 10286
Attention: Carolle Montreuil
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Issuer will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, the Issuer may make additional
solicitations by telegraph, telephone or in person by its officers and regular
employees and those of our affiliates.
The Issuer has not retained any dealer-manager in connection with the
exchange offer and will not make any payments to broker-dealers or others
soliciting acceptances of the exchange offer. The
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Issuer will, however, pay the exchange agent reasonable and customary fees for
its services and reimburse it for its related reasonable out-of-pocket
expenses.
The Issuer will pay the cash expenses to be incurred in connection with
the exchange offer. They include:
o SEC registration fees;
o fees and expenses of the exchange agent and trustee;
o accounting and legal fees and printing costs; and
o related fees and expenses.
The expenses are estimated in the aggregate to be approximately $3,000,000.
TRANSFER TAXES
The Issuer will pay all transfer taxes, if any, applicable to the exchange
of outstanding notes under the exchange offer. The tendering holder, however,
will be required to pay any transfer taxes, whether imposed on the registered
holder or any other person, if:
o certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered;
o tendered outstanding notes are registered in the name of any person
other than the person signing the letter of transmittal; or
o a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer.
If satisfactory evidence of payment of such taxes is not submitted with
the letter of transmittal, the amount of such transfer taxes will be billed to
that tendering holder.
Holders who tender their outstanding notes for exchange will not be
required to pay any transfer taxes. However, holders who instruct the Issuer to
register exchange notes in the name of, or request that outstanding notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be required to pay any applicable
transfer tax.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of outstanding notes who do not exchange their outstanding notes
for exchange notes under the exchange offer will remain subject to the
restrictions on transfer of such outstanding notes:
o as set forth in the legend printed on the notes as a consequence of the
issuance of the outstanding notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
o otherwise as set forth in the prospectus distributed in connection with
the private offering of the outstanding notes.
In general, you may not offer or sell the outstanding notes unless they
are registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the exchange and registration rights agreement, the
Issuer does not intend to register resales of the outstanding notes under the
Securities Act. Based on interpretations of the SEC staff, exchange notes
issued pursuant to the exchange offer may be offered for resale, resold or
otherwise transferred by their holders, other than to any holder that is our
"affiliate" within the meaning of Rule 405 under the Securities Act, without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the holders acquired the exchange notes in the
ordinary course of the holders' business and the holders have no arrangement or
understanding with respect to the distribution of the exchange notes
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to be acquired in the exchange offer. Any holder who tenders in the exchange
offer for the purpose of participating in a distribution of the exchange notes:
o could not rely on the applicable interpretations of the SEC; and
o must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction.
ACCOUNTING TREATMENT
The Issuer will record the exchange notes in its accounting records at the
same carrying value as the outstanding notes, which is the aggregate principal
amount, as reflected in our accounting records on the date of exchange.
Accordingly, the Issuer will not recognize any gain or loss for accounting
purposes in connection with the exchange offer. The Issuer will record the
expenses of the exchange offer as incurred.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
The Issuer may in the future seek to acquire untendered outstanding notes
in open market or privately negotiated transactions, through subsequent
exchange offers or otherwise. The Issuer has no present plans to acquire any
outstanding notes that are not tendered in the exchange offer or to file a
registration statement to permit resales of any untendered outstanding notes.
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DESCRIPTION OF THE NOTES
The Issuer issued the notes, and will issue the exchange notes, under an
indenture, dated November 22, 2000, among the Issuer, the Note Guarantors and
The Bank of New York, as Trustee. The indenture contains provisions which
define your rights under the notes. In addition, the indenture governs the
obligations of the Issuer and of each Note Guarantor under the notes. The terms
of the notes include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939.
Definitions of certain terms used in this Description of the Notes may be
found below under "--Certain Definitions." In addition, we note that, for
purposes of this section only:
(1) the term "Issuer" refers only to Seagate Technology International and
not to any of its Subsidiaries;
(2) the term "HDD Holdings" refers to Seagate Technology HDD Holdings,
the parent company of the Issuer and not to any of its Subsidiaries;
(3) the term "Intermediate Holdings" refers to Seagate Technology
Holdings, the parent company of HDD Holdings and not to any of its
Subsidiaries; and
(4) the term "Company" refers to New SAC, the parent company of
Intermediate Holdings and not to any of its Subsidiaries. The Company
and various subsidiaries of the Company will guarantee the notes and
therefore will be subject to many of the provisions contained in this
Description of the Notes. Each company which guarantees the notes is
referred to in this section as a "Note Guarantor." Each such guarantee
is termed a "Note Guarantee."
The following description is meant to be only a summary of various
provisions of the indenture. It does not restate the terms of the indenture in
their entirety. For further information regarding the terms and provisions of
the indenture and the exchange notes please refer to the indenture and form of
exchange note, which we have filed as exhibits to the registration statement of
which this prospectus is a part. We urge you to carefully read these documents.
OVERVIEW OF THE NOTES AND THE NOTE GUARANTEES
The notes:
o are general unsecured obligations of the Issuer;
o rank equally in right of payment with any future Senior Subordinated
Indebtedness of the Issuer;
o are subordinated in right of payment to all existing and future Senior
Indebtedness of the Issuer;
o are senior in right of payment to any future Subordinated Obligations of
the Issuer;
o are effectively subordinated to any Secured Indebtedness of the Company
and its Subsidiaries to the extent of the value of the assets securing
such Indebtedness; and
o are effectively subordinated to all liabilities, including Trade
Payables, and Preferred Stock of each Subsidiary of the Company that is
not a Note Guarantor.
The Note Guarantors
Initially, the notes are guaranteed by the Company, Intermediate Holdings,
HDD Holdings and all of the other Subsidiaries of the Company other than the
Unrestricted Subsidiaries and those Subsidiaries which will not be guarantors
under the Credit Agreement, which will initially include those Subsidiaries
organized under the laws of Australia, Barbados, China, Denmark, France,
Germany, Hong Kong, Indonesia, Italy, Malaysia, the Netherlands, Sweden,
Switzerland, Taiwan and the U.S. Virgin Islands, which we refer to collectively
as the "Non-Guarantor Subsidiaries". Under
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circumstances specified below, specified Subsidiaries of the Company, including
those Subsidiaries that are Designated Subsidiaries, may be released from their
Note Guarantees, as described below.
The Note Guarantee of each Note Guarantor:
o is a general unsecured obligation of the Note Guarantor;
o ranks equally in right of payment with any future Senior Subordinated
Indebtedness of the Note Guarantor;
o is subordinated in right of payment to all existing and future Senior
Indebtedness of the Note Guarantor (including any guarantee of the Bank
Indebtedness);
o is senior in right of payment to any future Subordinated Obligations of
the Note Guarantor; and
o is effectively subordinated to any Secured Indebtedness of the Company
and its Subsidiaries to the extent of the value of the assets securing
such Indebtedness.
Initially, the notes are not guaranteed by any of the Non-Guarantor
Subsidiaries. After eliminating intercompany activity, as of December 29, 2000,
the Non-Guarantor Subsidiaries would have had total assets of $335 million or
10% of the Company's consolidated assets and $39 million or 1% of the Company's
consolidated liabilities. After eliminating intercompany activity, for fiscal
year 2000 and the combined results for the six months ended December 29, 2000,
the Non-Guarantor Subsidiaries would have generated total revenue of $1.3
billion and $730 million or 20% and 21% of the Company's consolidated revenue.
Seagate Technology Investments Holdings LLC is an Unrestricted Subsidiary
of the Company. Under certain circumstances, the Company will be able to
designate other current or future direct or indirect Subsidiaries of the
Company as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
Note Guarantors or be subject to any of the restrictive covenants set forth in
the indenture. After eliminating intercompany activity, as of December 29,
2000, the Unrestricted Subsidiary would have had assets of $137 million or 4%
of the Company's consolidated assets and no liabilities. After eliminating
intercompany activity, for fiscal year 2000 and the combined results for the
six months ended December 29, 2000, the Unrestricted Subsidiary would have
generated no revenue, and would not have generated material EBITDA.
Each of Seagate Technology SAN Holdings, Seagate Removable Storage
Solutions Holdings and Crystal Decisions and each of their Subsidiaries will be
a Designated Subsidiary of the Company on the Closing Date. Designated
Subsidiaries will be Restricted Subsidiaries and initially will be Note
Guarantors, however upon certain transactions involving the sale of Capital
Stock of a Designated Subsidiary, the Designated Subsidiary (and each of its
Subsidiaries) will be released from its Note Guarantee. A Designated Subsidiary
will continue to be a Restricted Subsidiary after the release of its Note
Guarantee until it may be designated as an Unrestricted Subsidiary by the Board
of Directors of the Company or until it is no longer a Subsidiary. See "--
Certain Definitions -- `Unrestricted Subsidiary'." After eliminating
intercompany activity, as of December 29, 2000, the Designated Subsidiaries
would have had total assets of $209 million or 6% of the Company's consolidated
assets and total liabilities of $109 million or 4% of our consolidated
liabilities. After eliminating intercompany activity, for fiscal year 2000 and
the combined results for the six months ended December 29, 2000, the Designated
Subsidiaries would have generated total revenue of $410 million and $228
million or 6% and 7% of the Company's consolidated revenue.
PRINCIPAL, MATURITY AND INTEREST
The Issuer issued notes in an aggregate principal amount of $210 million.
The notes will mature on November 15, 2007. The Issuer will issue the exchange
notes in fully registered form, without coupons, in denominations of $1,000 and
any integral multiple of $1,000.
Each note the Issuer issues will bear interest at a rate of 12 1/2% per
annum beginning on November 22, 2000, or from the most recent date to which
interest has been paid or provided for. The Issuer will pay interest
semiannually to Holders of record at the close of business on the May 1
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or November 1 immediately preceding the interest payment date on May 15 and
November 15 of each year. The Issuer will begin paying interest to Holders on
May 15, 2001.
The Issuer will also pay liquidated damages to Holders if it fails to file
a registration statement relating to the notes or if the registration statement
is not declared effective on a timely basis or if certain other conditions are
not satisfied. These liquidated damage provisions are more fully explained
under the heading "Exchange and Registration Rights Agreement."
INDENTURE MAY BE USED FOR FUTURE ISSUANCES
The Issuer may from time to time issue additional notes having identical
terms to the notes it is currently offering, which we refer to as the
Additional Notes. The Issuer will be permitted to issue such Additional Notes
only if at the time of, and after giving effect to, such issuance the Issuer is
in compliance with the covenants contained in the indenture. Any Additional
Notes will be part of the same series as the notes that the Issuer is currently
offering for all purposes under the indenture, including regarding any vote on
any matter under the indenture.
PAYING AGENT AND REGISTRAR
The Issuer will pay the principal of, premium, if any, interest and
liquidated damages, if any, on the notes at any office of the Issuer or any
agency designated by the Issuer which is located in the Borough of Manhattan,
The City of New York. The Issuer has initially designated the corporate trust
office of the Trustee to act as the agent of the Issuer in such matters. The
location of the principal corporate trust office is 101 Barclay Street, Floor
21 West, New York, New York 10286. The Issuer, however, reserves the right to
pay interest to Holders by check mailed directly to Holders at their registered
addresses.
Holders may exchange or transfer their notes at Floor 7 East of the same
location given in the preceding paragraph. No service charge will be made for
any registration of transfer or exchange of notes. The Issuer, however, may
require Holders to pay any transfer tax or other similar governmental charge
payable in connection with any such transfer or exchange.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Issuer may not redeem
the notes prior to November 15, 2004. After this date, the Issuer may redeem
the notes, in whole or in part on one or more occasions, on not less than 30
nor more than 60 days' prior notice, at the following redemption prices,
expressed as percentages of principal amount, plus accrued and unpaid interest
and liquidated damages thereon, if any, to the redemption date, subject to the
right of Holders of record on the relevant record date to receive interest and
liquidated damages, if any, due on the relevant interest payment date, if
redeemed during the 12-month period and liquidated damages, if any, commencing
on November 15 of the years set forth below:
REDEMPTION
YEAR PRICE
- ---------------------------------------- -------------
2004 ................................. 106.250%
2005 ................................. 103.313%
2006 and thereafter .................. 100.000%
Prior to November 15, 2003, the Issuer may, on one or more occasions, also
redeem up to a maximum of 35% of the aggregate principal amount of the notes,
calculated after giving effect to any issuance of Additional Notes, with the
Net Cash Proceeds of one or more Equity Offerings (1) by the Issuer or (2) by
the Company, Intermediate Holdings or HDD Holdings to the extent the Net Cash
Proceeds from the Equity Offering are contributed to the Issuer or used to
purchase Capital Stock, other than Disqualified Stock, of the Issuer from the
Issuer, at a redemption price equal to 112.5% of the principal amount thereof,
plus accrued and unpaid interest and liquidated damages, if any, to the
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redemption date, subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date;
provided, however, that after giving effect to any such redemption:
o at least 65% of the aggregate principal amount of the notes,
calculated after giving effect to any issuance of Additional Notes,
remains outstanding; and
o any redemption must be made within 90 days of the Equity Offering and
must be made in accordance with specified procedures set forth in the
indenture.
At any time prior to November 15, 2004, the notes may be redeemed, as a
whole but not in part, at the option of the Issuer upon the occurrence of a, or
if applicable each, Change of Control, as more fully defined in "--Change of
Control," upon not less than 30 or more than 60 days' prior notice, but in no
event may any such redemption occur more than 90 days after the occurrence of
such Change of Control, mailed by first-class mail to each Holder's registered
address, at a redemption price equal to the sum of (1) the principal amount
thereof and (2) the Applicable Premium as of, and accrued and unpaid interest,
if any, to, the redemption date, subject to the right of Holders of record on
the relevant record date to receive interest due on the relevant interest
payment date.
"Applicable Premium" means, with respect to a Note at any redemption date,
the greater of (1) 1.0% of the principal amount of such note and (2) the excess
of (A) the present value of (1) the redemption price of such note at November
15, 2004, as set forth in the table above plus (2) all required interest
payments due on such note through November 15, 2004, computed using a discount
rate equal to the Treasury Rate plus 50 basis points, over (B) the
then-outstanding principal amount of such note.
"Treasury Rate" means the yield to maturity at the time of computation of
U.S. Treasury securities with a constant maturity, as compiled by, and
published in, the most recent Federal Reserve Statistical Release H.15(519)
which has become publicly available at least two Business Days prior to the
date fixed for redemption of the notes following a Change of Control (or, if
such Statistical Release is no longer published, any publicly available source
of similar market data), most nearly equal to the period from the redemption
date to November 15, 2004; provided, however, that if the period from the
redemption date to November 15, 2004 is not equal to the constant maturity of a
U.S. Treasury security for which a weekly average yield is given, the Treasury
Rate shall be obtained by linear interpolation, calculated to the nearest
one-twelfth of a year, from the weekly average yields of U.S. Treasury
securities for which such yields are given, except that if the period from the
redemption date to November 15, 2004, is less than one year, the weekly average
yield on actually traded U.S. Treasury securities adjusted to a constant
maturity of one year shall be used.
SELECTION
If the Issuer partially redeems notes, the Trustee will select the notes
to be redeemed on a pro rata basis, by lot or by another method as the Trustee
in its sole discretion shall deem to be fair and appropriate, although no note
of $1,000 in original principal amount or less will be redeemed in part. If the
Issuer redeems any note in part only, the notice of redemption relating to the
note shall state the portion of the principal amount to be redeemed. A new note
in principal amount equal to the unredeemed portion of the note will be issued
in the name of the Holder of the note upon cancellation of the original note.
On and after the redemption date, interest will cease to accrue on notes or
portions of notes called for redemption so long as the Issuer has deposited
with the Paying Agent funds sufficient to pay the principal of, plus accrued
and unpaid interest and liquidated damages, if any, on the notes to be
redeemed.
RANKING
The notes are unsecured Senior Subordinated Indebtedness of the Issuer,
are subordinated in right of payment to all existing and future Senior
Indebtedness of the Issuer, rank equally in right of payment with any future
Senior Subordinated Indebtedness of the Issuer and are senior in right of
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payment to any future Subordinated Obligations of the Issuer. The notes also
are effectively subordinated to any Secured Indebtedness of the Company and its
Subsidiaries, including the Issuer, to the extent of the value of the assets
securing such Indebtedness. However, payment from the money or the proceeds of
U.S. Government Obligations held in any defeasance trust described below under
the caption "-- Defeasance" will not be subordinated to any Senior Indebtedness
or subject to the restrictions described herein.
The Note Guarantees are unsecured Senior Subordinated Indebtedness of the
applicable Note Guarantor, are subordinated in right of payment to all existing
and future Senior Indebtedness of the Note Guarantor, rank equally in right of
payment with any future Senior Subordinated Indebtedness of the Note Guarantor
and are senior in right of payment to any future Subordinated Obligations of
the Note Guarantor. The Note Guarantees are also effectively subordinated to
any Secured Indebtedness of the Company and its Subsidiaries to the extent of
the value of the assets securing such Secured Indebtedness.
The Company currently conducts all of its operations through its
Subsidiaries, and the Issuer currently conducts substantially all of its
operations through its Subsidiaries. To the extent the Subsidiaries of the
Company are not Note Guarantors, creditors of the Non-Guarantor Subsidiaries,
including trade creditors, and preferred stockholders, if any, of the
Non-Guarantor Subsidiaries will have priority with respect to the assets and
earnings of the Non-Guarantor Subsidiaries over the claims of creditors of the
Issuer or the Note Guarantors, including the Holders. The notes, therefore,
will be effectively subordinated to the claims of creditors, including trade
creditors, and preferred stockholders, if any, of the Non-Guarantor
Subsidiaries. After eliminating intercompany activity, as of December 29, 2000,
the Non-Guarantor Subsidiaries would have had total assets of $335 million or
10% of the Company's consolidated assets and $39 million or 1% of the Company's
consolidated liabilities.
As of December 29, 2000:
o the Issuer had $101 million of Senior Indebtedness, excluding its
guarantee and unused commitments under the Senior credit facilities, all
of which were Secured Indebtedness. In addition, the Issuer had $700
million of Senior Indebtedness in respect of its guarantee of debt under
the senior credit facilities, all of which was Secured Indebtedness.
o the Issuer had no Senior Subordinated Indebtedness other than the notes
and no indebtedness that is subordinate or junior in right of payment to
the notes;
o the Note Guarantors had $103 million of Senior Indebtedness, excluding
their guarantees under the senior credit facilities, all of which was
Secured Indebtedness; and
o the Note Guarantors had no Senior Subordinated Indebtedness (other than
the Note Guarantees) and no Indebtedness that is subordinate or junior
in right of payment to the Note Guarantees.
Although the amount of additional Indebtedness we can incur is limited by
the indenture, we may be able to incur substantial amounts of additional
Indebtedness in certain circumstances. Such Indebtedness may be Senior
Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness" below.
"Senior Indebtedness" of the Issuer or any Note Guarantor means the
principal of, premium, if any, and accrued and unpaid interest on, including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization of the Issuer or any Note Guarantor, regardless of whether or
not a claim for post-filing interest is allowed in such proceedings, and fees
and other amounts, including expenses, reimbursement obligations under letters
of credit and indemnities, owing in respect of, Bank Indebtedness and all other
Indebtedness of the Issuer or any Note Guarantor, as applicable, whether
outstanding on the Closing Date or thereafter Incurred, unless in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding it is provided that such obligations are not superior in right of
payment to the notes or such Note Guarantor's Note Guarantee, as applicable;
provided, however, that Senior Indebtedness of the Issuer or any Note Guarantor
shall not include:
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o any obligation of the Issuer to the Company or any other Subsidiary of
the Company or any obligation of the Note Guarantor to the Company or
any other Subsidiary of the Company;
o any liability for U.S. Federal, state, local or other taxes owed or
owing by the Issuer or such Note Guarantor, as applicable;
o any accounts payable or other liability to trade creditors arising in
the ordinary course of business, including Guarantees or instruments
evidencing the liabilities;
o any Indebtedness or obligation of the Issuer or the Note Guarantor, as
applicable, and any accrued and unpaid interest in respect thereof, that
by its terms is subordinate or junior in any respect to any other
Indebtedness or obligation of the Issuer or such Note Guarantor, as
applicable, including any Senior Subordinated Indebtedness and any
Subordinated Obligations of the Issuer or such Note Guarantor, as
applicable;
o any obligations with respect to any Deferred Compensation Plan;
o any obligations with respect to any Capital Stock; or
o any Indebtedness Incurred in violation of the indenture.
If any Senior Indebtedness is disallowed, avoided or subordinated pursuant
to Section 548 of Title 11 of the United States Bankruptcy Code or any
applicable state fraudulent conveyance law, such Senior Indebtedness will
nevertheless constitute Senior Indebtedness.
Only Indebtedness of the Issuer or a Note Guarantor that is Senior
Indebtedness will rank senior to the notes. The notes will rank equally in all
respects with all other Senior Subordinated Indebtedness of the Issuer. The
Issuer will not Incur, directly or indirectly, any Indebtedness which is
subordinate or junior in ranking in any respect to Senior Indebtedness unless
such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured
Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness
merely because it is unsecured.
The Issuer may not pay principal of, any premium, any liquidated damages
or interest on the notes, or make any deposit pursuant to the provisions
described under "-- Defeasance" below, and may not otherwise purchase,
repurchase, redeem or otherwise acquire or retire for value any notes, which we
describe collectively as "pay the notes" if:
(1) any principal of any premium or interest on, or any other amount
owing in respect of any Designated Senior Indebtedness of the Issuer
is not paid when due, or
(2) any other default on Designated Senior Indebtedness of the Issuer
occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms
unless, in either case,
o the default has been cured or waived and any such acceleration has been
rescinded; or
o such Designated Senior Indebtedness has been paid in full in cash;
provided, however, that the Issuer may pay the notes without regard to the
foregoing if the Issuer and the Trustee receive written notice approving the
payment from the Representative of the Designated Senior Indebtedness with
respect to which either of the events set forth in clause (1) or (2) above has
occurred and is continuing.
During the continuance of any default, other than a default described in
clause (1) or (2) of the immediately preceding paragraph, with respect to any
Designated Senior Indebtedness of the Issuer pursuant to which the maturity
thereof may be accelerated immediately without further notice, except such
notice as may be required to effect the acceleration, or the expiration of any
applicable grace periods, the Issuer may not pay the notes for a period, which
we refer to as a "Payment Blockage Period", commencing upon the receipt by the
Trustee, with a copy to the Issuer, of written notice,
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which we refer to as a "Blockage Notice", of such default from the
Representative of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days later or earlier if the
Payment Blockage Period is terminated:
o by written notice to the Trustee and the Issuer from the Person or
Persons who gave such Blockage Notice,
o by repayment in full in cash of the Designated Senior Indebtedness, or
o because the default giving rise to the Blockage Notice is no longer
continuing.
Notwithstanding the provisions described in the immediately preceding
paragraph, but subject to the provisions contained in the second preceding and
in the immediately succeeding paragraph, unless the holders of the Designated
Senior Indebtedness or the Representative of the holders have accelerated the
maturity of the Designated Senior Indebtedness, the Issuer may resume payments
on the notes after the end of the Payment Blockage Period, including any missed
payments.
Not more than one Blockage Notice may be given in any consecutive 360-day
period, irrespective of the number of defaults with respect to Designated
Senior Indebtedness during the 360-day period. However, if any Blockage Notice
within the 360-day period is given by or on behalf of any holders of Designated
Senior Indebtedness other than the Bank Indebtedness, the Representative of the
Bank Indebtedness may give another Blockage Notice within the 360-day period.
In no event, however, may the total number of days during which any Payment
Blockage Period or Periods is in effect exceed 179 days in the aggregate during
any 360 consecutive day period. For purposes of this paragraph, no default or
event of default that existed or was continuing on the date of the commencement
of any Payment Blockage Period with respect to the Designated Senior
Indebtedness initiating such Payment Blockage Period shall be, or be made, the
basis of the commencement of a subsequent Payment Blockage Period by the
Representative of such Designated Senior Indebtedness, whether or not within a
period of 360 consecutive days, unless the default or event of default shall
have been cured or waived for a period of not less than 90 consecutive days.
Upon any payment or distribution of the assets of the Issuer to creditors
upon a total or partial liquidation or a total or partial dissolution of the
Issuer or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Issuer or its property:
(1) the holders of Senior Indebtedness of the Issuer will be entitled to
receive payment in full in cash of the Senior Indebtedness before the
Holders are entitled to receive any payment of principal of, premium,
if any, or interest on or any other amount owing in respect of the
notes; and
(2) until the Senior Indebtedness is paid in full in cash any payment or
distribution to which Holders would be entitled but for the
subordination provisions of the indenture will be made to holders of
the Senior Indebtedness as their interests may appear, except that
Holders may receive and retain (i) Permitted Junior Securities and
(ii) payments made from the trust described under "-- Defeasance"
provided, that on the date or dates the respective amounts were paid
into the trust, such payments were made with respect to the notes
without violating the subordination provisions described herein.
If a distribution is made to Holders that due to the subordination provisions
of the indenture should not have been made to them, the Holders will be
required to hold it in trust for the holders of Senior Indebtedness of the
Issuer and pay it over to them as their interests may appear.
If payment of the notes is accelerated because of an Event of Default, the
Issuer or the Trustee, provided that the Trustee shall have received written
notice from the Issuer, on which notice the Trustee shall be entitled to
conclusively rely, shall promptly notify the holders of the Designated Senior
Indebtedness of the Issuer or their Representative of the acceleration. If any
Designated Senior Indebtedness of the Issuer is outstanding, the Issuer may not
pay the notes until five
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Business Days after the holders or the Representative of the Designated Senior
Indebtedness receive notice of the acceleration and, thereafter, may pay the
notes only if the subordination provisions of the indenture otherwise permit
payment at that time.
By reason of the subordination provisions of the indenture, in the event
of insolvency, creditors of the Issuer who are holders of Senior Indebtedness
of the Company may recover more, ratably, than the Holders, and creditors of
the Issuer who are not holders of Senior Indebtedness of the Issuer or of
Senior Subordinated Indebtedness of the Issuer, including the notes, may
recover less, ratably, than holders of Senior Indebtedness of the Issuer and
may recover more, ratably, than the holders of Senior Subordinated Indebtedness
of the Issuer.
The indenture contains substantially identical subordination provisions
relating to each Note Guarantor's obligations under its Note Guarantee.
NOTE GUARANTEES
The Company and each of its Subsidiaries, other than any Unrestricted
Subsidiaries, that Guarantees the Bank Indebtedness on the Closing Date, and
specified future Subsidiaries of the Company, as primary obligors and not
merely as sureties, jointly and severally irrevocably and unconditionally
Guaranteed on an unsecured senior subordinated basis the performance and full
and punctual payment when due, whether at Stated Maturity, by acceleration or
otherwise, of all obligations of the Issuer under the indenture, including
obligations to the Trustee, and the notes, whether for payment of principal of
or interest on or liquidated damages, if any, in respect of the notes,
expenses, indemnification or otherwise. We refer to the obligations guaranteed
by the Note Guarantors as the "Guaranteed Obligations". The Note Guarantors
agreed to pay, in addition to the amount stated above, any and all costs and
expenses, including reasonable counsel fees and expenses, incurred by the
Trustee or the Holders in enforcing any rights under the Note Guarantees. Each
Note Guarantee is limited in amount to an amount not to exceed the maximum
amount that can be Guaranteed by the applicable Note Guarantor without
rendering the Note Guarantee, as it relates to the Note Guarantor, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer
or similar laws affecting the rights of creditors generally. After the Closing
Date, the Company will cause (1) at any time that any Bank Indebtedness is
outstanding, each Subsidiary of the Company, other than the Issuer, that Incurs
or enters into a Guarantee of any Bank Indebtedness and (2) at any time that no
Bank Indebtedness is outstanding, each Subsidiary of the Company, other than
the Issuer, that Incurs any Indebtedness, to execute and deliver to the Trustee
a supplemental indenture pursuant to which such Subsidiary will Guarantee
payment of the notes. See "-- Certain Covenants -- Future Note Guarantors"
below.
The obligations of a Note Guarantor under its Note Guarantee are senior
subordinated obligations. As such, the rights of the Holders to receive payment
by a Note Guarantor pursuant to its Note Guarantee will be subordinated in
right of payment to the rights of holders of Senior Indebtedness of the Note
Guarantor. The terms of the subordination provisions described above with
respect to the Issuer's obligations under the notes apply equally to a Note
Guarantor and the obligations of the Note Guarantor under its Note Guarantee.
Each Note Guarantee is a continuing guarantee and shall (a) remain in full
force and effect until payment in full of all the Guaranteed Obligations, (b)
be binding upon each Note Guarantor and its successors and (c) inure to the
benefit of, and be enforceable by, the Trustee, the Holders and their
successors, transferees and assigns.
Any Note Guarantee by a Subsidiary of the Company, other than Intermediate
Holdings or HDD Holdings, will be automatically released upon the sale,
including through merger or consolidation, of the Capital Stock of such
Subsidiary if (1) the sale is made in compliance with the covenants described
under "-- Certain Covenants -- Limitation on Sales of Assets and Capital Stock"
and, to the extent applicable, "Merger and Consolidation," and (2) after the
sale, the Subsidiary is no longer a Subsidiary of the Company. In addition, at
any time that Bank Indebtedness is outstanding, if any Subsidiary of the
Company is released from its Guarantee of, and all pledges and security
interests
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granted in connection with, the Credit Agreement, then the Subsidiary shall, at
the option of the Company, be released and relieved of any obligations under
its Note Guarantee. At any time that no Bank Indebtedness is outstanding, (1)
each Subsidiary of the Company, other than Intermediate Holdings or HDD
Holdings, that has no outstanding Indebtedness shall, at the option of the
Company, be released from its Note Guarantee; provided, that following any such
release the Company shall comply with the provisions of the covenant described
under "-- Certain Covenants -- Future Note Guarantors" with respect to such
Subsidiary and (2) each Designated Subsidiary, and each Subsidiary of the
Designated Subsidiary, shall be released from its Note Guarantee upon the first
Qualified Releasing Event with respect to the Designated Subsidiary.
A Note Guarantee by a Subsidiary of the Company will be automatically
released upon the Subsidiary ceasing to be a Subsidiary of the Company as a
result of any foreclosure on any pledge or security interest securing Bank
Indebtedness or other exercise of its remedies if such Subsidiary is released
from its guarantee of, and all pledges and security interests granted in
connection with, the Credit Agreement.
CHANGE OF CONTROL
Upon the occurrence of any, or if applicable, each of the following
events, which we refer to as a "Change of Control", each Holder will have the
right to require the Issuer to purchase all or any part of the Holder's notes
at a purchase price in cash equal to 101% of the principal amount of the
Holder's notes plus accrued and unpaid interest and liquidated damages, if any,
to the date of purchase, subject to the right of Holders of record on the
relevant record date to receive interest and liquidated damages, if any, due on
the relevant interest payment date; provided, however, that notwithstanding the
occurrence of a Change of Control, the Issuer shall not be obligated to
purchase the notes pursuant to this section in the event that it has exercised
its right to redeem all the notes under the terms of the section titled
"Optional Redemption":
(1) prior to the earliest to occur of (A) the first public offering of
common stock of the Company, (B) the first public offering of common
stock of Intermediate Holdings, (C) the first public offering of
common stock of HDD Holdings or (D) the first public offering of
common stock of the Issuer, the Permitted Holders cease to be the
"beneficial owner", as defined in Rules 13d-3 and 13d-5 under the
Securities Exchange Act, directly or indirectly, of a majority in the
aggregate of the total voting power of the Voting Stock of the
Company, Intermediate Holdings, HDD Holdings or the Issuer whether as
a result of issuance of securities of the Company, Intermediate
Holdings, HDD Holdings or the Issuer, any merger, consolidation,
liquidation or dissolution of the Company, Intermediate Holdings, HDD
Holdings or the Issuer, any direct or indirect transfer of securities
by any Permitted Holder or otherwise, for purposes of this clause (1)
and clause (2) below, the Permitted Holders shall be deemed to
beneficially own any Voting Stock of an entity, which we refer to as
the "specified entity", held by any other entity, which we refer to as
the "parent entity", so long as the Permitted Holders beneficially
own, directly or indirectly, in the aggregate a majority of the voting
power of the Voting Stock of the parent entity;
(2) (A) any "person", as such term is used in Sections 13(d) and 14(d) of
the Exchange Act, other than one or more Permitted Holders, is or
becomes the beneficial owner, as defined in clause (1) above, except
that for purposes of this clause (2) the person shall be deemed to
have "beneficial ownership" of all shares that any person has the
right to acquire, whether such right is exercisable immediately or
only after the passage of time, directly or indirectly, of more than
35% of the total voting power of the Voting Stock of the Company,
Intermediate Holdings, HDD Holdings or the Issuer and (B) the
Permitted Holders "beneficially own", as defined in clause (1) above,
directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company, Intermediate
Holdings, HDD Holdings or the Issuer than such other person and do not
have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the board of directors
of the Company, Intermediate Holdings, HDD Holdings or
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the Issuer, as the case may be (for the purposes of this clause (2),
the other person shall be deemed to beneficially own any Voting Stock
of a specified entity held by a parent entity, if the other person is
the beneficial owner, as defined in this clause (2), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
the parent entity and the Permitted Holders "beneficially own", as
defined in clause (1) above, directly or indirectly, in the aggregate a
lesser percentage of the voting power of the Voting Stock of the parent
entity and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board
of directors of such parent entity); or
(3) during any period of two consecutive years, individuals who at the
beginning of such period constituted the board of directors of the
Company, Intermediate Holdings, HDD Holdings or the Issuer, as the
case may be, together with any new directors whose election by such
board of directors of the Company, Intermediate Holdings, HDD Holdings
or the Issuer, as the case may be, or whose nomination for election by
the shareholders of the Company, Intermediate Holdings, HDD Holdings
or the Issuer, as the case may be, was approved by a vote of 662/3% of
the directors of the Company, Intermediate Holdings, HDD Holdings or
the Issuer, as the case may be, then still in office who were either
directors at the beginning of such period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute a majority of the board of directors of the
Company, Intermediate Holdings, HDD Holdings or the Issuer, as the
case may be, then in office; or
(4) the adoption of a plan relating to the liquidation or dissolution of
the Company, Intermediate Holdings, HDD Holdings or the Issuer; or
(5) the merger or consolidation of the Company, Intermediate Holdings,
HDD Holdings or the Issuer with or into another Person or the merger
of another Person with or into the Company, Intermediate Holdings, HDD
Holdings or the Issuer, or the sale of all or substantially all the
assets of the Company, Intermediate Holdings, HDD Holdings or the
Issuer to another Person, other than a Person that is controlled by
the Permitted Holders, and, in the case of any such merger or
consolidation, the securities of the Company, Intermediate Holdings,
HDD Holdings or the Issuer that are outstanding immediately prior to
such transaction and which represent 100% of the aggregate voting
power of the Voting Stock of the Company, Intermediate Holdings, HDD
Holdings or the Issuer are changed into or exchanged for cash,
securities or property, unless pursuant to the transaction the
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving Person or transferee that
represent immediately after the transaction, at least a majority of
the aggregate voting power of the Voting Stock of the surviving Person
or transferee.
In the event that at the time of a Change of Control the terms of the Bank
Indebtedness restrict or prohibit the repurchase of notes pursuant to this
covenant, then prior to the mailing of the notice to Holders provided for in
the immediately following paragraph but in any event within 30 days following
any Change of Control, the Issuer shall:
(1) repay in full all Bank Indebtedness or, if doing so will allow the
purchase of notes, offer to repay in full all Bank Indebtedness and
repay the Bank Indebtedness of each lender who has accepted the offer
to repay, or
(2) obtain the requisite consent under the agreements governing the Bank
Indebtedness to permit the repurchase of the notes as provided for in
the immediately following paragraph.
If the Issuer does not obtain the consents or repay the Bank Indebtedness,
the Issuer will remain prohibited from repurchasing the notes pursuant to this
covenant. In this event the Issuer's failure to make an offer to purchase notes
pursuant to this covenant would constitute an Event of Default under the
indenture, which would in turn constitute a default under the Credit Agreement.
In these circumstances, the subordination provisions of the indenture would
likely prohibit payments to Holders of the notes.
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Within 30 days following any Change of Control, the Issuer shall mail a
notice to each Holder with a copy to the Trustee, which we refer to as the
"Change of Control Offer", stating:
(1) that a Change of Control has occurred and that the Holder has the
right to require the Issuer to purchase all or a portion of the
Holder's notes at a purchase price in cash equal to 101% of the
principal amount of the notes, plus accrued and unpaid interest and
liquidated damages, if any, to the date of purchase, subject to the
right of Holders of record on the relevant record date to receive
interest and liquidated damages, if any, on the relevant interest
payment date;
(2) the circumstances and relevant facts and financial information
regarding the Change of Control;
(3) the purchase date, which shall be no earlier than 30 days nor later
than 60 days from the date the notice is mailed; and
(4) the instructions determined by the Issuer, consistent with this
covenant, that a Holder must follow in order to have its notes
purchased.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if it has exercised its rights under the terms of the section
titled "Optional Redemption" or if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the indenture applicable to a Change of Control Offer
made by the Issuer and purchases all notes validly tendered and not withdrawn
under the Change of Control Offer.
The Issuer will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the purchase of notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Issuer will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this covenant by virtue of its compliance with applicable
securities laws and regulations.
The Change of Control purchase feature is a result of negotiations between
the Issuer and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that we would decide to do so in the future. Subject to the limitations
discussed below, we could, in the future, enter into various transactions,
including acquisitions, refinancings or recapitalizations, that would not
constitute a Change of Control under the indenture, but that could increase the
amount of indebtedness outstanding at the time or otherwise affect our capital
structure or credit ratings. Restrictions on our ability to Incur additional
Indebtedness are contained in the covenant described under "Certain Covenants
- -- Limitation on Indebtedness." These restrictions can only be waived with the
consent of the Holders of a majority in principal amount of the notes then
outstanding. Except for the limitations contained in that covenant, however,
the indenture will not contain any covenants or provisions that may afford
Holders protection in the event of a highly leveraged transaction.
The occurrence of some events which would constitute a Change of Control
would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Company and its Subsidiaries may prohibit specified events
which would constitute a Change of Control or require the Senior Indebtedness
to be repurchased or repaid upon a Change of Control. Moreover, the exercise by
the Holders of their right to require the Issuer to purchase the notes could
cause a default under the Senior Indebtedness, even if the Change of Control
itself does not, due to the financial effect of the purchase on the Company and
its Subsidiaries. Finally, the Issuer's ability to pay cash to the Holders upon
a purchase may be limited by the Issuer's then existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any required purchases. The provisions under the indenture
relating to the Issuer's obligation to make an offer to purchase the notes as a
result of a Change of Control may be waived or modified with the written
consent of the Holders of a majority in principal amount of the notes.
187
The definition of Change of Control includes a phrase relating to the
sale, lease or transfer of "all or substantially all" of the assets of the
Company, Intermediate Holdings, HDD Holdings or the Issuer. Although there is a
developing body of case law interpreting the phrase "substantially all," there
is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of notes to require the Issuer to purchase
the notes as a result of a sale, lease or transfer of less than all of the
assets of the Company, Intermediate Holdings, HDD Holdings or the Issuer to
another Person or group may be uncertain.
ADDITIONAL AMOUNTS
The Issuer, which shall include any Successor Company, which we define in
the first paragraph of the covenant described under "-- Merger and
Consolidation" below, is required to make all its payments under or with
respect to the notes free and clear of and without withholding or deduction for
or on account of any present or future tax, duty, levy, impost, assessment or
other governmental charge including penalties, interest and other liabilities
related thereto, which we refer to as "Taxes", imposed or levied by or on
behalf of the government of the Cayman Islands or any political subdivision or
any authority or agency therein or thereof having power to tax, or within any
other jurisdiction in which it is organized or is otherwise resident for tax
purposes or any jurisdiction from or through which payment is made, each of
which we refer to as a "Relevant Taxing Jurisdiction", unless the Issuer is
required to withhold or deduct Taxes by law or by the interpretation or
administration thereof.
If the Issuer is required to withhold or deduct any amount for or on
account of Taxes imposed by a Relevant Taxing Jurisdiction from any payment
made under or with respect to the notes, the Issuer will be required to pay the
additional amounts, which we refer to as "Additional Amounts", as may be
necessary so that the net amount received by each Holder, including Additional
Amounts, after the withholding or deduction will not be less than the amount
the Holder would have received if the Taxes had not been withheld or deducted;
provided, however, that the foregoing obligation to pay Additional Amounts does
not apply to (1) any Taxes that would not have been imposed but for the
existence of any present or former connection between the relevant Holder, or
between a fiduciary, settlor, beneficiary, member or shareholder of, or
possessor of power over the relevant Holder, if the relevant Holder is an
estate, nominee, trust or corporation, and the Relevant Taxing Jurisdiction,
(other than the mere receipt of the payment or the ownership or holding outside
of the Cayman Islands of the note but including, without limitation, the
relevant Holder, or the fiduciary, settlor, beneficiary, member or shareholder
or possessor, being or having been a citizen or resident of the Cayman Islands
or being or having been present or engaged in a trade or business in the Cayman
Islands or having or having had a permanent establishment in the Cayman
Islands; or (2) any estate, inheritance, gift, sales, excise, transfer,
personal property tax or similar tax, assessment or governmental charge; (3)
any tax, assessment or other governmental charge that is imposed or withheld by
reason of the failure by the Holder or the beneficial owner of the note to
comply with a request of the Issuer addressed to the Holder (x) to provide
information, documents or other evidence concerning the nationality, residence
or identity of the Holder or such beneficial owner or (y) to make and deliver
any declaration or other similar claim, other than a claim for refund of a tax,
assessment or other governmental charge withheld by the Issuer, or satisfy any
information or reporting requirements, which, in the case of (x) or (y), is
required or imposed by a statute, treaty, regulation or administrative practice
of the taxing jurisdiction as a precondition to exemption from all or part of
such tax, assessment or other governmental charge or (4) any tax, assessment or
other governmental charge that is payable otherwise than by withholding from
payment of principal of, premium, if any, or interest on such note; nor will we
pay Additional Amounts (a) if the payment could have been made without such
deduction or withholding if the beneficiary of the payment had presented the
note for payment within 30 days after the date on which such payment or such
note became due and payable or the date on which payment thereof is duly
provided for, whichever is later, except to the extent that the holder would
have been entitled to Additional Amounts had the note been presented on the
last day of such 30-day period, (b) if, at the election of the relevant Holder,
the payment of principal of, or premium, if any, on, or interest on the note
could have been made through another paying agent
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without the deduction or withholding, or (c) with respect to any payment of
principal of, or premium, if any, on, or interest on the note to any Holder who
is a fiduciary, partnership or limited liability company that is treated as a
partnership for U.S. Federal income tax purposes or any person other than the
sole beneficial owner of the payment, to the extent that a beneficiary or
settlor with respect to the fiduciary, a member of the partnership or limited
liability company that is treated as a partnership for U.S. Federal income tax
purposes or the beneficial owner of the payment would not have been entitled to
the Additional Amounts had the beneficiary, settlor, member or beneficial owner
been the actual holder of the note.
Upon request, the Issuer will provide the Trustee with official receipts
or other documentation satisfactory to the Trustee evidencing the payment of
the Taxes with respect to which Additional Amounts are paid.
Whenever in the indenture there is mentioned, in any context:
(1) the payment of principal;
(2) purchase prices in connection with a purchase of notes;
(3) interest; or
(4) any other amount payable on or with respect to any of the notes,
such reference shall be deemed to include payment of Additional Amounts as
described under this heading to the extent that, in that context, Additional
Amounts are, were or would be payable in respect thereof.
The Issuer will pay any present or future stamp, court or documentary
taxes or any other excise or property taxes, charges or similar levies and
other duties, including interest and penalties, that arise in any jurisdiction
from the execution, delivery, enforcement or registration of the notes, the
indenture or any other document or instrument relating to the notes, or the
receipt of any payments with respect to the notes, excluding the taxes, charges
or similar levies imposed by any jurisdiction outside of the Cayman Islands or
the United States, or any political subdivision or taxing authority of either
jurisdiction, the jurisdiction of incorporation of any successor of the Issuer,
any jurisdiction through which payment is made or in which a paying agent is
located or any jurisdiction in which the Issuer is organized or engaged in
business for tax purposes, and the Issuer will agree to indemnify the Holders
for any such taxes paid by the Holders.
The obligations described under this heading will survive any termination,
defeasance or discharge of the indenture and will apply mutatis mutandis to any
jurisdiction in which any successor Person to the Issuer is organized or any
political subdivision or taxing authority or agency of or in that jurisdiction.
In addition, the obligations described under this heading shall apply to each
Note Guarantor and its Note Guarantee as if each reference to the Issuer was a
reference to the Note Guarantor and each reference to the notes was a reference
to the Note Guarantor's Note Guarantee.
REDEMPTION FOR CHANGES IN WITHHOLDING TAXES
The Issuer, which shall include any Successor Company, which we define in
the first paragraph of the covenant described under "-- Merger and
Consolidation," is entitled to redeem the notes, at its option, at any time as
a whole but not in part, upon not less than 30 nor more than 60 days' notice,
at 100% of the principal amount of the notes, plus accrued and unpaid interest,
if any, to the date of redemption, subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date, in the event the Issuer has become or would become obligated to
pay, on the next date on which any amount would be payable with respect to the
notes, any Additional Amounts as a result of:
(1) a change in or an amendment to the laws, including any regulations or
ruling promulgated under the laws, of (x) the Cayman Islands, (y) any
jurisdiction, other than the United States, from or through which
payment on the notes is made or (z) any other jurisdiction, other than
the United States, in which the Issuer or a Successor Company, as
defined in the first
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paragraph of "-- Merger and Consolidation" below, is organized (or any
political subdivision or taxing authority thereof or therein), which
change or amendment is announced or becomes effective on or after
November 17, 2000 (and, in the case of a Successor Company, becomes
effective after the date of that entity's assumption of the Issuer's
obligations under the notes); or
(2) any change in or amendment to any official position regarding the
application or interpretation of such laws, regulations or rulings, or
any execution of or amendment to, any treaty or treaties affecting
taxation to which such jurisdiction (or such political subdivision or
taxing authority) is a party, which change or amendment is announced
or becomes effective on or after November 17, 2000.
and the Issuer or the Successor Company, if applicable, cannot avoid the
obligation by taking reasonable measures available to it.
Before the Issuer or the Successor Company, if applicable, publishes or
mails notice of redemption of the notes as described above, the Issuer or the
Successor Company, if applicable, will deliver to the Trustee an officers'
certificate to the effect that the Issuer or the Successor Company, if
applicable, cannot avoid its obligation to pay Additional Amounts by taking
reasonable measures available to it. The Issuer or the Successor Company, if
applicable, will also deliver an opinion of independent legal counsel of
recognized standing stating that the Issuer or the Successor Company, if
applicable, would be obligated to pay Additional Amounts as a result of a
change in tax laws or regulations or the application or interpretation of such
laws or regulations.
CERTAIN COVENANTS
The indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
provided, however, that the Issuer or any Note Guarantor may Incur Indebtedness
if on the date of such Incurrence and after giving effect thereto the
Consolidated Coverage Ratio would be at least 5.0:1.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries may Incur the following Indebtedness:
(1) Bank Indebtedness Incurred pursuant to the Credit Agreement in an
aggregate principal amount not to exceed $900 million;
(2) Indebtedness of the Company owed to and held by any Note
Guarantor or Wholly Owned Subsidiary or Indebtedness of a Note
Guarantor or Wholly Owned Subsidiary owed to and held by the
Company or another Note Guarantor or Wholly Owned Subsidiary;
provided, however, that (A) any subsequent issuance or transfer of
any Capital Stock or any other event that results in any Note
Guarantor or Wholly Owned Subsidiary ceasing to be a Note
Guarantor or Wholly Owned Subsidiary, as applicable, or any
subsequent transfer of any Indebtedness, except to the Company or
another Note Guarantor or Wholly Owned Subsidiary, shall be
deemed, in each case, to constitute the Incurrence of such
Indebtedness by the Issuer thereof, (B) if the Issuer is the
obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all
obligations with respect to the notes and (C) if a Note Guarantor
is the obligor on such Indebtedness and such Indebtedness is owed
to and held by a Restricted Subsidiary that is not a Note
Guarantor, such Indebtedness is expressly subordinated to the
prior payment in full in cash of all obligations of the Note
Guarantor with respect to its Note Guarantee;
(3) Indebtedness (A) represented by the notes, not including any
Additional Notes, and the Note Guarantees, (B) outstanding on the
Closing Date, other than the Indebtedness described in clauses (1)
and (2) above; provided, however, that all Indebtedness of the
Company and its Subsidiaries in respect of the Existing Notes
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shall only be permitted to be outstanding under this clause (B)
until 45 days or, if the date of redemption of the Existing Notes
shall be reasonably extended by the Trustee under the indenture
under which the Existing Notes were issued, the earlier of the
extended date of redemption and 120 days following the Closing
Date; provided, further, that Indebtedness under the Existing
Notes shall only be permitted under this clause (B) to the extent
that sufficient funds to effect the redemption of the Existing
Notes remain deposited in trust for that purpose, on the terms
described in the prospectus under "The Transactions -- Redemption
of Existing Senior Notes," (C) consisting of Refinancing
Indebtedness Incurred in respect of any Indebtedness described in
this clause (3), including Indebtedness that is Refinancing
Indebtedness, or the foregoing paragraph (a) and (D) consisting of
Guarantees by the Issuer or a Note Guarantor of Indebtedness or
other obligations of the Company or any of its Restricted
Subsidiaries so long as the Incurrence of such Indebtedness
Incurred by the Company or such Restricted Subsidiary is permitted
under the terms of the indenture; provided that if such
Indebtedness is by its express terms subordinated in right of
payment to the notes or the Note Guarantee of such Restricted
Subsidiary, as applicable, any such Guarantee of such Note
Guarantor with respect to such Indebtedness or other obligations
shall be subordinated in right of payment to the notes or such
Note Guarantor's Note Guarantee with respect to the notes
substantially to the same extent as such Indebtedness is
subordinated to the notes or the Note Guarantee of such Restricted
Subsidiary, as applicable;
(4)(A) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Restricted Subsidiary was
acquired by the Company, other than Indebtedness Incurred in
contemplation of, in connection with, as consideration in, or to
provide all or any portion of the funds or credit support utilized
to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Subsidiary
of or was otherwise acquired by the Company; provided, however,
that on the date that such Restricted Subsidiary is acquired by
the Company, either (x) the Company would have been able to Incur
$1.00 of additional Indebtedness pursuant to the foregoing
paragraph (a) after giving effect to the Incurrence of such
Indebtedness pursuant to this clause (4) or (y) the Consolidated
Coverage Ratio after giving effect to such acquisition would be
(i) greater than the Consolidated Coverage Ratio immediately prior
to such acquisition and (ii) at least 4.5:1 and (B) Refinancing
Indebtedness Incurred by a Restricted Subsidiary in respect of
Indebtedness Incurred by such Restricted Subsidiary pursuant to
this clause (4);
(5) Indebtedness (A) in respect of performance bonds, workman's
compensation, completion guarantees, bankers' acceptances, letters
of credit and bid, surety or appeal bonds provided by the Company
and the Restricted Subsidiaries in the ordinary course of their
business, and (B) under Hedging Agreements entered into for bona
fide hedging purposes of the Company in the ordinary course of
business or entered into in connection with the redemption of the
Existing Notes; provided, however, that such Hedging Agreements do
not increase the Indebtedness of the Company outstanding at any
time other than as a result of fluctuations in interest rates,
exchange rates, commodity prices or by reason of fees, indemnities
and compensation payable thereunder;
(6) Purchase Money Indebtedness, mortgage financings, Capitalized
Lease Obligations and Attributable Debt in respect of
Sale/Leaseback Transactions in an aggregate principal amount not
in excess of $125 million at any time outstanding;
(7) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in
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each case Incurred in connection with the disposition of any
business, assets or a subsidiary of the Company in accordance with
the terms of the indenture, other than guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such
acquisition;
(8) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument
drawn against insufficient funds in the ordinary course of
business, provided that such Indebtedness is extinguished within
five Business Days of its Incurrence;
(9) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness constituting reimbursement
obligations with respect to letters of credit issued in the
ordinary course of business; provided, however, that upon the
drawing of such letters of credit, such obligations are reimbursed
within 30 days following such drawing;
(10) obligations arising from or representing deferred compensation to
employees of the Company or its Subsidiaries that constitute or
are deemed to be Indebtedness under GAAP and that are Incurred in
the ordinary course of business;
(11) Indebtedness, other than Indebtedness permitted to be Incurred
pursuant to the foregoing paragraph (a) or any other clause of
this paragraph (b), in an aggregate principal amount on the date
of Incurrence that, when added to all other Indebtedness Incurred
pursuant to this clause (11) and then outstanding, will not exceed
$75 million.
(c) Notwithstanding the foregoing, the Issuer or any Note Guarantor may
not Incur any Indebtedness pursuant to paragraph (b) above if the proceeds of
the Indebtedness are used, directly or indirectly, to repay, prepay, redeem,
defease, retire, refund or refinance any Subordinated Obligations unless such
Indebtedness will be subordinated to the notes or such Note Guarantor's Note
Guarantee, as applicable, to at least the same extent as such Subordinated
Obligations. The Issuer may not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. In
addition, the Issuer may not Incur any Secured Indebtedness which is not Senior
Indebtedness unless contemporaneously therewith effective provision is made to
secure the notes equally and ratably with, or on a senior basis to, in the case
of Indebtedness subordinated in right of payment to the notes, such Secured
Indebtedness for so long as such Secured Indebtedness is secured by a Lien. A
Note Guarantor may not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness of
such Note Guarantor unless such Indebtedness is Senior Subordinated
Indebtedness of such Note Guarantor or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness of such Note Guarantor. In
addition, a Note Guarantor may not Incur any Secured Indebtedness that is not
Senior Indebtedness of such Note Guarantor unless contemporaneously therewith
effective provision is made to secure the Note Guarantee of such Note Guarantor
equally and ratably with, or on a senior basis to, in the case of Indebtedness
subordinated in right of payment to such Note Guarantee, such Secured
Indebtedness for as long as such Secured Indebtedness is secured by a Lien.
(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a result
of fluctuations in the exchange rates of currencies. For purposes of
determining the outstanding principal amount of any particular Indebtedness
Incurred pursuant to this covenant:
(1) Indebtedness Incurred pursuant to the Credit Agreement prior to or
on the Closing Date shall be treated as Incurred pursuant to clause
(1) of paragraph (b) above,
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(2) Indebtedness permitted by this covenant need not be permitted
solely by reference to one provision permitting such Indebtedness
but may be permitted in part by one such provision and in part by
one or more other provisions of this covenant permitting such
Indebtedness,
(3) in the event that Indebtedness meets the criteria of more than one
of the types of Indebtedness described in this covenant, the Issuer,
in its sole discretion, shall classify such Indebtedness and only be
required to include the amount of such Indebtedness in one of such
clauses; provided, however, subject to clause (1) above, that at any
time that the Company or a Note Guarantor is permitted to Incur at
least $1.00 of additional Indebtedness pursuant to paragraph (a) of
this covenant, the Issuer may reclassify Indebtedness originally
Incurred pursuant to one or more clauses of paragraph (b) of this
covenant as Indebtedness Incurred pursuant to such paragraph (a),
and
(4) for purposes of determining compliance with any U.S. dollar
denominated restriction on the Incurrence of Indebtedness where the
Indebtedness Incurred is denominated in a different currency, the
amount of such Indebtedness will be the U.S. Dollar Equivalent
determined on the date of the Incurrence of such Indebtedness,
provided, however, that if any such Indebtedness denominated in a
different currency is subject to a Currency Agreement with respect
to the U.S. dollar covering all principal, premium, if any, and
interest payable on such Indebtedness, the amount of such
Indebtedness expressed in U.S. dollars will be as provided in such
Currency Agreement. The principal amount of any Refinancing
Indebtedness Incurred in the same currency as the Indebtedness being
Refinanced will be the U.S. Dollar Equivalent of the Indebtedness
Refinanced, except to the extent that (i) such U.S. Dollar
Equivalent was determined based on a Currency Agreement, in which
case the Refinancing Indebtedness will be determined in accordance
with the preceding sentence, and (ii) the principal amount of the
Refinancing Indebtedness exceeds the principal amount of the
Indebtedness being Refinanced, in which case the U.S. Dollar
Equivalent of such excess, will be determined on the date such
Refinancing Indebtedness is Incurred.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to:
(1) declare or pay any dividend, make any distribution on or in respect
of its Capital Stock or make any similar payment, including any
payment in connection with any merger or consolidation involving the
Company or any Subsidiary of the Company, to the direct or indirect
holders of its Capital Stock, except (x) dividends or distributions
payable solely in its Capital Stock, other than Disqualified Stock
or, except in the case of the Company, Intermediate Holdings or HDD
Holdings, Preferred Stock, (y) dividends or distributions payable to
the Company or a Restricted Subsidiary, and if such Restricted
Subsidiary has shareholders other than the Company or other
Restricted Subsidiaries, to its other shareholders on a pro rata
basis and (z) following a bona fide underwritten initial public
offering of Capital Stock, other than Disqualified Stock, of
Intermediate Holdings or HDD Holdings, dividends or distributions
consisting of Capital Stock of the same class and series of
Intermediate Holdings or HDD Holdings, as applicable;
(2) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of the Company held by any Person or any Capital
Stock of a Restricted Subsidiary held by any Affiliate of the
Company, other than a Restricted Subsidiary;
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(3) purchase, repurchase, redeem, retire, defease or otherwise acquire
for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations, other
than (a) the purchase, repurchase, redemption, retirement,
defeasance or other acquisition for value of Subordinated
Obligations acquired in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition and (b) Indebtedness
permitted under clause (b)(2) of the covenant described under "--
Limitation on Indebtedness";
(4) make any distribution or other payment, whether in cash, securities
or other property or any combination thereof, under or in respect of
any Deferred Compensation Plan; or
(5) make any Investment, other than a Permitted Investment, in any
Person, (we refer to any such dividend, distribution, payment,
purchase, redemption, repurchase, defeasance, retirement, or other
acquisition or Investment as a "Restricted Payment") if at the time
the Company or such Restricted Subsidiary makes such Restricted
Payment:
(A) a Default will have occurred and be continuing, or would result
therefrom;
(B) the Company could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or
(C) the aggregate amount of such Restricted Payment and all other
Restricted Payments, including, if the amount so expended is
other than in cash, the Fair Market Value of such Restricted
Payments, declared or made subsequent to the Closing Date would
exceed the sum, without duplication, of:
(i) 50% of the Consolidated Net Income accrued during the
period, treated as one accounting period, from the beginning
of the fiscal quarter immediately following the fiscal
quarter during which the Closing Date occurs to the end of
the most recent fiscal quarter ending at least 45 days prior
to the date of such Restricted Payment, or in case such
Consolidated Net Income will be a deficit, minus 100% of
such deficit;
(ii) the aggregate Net Cash Proceeds received by the Company from
contributions to its capital and from the issue or sale of
its Capital Stock, other than Disqualified Stock, Excluded
Contributions or Designated Preferred Stock, subsequent to
the Closing Date (other than an issuance or sale to (x) a
Subsidiary of the Company or (y) an employee stock ownership
plan or other trust established by the Company or any of its
Subsidiaries);
(iii) the amount by which Indebtedness of the Company or the
Restricted Subsidiaries is reduced on the Company's balance
sheet upon the conversion or exchange, other than by a
Subsidiary of the Company, subsequent to the Closing Date of
any Indebtedness of the Company or the Restricted
Subsidiaries issued after the Closing Date which is
convertible or exchangeable for Capital Stock, other than
Disqualified Stock, of the Company (less the amount of any
cash or the Fair Market Value of other property distributed
by the Company or any Restricted Subsidiary upon such
conversion or exchange);
(iv) an amount equal to the sum of (x) the net reduction in
Investments, other than Permitted Investments, made by the
Company or any Restricted Subsidiary in any Person, other
than the Company or a Restricted Subsidiary, resulting from
(A) Net Cash Proceeds received from repurchases, repayments
or redemptions of such Investments by such Person, Net Cash
Proceeds
194
realized on the sale of such Investments, Net Cash Proceeds
representing the return of capital, excluding dividends and
distributions, and cash repayments of loans or advances which
constituted Restricted Payments, in each case received by the
Company or any Restricted Subsidiary or (B) to the extent
such Person is an Unrestricted Subsidiary, the merger,
consolidation or amalgamation of such Person with or into the
Company or a Restricted Subsidiary; provided, that the
surviving entity is the Company or a Restricted Subsidiary
and (y) to the extent such Person is an Unrestricted
Subsidiary, the portion, proportionate to the Company's
equity interest in such Subsidiary, of the Fair Market Value
of the net assets of such Unrestricted Subsidiary at the time
such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall
not exceed, in the case of any such Person or Unrestricted
Subsidiary, the amount of Investments, excluding Permitted
Investments, previously made and treated as a Restricted
Payment, by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary; and
(v) the aggregate Net Cash Proceeds received by the Company or a
Restricted Subsidiary from the issue or sale of Capital
Stock, other than Disqualified Stock, of Intermediate
Holdings or HDD Holdings in a bona fide underwritten public
offering subsequent to the Closing Date, other than an
issuance or sale to (x) the Company or a Subsidiary or
Affiliate of the Company or (y) an employee stock ownership
plan or other trust established by the Company or any of its
Subsidiaries.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) any purchase, repurchase, redemption, retirement or other
acquisition for value of Capital Stock of the Company made by
exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company, other than
Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or
other trust established by the Company or any of its Subsidiaries;
provided, however, that:
(A) such purchase, repurchase, redemption, retirement or other
acquisition for value will be excluded in the calculation of
the amount of Restricted Payments, and
(B) the Net Cash Proceeds from such sale applied in the manner set
forth in this clause (1) will be excluded from the calculation
of amounts under clause (5)(C) of paragraph (a) above;
(2) any prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value of
Subordinated Obligations of the Company made by exchange for, or
out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company that is permitted to be Incurred
pursuant to paragraph (b) of the covenant described under "--
Limitation on Indebtedness"; provided, however, that such
prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value will be
excluded in the calculation of the amount of Restricted Payments;
(3) any prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value of
Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "-- Limitation on Sales
of Assets and Capital Stock"; provided, however, that such
prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value will be
excluded in the calculation of the amount of Restricted Payments;
195
(4) dividends or distributions paid within 60 days after the date of
declaration thereof if at such date of declaration such dividends
or distributions would have complied with this covenant; provided,
however, that such dividends or distributions will be included in
the calculation of the amount of Restricted Payments;
(5) any repurchase of Capital Stock deemed to occur upon exercise of
stock options if such Capital Stock represents a portion of the
exercise price of such options, provided, however, that such
repurchase will be excluded in the calculation of the amount of
Restricted Payments;
(6) any purchase, repurchase, redemption, retirement or other
acquisition for value of shares of, or options to purchase shares
of, Capital Stock of the Company or any of its Subsidiaries from
employees, former employees, directors or former directors of the
Company or any of its Subsidiaries, or permitted transferees of
such employees, former employees, directors or former directors,
pursuant to the terms of agreements, including employment
agreements, or plans, or amendments thereto, approved by the Board
of Directors in good faith under which such individuals purchase or
sell or are granted the option to purchase or sell, shares of such
Capital Stock; provided, however, that the aggregate amount of such
purchases, repurchases, redemptions, retirements and other
acquisitions for value will not exceed $25 million in any calendar
year (with unused amounts in any calendar year (together with any
increase in such amounts for any calendar year permitted by the
following proviso) being permitted to be carried over for the two
succeeding calendar years); provided, further, that such amount in
any calendar year may be increased by an amount not to exceed (i)
the cash proceeds received by the Company or any of its Restricted
Subsidiaries in such calendar year from the sale of Capital Stock
of the Company or any of its Restricted Subsidiaries, other than
Disqualified Stock or Preferred Stock, to members of management or
directors of the Company or any of its Restricted Subsidiaries that
occurs after the Closing Date (provided that the amount of such
cash proceeds utilized for any such repurchase, retirement, other
acquisition or dividend will not increase the amount available for
Restricted Payments under clause (5)(C) of paragraph (a) of this
covenant) plus (ii) the cash proceeds of key man life insurance
policies received by the Company and its Restricted Subsidiaries in
such calendar year after the Closing Date; provided further,
however, that such purchases, repurchases, redemptions, retirements
and other acquisitions for value shall be excluded in the
calculation of the amount of Restricted Payments;
(7) the declaration and payment of dividends or distributions to
holders of any class or series of Disqualified Stock of the Company
or its Restricted Subsidiaries issued or Incurred in accordance
with the covenant described under "-- Limitation on Indebtedness";
provided, however, that such dividends or distributions shall be
excluded in the calculation of the amount of Restricted Payments;
(8) the payment of dividends on the Company's, Intermediate Holdings',
HDD Holdings' or the Issuer's common stock following the first bona
fide underwritten public offering of common stock of the Company,
Intermediate Holdings, HDD Holdings or the Issuer, as the case may
be, after the Closing Date, of up to 6% per annum of the net
proceeds received by the Company, Intermediate Holdings, HDD
Holdings or the Issuer, as the case may be, from such public
offering; provided, however, that (A) the aggregate amount of all
such dividends shall not exceed the aggregate amount of net
proceeds received by the Company, Intermediate Holdings, HDD
Holdings or the Issuer, as the case may be, from such public
offering and (B) such dividends will be included in the calculation
of the amount of Restricted Payments;
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(9) the payment of annual management, consulting, monitoring and
advisory fees to any of the Sponsors; provided, that any such
payment is permitted by the covenant described under "-- Limitation
on Transactions with Affiliates"; provided, further, that any such
payment will be excluded in the calculation of the amount of
Restricted Payments;
(10) the declaration and payment of dividends to holders of any class
or series of Designated Preferred Stock issued after the Closing
Date; provided, however, that (A) for the most recently ended four
full fiscal quarters for which internal financial statements are
available immediately preceding the declaration of any such
dividend after giving effect to such dividend on a pro forma basis,
the Consolidated Coverage Ratio would have been at least 5.0:1 and
(B) the aggregate amount of dividends declared and paid pursuant to
this clause (10) does not exceed the Net Cash Proceeds received by
the Company from the sale of Designated Preferred Stock issued
after the Closing Date; provided, further, that such dividends
shall be excluded in the calculation of the amount of Restricted
Payments;
(11) payments which are contemplated by the Stock Purchase Agreement,
the Indemnification Agreement and the Shareholders Agreement and
the related transactions on the terms described in this prospectus,
including the payment of retention bonuses to senior managers of
the Company and its Subsidiaries; provided, however, that such
payments shall be excluded in the calculation of the amount of
Restricted Payments;
(12) Investments that are made with Excluded Contributions; provided,
however, that such Investments shall be excluded in the calculation
of the amount of Restricted Payments;
(13) the declaration and payment of dividends or distributions on the
Company's Capital Stock or payments in respect of Deferred
Compensation Plans (i) consisting of Capital Stock, other than
Disqualified Stock or Preferred Stock, of an Existing Unrestricted
Entity or (ii) with the Net Cash Proceeds, property, assets or
other forms of consideration received by the Company or a
Restricted Subsidiary from the issue or sale of Capital Stock,
other than Disqualified Stock or Preferred Stock, of an Existing
Unrestricted Entity (other than an issuance or sale to (x) the
Company or a Subsidiary or Affiliate of the Company or (y) an
employee stock ownership plan or other trust established by the
Company or any of its Subsidiaries); provided that (A) no Default
has occurred and is continuing or would occur as a result of such
dividend or distribution, (B) with respect to any dividend or
distribution made with consideration received by the Company or a
Restricted Subsidiary as described in clause (ii) above, if the
consideration for such issue or sale consists, in whole or in part,
of any property, assets or other form of consideration other than
cash, such dividends or distributions shall be paid in the form of
cash, property, assets or such other form of consideration such
that the relative proportions of cash, property, assets and such
other form of consideration comprising such dividend or
distribution shall be the same as the relative proportions of cash,
property, assets and such other form of consideration comprising
the consideration received upon such issue or sale, (C) with
respect to dividends or distributions in the form of Capital Stock,
other than Disqualified Stock or Preferred Stock, of an Existing
Unrestricted Entity as described in clause (i) above, such Existing
Unrestricted Entity shall have previously consummated a bona fide
underwritten initial public offering of Capital Stock, other than
Disqualified Stock or Preferred Stock, of the same class and series
registered under the Securities Act, (D) such dividends or
distributions shall be excluded in the calculation of the amount of
Restricted Payments and (E) the Net Cash Proceeds and any value
attributable to any property, assets or other form of consideration
received in connection with such issue or sale described in clause
(ii) above shall be excluded from the calculation of amounts under
clause (5)(C) of paragraph (a) above;
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(14) the declaration and payment of dividends on the Company's Capital
Stock within 30 days after the end of any calendar year for the
purpose of providing the holders of the Company's Capital Stock,
which we refer to as the "Equity Holders", with cash, or Publicly
Traded Equity Securities, to pay United States income taxes
attributable to taxable income of the Company and its Subsidiaries
for such calendar year attributed to the Equity Holders, which
dividends we refer to as "Tax Distributions"; provided that (A) on
the date of each such declaration and payment the Company is
treated as a pass-through entity for United States Federal income
tax purposes or a controlled foreign corporation for United States
Federal income tax purposes, (B) the maximum amount of Tax
Distributions that may be declared and paid pursuant to this clause
(14) in any calendar year shall be equal to (x)(a) if the Company
is a pass-through entity for United States Federal income tax
purposes, the amount of taxable income of the Company for such
calendar year (for the purposes of the calculation made pursuant to
this clause (B)(x)(a), the taxable income of the Company shall be
assumed to be the taxable income the Company would have had if it
were a corporation incorporated in the United States, including any
"Subpart F income" (within the meaning of Section 952 of the Code,
which for the purposes of this clause (14) shall include income
includable under Section 951(a)(1)(B) of the Code) of its
subsidiaries that it would be required to include in its taxable
income if it were such a corporation), reduced by the amount of
taxable loss allocated to the Equity Holders for all prior calendar
years (except to the extent such taxable losses have been
previously taken into account with respect to a prior calendar year
under this clause (B)(x)(a)) or (b) if the Company is a controlled
foreign corporation, the aggregate amount of the Company's Subpart
F income for such calendar year (and, to the extent such Subpart F
income would be attributed to the Equity Holders, the Subpart F
income of the Company's subsidiaries for such calendar year),
multiplied by (y) 40%, (C) the Company shall have delivered to the
Trustee at least 30 calendar days prior to the declaration of such
Tax Distribution or any interim Tax Distribution pursuant to clause
(F) below, a notice, certified by the Chief Financial Officer of
the Company, setting forth in detail reasonably satisfactory to the
Trustee the basis for the determination of the amount of such Tax
Distribution, (D) if any Tax Distribution is made pursuant to this
clause (14) in respect of any taxable income realized on any sale
of any asset or Capital Stock, the consideration for which consists
in whole or in part of Publicly Traded Equity Securities, such Tax
Distribution shall be made in the form of cash and Publicly Traded
Equity Securities such that the ratio of cash to Publicly Traded
Equity Securities comprising such Tax Distribution shall be the
same as the ratio of cash to Publicly Traded Equity Securities
comprising the consideration received upon such sale, to the extent
that the Company is legally permitted to make such Tax Distribution
in any form other than cash, (E) Tax Distributions in respect of
any taxes attributable to the taxable income of an Unrestricted
Subsidiary shall only be permitted if they are made with the
proceeds of dividends or distributions from an Unrestricted
Subsidiary that are received by the Company or a Restricted
Subsidiary; provided, that the amount of such dividends and
distributions will not increase the amount available for Restricted
Payments under clause 5(C) of paragraph (a) of this covenant,
(F)(i) interim Tax Distributions may be made during each calendar
year on or shortly after April 10, June 10, September 10 and
December 31 of such year for the purpose of providing the Equity
Holders with cash to pay estimated United States income taxes
attributable to taxable income of the Company and its Subsidiaries
for such taxable year, based on good-faith estimates of such
estimated tax liability made by the Company and (ii) if any such
interim Tax Distributions are made by the Company during a taxable
year, then within 30 calendar days after the end of such calendar
year the Company shall deliver to the Trustee a determination of
the maximum amount of Tax Distributions that may be made for such
calendar year under clause (B) above, and if the aggregate interim
Tax Distributions made for such
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calendar year exceed such maximum, then such excess amount, which
we refer to as "Excess Interim Tax Distributions", shall be applied
to reduce amounts payable under any clause of paragraph (b) for the
next calendar year and to the extent not so applied, shall be
carried forward for application against such amounts in a future
calendar year, and (G)(i) any Tax Distributions, excluding any
Excess Interim Tax Distributions, paid pursuant to this clause (14)
shall be excluded in the calculation of the amount of Restricted
Payments and (ii) any Excess Interim Tax Distributions shall be
included in the amount of Restricted Payments;
(15) the declaration and payment of dividends or distributions on the
Company's Capital Stock or payments in respect of Deferred
Compensation Plans with the Net Cash Proceeds received by the
Company or a Restricted Subsidiary, other than a Designated
Subsidiary, from an issue or sale (other than an issuance or sale
to (x) the Company or a Subsidiary or Affiliate of the Company or
(y) an employee stock ownership plan or other trust established by
the Company or any of its Subsidiaries) of Capital Stock, other
than Disqualified Stock or Preferred Stock, of a Designated
Subsidiary in an amount equal to such Net Cash Proceeds from such
issuance or sale less the aggregate amount of all Investments,
other than Investments which may be deemed to have been made as a
result of sevices performed in the ordinary course of business, in
such Designated Subsidiary made by the Company or a Restricted
Subsidiary that are outstanding at such time (with the amount of
any Investment being measured at the time such Investment was made
and not giving effect to any subsequent changes in value subject to
the covenant described under "-- Designated Subsidiary
Investments") (which aggregate amount we refer to as "Designated
Subsidiary Investments"); provided, however, that (A) after giving
effect to such dividend or distribution or payments, the Company
would be able to Incur an additional $1.00 of Indebtedness under
paragraph (a) of the covenant described under "-- Limitation on
Indebtedness," (B) at least 50% of the term loans under the Credit
Agreement outstanding on the Closing Date, and any Indebtedness
Refinancing such term loans, shall have been repaid, (C) the
long-term senior unsecured debt of the Issuer shall be rated at
least (x) Baa3 by Moody's and (y) BBB- by S&P, and each of Moody's
and S&P shall have reaffirmed its rating of the long-term senior
unsecured debt of the Issuer after having been informed of such
dividend, distribution or payment and (D) no Default has occurred
and is continuing or will occur as a result of such dividend or
distribution; provided, further, that (X) such Net Cash Proceeds
shall be excluded from the calculation of amounts under clause 5(C)
of paragraph (a) above and (Y) such dividends or distributions
shall be excluded in the calculation of the amount of Restricted
Payments;
(16) the declaration and payment of dividends or distributions on the
Company's Capital Stock or payments in respect of Deferred
Compensation Plans (i) consisting of Capital Stock, other than
Disqualified Stock or Preferred Stock, of a Designated Subsidiary
or (ii) in the form of Publicly Traded Equity Securities received
by the Company or a Restricted Subsidiary, other than a Designated
Subsidiary, from the Issuer of such Publicly Traded Equity
Securities as consideration for the issue or sale of Capital Stock,
other than Disqualified Stock or Preferred Stock, of a Designated
Subsidiary; provided, however, that (A) with respect to dividends
or distributions in the form of Capital Stock, other than
Disqualified Stock or Preferred Stock, of a Designated Subsidiary
as described in clause (i) above, such Designated Subsidiary shall
have previously consummated a bona fide underwritten initial public
offering of Capital Stock, other than Disqualified Stock or
Preferred Stock, of the same class and series registered under the
Securities Act, (B) the Company or a Restricted Subsidiary, other
than a Designated Subsidiary, retains a portion of (I) in the event
of a dividend or distribution in the form of Capital Stock, other
than Disqualified Stock or Preferred Stock, of a Designated
Subsidiary as described in clause (i) above, the
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Capital Stock of such Designated Subsidiary or (II) in the event of
a dividend or distribution of Publicly Traded Equity Securities
received as consideration for the sale of Capital Stock of a
Designated Subsidiary as described in clause (ii) above, such
Publicly Traded Equity Securities, in each case having a Fair
Market Value at least equal to the amount of Designated Subsidiary
Investments outstanding at such time, (C) after giving effect to
such dividend or distribution the Company would be able to Incur an
additional $1.00 of Indebtedness under paragraph (a) of the
covenant described under "-- Limitation on Indebtedness," (D) at
least 50% of the term loans under the Credit Agreement outstanding
on the Closing Date, and any Indebtedness Refinancing such term
loans, shall have been repaid, (E) the long-term senior unsecured
debt of the Issuer shall be rated at least (x) Baa3 by Moody's and
(y) BBB- by S&P, and each of Moody's and S&P shall have reaffirmed
its rating of the long-term senior unsecured debt of the Issuer
after having been informed of such dividend, distribution or
payment and (F) no Default has occurred and is continuing or would
occur as a result of such dividend or distribution; provided,
further, that (X) that any value attributable to such Publicly
Traded Equity Securities received as described in clause (ii) above
shall be excluded from the calculation of amounts under clause 5(C)
of paragraph (a) above and (Y) such dividends or distributions
shall be excluded in the calculation of the amount of Restricted
Payments; and
(17) other Restricted Payments in an aggregate amount not to exceed $25
million; provided, however, that such Restricted Payments shall be
excluded in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to the Company or any
Restricted Subsidiary;
(2) make any loans or advances to the Company or any Restricted
Subsidiary; or
(3) transfer any of its property or assets to the Company or any
Restricted Subsidiary, except:
(A) any encumbrance or restriction pursuant to applicable law, rule,
regulation or order or an agreement in effect at or entered into
on the Closing Date;
(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary prior to the date on which
such Restricted Subsidiary was acquired by the Company (other
than Indebtedness Incurred as consideration in, in contemplation
of, or to provide all or any portion of the funds or credit
support utilized to consummate the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was otherwise acquired by the
Company) and outstanding on such date;
(C) in the case of clause (3), any encumbrance or restriction
(i) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is
subject to a lease, license or similar contract, or
(ii) contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such
encumbrance or restriction restricts the transfer of the
property subject to such security agreements or mortgages;
(D) with respect to a Restricted Subsidiary, any restriction imposed
pursuant to an agreement entered into for the sale or disposition
of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or
disposition;
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(E) any encumbrance or restriction on cash or other deposits or net
worth imposed by customers under contracts entered into in the
ordinary course of business;
(F) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business;
(G) any encumbrance or restriction contained in an agreement evidencing
Indebtedness of a Restricted Subsidiary permitted to be Incurred
subsequent to the Closing Date pursuant to the provisions of the
covenant described under "-- Limitation on Indebtedness"; provided,
however, that such encumbrance or restriction applies only in the
event of and during the continuance of a default contained in such
agreement; and
(H) any encumbrances or restrictions of the type referred to in clauses
(1), (2) and (3) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or
obligations referred to in clauses (A) through (G) above; provided
that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings
are, in the good faith judgment of the Board of Directors, no more
restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment
restrictions prior to such amendment, modification, restatement,
renewal, increase, supplement, refunding, replacement or
refinancing.
Limitation on Sales of Assets and Capital Stock. (a) The Company will not,
and will not permit any Restricted Subsidiary to, make any Asset Disposition
unless:
(1) the Company or such Restricted Subsidiary receives consideration,
including by way of relief from, or by any other Person assuming sole
responsibility for, any liabilities, contingent or otherwise, at the
time of such Asset Disposition at least equal to the Fair Market Value
of the shares and assets subject to such Asset Disposition,
(2) at least 75% of the consideration thereof received by the Company or
such Restricted Subsidiary is in the form of cash or Temporary Cash
Investments, and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company, or the Restricted Subsidiary,
as the case may be,
(A) to the extent the Company elects, or is required by the terms of
any Indebtedness, to prepay, repay, purchase, repurchase, redeem,
retire, defease or otherwise acquire for value Senior
Indebtedness of the Company or a Note Guarantor or Indebtedness,
other than obligations in respect of Preferred Stock, of a Wholly
Owned Subsidiary other than the Issuer or a Note Guarantor, in
each case other than Indebtedness owed to the Company or an
Affiliate of the Company and other than obligations in respect of
Disqualified Stock, within one year after the later of the date
of such Asset Disposition or the receipt of such Net Available
Cash;
(B) to the extent the Company or such Restricted Subsidiary elects,
to reinvest in Additional Assets, including by means of an
Investment in Additional Assets by a Restricted Subsidiary with
Net Available Cash received by the Company or another Restricted
Subsidiary, within one year from the later of such Asset
Disposition or the receipt of such Net Available Cash;
(C) to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an
Offer, as defined in paragraph (b) of this covenant below, to
purchase notes pursuant to and subject to the conditions set
forth in paragraph (b) of this covenant; provided, however, that
if the Issuer elects, or is required by the terms of any other
Senior Subordinated Indebtedness, such Offer may be made ratably
to purchase the notes and other Senior Subordinated Indebtedness
of the Issuer; and
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(D) to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), for any
general corporate purpose permitted by the terms of the
indenture;
provided, however that (X) in connection with any prepayment, repayment,
purchase, repurchase, redemption, retirement, defeasance or other
acquisition for value of Indebtedness pursuant to clause (A), (C) or (D)
above, the Company or such Restricted Subsidiary will retire such
Indebtedness and will cause the related loan commitment, if any, to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid, purchased, repurchased, redeemed, retired, defeased or otherwise
acquired for value and (Y) any Asset Disposition consisting of the sale of
Capital Stock of a Designated Subsidiary shall not be subject to paragraph
(a)(3) of this covenant.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available
Cash in accordance with this covenant except to the extent that the aggregate
Net Available Cash from all Asset Dispositions that is not applied in
accordance with this covenant exceeds $15 million.
For the purposes of this covenant, the following are deemed to be cash:
o the assumption of Indebtedness of (i) the Issuer, other than obligations
in respect of Disqualified Stock of the Issuer, or (ii) the Company or
any Restricted Subsidiary other than the Issuer, other than obligations
in respect of Disqualified Stock and Preferred Stock of the Company or a
Restricted Subsidiary that is a Note Guarantor, and the release of the
Issuer, the Company or such Restricted Subsidiary from all liability on
such Indebtedness in connection with such Asset Disposition,
o securities received by the Company or any Restricted Subsidiary in an
Asset Disposition from the transferee with respect to which the Company
or such Restricted Subsidiary shall use its reasonable best efforts to
convert into cash within 90 days after the later to occur of (i) the
consummation of such Asset Disposition or (ii) the expiration of any
lock-up or similar restriction on the right of the Company or such
Restricted Subsidiary to dispose of such securities; provided, that all
the cash received upon such conversion shall be Net Available Cash for
the purposes of, and applied in accordance with, this covenant,
o any assets related to a Permitted Business received in exchange for
assets of comparable Fair Market Value in the good faith determination of
the Board of Directors of the Company, and
o Publicly Traded Equity Securities that are received in exchange for a
sale of Capital Stock, other than Disqualified Stock or Preferred Stock,
of a Designated Subsidiary.
(b) In the event of an Asset Disposition that requires the purchase of
notes pursuant to clause (a)(3)(C) of this covenant, the Issuer will be
required (i) to purchase notes tendered pursuant to an offer by the Issuer for
the notes, which we refer to as the "Offer", at a purchase price of 100% of
their principal amount plus accrued and unpaid interest and liquidated damages
thereon, if any, to the date of purchase (subject to the right of Holders of
record on the relevant date to receive interest due on the relevant interest
payment date) in accordance with the procedures (including prorating in the
event of oversubscription), set forth in the indenture and (ii) to purchase
other Senior Subordinated Indebtedness of the Issuer on the terms and to the
extent contemplated thereby (provided that in no event shall the Issuer offer
to purchase such other Senior Subordinated Indebtedness of the Issuer at a
purchase price in excess of 100% of its principal amount, plus accrued and
unpaid interest thereon). If the aggregate purchase price of notes, and other
Senior Subordinated Indebtedness, tendered pursuant to the Offer is less than
the Net Available Cash allotted to the purchase of the notes, and other Senior
Subordinated Indebtedness, the Issuer will apply the remaining Net Available
Cash in accordance with clause (a)(3)(D) of this covenant. The Issuer will not
be required to make an Offer for notes, and other Senior Subordinated
Indebtedness, pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (a)(3)(A)
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and (B)) is less than $15 million for any particular Asset Disposition (which
lesser amount will be carried forward for purposes of determining whether an
Offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).
(c) The Issuer will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuer will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into or conduct any transaction or series of related transactions, including
the purchase, sale, lease or exchange of any property or the rendering of any
service, with any Affiliate of the Company, which we refer to as an "Affiliate
Transaction", unless such transaction is on terms:
(1) that are no less materially favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with
a Person who is not such an Affiliate,
(2) that, in the event such Affiliate Transaction involves an aggregate
amount in excess of $25 million,
(A) are set forth in writing, and
(B) have been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction
and,
(3) that, in the event such Affiliate Transaction involves an amount in
excess of $50 million, have been determined by a nationally recognized
appraisal or investment banking firm to be fair, from a financial
standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(1) any Restricted Payment permitted to be paid pursuant to the covenant
described under "-- Limitation on Restricted Payments,"
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans
approved by the Board of Directors in good faith,
(3) the grant of stock options or similar rights to employees and
directors of the Company or any of its Restricted Subsidiaries pursuant
to plans approved by the Board of Directors in good faith,
(4) loans or advances to employees, directors or consultants in the
ordinary course of business, which are approved by the Board of
Directors in good faith in an amount not to exceed $10 million
outstanding at any one time,
(5) the payment of reasonable and customary fees to, and indemnity
provided on behalf of, officers, directors, employees or consultants of
the Company and its Subsidiaries,
(6) any transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries,
(7) the existence of, or the performance by the Company or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement, including any registration rights agreement or
purchase agreement related thereto, to which it is a party as of the
Closing Date on the terms described in this prospectus and any similar
agreements which it may enter into thereafter; provided, however, that
the existence of, or
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the performance by the Company or any of its Restricted Subsidiaries of
its obligations under, any future amendment to such existing agreement
or under any similar agreement entered into after the Closing Date
shall only be permitted by this clause (7) to the extent that the terms
of any such amendment or new agreement are not disadvantageous to the
Holders of the notes in any material respect,
(8) the issuance or sale of Capital Stock, other than Disqualified Stock,
of the Company, Intermediate Holdings, HDD Holdings or the Issuer to
any Permitted Holder,
(9) the payment by the Company or any of its Restricted Subsidiaries of
(i) annual management, consulting, monitoring and advisory fees and any
related and reasonable out-of-pocket expenses to any of the Sponsors in
an aggregate amount, for all the Sponsors, not to exceed $5 million in
any calendar year and (ii) fees to any of the Sponsors paid for any
financial advisory, financing, underwriting or placement services
including, without limitation, in connection with any acquisition
transaction or divestiture entered into by the Company or any
Restricted Subsidiary; provided, however, that the aggregate amount of
fees paid to all of the Sponsors under this clause (ii) in respect of
any transaction shall not exceed the lesser of (A) 25% of the total
amount of such transaction and (B) the greater of 2% of the total
amount of such transaction and $2 million,
(10) transactions with customers, clients, suppliers or purchasers or
sellers of goods or services in each case in the ordinary course of
business and otherwise in compliance with the terms of the indenture
which are fair to the Company or its Restricted Subsidiaries, in the
good faith determination of the Board of Directors or the senior
management thereof, or are on terms at least as favorable as might
reasonably have been obtained at such time from an unaffiliated party,
(11) any agreement as in effect as of the Closing Date on the terms
described in this prospectus or any amendment thereto, so long as any
such amendment is not disadvantageous to the Holders of the notes in
any material respect, or any transaction contemplated thereby,
(12) the payment of all fees and expenses related to the Transactions,
including fees to each of the Sponsors, on the terms described in this
prospectus, or
(13) any licensing agreement or similar agreement entered into in the
ordinary course of business relating to the use of technology or
intellectual property between any of the Company and its Subsidiaries,
on the one hand, and any company or other Person which is an Affiliate
of the Company or its Subsidiaries by virtue of the fact that a
Sponsor has made an Investment in or owns any Capital Stock of such
company or other Person which are fair to the Company or its
Restricted Subsidiaries, in the reasonable determination of the Board
of Directors or the senior management thereof, or are on terms at
least as favorable as might reasonably have been obtained at such time
from an unaffiliated party.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, sell or otherwise dispose of any shares of Capital Stock of a
Restricted Subsidiary, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell or otherwise dispose of any shares of its
Capital Stock except:
(1) to the Company or a Wholly Owned Subsidiary;
(2) if, immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own any
Capital Stock of such Restricted Subsidiary; provided, however, that
if such Restricted Subsidiary is a Designated Subsidiary and if any of
the proceeds of such issue, sale or other disposition are received by
a Person other than the Company or a Restricted Subsidiary, other than
a Designated Subsidiary, such Person shall dividend or distribute cash
to the Company or a Restricted Subsidiary, other than a
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Designated Subsidiary, in an amount at least equal to the amount of (x)
the Designated Subsidiary Investments with respect to such Designated
Subsidiary or (y) if the proceeds of such issue or sale received by such
Person are less than the amount of such Designated Subsidiary
Investments in such Designated Subsidiary, such proceeds; provided,
further, that such dividend or distribution shall be excluded from the
calculation of amounts under clause 5(C) of paragraph (a) of the
covenant described under "-- Limitation on Restricted Payments"; or
(3) in compliance with the covenant described under "-- Limitation on
Sales of Assets and Capital Stock" and immediately after giving effect
to such issuance, sale or other disposition, such Restricted
Subsidiary either (A) continues to be a Restricted Subsidiary or (B)
either (i) if such Restricted Subsidiary is not a Designated
Subsidiary and would no longer be a Restricted Subsidiary, then the
Investment of the Company in such Person, after giving effect to such
issuance or sale, would have been permitted to be made in accordance
with the covenant described under "-- Limitation on Restricted
Payments" as if made on the date of such issuance or sale and such
Investment will be deemed to be an Investment for the purposes of such
covenant or (ii) if such Restricted Subsidiary is a Designated
Subsidiary and would no longer be a Restricted Subsidiary, then if any
of the proceeds of such issuance, sale, or other disposition are
received by a Person other than the Company or a Restricted
Subsidiary, other than a Designated Subsidiary, such Person shall
dividend or distribute cash to the Company or a Restricted Subsidiary,
other than a Designated Subsidiary, at least equal to the amount of
(x) the Designated Subsidiary Investments with respect to such
Designated Subsidiary or (y) if the proceeds of such issue or sale
received by such Person are less than the amount of such Designated
Subsidiary Investments in such Designated Subsidiary, such proceeds;
provided, that (X) such dividend or distribution shall be excluded
from the calculation of amounts under clause 5(C) of paragraph (a) of
the covenant described under "-- Limitation on Restricted Payments"
and (Y) the remaining Investment of the Company and the Restricted
Subsidiaries in such Designated Subsidiary shall not be subject to the
covenant described under "-- Limitation on Restricted Payments."
The proceeds of any sale of such Capital Stock, other than a sale of
Capital Stock of a Designated Subsidiary, permitted hereby will be treated as
Net Available Cash from an Asset Disposition and must be applied in accordance
with the terms of the covenant described under "-- Limitation on Sales of
Assets and Capital Stock."
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the SEC and provide the Trustee and Holders and prospective
Holders, upon request, within 15 days after it files them with the SEC, copies
of its annual report and the information, documents and other reports that are
specified in Sections 13 and 15(d) of the Exchange Act; provided, however, the
Company shall not be so obligated to file such reports with the SEC if the SEC
does not permit such filing, in which event the Company will make available
such information to the trustee, Holders and prospective Holders, upon request,
within 15 days after the time the Company would be required to file such
information with the SEC if it were subject to Section 13 or 15(d) of the
Exchange Act. In addition, following a public equity offering, the Company
shall furnish to the Trustee and the Holders, promptly upon their becoming
available, copies of the annual report to shareholders and any other
information provided by the Company to its public shareholders generally. The
Company also will comply with the other provisions of Section 314(a) of the
TIA.
Future Note Guarantors. The Company will cause (i) at any time that any
Bank Indebtedness is outstanding, each Subsidiary of the Company, other than
the Issuer, that Incurs or enters into a Guarantee of any Bank Indebtedness and
(ii) at any time that no Bank Indebtedness is outstanding, each Subsidiary of
the Company, other than the Issuer, that Incurs any Indebtedness, to become a
Note Guarantor, and if applicable, execute and deliver to the Trustee a
supplemental indenture in the form set forth in the indenture pursuant to which
such Subsidiary will Guarantee payment of the
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notes. Each Note Guarantee will be limited to an amount not to exceed the
maximum amount that can be Guaranteed by that Note Guarantor, without rendering
the Note Guarantee, as it relates to such Note Guarantor voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Designated Subsidiary Investments. For the purposes of the indenture, (1)
the aggregate amount of Designated Subsidiary Investments on the Closing Date
in each of Seagate Technology SAN Holdings and its Subsidiaries, Seagate
Removable Storage Solutions Holdings and its Subsidiaries and Seagate Software
Information Management Group Holdings, Inc. (the predecessor of Crystal
Decisions, Inc.) and its Subsidiaries, will be deemed to be $189.4 million,
$31.5 million and $71.5 million, respectively and (2) following the Closing
Date the aggregate amount of Designated Subsidiary Investments in each of such
entities shall be based on such amounts outstanding on the Closing Date as set
forth in clause (1) as adjusted to reflect further Investments (other than
Investments which may be deemed to have been made as a result of services
performed in the ordinary course of business) made and reductions in such
Investments resulting from repurchases, repayments or redemptions of, or other
returns of capital from, such Investments, in each case after the Closing Date.
The Company will provide to the Trustee and Holders and prospective Holders
(upon request) a statement of the amount of Designated Subsidiary Investments
in each Designated Subsidiary, as of the end of each fiscal quarter within 45
days of the end of such fiscal quarter.
Rigid Disc Drive Operations. The Company will not permit any Designated
Subsidiary to own any material assets used in the rigid disc drive operations
of the Company and its Subsidiaries.
Amendment of Deferred Compensation Plans. The Company will not, and will
not permit any Restricted Subsidiary to, (i) amend, modify or waive any of its
rights under any Deferred Compensation Plan, except to the extent that such
amendments, modifications or waivers, individually and in the aggregate, (1)
would not reasonably be expected to be materially adverse to the Holders and
(2) would not require the Company or any of its Subsidiaries to make any
distributions or other payments, whether in cash, securities or other property
or any combination thereof, that would be in violation of the covenants set
forth in the indenture, or (ii) adopt any Deferred Compensation Plan if the
terms, including subordination terms, of such Deferred Compensation Plan that
are material to the Holders are in any way less favorable to the indenture than
the terms of the Deferred Compensation in effect on the Closing Date.
Notwithstanding clause (i) above, the Company will not, and will not permit any
Restricted Subsidiary to, amend, modify or waive any of the subordination terms
of any Deferred Compensation Plan in effect on the Closing Date.
Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business, other than a Permitted
Business.
MERGER AND CONSOLIDATION
The Issuer will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person, which we refer to as
the "Successor Company", will be a corporation, partnership or limited
liability company organized and existing under the laws of the Cayman
Islands or the laws of any political subdivision thereof or the laws
of the United States of America, any State thereof or the District of
Columbia and (i) the Successor Company, if not the Issuer, will
expressly assume, by a supplemental indenture, executed and delivered
to the Trustee, in form reasonably satisfactory to the Trustee, all
the obligations of the Issuer under the notes and the indenture and
(ii) if the Successor Company is a partnership or limited liability
company, the Successor Company and a Subsidiary of the Successor
Company which is a corporation organized and existing under the laws
of the Cayman Islands or the laws of any political subdivision thereof
or the laws of the United States of America, any State thereof or the
District of Columbia will execute and deliver to the Trustee, in form
reasonably satisfactory
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to the Trustee, a supplemental indenture pursuant to which each will
jointly and severally assume all of the obligations of the Issuer under
the notes and the indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company, the
Company or any Restricted Subsidiary as a result of such transaction
as having been Incurred by the Successor Company, the Company or such
Restricted Subsidiary at the time of such transaction), no Default
shall have occurred and be continuing;
(3) immediately after giving effect to such transaction, either (A) the
Company would be able to Incur an additional $1.00 of Indebtedness
under paragraph (a) of the covenant described under "-- Limitation on
Indebtedness" or (B) the Consolidated Coverage Ratio for the Successor
Company would be (i) greater than the Consolidated Coverage Ratio for
the Company immediately prior to the such merger, conveyance or
transfer and (ii) at least 4.5:1; and
(4) the Issuer shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture, if
any, comply with the indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of the Issuer under the indenture, but the
predecessor Issuer in the case of a conveyance, transfer or lease of all or
substantially all its assets will not be released from the obligation to pay
the principal of and interest on the notes.
In addition, none of the Note Guarantors will consolidate with or merge
with or into, or convey, transfer or lease all or substantially all of its
assets to any Person unless:
(1) except in the case of a Note Guarantor that has been disposed of in
its entirety to another Person, the resulting, surviving or transferee
Person, which we refer to as the "Successor Guarantor", will be a
corporation, partnership or limited liability company organized and
existing under the laws of the jurisdiction under which such Note
Guarantor was organized and existing or the laws of the United States
of America, any State thereof or the District of Columbia, and such
Person, if not such Note Guarantor, will expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
reasonably satisfactory to the Trustee, all the obligations of such
Note Guarantor under its Note Guarantee;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Guarantor or
any Restricted Subsidiary as a result of such transaction as having
been Incurred by the Successor Guarantor or such Restricted Subsidiary
at the time of such transaction), no Default shall have occurred and
be continuing; and
(3) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture, if
any, comply with the indenture.
Notwithstanding the foregoing and subject to the following proviso:
(A) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Issuer or
any Note Guarantor; and
(B) the Company, Intermediate Holdings, HDD Holdings or the Issuer may
merge with an Affiliate incorporated or organized solely for the
purpose of reincorporating the Company, Intermediate Holdings, HDD
Holdings or the Issuer, as the case may be, in another jurisdiction
to realize tax or other benefits;
provided, however, that in the case of any merger or consolidation in which the
Issuer is a party if the resulting or surviving Person is a partnership or
limited liability company, such Person and a
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Subsidiary of such Person which is a corporation organized and existing under
the laws of the Cayman Islands or the laws of any political subdivision thereof
or the laws of the United States of America, any State thereof or the District
of Columbia will execute and deliver to the Trustee, in form reasonably
satisfactory to the Trustee, a supplemental indenture pursuant to which each
will jointly and severally assume all of the obligations of the Issuer under
the notes and the indenture.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in any payment of interest on any Note when due and payable
or in any payment of liquidated damages whether or not prohibited by
the provisions described under "Ranking" above, continued for 30 days,
(2) a default in the payment of principal of any Note when due and payable
at its Stated Maturity, upon required redemption or repurchase, upon
declaration or otherwise, whether or not such payment is prohibited by
the provisions described under "Ranking" above,
(3) the failure by the Company or any Subsidiary to comply with its
obligations under the covenant described under "Merger and
Consolidation" above,
(4) the failure by the Company or any Subsidiary to comply for 45 days
after notice with any of its obligations under the covenants described
under "Change of Control" or "Certain Covenants" above (in each case,
other than a failure to purchase notes),
(5) the failure by the Company or any Subsidiary to comply for 60 days
after notice with its other agreements contained in the notes or the
indenture,
(6) the failure by the Company, the Issuer or any Significant Subsidiary
to pay any Indebtedness within any applicable grace period after final
maturity or the acceleration of any such Indebtedness by the holders
thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $50 million or its foreign currency
equivalent, which we refer to as the "cross acceleration provision",
and such failure continues for 30 days after receipt of the notice
specified in the indenture,
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, Intermediate Holdings, HDD Holdings, the Issuer or a
Significant Subsidiary, which we refer to as the "bankruptcy
provisions",
(8) the rendering of any judgment or decree for the payment of money
(other than judgments which are covered by enforceable insurance
policies issued by reputable and creditworthy insurance companies) in
excess of $50 million or its foreign currency equivalent against the
Company, the Issuer or a Significant Subsidiary if:
(A) an enforcement proceeding thereon is commenced by any creditor or
(B) such judgment or decree remains outstanding for a period of 60
days following such judgment and is not discharged, waived or
stayed, which we refer to as the "judgment default provision",
(9) any Note Guarantee ceases to be in full force and effect, except as
contemplated by the terms thereof, or any Note Guarantor or Person
acting by or on behalf of such Note Guarantor denies or disaffirms such
Note Guarantor's obligations under the indenture or any Note Guarantee
and such Default continues for 10 days after receipt of the notice
specified in the indenture, or
(10) the Company or any Subsidiary challenging in any proceeding before,
or any filing with, any court, tribunal or governmental authority the
subordination provisions of any Deferred Compensation Plan or
asserting in any proceeding before, or any filing with, any court,
tribunal or governmental authority that such provisions are invalid or
unenforceable or that the obligations of the Issuer and the Note
Guarantors in respect of the notes and the Note
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Guarantees are not senior obligations under the subordination
provisions of any Deferred Compensation Plan, or any court, tribunal or
government authority of competent jurisdiction shall judge the
subordination provisions of any Deferred Compensation Plan to be
invalid or unenforceable or such obligations to be not senior
obligations under such subordination provisions.
The foregoing will constitute Events of Default whatever the reason for
any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body.
However, a default under clauses (4), (5), (6) or (9) will not constitute
an Event of Default until the Trustee notifies the Issuer or the Holders of at
least 25% in principal amount of the outstanding notes notify the Issuer and
the Trustee of the default and the Company or the Subsidiary, as applicable,
does not cure such default within the time specified in clauses (4), (5), (6)
or (9) hereof after receipt of such notice.
If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Company, Intermediate
Holdings, HDD Holdings or the Issuer) occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount of the outstanding notes by
notice to the Issuer, may declare the principal of and accrued but unpaid
interest on all the notes to be due and payable. Upon such a declaration, such
principal and interest will be due and payable immediately. If an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of the Company, Intermediate Holdings, HDD Holdings or the Issuer occurs, the
principal of and interest on all the notes will become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holders. Under certain circumstances, the Holders of a majority in principal
amount of the outstanding notes may rescind any such acceleration with respect
to the notes and its consequences.
Subject to the provisions of the indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee indemnity or security satisfactory to it against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium, if any, or interest when due, no Holder may pursue any
remedy with respect to the indenture or the notes unless:
(1) such Holder has previously given the Trustee notice that an Event of
Default is continuing,
(2) Holders of at least 25% in principal amount of the outstanding notes
have requested the Trustee in writing to pursue the remedy,
(3) such Holders have offered the Trustee security or indemnity
satisfactory to it against any loss, liability or expense,
(4) the Trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity and
(5) the Holders of a majority in principal amount of the outstanding
notes have not given the Trustee a direction inconsistent with such
request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding notes will be given the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with
applicable law or the indenture or that the Trustee determines is unduly
prejudicial to the rights of any other Holder or that would involve the Trustee
in personal liability. Prior to taking any action under the indenture, the
Trustee will be entitled to indemnification satisfactory to it in its sole
discretion against all losses and expenses caused by taking or not taking such
action.
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If a Default occurs and is continuing and is known to the Trustee, the
Trustee must mail to each Holder notice of the Default within the earlier of 90
days after it occurs or 30 days after it is actually known to a Trust Officer
or written notice of it is received by the Trustee. Except in the case of a
Default in the payment of principal of, premium, if any, or interest on any
note (including payments pursuant to the redemption provisions of such note),
the Trustee may withhold notice if and so long as a committee of its Trust
Officers in good faith determines that withholding notice is in the interests
of the Holders. In addition, the Issuer will be required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Issuer will also be required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Events of Default, their status and what action the
Issuer is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the indenture or the notes may be amended
with the written consent of the Holders of a majority in principal amount of
the notes then outstanding and any past default or compliance with any
provisions may be waived with the consent of the Holders of a majority in
principal amount of the notes then outstanding. However, without the consent of
each Holder of an outstanding note affected, no amendment may, among other
things:
(1) reduce the amount of notes whose Holders must consent to an amendment,
(2) reduce the rate of or extend the time for payment of interest or any
liquidated damages on any note,
(3) reduce the principal of or extend the Stated Maturity of any note,
(4) reduce the premium payable upon the redemption of any note or change
the time at which any note may be redeemed as described under "Optional
Redemption" or "Redemption for Changes in Withholding Taxes" above,
(5) make any note payable in money other than that stated in the note,
(6) make any change to the subordination provisions of the indenture that
adversely affects the rights of any Holder,
(7) impair the right of any Holder to receive payment of principal of, and
interest or any liquidated damages on, such Holder's notes on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such Holder's notes,
(8) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions,
(9) modify the Note Guarantees in any manner adverse to the Holders, or
(10) make any change in the provisions of the indenture described under
"Redemption for Changes in Withholding Taxes" above, that adversely
affects the rights of any Holder or amend the terms of the notes or
the indenture in a way that would result in the loss of an exemption
from any of the Taxes described thereunder.
Without the consent of any Holder, the Issuer, the Note Guarantors and the
Trustee may amend the indenture to:
o cure any ambiguity, omission, defect or inconsistency,
o provide for the assumption by (A) a successor corporation or (B) to the
extent permitted under the covenant described under "-- Merger and
Consolidation," a successor partnership or limited liability company and
a Subsidiary of such successor partnership or limited liability company
that is a corporation, of the obligations of the Issuer under the
indenture,
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o provide for the assumption by a successor corporation, partnership or
limited liability company of the obligations of a Note Guarantor under
the indenture,
o provide for uncertificated notes in addition to or in place of
certificated notes (provided, however, that the uncertificated notes are
issued in registered form for purposes of Section 163(f) of the Code, or
in a manner such that the uncertificated notes are described in Section
163(f)(2)(B) of the Code),
o to make any change in the subordination provisions of the indenture that
would limit or terminate the benefits available to any holder of Senior
Indebtedness of the Issuer or a Note Guarantor, or any Representative
thereof, under such subordination provisions,
o add additional Guarantees with respect to the notes,
o secure the notes,
o add to the covenants of the Company and the Restricted Subsidiaries for
the benefit of the Holders or to surrender any right or power conferred
upon the Company or the Issuer,
o make any change that does not adversely affect the rights of any Holder,
subject to the provisions of the indenture,
o provide for the issuance of the Exchange Notes or Additional Notes, in
compliance with the covenant described under "-- Certain Covenants --
Limitation on Indebtedness," or
o comply with any requirement of the SEC in connection with the
qualification of the indenture under the TIA.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior
Indebtedness of the Issuer or a Note Guarantor then outstanding unless the
holders of such Senior Indebtedness, or any group or Representative thereof
authorized to give a consent, consent to such change.
The consent of the Holders will not be necessary to approve the particular
form of any proposed amendment. It will be sufficient if such consent approves
the substance of the proposed amendment.
After an amendment becomes effective, the Issuer is required to mail to
Holders a notice briefly describing such amendment. However, the failure to
give such notice to all Holders, or any defect therein, will not impair or
affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Holder will be able to transfer or exchange notes. Upon any transfer or
exchange, the registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Issuer may require a Holder to pay any taxes required by law or permitted by
the indenture. The Issuer will not be required to transfer or exchange any note
selected for redemption or to transfer or exchange any Note for a period of 15
days prior to a selection of notes to be redeemed. The notes will be issued in
registered form and the Holder will be treated as the owner of such note for
all purposes.
DEFEASANCE
The Company and the Issuer may at any time terminate all their obligations
under the notes and the indenture, which we refer to as "legal defeasance",
except for certain obligations, including those respecting the defeasance trust
and obligations to register the transfer or exchange of the notes, to replace
mutilated, destroyed, lost or stolen notes and to maintain a registrar and
paying agent in respect of the notes.
In addition, the Company and the Issuer may at any time terminate:
(1) its obligations under the covenants described under "-- Certain
Covenants",
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(2) the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries and the judgment
default provision described under "Defaults" above and the limitations
contained in clause (3) under the first paragraph and clause (3) under
the third paragraph of "-- Merger and Consolidation" above, which we
refer to as "covenant defeasance".
In the event that the Company and the Issuer exercise their legal
defeasance option or their covenant defeasance option, each Note Guarantor will
be released from all of its obligations with respect to its Note Guarantee.
The Company and the Issuer may exercise their legal defeasance option
notwithstanding their prior exercise of their covenant defeasance option. If
the Company and the Issuer exercise their legal defeasance option, payment of
the notes may not be accelerated because of an Event of Default with respect
thereto. If the Company and the Issuer exercise their covenant defeasance
option, payment of the notes may not be accelerated because of an Event of
Default specified in clause (4), (6) or (7) (with respect only to Significant
Subsidiaries), (8) (with respect only to Significant Subsidiaries) under
"Defaults" above or because of the failure of the Issuer to comply with clause
(3) under the first paragraph and clause (3) under the third paragraph of "--
Merger and Consolidation" above.
In order to exercise either defeasance option, the Company and the Issuer
must irrevocably deposit in trust, which we refer to as the "defeasance trust",
with the Trustee money in an amount sufficient or U.S. Government Obligations,
the principal of and interest on which will be sufficient, or a combination
thereof sufficient, to pay the principal of, premium, if any, and interest on,
and liquidated damages, if any, in respect of the notes to redemption or
maturity, as the case may be, and must comply with certain other conditions,
including delivery to the Trustee of an Opinion of Counsel, subject to
customary exceptions and exclusions, to the effect that Holders will not
recognize income, gain or loss for U.S. Federal income or Cayman Islands tax
purposes as a result of such deposit and defeasance and will be subject to U.S.
Federal income or Cayman Islands tax, including withholding taxes, on the same
amounts and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such Opinion of Counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable U.S. Federal income tax
law).
CONCERNING THE TRUSTEE
The Bank of New York is the Trustee under the indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
notes.
GOVERNING LAW
The indenture and the notes are governed by, and construed in accordance
with, the laws of the State of New York.
ENFORCEABILITY OF JUDGMENTS
The Issuer and several of the Note Guarantors are incorporated under the
laws of the Cayman Islands and other Note Guarantors are organized in various
other jurisdictions outside the United States. Some of the directors and
officers and assets of these companies are located outside the United States.
Although the Issuer and the Note Guarantors which are located outside the
United States have agreed to accept service of process within the United States
by their agent designated for that purpose, it may be difficult for Holders to
effect service of process within the United States upon these persons or to
enforce against them, in courts outside the United States, judgments of courts
of the United States predicated upon civil liabilities under the U.S. federal
securities or other laws.
The Issuer has been advised by its Cayman Islands legal counsel, Walkers,
that there is doubt with respect to Cayman Islands law as to (a) whether a
judgment of a U.S. court predicated solely
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upon the civil liability provisions of the U.S. federal securities or other
laws would be enforceable in the Cayman Islands against the Issuer or a Note
Guarantor and (b) whether an action could be brought in the Cayman Islands
against the Issuer or a Note Guarantor in the first instance on the basis of
liability predicated solely upon the provisions of the U.S. federal securities
or other laws. In addition, the Issuer has been advised by its counsel in the
jurisdictions of organization of the Note Guarantors other than the Cayman
Islands that there is similar doubt with respect to the laws of these other
jurisdictions. In addition, other laws of these jurisdictions, such as those
limiting a party's enforcement rights on the grounds of public policy of that
jurisdiction, and the fact that a treaty may not exist between the United
States and the governments of these jurisdictions regarding the enforcement of
civil liabilities may also restrict the ability to enforce the Note Guarantors'
obligations under their Note Guarantees.
CONSENT TO JURISDICTION AND SERVICE
The Issuer and each Note Guarantor has appointed CT Corporation System,
111 Eighth Avenue, 13th Floor, New York, New York 10011 as its agent for
actions brought under U.S. Federal or state securities laws brought in any U.S.
Federal or state court located in the Borough of Manhattan in The City of New
York and will submit to such jurisdiction.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property or assets, other than Indebtedness and Capital Stock, to
be used by the Company or a Restricted Subsidiary in a Permitted
Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as
a result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary; provided, however, that:
any such Restricted Subsidiary described in clauses (2) or (3) above is
primarily engaged in a Permitted Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Transactions with Affiliates" and "-- Certain Covenants -- Limitation on
Sales of Assets and Capital Stock" only, "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power
of the Voting Stock, on a fully diluted basis, of the Company, HDD Holdings or
the Issuer or of rights or warrants to purchase such Voting Stock, whether or
not currently exercisable, and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease (other than an operating lease
entered into in the ordinary course of business), transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation, or similar transaction (we refer to each for the purposes of
this definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted
Subsidiary),
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary or
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(3) any other assets of the Company or any Restricted Subsidiary outside
of the ordinary course of business of the Company or such Restricted
Subsidiary
other than, in the case of (1), (2) and (3) above,
(A) disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Note Guarantor or a
Wholly Owned Subsidiary,
(B) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Capital Stock"
only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under "-- Certain Covenants
-- Limitation on Restricted Payments,"
(C) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions
described under "-- Merger and Consolidation,"
(D) any sale of Capital Stock, other than Disqualified Stock, of
Intermediate Holdings or HDD Holdings,
(E) any sale of Capital Stock in, or Indebtedness or other securities
of, an Unrestricted Subsidiary,
(F) a disposition of Temporary Cash Investments,
(G) sales of assets received by the Company or any Restricted
Subsidiary upon the foreclosure of a lien,
(H) issuances of (1) options, warrants or other rights to purchase
common stock of a Restricted Subsidiary or (2) shares of common
stock of such Restricted Subsidiary upon exercise of such
options, warrants or other rights to officers, directors and
employees of such Restricted Subsidiary pursuant to the terms of
agreements, including employment agreements, or employee or
director benefit plans, or amendments thereto, approved by the
Board of Directors in good faith; provided, however, that shares
of common stock of such Restricted Subsidiary issued pursuant to
the exercise of such options, warrants or other rights to
purchase such common stock which are subject this clause (H)
shall not exceed 25%, in the case of Seagate Removable Storage
Solutions (Cayman) Holdings, or 20%, in the case of any other
Restricted Subsidiary, of the outstanding shares of common stock
of such Restricted Subsidiary, on a fully-diluted basis,
(I) any sale of Capital Stock in CacheVision, Inc., e2open.com LLC or
Iolon, Inc.,
(J) transfers of patents for microactuator and flexure-related
technology to Hutchinson Technology Incorporated in connection
with an interference action; provided, that the Company and its
Subsidiaries shall have received (a) a fully paid-up license to
such patents and (b) a contractual right to receive royalties
from the license by Hutchinson Technology Incorporated of such
patents to third parties, and
(K) a disposition of assets with a Fair Market Value of less than
$1.0 million.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as
at the time of determination, the present value, discounted at the interest
rate borne by the notes, compounded annually, of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction, including any period for which such lease has
been extended.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing:
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(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal
payment of such Indebtedness or scheduled redemption or similar
payment with respect to such Preferred Stock multiplied by the amount
of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement, the guarantees thereof, the collateral documents
related thereto, any Hedging Agreements related thereto and any Refinancing
Indebtedness with respect thereto, as amended from time to time, including
principal, premium, if any, interest, including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Issuer or any Note Guarantor whether or not a claim for post-filing interest is
allowed in such proceedings, fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof. It is understood and agreed that Refinancing Indebtedness in respect
of the Credit Agreement may be Incurred from time to time after termination of
the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of the Board of Directors of
the Company.
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in, however designated, equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined
in accordance with GAAP; and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be prepaid by the lessee without payment
of a penalty.
"Closing Date" means November 22, 2000.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Agreements" means with respect to any Person any agreement for
the protection against fluctuations in commodity prices or similar agreements
or arrangements to which such Person is a party or of which it is a
beneficiary.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of:
(1) the aggregate amount of EBITDA for the period of the most recent four
consecutive fiscal quarters ending at least 45 days prior to the date
of such determination to
(2) Consolidated Interest Expense for such four fiscal quarters;
provided, however, that:
(A) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains
outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period
and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day
of such period,
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(B) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since
the beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other
than Indebtedness Incurred under any revolving credit facility
unless such Indebtedness has been permanently repaid and has not
been replaced) on the date of the transaction giving rise to the
need to calculate the Consolidated Coverage Ratio, EBITDA and
Consolidated Interest Expense for such period shall be calculated on
a pro forma basis as if such discharge had occurred on the first day
of such period and as if the Company or such Restricted Subsidiary
has not earned the interest income actually earned during such
period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness,
(C) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for
such period shall be reduced by an amount equal to the EBITDA, if
positive, directly attributable to the assets that are the subject
of such Asset Disposition for such period or increased by an amount
equal to the EBITDA, if negative, directly attributable thereto for
such period and Consolidated Interest Expense for such period shall
be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is
sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to
the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale),
(D) if since the beginning of such period the Company or any Restricted
Subsidiary, by merger or otherwise, shall have made an Investment in
any Restricted Subsidiary (or any Person that becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition
of assets occurring in connection with a transaction causing a
calculation to be made hereunder, which constitutes all or
substantially all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on
the first day of such period, and
(E) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment
pursuant to clause (C) or (D) above if made by the Company or a
Restricted Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or
acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets or other Investment, the amount of income or
earnings relating thereto, the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith and any
operating expense reductions and other adjustments as described below, the pro
forma calculations shall be determined in good faith by a responsible financial
or accounting Officer of the Company and (i) shall, except as described below
in clause (iii), comply with the requirements of Rule 11-02 of Regulation S-X
of the SEC, (ii) may include adjustments for operating expense reductions that
would be permitted by such Rule and (iii) in connection with acquisitions,
purchases or mergers, may reflect adjustments not permitted by such Rule for
the elimination of operating
216
expenses attributable to any terminated lease or contract, the related
reduction in personnel or facility expenses as a result of such termination and
the elimination of personnel expenses as a result of severance and of
facilities expense as a result of the termination, closure or relocation of
facilities, in each case if such termination, severance, closure or relocation
has occurred at the time of such acquisition, purchase or merger or occurs
within three months thereof.
If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest expense on such Indebtedness shall be calculated
as if the rate in effect on the date of determination had been the applicable
rate for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term as at the date of determination in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Company and its Consolidated Restricted Subsidiaries
in such period but not included in such interest expense, without duplication:
(1) interest expense attributable to Capitalized Lease Obligations
and the interest expense attributable to leases constituting part
of a Sale/Leaseback Transaction,
(2) amortization of debt discount and debt issuance costs (other than
any such costs associated with the Incurrence of Indebtedness on
the Closing Date in connection with the Transactions),
(3) capitalized interest,
(4) noncash interest expense,
(5) commissions, discounts and other fees and charges attributable to
letters of credit and bankers' acceptance financing,
(6) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary,
(7) net costs associated with Hedging Obligations, including
amortization of fees,
(8) dividends in respect of all Disqualified Stock of the Issuer and
all Preferred Stock of the Company and any of the Subsidiaries of
the Company, other than the Issuer, to the extent held by Persons
other than the Company, a Note Guarantor or a Wholly Owned
Subsidiary, other than dividends payable solely in Capital Stock
(other than Disqualified Stock),
(9) interest Incurred in connection with investments in discontinued
operations and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such
plan or trust to pay interest or fees to any Person, other than
the Company, in connection with Indebtedness Incurred by such
plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income:
(1) any net income of any Person, other than the Company, if such Person
is not a Restricted Subsidiary, except that:
(A) subject to the limitations contained in clause (4) below, the
Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to
the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution, subject, in the case of a
dividend or other distribution made to a Restricted Subsidiary,
to the limitations contained in clause (3) below, and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net
Income;
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(2) any net income, or loss, of any Person acquired by the Company or a
Subsidiary of the Company in a pooling of interests transaction for
any period prior to the date of such acquisition;
(3) any net income, or loss, of any Restricted Subsidiary other than the
Issuer if such Restricted Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly,
except that:
(A) subject to the limitations contained in clause (4) below, the
Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to
the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution made to another Restricted Subsidiary, to the
limitation contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(4) any gain, or loss, realized upon the sale or other disposition of any
asset of the Company or its Consolidated Restricted Subsidiaries,
including pursuant to any Sale/Leaseback Transaction, that is not sold
or otherwise disposed of in the ordinary course of business and any
gain, or loss, realized upon the sale or other disposition of any
Capital Stock of any Person;
(5) the net after tax effect of any extraordinary gain or loss, including
all fees and expenses related to such extraordinary gain or loss; and
(6) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purpose of the covenant described
under "-- Certain Covenants -- Limitation on Restricted Payments" only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from Unrestricted Subsidiaries
to the Company or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (5)(C) of paragraph (a) thereof.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Company or any Restricted Subsidiary in an Unrestricted Subsidiary will
be accounted for as an investment. The term "Consolidated" has a correlative
meaning.
"Credit Agreement" means the credit agreement dated as of November 22,
2000, as amended, restated, supplemented, waived, replaced (whether or not upon
termination, and whether with the original lenders or otherwise), refinanced
(in whole or in part), restructured, repaid, refunded or otherwise modified
from time to time, among the Company, the Issuer, Seagate Technology (U.S.)
Holdings, Inc., the financial institutions party thereto as lenders and The
Chase Manhattan Bank, as administrative agent (except to the extent that any
such amendment, restatement, supplement, waiver, replacement, refinancing,
restructuring, repayment, refunding or other modification thereto would be
prohibited by the terms of the indenture, unless otherwise agreed to by the
Holders of at least a majority in aggregate principal amount of notes at the
time outstanding).
"Currency Agreement" means with respect to any Person any foreign exchange
contract, currency swap agreements or other similar agreement or arrangement to
which such Person is a party or of which it is a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
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"Deferred Compensation Plans" means:
(1) the deferred compensation plan dated as of November 22, 2000, of HDD
Holdings, as amended, waived, supplemented or otherwise modified from
time to time;
(2) the deferred compensation plan dated as of November 22, 2000, of
Seagate Removable Storage Solutions Holdings, as amended, waived,
supplemented or otherwise modified from time to time;
(3) the deferred compensation plan dated as of November 22, 2000, of
Seagate Technology SAN Holdings, as amended, waived, supplemented or
otherwise modified from time to time;
(4) any other plan established in lieu of, or to renew or replace, in
whole or in part, any plan referred to in clause (1), (2) or (3) above
or this clause (4) and any other similar plan the purpose or effect of
which is to provide to the participants therein substantially the
economic equivalent of an equity participation in the Company or any
of its Subsidiaries in lieu of such an equity participation or to
provide the participants therein the benefits that they are entitled
to on the Closing Date under the Plans described in clauses (1), (2)
(3) above or this clause (4); and
(5) any Guarantee by the Company or any of its Subsidiaries of any
obligation under any Deferred Compensation Plan referred to in clause
(1), (2), (3) or (4) above.
"Designated Preferred Stock" means Preferred Stock of the Company, other
than Disqualified Stock, that is issued for cash, other than to a Subsidiary of
the Company or an employee stock ownership plan or trust established by the
Company or any of its Subsidiaries, and is so designated as Designated
Preferred Stock, pursuant to an Officer's Certificate, on the issuance date
thereof, the cash proceeds of which are excluded from the calculation set forth
in clause (5)(C) of paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Designated Senior Indebtedness" of the Issuer means
(1) the Bank Indebtedness and
(2) any other Senior Indebtedness of the Issuer that, at the date of
determination, has an aggregate principal amount outstanding of, or
under which, at the date of determination, the holders thereof are
committed to lend up to, at least $20 million and is specifically
designated by the Issuer in the instrument evidencing or governing
such Senior Indebtedness as "Designated Senior Indebtedness" for
purposes of the indenture.
"Designated Senior Indebtedness" of a Note Guarantor has a correlative
meaning.
"Designated Subsidiary" shall mean each of Seagate Technology SAN
Holdings, Seagate Removable Storage Solutions Holdings and Seagate Software
Information Management Group Holdings, Inc. (now Crystal Decisions, Inc.) and
each of their Subsidiaries.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms, or by the terms of any security into which it is
convertible or for which it is exchangeable or exercisable, or upon the
happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock
(excluding Capital Stock convertible or exchangeable solely at the
option of the Company or a Restricted Subsidiary; provided, however,
that any such conversion or exchange shall be deemed an Incurrence of
Indebtedness or Disqualified Stock, as applicable) or
(3) is redeemable at the option of the holder thereof, in whole or in
part,
in the case of each of clauses (1), (2) and (3), on or prior to 91 days after
the Stated Maturity of the notes; provided, however, that if such Capital Stock
is issued to any employee or to any plan for the benefit of employees of the
Company or its Subsidiaries or by any such plan to such employees,
219
such Capital Stock shall not constitute Disqualified Stock solely because it
may be required to be repurchased by the Company in order to satisfy applicable
statutory or regulatory obligations or as a result of such employee's death or
disability; provided further, however, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock
upon the occurrence of an "asset sale" or "change of control" occurring prior
to 91 days after the Stated Maturity of the notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the provisions of the covenants described under "Change of
Control" and "-- Certain Covenants -- Limitation on Sale of Assets and Capital
Stock".
"EBITDA" for any period means the Consolidated Net Income for such period,
plus, without duplication, the following to the extent deducted in calculating
such Consolidated Net Income:
(1) income tax expense of the Company and its Consolidated Restricted
Subsidiaries,
(2) Consolidated Interest Expense,
(3) depreciation expense of the Company and its Consolidated Restricted
Subsidiaries,
(4) amortization expense of the Company and its Consolidated Restricted
Subsidiaries (excluding amortization expense attributable to a prepaid
cash item that was paid in a prior period),
(5) any annual management, consulting, monitoring and advisory fees paid
by the Company and its Restricted Subsidiaries to any of the Sponsors,
in an amount not to exceed $5 million in the aggregate in any calendar
year,
(6) any non-recurring charge relating to a restructuring plan of the
Company and its Restricted Subsidiaries, and
(7) all other noncash charges of the Company and its Consolidated
Restricted Subsidiaries, excluding any such noncash charge to the
extent it represents an accrual of or reserve for cash expenditures in
any future period, less all noncash items of income of the Company and
its Restricted Subsidiaries
in each case for such period.
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization and non-cash charges of, a
Restricted Subsidiary of the Company shall be added to Consolidated Net Income
to compute EBITDA only to the extent, and in the same proportion, that the net
income of such Restricted Subsidiary was included in calculating Consolidated
Net Income and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company or another Restricted Subsidiary
by such Restricted Subsidiary without prior approval that has not been
obtained, pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Restricted Subsidiary or its stockholders.
"Equity Offering" means any public or private sale of common stock or
Preferred Stock of the Company, Intermediate Holdings, HDD Holdings or the
Issuer, other than Disqualified Stock, other than (i) public offerings with
respect to the Company's, Intermediate Holdings, HDD Holdings' or the Issuer's
common stock registered on Form S-8, (ii) any such public or private sale that
constitutes an Excluded Contribution and (iii) other issuances upon exercise of
options by employees of the Company, Intermediate Holdings, HDD Holdings or the
Issuer or any of their Restricted Subsidiaries.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Contributions" means the net cash proceeds received by the
Company after the Closing Date from;
(1) contributions, other than from a Subsidiary of the Company, to its
common equity capital; and
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(2) the sale (other than to a Subsidiary of the Company or to any Company
or Subsidiary management equity plan or stock option plan or any other
management or employee benefit plan or agreement) of Capital Stock,
other than Disqualified Stock and Designated Preferred Stock, of the
Company, in each case designated as Excluded Contributions pursuant to
an Officers' Certificate executed by an Officer of the Company, the
cash proceeds of which are excluded from the calculation set forth in
clause (5)(C) of the covenant described under "-- Certain Covenants --
Limitation on Restricted Payments."
"Existing Notes" means the debt securities of Seagate Technology Inc.
issued under the indenture dated as of March 1, 1997, between Seagate
Technology, Inc. and First Trust of California, National Association, as
trustee, including any supplemental indentures thereto.
"Existing Unrestricted Entity" means Seagate Technology Investments
Holdings LLC and each of its Subsidiaries and entities in which it has made
Investments, including CacheVision, Inc., e2open.com LLC and Iolon, Inc., as of
the Closing Date; provided, however, that each of the foregoing Persons shall
cease to be an Existing Unrestricted Entity at the time that such Person
becomes a Restricted Subsidiary.
"Fair Market Value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. For all purposes of
the indenture, the Fair Market Value of property or assets which involve (a) an
aggregate amount in excess of $25 million, shall be set forth in a resolution
approved by the Board of Directors in good faith and (b) an aggregate amount in
excess of $50 million, shall have been determined in writing by a nationally
recognized appraisal or investment banking firm.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants,
(2) statements and pronouncements of the Financial Accounting Standards
Board,
(3) such other statements by such other entities as approved by a
significant segment of the accounting profession, and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements, including pro forma financial statements, in
periodic reports required to be filed pursuant to Section 13 of the
Exchange Act, including opinions and pronouncements in staff
accounting bulletins and similar written statements from the
accounting staff of the SEC.
All ratios and computations based on GAAP contained in the indenture shall
be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise,
of such Person:
(1) to purchase or pay, or advance or supply funds for the purchase or
payment of, such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by
agreement to keep-well, to purchase assets, goods, securities or
services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or
(2) entered into for purposes of assuring in any other manner the obligee
of such Indebtedness or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof, in whole or in
part;
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
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"Hedging Agreement" means any Currency Agreement, any Interest Rate
Agreement and any Commodity Agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Hedging Agreement.
"Holder" means the Person in whose name a note is registered on the
Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary, whether by merger,
consolidation, acquisition or otherwise, shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as
a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:
(1) the principal of and premium, if any, in respect of indebtedness of
such Person for borrowed money;
(2) the principal of and premium, if any, in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments, including reimbursement obligations with
respect thereto;
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, except Trade Payables, which
purchase price is due more than six months after the date of placing
such property in service or taking delivery and title thereto or the
completion of such services;
(5) all Capitalized Lease Obligations and all Attributable Debt of such
Person;
(6) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock
or, with respect to any Subsidiary of such Person, any Preferred
Stock, but excluding, in each case, any accrued dividends;
(7) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such
Person shall be the lesser of:
(A) the Fair Market Value of such asset at such date of determination
and
(B) the amount of such Indebtedness of such other Persons;
(8) Hedging Obligations of such Person; and
(9) all obligations of the type referred to in clauses (1) through (8) of
other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly
or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date and in no
event shall it include any liabilities incurred under the Deferred Compensation
Plans.
"Indemnification Agreement" means that Indemnification Agreement dated as
of March 29, 2000 among Seagate Technology, Inc., VERITAS Software Corporation
and Suez Acquisition Company (Cayman) Limited, as amended from time to time on
or prior to the Closing Date.
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"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement to which such Person is party or of which it is a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "Certain Covenants
- -- Limitation on Restricted Payments":
(1) "Investment" shall include the portion, proportionate to the
Company's equity interest in such Subsidiary, of the Fair Market Value
of the net assets of any Subsidiary of the Company at the time that
such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount, if
positive, equal to:
(A) the Company's "Investment" in such Subsidiary at the time of such
redesignation less
(B) the portion, proportionate to the Company's equity interest in
such Subsidiary, of the Fair Market Value of the net assets of
such Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its Fair Market Value at the time of such transfer.
"Legal Holiday" means a Saturday, Sunday or other day on which banking
institutions are not required by law or regulation to be open in the State of
New York.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind, including any conditional sale or other title retention
agreement or lease in the nature thereof.
"Merger Agreement" means the Agreement and Plan of Merger and
Reorganization dated as of March 29, 2000, by and among VERITAS Software
Corporation, Victory Merger Sub, Inc. and Seagate Technology, Inc., as amended
from time to time on or prior to the Closing Date.
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and
proceeds from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to the properties or assets that are
the subject of such Asset Disposition or received in any other noncash form)
therefrom, in each case net of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all
U.S. Federal, state, provincial, foreign and local taxes required to
be paid or accrued as a liability under GAAP, as a consequence of such
Asset Disposition,
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out
of the proceeds from such Asset Disposition,
223
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition and
(4) appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the
property or other assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Note Guarantee" means each Guarantee of the obligations with respect to
the notes issued by a Person pursuant to the terms of the indenture.
"Note Guarantor" means any Person that has issued a Note Guarantee.
"Officer" means the Chairman of the Board, the Chief Executive Officer,
the Chief Financial Officer, the President, any Vice President, the Treasurer
or the Secretary of the Issuer. "Officer" of a Note Guarantor has a correlative
meaning.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Issuer, the Company or a Note Guarantor or the Trustee.
"Permitted Business" means any business engaged in by the Company or any
Restricted Subsidiary on the Closing Date and any Related Business.
"Permitted Holders" means the Sponsors, members of management of the
Company, Intermediate Holdings, HDD Holdings or the Issuer who own Capital
Stock of the Company on the Closing Date and each of their Affiliates.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Permitted Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted
Subsidiary; provided, however, that such Person's primary business is
a Permitted Business;
(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business;
(6) loans or advances to employees and directors made in the ordinary
course of business consistent with past practices of the Company or
such Restricted Subsidiary and not exceeding $5 million at any one
time outstanding;
224
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the noncash
portion of the consideration received for an Asset Disposition that
was made pursuant to and in compliance with the covenant described
under "-- Certain Covenants -- Limitation on Sale of Assets and
Capital Stock";
(9) any Person; provided, that such Investment exists on the Closing Date
and any Investment that replaces or refunds such an Investment;
provided, that the replacing or refunding Investment is in an amount
that does not exceed the amount of the replaced or refunded
Investment, valued at the time made and without giving effect to
subsequent changes in value, and is made in the same Person as the
replaced or refunded Investment;
(10) Persons other than Restricted Subsidiaries, including, but not
limited to, CacheVision, Inc., e2open.com LLC, Iolon, Inc. and Seagate
Technology Investments Holdings LLC, having an aggregate Fair Market
Value, taken together with all other Investments made pursuant to this
clause (10) that are at that time outstanding, not to exceed $150
million at the time of such Investment, with the Fair Market Value of
each Investment being measured at the time made and without giving
effect to subsequent changes in value; provided, however, that not
more than $75 million in aggregate Fair Market Value of such
Investments may be made in any calendar year;
(11) Hedging Agreements permitted under clause (b)(5) of the covenant
described under "-- Certain Covenants -- Limitation on Indebtedness";
(12) any Person; provided, that the payment for such Investments consists
solely of Capital Stock of the Company or its Subsidiaries, other than
Disqualified Stock or, except in the case of the Company, Intermediate
Holdings or HDD Holdings, Preferred Stock;
(13) any Person; provided, that such Investment is acquired by the Company
or any of its Restricted Subsidiaries (a) in exchange for any other
Investment or accounts receivable held by the Company or any such
Restricted Subsidiary in connection with or as a result of a
bankruptcy, workout, reorganization or recapitalization of the Issuer
of such other Investment or accounts receivable or (b) as a result of
a foreclosure by the Company or any of its Restricted Subsidiaries on
a lien;
(14) any Person consisting of Guarantees issued in accordance with the
covenant described under "-- Certain Covenants -- Limitation on
Indebtedness";
(15) any Person consisting of the licensing of intellectual property
pursuant to joint ventures, strategic alliances or joint marketing
arrangements with such Person, in each case made in the ordinary
course of business; and
(16) a vendor or supplier consisting of loans or advances to such vendor
or supplier in connection with any guarantees to the Company or any
Restricted Subsidiary of supply by, or to fund the supply capacity of,
such vendor or supplier, in any case not to exceed $50 million at any
one time outstanding.
"Permitted Junior Securities" shall mean debt or equity securities of the
Issuer or any successor corporation issued pursuant to a plan of reorganization
or readjustment of the Issuer that are subordinated to the payment of all
then-outstanding Senior Indebtedness of the Issuer to at least the same extent
that the notes are subordinated to the payment of all Senior Indebtedness of
the Issuer on the Closing Date, so long as to the extent that any Senior
Indebtedness of the Issuer outstanding on the date of consummation of any such
plan or reorganization or readjustment is not paid in full in cash or Temporary
Cash Investments on such date, the holders of any such Senior Indebtedness not
so paid in full in cash or Temporary Cash Investments have consented to the
terms of such plan or reorganization or readjustment.
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"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes, however designated, that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"principal" of a note means the principal of the note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Publicly Traded Equity Securities" means equity securities of companies,
other than any Affiliate of the Company, which are listed on the New York Stock
Exchange, the Nasdaq National Market, or another recognized national securities
exchange.
"Purchase Money Indebtedness" means Indebtedness:
(1) consisting of the deferred purchase price of an asset, conditional
sale obligations, obligations under any title retention agreement and
other purchase money obligations, in each case where the maturity of
such Indebtedness does not exceed the anticipated useful life of the
asset being financed, and
(2) Incurred to finance the acquisition by the Company or a Restricted
Subsidiary of such asset, including additions and improvements;
provided, however, that such Indebtedness is incurred within 180 days after the
acquisition by the Company or such Restricted Subsidiary of such asset.
"Qualified Releasing Event" means, with respect to any Designated
Subsidiary, (a) a transfer by the Company or any Subsidiary of the Company of
all the outstanding Capital Stock of such Designated Subsidiary, or (b) a bona
fide underwritten initial public offering of shares of voting common stock of
such Designated Subsidiary in which at least 10% of the aggregate outstanding
shares of voting common stock of such Designated Subsidiary (calculated on a
fully diluted basis after giving effect to all options to acquire voting common
stock of such Designated Subsidiary then outstanding, regardless of whether
such options are currently exercisable) is issued, in each case, to Persons
other than (1) the Company, (2) any Affiliate of the Company, (3) any director,
officer or employee of the Company or any Affiliate of the Company or (4) any
employee stock ownership plan or other trust established by the Company or any
of its Subsidiaries.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend, including pursuant to any
defeasance or discharge mechanism, any Indebtedness of the Company or any
Restricted Subsidiary existing on the Closing Date or Incurred in compliance
with the indenture, including Indebtedness of the Company that Refinances
Refinancing Indebtedness; provided, however, that:
(1) the Refinancing Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the Indebtedness being Refinanced,
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being refinanced,
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount, or if issued with original issue discount, an aggregate issue
price, that is equal to or less than the aggregate principal amount,
or if issued with original issue discount, the aggregate accreted
value, then outstanding of the Indebtedness being Refinanced and
226
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the notes or a Note Guarantee, such Refinancing
Indebtedness is subordinated in right of payment to the notes or such
Note Guarantee at least to the same extent as the Indebtedness being
Refinanced;
provided, however, that clauses (1) and (2) will not apply to any refunding or
refinancing of any Senior Indebtedness; provided further, however, that
Refinancing Indebtedness shall not include:
(A) Indebtedness of a Restricted Subsidiary, other than the Issuer,
that Refinances Indebtedness of the Issuer or
(B) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on the Closing
Date or which constitutes a reasonable extension or expansion of their
businesses.
"Representative" means the trustee, agent or representative, if any, for
an issue of Senior Indebtedness.
"Restricted Subsidiary" means the Issuer, HDD Holdings, Intermediate
Holdings and any other Subsidiary of the Company other than an Unrestricted
Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or a Restricted Subsidiary transfers such property to a Person and
the Company or such Restricted Subsidiary leases it from such Person, other
than leases between (1) the Company and a Note Guarantor or a Wholly Owned
Subsidiary, (2) Note Guarantors, (3) Wholly Owned Subsidiaries or (4) a Note
Guarantor and a Wholly Owned Subsidiary.
"S&P" means Standard & Poor's Rating Service.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Issuer secured by a
Lien. "Secured Indebtedness" of a Note Guarantor has a correlative meaning.
"Senior Subordinated Indebtedness" of the Issuer means the notes and any
other Indebtedness of the Issuer that specifically provides that such
Indebtedness is to rank equally with the notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Issuer which is not Senior Indebtedness. "Senior Subordinated
Indebtedness" of a Note Guarantor has a correlative meaning.
"Shareholders Agreement" means each of (1) that Shareholders Agreement
entered into as of the Closing Date among each of the Sponsors and the Company
and (2) that Management Shareholders Agreement entered into as of the Closing
Date among each of the members of the management group that held ordinary
shares of the Company on the Closing Date and the Company, each as in effect on
the Closing Date.
"Significant Subsidiary" means any Restricted Subsidiary other than the
Issuer that would be a "Significant Subsidiary" of the Company within the
meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.
"Sponsors" means Silver Lake Capital Partners, L.P., Integral Capital
Partners, TPG Partners III, L.P., August Capital, Chase Capital Partners and GS
Capital Partners III, L.P. and each of their respective Affiliates that is a
party to the Shareholders Agreement.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision, but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency beyond the control of the Issuer unless such contingency has
occurred.
227
"Stock Purchase Agreement" means that certain Stock Purchase Agreement
dated as of March 29, 2000 among the Company, the Issuer and Seagate Software
Holdings, Inc., as amended from time to time on or prior to the Closing Date.
"Subordinated Obligation" means any Indebtedness of the Issuer, whether
outstanding on the Closing Date or thereafter Incurred, that is subordinate or
junior in right of payment to the notes pursuant to a written agreement.
"Subordinated Obligation" of a Note Guarantor has a correlative meaning.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by:
(1) such Person,
(2) such Person and one or more Subsidiaries of such Person or
(3) one or more Subsidiaries of such Person; provided, that HDD Holdings
and Intermediate Holdings and their Subsidiaries shall each be deemed
to be a Subsidiary of the Company at all times and for all purposes
under the indenture.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of America
or any agency thereof or obligations Guaranteed by the United States
of America or any agency thereof,
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company that is
organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States of
America having capital, surplus and undivided profits aggregating in
excess of $250,000,000, or the foreign currency equivalent thereof,
and whose long-term debt is rated "A", or such similar equivalent
rating, or higher by at least one nationally recognized statistical
rating organization, as defined in Rule 436 under the Securities Act,
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above
entered into with a bank meeting the qualifications described in
clause (2) above,
(4) investments in commercial paper, maturing not more than one year
after the date of acquisition, issued by a corporation, other than an
Affiliate of the Company, organized and in existence under the laws of
the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any
investment therein is made of "P-1" or higher, according to Moody's
Investors Service, Inc. or "A-1" or higher, according to Standard and
Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc.,
(5) investments in securities with maturities of one year or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least
"A" by S&P or "A" by Moody's Investors Service, Inc., and
(6) securities issued by any foreign government or any political
subdivision of any foreign government or any public instrumentality
thereof having maturities of not more than six months from the date of
acquisition thereof and, at the time of acquisition, having one of the
two highest credit ratings obtainable from Moody's Investors Service,
Inc. or S&P.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section Section
77aaa-77bbbb) as in effect on the Closing Date.
228
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"Trade Payables" means, with respect to any Person, any accounts payable
or any indebtedness or monetary obligation to trade creditors created, assumed
or Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Transactions" means the transactions contemplated by the Stock Purchase
Agreement, the Merger Agreement, the Credit Agreement and the Issuance of the
notes including, in each case, the payment of fees and expenses in connection
therewith, all on the terms described in the prospectus.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Trustee" means the party named as such in the indenture until a successor
replaces it and, thereafter, means the successor.
"Unrestricted Subsidiary" means Seagate Technology Investments Holdings
LLC and:
(1) any Subsidiary of the Company that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary of the Company but
excluding the Issuer, HDD Holdings and Intermediate Holdings) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or owns or holds any Lien on any property
of, the Company or any other Subsidiary of the Company that is not a Subsidiary
of the Subsidiary to be so designated; provided, however, that either:
(A) the Subsidiary to be so designated has total Consolidated assets of
$1,000 or less or
(B) if such Subsidiary has Consolidated assets greater than $1,000,
then such designation would be permitted under the covenant entitled
"Limitation on Restricted Payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation:
(x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" or the Consolidated
Coverage Ratio would be greater than such ratio immediately prior
to such designation and
(y) no Default shall have occurred and be continuing.
Any such designation of a Subsidiary as a Restricted Subsidiary or
Unrestricted Subsidiary by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Dollar Equivalent" means with respect to any monetary amount in a
currency other than U.S. dollars, at any time for determination thereof, the
amount of U.S. dollars obtained by converting such foreign currency involved in
such computation into U.S. dollars at the spot rate for the purchase of U.S.
dollars with the applicable foreign currency as published in The Wall Street
Journal in the "Exchange Rates" column under the heading "Currency Trading" on
the date two Business Days prior to such determination.
Except as described under "-- Certain Covenants -- Limitation on
Indebtedness", whenever it is necessary to determine whether the Company or the
Restricted Subsidiaries have complied with any
229
covenant in the indenture or a Default has occurred and an amount is expressed
in a currency other than U.S. dollars, such amount will be treated as the U.S.
Dollar Equivalent determined as of the date such amount is initially determined
in such currency.
"U.S. Government Obligations" means direct obligations, or certificates
representing an ownership interest in such obligations, of the United States of
America, including any agency or instrumentality thereof, for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the Issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests, including partnership interests, of such Person then outstanding and
normally entitled, without regard to the occurrence of any contingency, to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which, other than directors' qualifying shares, is owned
by the Company or another Wholly Owned Subsidiary.
230
CERTAIN INCOME TAX CONSIDERATIONS
The exchange of outstanding notes for exchange notes in the exchange offer
will not constitute a taxable event to holders. Consequently, no gain or loss
will be recognized by you upon receipt of an exchange note, the holding period
of the exchange notes will include the holding period of the outstanding note
and the basis of the exchange notes will be the same as the basis of the
outstanding note immediately before the exchange.
IN ANY EVENT, YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF YOUR PARTICULAR
SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER
TAXING JURISDICTION.
231
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Issuer, the initial purchasers and the note guarantors entered into
the exchange and registration rights agreement in connection with the issuance
of the notes. Pursuant to the exchange and registration rights agreement, the
Issuer and the note guarantors agreed to:
o file with the SEC on or prior to 150 days after the date of issuance of
the notes a registration statement on an appropriate form relating to a
registered exchange offer for the notes under the Securities Act of 1933
and
o use their reasonable best efforts to cause the exchange offer
registration statement to be declared effective under the Securities Act
of 1933 within 270 days after the issuance of the outstanding notes. As
soon as practicable after the effectiveness of the exchange offer
registration statement, the Issuer will offer to the holders of Transfer
Restricted Securities, which we define below, who are not prohibited by
any law or policy of the SEC from participating in the exchange offer the
opportunity to exchange their Transfer Restricted Securities for an issue
of a second series of notes that are identical in all material respects
to the notes, except that the exchange notes will not contain terms with
respect to transfer restrictions, and that would be registered under the
Securities Act of 1933. The Issuer and the note guarantors will keep the
exchange offer open for not less than 20 business days, or longer, if
required by applicable law, after the date on which notice of the
exchange offer is mailed to the holders of the notes.
If:
o because of any change in law or applicable interpretations thereof by
the staff of the SEC, the Issuer is not permitted to effect the exchange
offer as contemplated by this prospectus,
o any securities validly tendered pursuant to the exchange offer are not
exchanged for exchange securities within 300 days after the issuance of
the outstanding notes,
o any initial purchaser so requests with respect to notes not eligible to
be exchanged for exchange notes in the exchange offer,
o any applicable law or interpretations do not permit any holder of notes
to participate in the exchange offer,
o any holder of notes that participates in the exchange offer does not
receive freely transferable exchange notes in exchange for tendered notes
or
o the Issuer so elects,
then the Issuer and the note guarantors will file with the SEC a shelf
registration statement to cover resales of Transfer Restricted Securities by
the holders who satisfy certain conditions relating to the provision of
information in connection with the shelf registration statement. For purposes
of the foregoing, "Transfer Restricted Securities" means each note until:
o the date on which the note has been exchanged for a freely transferable
exchange note in the exchange offer;
o the date on which the note has been effectively registered under the
Securities Act of 1933 and disposed of in accordance with the shelf
registration statement; or
o the date on which the note is distributed to the public pursuant to Rule
144 under the Securities Act of 1933 or is salable pursuant to Rule
144(k) under the Securities Act of 1933.
The Issuer and each of the note guarantors will use their reasonable best
efforts to have the exchange offer registration statement or, if applicable,
the shelf registration statement declared effective by the SEC as promptly as
practicable after the filing of this registration statement. Unless the
exchange offer would not be permitted by a policy of the SEC, the Issuer will
commence the exchange offer and will use its reasonable best efforts to
consummate the exchange offer as promptly as practicable, but in any event
prior to 300 days after the issuance of the outstanding notes. If applicable,
the Issuer and each of the note guarantors will use their reasonable best
efforts
232
to keep the shelf registration statement effective for a period ending on the
earlier of two years after the issue date and the date on which all of the
notes become eligible for resale without volume restrictions pursuant to Rule
144 under the Securities Act.
If:
o the applicable registration statement is not filed with the SEC on or
prior to 150 days after the issuance of the outstanding notes;
o the exchange offer registration statement or the shelf registration
statement, as the case may be, is not declared effective within 270 days
after the issuance of the outstanding notes;
o the exchange offer is not consummated on or prior to 300 days after the
issuance of the outstanding notes; or
o the shelf registration statement is filed and declared effective within
270 days after the issuance of the outstanding notes but shall thereafter
cease to be effective at any time that the Issuer and the note guarantors
are obligated to maintain the effectiveness of the shelf registration
statement without being succeeded within 45 days by an additional
registration statement filed and declared effective
(we refer to each of the events listed above as a "Registration Default"), the
Issuer and the note guarantors will be obligated to pay liquidated damages to
each holder of Transfer Restricted Securities, during the period of one or more
Registration Defaults, in an amount equal to $0.192 per week per $1,000
principal amount of the notes constituting Transfer Restricted Securities held
by the holder until the applicable registration statement is filed, the
exchange offer registration statement is declared effective and the exchange
offer is consummated or the shelf registration statement is declared effective
or again becomes effective, as the case may be. All accrued liquidated damages
shall be paid to holders in the same manner as interest payments on the notes
on semi-annual payment dates which correspond to interest payment dates for the
notes. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease.
Notwithstanding the above, the Issuer and the note guarantors may issue a
notice that the shelf registration statement is unusable pending the
announcement of a material corporate transaction and may issue any notice
suspending use of the shelf registration statement required under applicable
securities laws to be issued. In the event that the aggregate number of days in
any consecutive twelve-month period for which all notices are issued and
effective exceeds 60 days in total, then the Issuer will be obligated to pay
liquidated damages to each holder of Transfer Restricted Securities in an
amount equal to $0.192 per week per $1,000 principal amount of securities
constituting Transfer Restricted Securities held by that holder. Upon the
Issuer declaring that the shelf registration statement is usable after the
period of time described in the preceding sentence, accrual of liquidated
damages shall cease; provided, however, that if after any cessation of the
accrual of liquidated damages the shelf registration statement again ceases to
be usable beyond the period permitted above, liquidated damages will again
accrue.
The exchange and registration rights agreement also provides that the
Issuer and the note guarantors:
o shall make available for a period of not less than 90 days after the
consummation of the exchange offer a prospectus meeting the requirements
of the Securities Act of 1933 to any broker-dealer for use in connection
with any resale of any exchange notes and
o shall pay all expenses incident to the exchange offer, including the
expense of one counsel to the holders of the notes, and will jointly and
severally indemnify various holders of the notes, including any
broker-dealer, against specified liabilities, including liabilities under
the Securities Act of 1933.
A broker-dealer which delivers a prospectus to purchasers in connection
with resales will be subject to various civil liability provisions under the
Securities Act and will be bound by the provisions of the exchange and
registration rights agreement, including certain indemnification rights and
obligations.
233
Each holder of the outstanding notes who wishes to exchange such notes for
exchange notes in the exchange offer will be required to make specified
representations, including representations that:
o any exchange notes to be received by it will be acquired in the ordinary
course of its business;
o it has no arrangement or understanding with any person to participate in
the distribution of the exchange notes; and
o it is not an "affiliate", as defined in Rule 405 under the Securities
Act of 1933, of the Issuer, or if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the
Securities Act of 1933 to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent
that it is not engaged in, and does not intend to engage in, the distribution
of the exchange notes. If the holder is a broker-dealer that will receive
exchange notes for its own account in exchange for notes that were acquired as
a result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with
any resale of the exchange notes.
Holders of the outstanding notes will be required to make certain
representations to the Issuer, as described above, in order to participate in
the exchange offer and will be required to deliver information to be used in
connection with the shelf registration statement in order to have their notes
included in the shelf registration statement and benefit from the provisions
regarding liquidated damages set forth in the preceding paragraphs. A holder
who sells notes pursuant to the shelf registration statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to various civil
liability provisions under the Securities Act of 1933 in connection with such
sales and will be bound by the provisions of the exchange and registration
rights agreement which are applicable to the holder, including specified
indemnification obligations.
For so long as the outstanding notes are outstanding, the Issuer will
continue to provide to holders of the notes and to prospective purchasers of
the notes the information required by Rule 144A(d)(4) under the Securities Act
of 1933.
The foregoing description of the exchange and registration rights
agreement is a summary only, does not purport to be complete and is qualified
in its entirety by reference to all provisions of the exchange and registration
rights agreement. For further information regarding the terms and provisions of
the exchange and registration rights agreement, please refer to the agreement
which we have filed as an exhibit to the registration statement of which this
prospectus is a part.
234
BOOK-ENTRY; DELIVERY AND FORM
The exchange notes will initially be represented in the form of one or
more global notes in definitive, fully-registered book-entry form, without
interest coupons that will be deposited with or on behalf of The Depository
Trust Company, or DTC, and registered in the name of DTC or its participants.
Except as set forth below, the global notes may be transferred, in whole
and not in part, solely to another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the global notes may not be exchanged for
notes in physical, certificated form except in the limited circumstances
described below.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Clearstream set forth below are provided solely as a matter of convenience.
These operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. Neither
the Issuer nor the initial purchaser takes any responsibility for these
operations or procedures, and investors are urged to contact the relevant
system or its participants directly to discuss these matters.
DTC has advised the Issuer that it is:
o a limited purpose trust company organized under the laws of the State of
New York,
o a "banking organization" within the meaning of the New York Banking Law,
o a member of the Federal Reserve System,
o a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and
o a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants and facilitates
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of
certificates. DTC's participants include securities brokers and dealers,
including the initial purchasers, banks and trust companies, clearing
corporations and certain other organizations. Indirect access to DTC's system
is also available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Investors who are not participants
may beneficially own securities held by or on behalf of DTC only through
participants or indirect participants.
The Issuer expects that pursuant to procedures established by DTC:
o upon deposit of each global note, DTC will credit the accounts of
participants designated by the initial purchaser with an interest in the
global note and
o ownership of the notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC, with
respect to the interests of participants, and the records of participants
and the indirect participants, with respect to the interests of persons
other than participants.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the notes represented by a
global note to such persons may be limited. In addition, because DTC can act
only on behalf of its participants, who in turn act on behalf of persons who
hold interests through participants, the ability of a person having an interest
in notes represented by a global note to pledge or transfer such interest to
persons or entities that do not participate in DTC's system, or to otherwise
take actions in respect of such interest, may be affected by the lack of a
physical definitive security in respect of such interest.
235
So long as DTC or its nominee is the registered owner of a global note,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the notes represented by the global note for all purposes under the
indenture. Except as provided below, owners of beneficial interests in a global
note will not be entitled to have notes represented by such global note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated notes, and will not be considered the owners or
holders thereof under the indenture for any purpose, including with respect to
the giving of any direction, instruction or approval to the trustee under the
indenture. Accordingly, each holder owning a beneficial interest in a global
note must rely on the procedures of DTC and, if such holder is not a
participant or an indirect participant, on the procedures of the participant
through which such holder owns its interest, to exercise any rights of a holder
of notes under the indenture or such global note. The Issuer understands that
under existing industry practice, in the event that the Issuer requests any
action of holders of notes, or a holder that is an owner of a beneficial
interest in a global note desires to take any action that DTC, as the holder of
such global note, is entitled to take, DTC would authorize the participants to
take such action and the participants would authorize holders owning through
such participants to take such action or would otherwise act upon the
instruction of such holders. Neither the Issuer nor the trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of notes by DTC, or for maintaining, supervising or
reviewing any records of DTC relating to such notes.
Payments with respect to the principal of, and premium, if any, liquidated
damages, if any, and interest on, any notes represented by a global note
registered in the name of DTC or its nominee on the applicable record date will
be payable by the trustee to or at the direction of DTC or its nominee in its
capacity as the registered holder of the global note representing such notes
under the indenture. Under the terms of the indenture, the Issuer and the
trustee may treat the persons in whose names the notes, including the global
notes, are registered as the owners thereof for the purpose of receiving
payment thereon and for any and all other purposes whatsoever. Accordingly,
neither the Issuer nor the trustee has or will have any responsibility or
liability for the payment of such amounts to owners of beneficial interests in
a global note (including principal, premium, if any, liquidated damages, if
any, and interest). Payments by the participants and the indirect participants
to the owners of beneficial interests in a global note will be governed by
standing instructions and customary industry practice and will be the
responsibility of the participants or the indirect participants and DTC.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Clearstream will be effected in the ordinary way
in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver
instructions to its respective depositary to take action to effect final
settlement on its behalf by delivering or receiving interests in the relevant
global notes in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Euroclear
participants and Clearstream participants may not deliver instructions directly
to the depositaries for Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a global note from a
participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day, which must be a business day for Euroclear and
Clearstream, immediately following the settlement date of DTC. Cash received in
Euroclear or Clearstream as a
236
result of sales of interest in a global security by or through a Euroclear or
Clearstream participant to a participant in DTC will be received with value on
the settlement date of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the global notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Issuer nor the trustee will have any
responsibility for the performance by DTC, Euroclear or Clearstream or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
If:
o the Issuer notifies the trustee in writing that DTC is no longer willing
or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of this notice or cessation,
o the Issuer, at its option, notifies the trustee in writing that it
elects to cause the issuance of notes in definitive form under the
indenture or
o upon the occurrence of specified other events as provided in the
indenture,
then, upon surrender by DTC of the global notes, certificated notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by the global notes. Upon any issuance described above, the trustee
is required to register the certificated notes in the name of, and cause the
certificated notes to be delivered to, person or persons identified by DTC, or
their nominee.
Neither the Issuer nor the trustee shall be liable for any delay by DTC or
any participant or indirect participant in identifying the beneficial owners of
the related notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes, including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued.
237
PLAN OF DISTRIBUTION
Until , 2001, 90 days after the date of this prospectus, all dealers
effecting transactions in the exchange notes, whether or not participating in
this distribution, may be required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. This
prospectus, as it may be amended or supplemented, may be used by a
broker-dealer in connection with resales of exchange notes received in exchange
for outstanding notes only where the outstanding notes were acquired as a
result of market-making activities or other trading activities. We have agreed
that we will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any resale for a period of 180 days
from the date on which the exchange offer is consummated, or such shorter
period as will terminate when all outstanding notes acquired by broker-dealers
for their own accounts as a result of market-making activities or other trading
activities have been exchanged for exchange notes and the exchange notes have
been resold by the broker-dealers.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of these
methods of resale, at market prices prevailing at the time of resale, at prices
related to the prevailing market prices or negotiated prices. Any resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any broker-dealer
or the purchasers of any exchange notes. Any broker-dealer that resells
exchange notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
the exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act of 1933 and any profit on any resale of exchange notes and
any commissions or concessions received by these persons may be deemed to be
underwriting compensation under the Securities Act of 1933. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act of 1933.
For a period of 180 days from the date on which the exchange offer is
consummated, or a shorter period as will terminate when all outstanding notes
acquired by broker-dealers for their own accounts as a result of market-making
activities or other trading activities have been exchanged for exchange notes
and the exchange notes have been resold by the broker-dealers, we will promptly
send additional copies of this prospectus and any amendment or supplement to
this prospectus to any broker-dealer that requests the documents in the letter
of transmittal. We have agreed to pay all expenses incident to the exchange
offer, including the expenses of one counsel for the holders of the outstanding
notes, other than commissions or concessions of any brokers or dealers and the
fees of any counsel or other advisors or experts retained by the holders of
outstanding notes, except as expressly set forth in the registration rights
agreement, and will indemnify the holders of outstanding notes, including any
broker-dealers, against specified liabilities, including liabilities under the
Securities Act of 1933.
238
LEGAL MATTERS
Certain legal matters with respect to the validity of the exchange notes
will be passed upon for us by Simpson Thacher & Bartlett, Palo Alto,
California. Certain partners of Simpson Thacher & Bartlett, members of their
families, related persons and others own through an investment vehicle less
than 1% of the capital commitments of Silver Lake Partners. In addition,
Simpson Thacher & Bartlett has in the past provided, and may continue to
provide, legal services to Silver Lake Partners.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of New SAC and its predecessor, Seagate Technology, Inc.,
at December 29, 2000, June 30, 2000, July 2, 1999, the period from November 23,
2000 through December 29, 2000, and the period from July 1, 2000 through
November 22, 2000 and for each of the three years in the period ended June 30,
2000, as set forth in their report. We have included these financial statements
in the prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
Ernst & Young LLP, independent auditors, have audited the combined
financial statements of Seagate Technology Hard Disc Drive Business, a division
of Seagate Technology Inc. at June 30, 2000 and July 2, 1999, and for each of
the three years in the period ended June 30, 2000, as set forth in their
report. We have included these financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the balance sheet of
XIOtech Corporation at June 30, 2000, and the related consolidated statements
of operations, changes in mandatorily redeemable convertible preferred stock
and stockholders' equity, and consolidated cash flows for the period from
January 29, 2000 to June 30, 2000. In addition, they have audited the balance
sheet at December 31, 1999, and the related statements of operations, changes
in mandatorily redeemable convertible preferred stock and stockholders' equity,
and cash flows for the period from January 1, 2000 to January 28, 2000 and for
the year ended December 31, 1999 as set forth in their report. We have included
these financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the combined
financial statements of Seagate Removable Storage Solutions Business, a
division of Seagate Technology Inc. at June 30, 2000 and July 2, 1999, and for
each of the three years in the period ended June 30, 2000 as set forth in their
report. We have included these financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated and
combined financial statements of Crystal Decisions, Inc. at June 30, 2000 and
July 2, 1999, and for each of the three years in the period ended June 30, 2000
as set forth in their report. We have included these financial statements in
the prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
The financial statements of XIOtech Corporation prior to being acquired by
Seagate Technology, Inc. as of December 31, 1998 and for each of the two years
in the period then ended, included in the prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants
given on the authority of said firm as experts in auditing and accounting.
239
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933 with respect to the exchange notes. This prospectus,
which forms a part of the registration statement, does not contain all of the
information in the registration statement. You should refer to the registration
statement for further information. Statements contained in this prospectus
about the contents of any contract or other document are not necessarily
complete, and, where a contract or other document is an exhibit to the
registration statement, each of these statements is qualified by the provision
in the exhibit to which the statement relates.
We are not currently subject to the full informational requirements of the
Securities Exchange Act of 1934. As a result of this offering, we will become
subject to the informational requirements of the Securities Exchange Act of
1934. Accordingly, we will file reports and other information with the SEC
unless and until we obtain an exemption from the requirement to do so. The
registration statement and other reports or information can be inspected, and
copies may be obtained, at the Public Reference Room of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates, and at the regional
public reference facilities maintained by the SEC located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven
World Trade Center, Suite 1300, New York, New York 10048. Information on the
operation of the Public Reference Room of the SEC may be obtained by calling
the SEC at 1-800-SEC-0330. The SEC also maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information that we have filed electronically with the SEC.
Furthermore, we agree that, even if we are not required to file periodic
reports and information with the SEC, for so long as any exchange note remains
outstanding, we will furnish to you the information that would be required to
be furnished by New SAC under Section 13 of the Securities Exchange Act of
1934.
240
INDEX TO FINANCIAL STATEMENTS
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY, INC.
PAGE
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CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors ........................ F-6
Consolidated Balance Sheets at December 29, 2000,
June 30, 2000 and July 2, 1999 .......................................... F-7
Consolidated Statements of Operations for the
Period from November 23, 2000 to December 29, 2000,
Period from July 1, 2000 to November 22, 2000,
the six month period ended December 31, 1999 (unaudited) and
the Fiscal Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 ..... F-8
Consolidated Statements of Cash Flows for the
Period from November 23, 2000 to December 29, 2000,
the Period from July 1, 2000 to November 22, 2000,
the six month period ended December 31, 1999 (unaudited) and
the Fiscal Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 ..... F-9
Consolidated Statements of Shareholders' Equity for the
Period from November 23, 2000 to December 22, 2000,
the Period from July 1, 2000 to November 22, 2000 and
the Fiscal Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 ..... F-11
Notes to Consolidated Financial Statements ............................... F-13
F-1
INDEX TO FINANCIAL STATEMENTS
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR, SEAGATE TECHNOLOGY HARD DISC
DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE TECHNOLOGY, INC.
PAGE
------
CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated and Condensed Combined Balance Sheets as of
December 29, 2000 and June 30, 2000 ......................................... F-129
Condensed Consolidated and Condensed Combined Statements of Operations for the
Period from November 23, 2000 to December 29, 2000, the
Period from July 1, 2000 to November 22, 2000, and the
Six Months Ended December 31, 1999 .......................................... F-130
Condensed Consolidated and Condensed Combined Statements of Cash Flows for the
Period from November 23, 2000 to December 29, 2000, the
Period from July 1, 2000 to November 22, 2000, and the
Six Months Ended December 31, 1999 .......................................... F-131
Notes to Condensed Consolidated and Condensed Combined Financial Statements .. F-132
COMBINED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors ............................ F-157
Combined Balance Sheets at June 30, 2000
and July 2, 1999 ............................................................ F-158
Combined Statements of Operations for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................... F-159
Combined Statements of Cash Flows for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................... F-160
Combined Statement of Business Equity for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................... F-161
Notes to Combined Financial Statements ....................................... F-162
F-2
INDEX TO FINANCIAL STATEMENTS
SEAGATE TECHNOLOGY SAN HOLDINGS
AND ITS PREDECESSORS, XIOTECH CORPORATION
PAGE
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CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets as of
December 29, 2000 and June 30, 2000 .................................................... F-205
Condensed Consolidated Statements of Operations for the
Period from November 23, 2000 to December 29, 2000, the
Period from July 1, 2000 to November 22, 2000, and the
Six Months Ended December 31, 1999 ..................................................... F-206
Condensed Consolidated Statements of Cash Flows for the
Period from November 23, 2000 to December 29, 2000, the
Period from July 1, 2000 to November 22, 2000, and the
Six Months Ended December 31, 1999 ..................................................... F-207
Notes to Condensed Consolidated Financial Statements .................................... F-208
FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors ....................................... F-221
Report of PricewaterhouseCoopers LLP, Independent Accountants ........................... F-222
Balance Sheets at June 30, 2000,
December 31, 1999, and December 31, 1998 ............................................... F-223
Statements of Operations from January 29, 2000 to June 30, 2000, from
January 1, 2000 to January 28, 2000, for the Six Month Period ended June 30, 1999
(unaudited), and for the Fiscal
Years Ended December 31, 1999, 1998 and 1997 ........................................... F-224
Statements of Changes in Mandatorily Redeemable Convertible Preferred Stock and
Stockholders' Equity (Net Capital Deficit) from January 29, 2000 to
June 30, 2000, from January 1, 2000 to January 28, 2000, and for the Fiscal
Years Ended December 31, 1999, 1998 and 1997 ........................................... F-225
Statements of Cash Flows from January 29, 2000 to June 30, 2000, from January 1, 2000 to
January 28, 2000, for the Six Month Period ended June 30, 1999 (unaudited), and for the
Fiscal Years Ended December 31, 1999, 1998 and 1997 .................................... F-227
Notes to Financial Statements ........................................................... F-228
F-3
INDEX TO FINANCIAL STATEMENTS
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR,
SEAGATE REMOVABLE STORAGE SOLUTIONS BUSINESS, AN OPERATING BUSINESS OF
SEAGATE TECHNOLOGY, INC.
PAGE
------
CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated and Condensed Combined Balance Sheets as of
December 29, 2000 and June 30, 2000 ......................................... F-247
Consolidated Combined Condensed Statements of Operations for the
Period from November 23, 2000 to December 29, 2000, the
Period from July 1, 2000 to November 22, 2000, and the
Six Months Ended December 31, 1999 .......................................... F-248
Condensed Consolidated and Condensed Combined Statements of Cash Flows for the
Period from November 23, 2000 to December 29, 2000, the
Period from July 1, 2000 to November 22, 2000, and the
Six Months Ended December 31, 1999 .......................................... F-249
Notes to Condensed Consolidated and Condensed Combined Financial Statements .. F-250
COMBINED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors ............................ F-269
Combined Balance Sheets at June 30, 2000
and July 2, 1999 ............................................................ F-270
Combined Statements of Income for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................... F-271
Combined Statements of Cash Flows for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................... F-272
Combined Statement of Business Equity for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................... F-273
Notes to Combined Financial Statements ....................................... F-274
F-4
INDEX TO FINANCIAL STATEMENTS
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE
INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
PAGE
------
CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated and Combined Condensed Balance Sheets as of
December 29, 2000 and June 30, 2000 ....................................... F-299
Consolidated and Combined Condensed Statements of Operations for the
Six Months Ended December 29, 2000 and December 31, 1999 .................. F-300
Consolidated and Combined Condensed Statements of Cash Flows for the
Six Months Ended December 29, 2000 and December 31, 1999 .................. F-301
Notes to Condensed Consolidated and Condensed Combined Financial Statements F-302
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Consolidated and Combined Balance Sheets at June 30, 2000
and July 2, 1999 .......................................................... F-327
Consolidated and Combined Statements of Operations for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................. F-328
Consolidated and Combined Statements of Cash Flows for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................. F-329
Consolidated and Combined Statements of Stockholders' Equity for the Fiscal
Years Ended June 30, 2000, July 2, 1999 and July 3, 1998 .................. F-330
Notes to Consolidated and Combined Financial Statements .................... F-331
Report of Ernst & Young LLP, Independent Auditors .......................... F-363
F-5
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
New SAC
We have audited the accompanying consolidated balance sheets of New SAC at
December 29, 2000 and the related consolidated statements of operations,
stockholders' equity and cash flows for the period from November 23, 2000 to
December 29, 2000. We have also audited the accompanying consolidated balance
sheets of Seagate Technology, Inc., the Predecessor to New SAC, as of June 30,
2000 and July 2, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the period from July 1, 2000 to
November 22, 2000 and for each of the three years in the period ended June 30,
2000. 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 auditing standards generally
accepted in the United States. 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 New SAC at December 29, 2000, and Seagate Technology, Inc. at June 30, 2000
and July 2, 1999, and the consolidated results of operations and cash flows of
New SAC for the period from November 23, 2000 to December 29, 2000, and for
Seagate Technology, Inc. for each of the three years in the period ended June
30, 2000, and for the period from July 1, 2000 to November 22, 2000 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
April 18, 2001
F-6
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
NEW SAC SEAGATE TECHNOLOGY
-------------- -------------------------
DECEMBER 29, JUNE 30, JULY 2,
2000 2000 1999
-------------- ---------- ------------
ASSETS (SEE NOTE 3)
Cash and cash equivalents ............................. $ 732 $ 875 $ 396
Short-term investments ................................ 118 1,140 1,227
Accounts receivable, net .............................. 893 678 872
Inventories ........................................... 448 430 451
Deferred income taxes ................................. 38 219 252
Other current assets .................................. 216 167 114
----- ------ -------
Total Current Assets ................................. 2,445 3,509 3,312
----- ------ -------
Property, equipment and leasehold improvements,
net .................................................. 789 1,608 1,687
Investment in VERITAS Software, net ................... -- 1,122 1,745
Goodwill and other intangibles, net ................... 169 353 144
Other assets........................................... 106 575 184
----- ------ -------
Total Assets (See Note 3) ............................ $3,509 $7,167 $7,072
====== ====== =======
LIABILITIES
Accounts payable ...................................... $ 769 $ 707 $ 714
Accrued employee compensation ......................... 175 195 205
Accrued expenses ...................................... 553 365 414
Accrued warranty ...................................... -- 129 163
Accrued income taxes .................................. 193 81 43
Current portion of long-term debt ..................... 11 1 1
------ ------ -------
Total Current Liabilities ............................ 1,701 1,478 1,540
------ ------ -------
Deferred income taxes ................................. 38 1,020 1,103
Accrued warranty ...................................... -- 109 126
Other liabilities ..................................... 118 10 37
Long-term debt, less current portion .................. 893 703 703
------ ------ -------
Total Liabilities .................................... 2,750 3,320 3,509
------ ------ -------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Preferred shares, $.0001 par value -- 100 million
authorized; 9,205,000 issued and outstanding at
December 29, 2000, none in 2000 or 1999
liquidation preference $920.5 ........................ -- -- --
Preferred stock, $.01 par value -- 1,000,000 shares
authorized; none issued or outstanding ............... -- -- --
Ordinary shares $.0001 par value -- 100 million
voting shares authorized and 20 million nonvoting
authorized; 9,409,000 voting shares issued and
outstanding, 1,591,000 nonvoting shares issued
and outstanding at December 29, 2000, none in
2000 or 1999 ......................................... -- -- --
Common stock, $.01 par value 600,000,000 shares
authorized; shares issued 251,890,019 in 2000
and 1999 ............................................. -- 3 3
Additional paid-in capital ............................ 938 1,960 1,991
Retained earnings (accumulated deficit) ............... (153) 2,539 2,355
Accumulated other comprehensive income (loss) ......... (3) 86 (7)
Deferred compensation ................................. (23) (33) (43)
Treasury common stock at cost; none at December
29, 2000, 22,638,025 shares in 2000 and
23,172,130 shares in 1999 ............................ -- (708) (736)
------- ------ --------
Total Shareholders' Equity ........................... 759 3,847 3,563
------- ------ --------
Total Liabilities and Shareholders' Equity ........... $3,509 $7,167 $ 7,072
======= ====== ========
See notes to consolidated financial statements.
F-7
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY, INC. (CONTINUED)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
SEAGATE TECHNOLOGY
------------------------------------------------------------
NEW SAC SIX FOR THE YEARS ENDED
PERIOD FROM PERIOD FROM MONTHS -------------------------------
NOVEMBER 23, JULY 1, ENDED
2000 TO 2000 TO DECEMBER 31,
DECEMBER 29, NOVEMBER 22, 1999 JUNE 30, JULY 2, JULY 3,
2000 2000 (UNAUDITED) 2000 1999 1998
------------- -------------- ------------- ---------- --------- ----------
Revenue .................................. $1,017 $ 2,449 $3,327 $6,448 $6,802 $6,819
Cost of sales ............................ 896 2,130 2,665 5,056 5,176 5,788
Product development ...................... 73 442 359 725 655 627
Marketing and administrative ............. 101 490 243 515 534 502
Amortization of goodwill and other
intangibles ............................. 5 26 17 51 39 40
In-process research and
development ............................. 59 -- -- 105 2 223
Restructuring ............................ -- 20 135 207 60 347
Unusual items ............................ -- -- 325 350 78 (22)
------ -------- ------ ------ ------ ------
Total operating expenses ................ 1,134 3,108 3,744 7,009 6,544 7,505
------ -------- ------ ------ ------ ------
Income (loss) from operations ........... (117) (659) (417) (561) 258 (686)
Interest income .......................... 3 58 42 101 102 98
Interest expense ......................... (10) (24) (26) (52) (48) (51)
Gain on contribution of NSMG to
VERITAS, net ............................ -- -- -- -- 1,670 --
Activity related to equity interest in
VERITAS ................................. -- (99) (183) (326) (119) --
Gain on sale of VERITAS stock ............ -- -- 537 537 -- --
Gain on sale of SanDisk stock ............ -- 102 62 679 -- --
Gain on sale of Veeco stock .............. -- 20 -- -- -- --
Gain on exchange of certain
investments in equity securities ........ -- -- -- 231 -- --
Loss on LHSP investment .................. -- (138) -- -- -- --
Loss on sale of operating assets to
New SAC ................................. -- (889) -- -- -- --
Other, net ............................... (8) (11) (2) -- 10 (65)
-------- -------- -------- ------ ------ ------
Other income (expense), net ............. (15) (981) 430 1,170 1,615 (18)
------- -------- ------- ------ ------ ------
Income (loss) before income taxes......... (132) (1,640) 13 609 1,873 (704)
Benefit (provision) for income
taxes ................................... (21) 76 (70) (299) (697) 174
------- -------- ------- ------ ------ ------
Net income (loss) ....................... $(153) $ (1,564) $ (57) $ 310 $1,176 $ (530)
======= ======== ======= ====== ====== ======
See notes to consolidated financial statements.
F-8
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY, INC. (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
SEAGATE TECHNOLOGY
NEW SAC --------------------------------------------------------------
FOR THE YEARS ENDED
PERIOD FROM PERIOD FROM SIX ---------------------------------
NOVEMBER 23, JULY 1, MONTHS
2000 TO 2000 TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31, JUNE 30, JULY 2, JULY 3,
2000 2000 1999 2000 1999 1998
------------- -------------- ------------- ---------- ----------- ----------
OPERATING ACTIVITIES
Net income (loss) ...................... $(153) $(1,564) $ (57) $310 $1,176 $(530)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization ......... 69 271 351 693 696 664
Deferred income taxes ................. (38) (320) (192) (121) 661 (33)
In-process research and
development ......................... 59 -- -- 105 2 223
Non-cash portion of restructuring
charge .............................. -- 7 76 109 35 203
Gain on contribution of NSMG to
VERITAS, net ........................ -- -- -- -- (1,670) --
Activity related to equity interest
in VERITAS .......................... -- 99 183 326 119 --
Gain on sale of VERITAS stock ......... -- -- (537) (537) --
Gain on sale of SanDisk stock ......... -- (102) (62) (679) -- --
Loss on certain investments ........... -- 118 -- -- -- --
Gain on exchange of certain
investments in equity
securities .......................... -- -- -- (231) -- --
Loss on sale of operating assets
to New SAC .......................... -- 889 -- -- -- --
Compensation expense related
to accelerated vesting of stock
options ............................. -- 584 -- -- -- --
Compensation expense related
to SSI exchange offer ............... -- -- 284 284 -- --
Other, net ............................ (3) 33 53 55 36 41
Changes in operating assets and
liabilities:
Accounts receivable ................... (399) 183 85 190 (114) 242
Inventories ........................... 303 (201) 63 (15) 29 213
Accounts payable ...................... 49 37 (86) (54) 104 (278)
Accrued expenses, employee
compensation and warranty ........... (34) (222) (135) (222) (124) (262)
Accrued income taxes .................. 62 355 (5) (154) 52 (37)
Other assets and liabilities .......... (4) (62) 12 14 198 54
-------- ------- ------- ---- ------ -----
Net cash provided by (used in)
operating activities .................. $ (89) $ 105 $ 33 $ 73 $1,200 $ 500
------- ------- ------- ---- ------ -----
See notes to consolidated financial statements
F-9
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY, INC. (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN MILLIONS)
SEAGATE TECHNOLOGY
NEW SAC ----------------------------------------------------------------------
FOR THE YEARS ENDED
PERIOD FROM PERIOD FROM SIX -----------------------------------------
NOVEMBER 23, JULY 1, MONTHS
2000 TO 2000 TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31, JUNE 30, JULY 2, JULY 3,
2000 2000 1999 2000 1999 1998
------------- -------------- ------------- ------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................ $ (89) $ 105 $ 33 $ 73 $ 1,200 $ 500
INVESTING ACTIVITIES
Acquisition of property, equipment
and leasehold improvements .......... (34) (272) (279) (580) (603) (709)
Purchases of short-term
investments ......................... (129) (1,612) (1,639) (3,352) (6,596) (4,810)
Maturities and sales of short-term
investments ......................... 130 2,628 1,803 3,429 6,519 4,889
Purchase of Seagate operating
assets and assumed liabilities,
net of cash acquired of $897......... (918) -- -- -- -- --
Sale of Seagate operating assets
to New SAC, net of cash sold of
$897................................. -- 918 -- -- -- --
Restricted cash (TRA) ................ -- (150) -- -- -- --
Proceeds from sale of certain
investments ......................... -- 234 -- -- -- --
Proceeds from sale of VERITAS
stock ............................... -- -- 834 834 -- --
Proceeds from sale of SanDisk
stock ............................... -- -- 67 680 -- --
Acquisitions of businesses, net of
cash acquired ....................... -- -- -- -- -- (204)
Merger with VERITAS .................. -- (2,144) -- -- -- --
Other, net ........................... (2) (6) (19) (18) (26) (14)
-------- ---------- -------- ------- ------- -------
Net cash provided by (used in)
investing activities .............. (953) (404) 767 993 (706) (848)
FINANCING ACTIVITIES
Issuance of long-term debt, net of
issuance costs ...................... 860 -- 1 -- -- --
Repayment of long-term debt .......... -- (812) -- -- -- --
Short-term borrowings ................ 66 -- -- -- -- --
Repayment of short-term
borrowings .......................... (66) -- -- -- -- --
Sale of common stock ................. -- 236 65 191 98 67
Purchase of treasury stock ........... -- -- (776) (776) (859) (105)
Sale of ordinary and preferred
shares .............................. 914 -- -- -- -- --
Other, net ........................... -- -- -- -- -- (1)
------- --------- -------- ------- ------- ----------
Net cash provided by (used in)
financing activities .............. 1,774 (576) (710) (585) (761) (39)
Effect of exchange rate changes on
cash and cash equivalents ........... -- -- -- (2) (3) 6
------- --------- -------- ---------- ---------- ---------
Increase (decrease) in cash and
cash equivalents .................... 732 (875) 90 479 (270) (381)
Cash and cash equivalents at the
beginning of the period ............. -- 875 396 396 666 1,047
------- --------- -------- --------- --------- ---------
Cash and cash equivalents at the
end of the period ................... $ 732 $ -- $ 486 $ 875 $ 396 $ 666
======= ========= ======== ========= ========= =========
See notes to consolidated financial statements.
F-10
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY, INC. (CONTINUED)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000 AND YEARS ENDED JUNE 30,
2000, JULY 2, 1999, AND JULY 3, 1998 (IN MILLIONS)
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
-------- -------- ------------ -------------
Balance at June 27, 1997 ............ 252 $ 3 $ 1,903 $ 1,946
Comprehensive income
Net loss ........................... (530)
Unrealized gain on marketable
securities ........................
Foreign currency translation .......
Comprehensive income (loss).........
Purchase of treasury stock at
cost ...............................
Stock options exercised and
employee stock purchase plan........ (98)
Issuance of restricted stock, net
of cancellations ................... 6 (20)
Amortization of deferred
compensation .......................
Income tax benefit from stock
options exercised .................. 12
Other stock-based compensation....... 8
-------
Balance at July 3, 1998 ............. 252 3 1,929 1,298
Comprehensive income
Net income ......................... 1,176
Unrealized loss on marketable
securities ........................
Foreign currency translation .......
Comprehensive income ...............
Purchase of treasury stock at
cost ...............................
Stock options exercised and
employee stock purchase plan........ (106)
Issuance of restricted stock, net
of cancellations ................... (2) (6)
Amortization of deferred
compensation .......................
Income tax benefit from stock
options exercised .................. 26
Other stock-based compensation....... 38 (7)
-------- ---------
Balance at July 2, 1999 ............. 252 3 1,991 2,355
Comprehensive income
Net income ......................... 310
Unrealized gain on marketable
securities .........................
Comprehensive income
Purchase of treasury stock at
cost ...............................
Stock options exercised and
employee stock purchase plan........ (5) (62)
Exchange of SSI stock for SEG
stock .............................. (249) (64)
Acquisition of XIOtech .............. 137
Issuance of restricted stock, net
of cancellations ................... (4)
ACCUMULATED
OTHER TREASURY
COMPREHENSIVE DEFERRED COMMON
INCOME COMPENSATION STOCK TOTAL
--------------- -------------- --------- ------------
Balance at June 27, 1997 ............ $-- $(57) $ (319) $3,476
Comprehensive income
Net loss ........................... (530)
Unrealized gain on marketable
securities ........................ 1 1
Foreign currency translation ....... (1) (1)
--------
Comprehensive income (loss)......... (530)
Purchase of treasury stock at
cost ............................... (105) (105)
Stock options exercised and
employee stock purchase plan........ 166 68
Issuance of restricted stock, net
of cancellations ................... (6) 20 --
Amortization of deferred
compensation ....................... 8 8
Income tax benefit from stock
options exercised .................. 12
Other stock-based compensation....... 8
-------
Balance at July 3, 1998 ............. -- (55) (238) 2,937
Comprehensive income
Net income ......................... 1,176
Unrealized loss on marketable
securities ........................ (6) (6)
Foreign currency translation ....... (1) (1)
--------
Comprehensive income ............... 1,169
Purchase of treasury stock at
cost ............................... (859) (859)
Stock options exercised and
employee stock purchase plan........ 204 98
Issuance of restricted stock, net
of cancellations ................... 2 6 --
Amortization of deferred
compensation ....................... 10 10
Income tax benefit from stock
options exercised .................. 26
Other stock-based compensation....... 151 182
------ -------
Balance at July 2, 1999 ............. (7) (43) (736) 3,563
Comprehensive income
Net income ......................... 310
Unrealized gain on marketable
securities ......................... 93 93
-------
Comprehensive income 403
Purchase of treasury stock at
cost ............................... (776) (776)
Stock options exercised and
employee stock purchase plan........ 258 191
Exchange of SSI stock for SEG
stock .............................. 324 11
Acquisition of XIOtech .............. 222 359
Issuance of restricted stock, net
of cancellations ................... 4 --
F-11
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY, INC. (CONTINUED)
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
-------- -------- ------------ -----------
Amortization of deferred
compensation .........................
Compensation expense related to
employee separations ................. 28
Income tax benefit from stock
options exercised .................... 57
Other stock-based compensation......... 5
--
Balance at June 30, 2000 .............. 252 3 1,960 2,539
Comprehensive income
Net loss ............................. (1,564)
Unrealized gain on marketable
securities ..........................
Comprehensive income .................
Stock options exercised and
employee stock purchase plan.......... 55 (78)
Accelerated vesting of stock
options .............................. 97
Amortization of deferred
compensation .........................
Income tax benefit from stock
options exercised .................... 115
Adjustment to tax liability related
to Canadian reorganization ........... 185
Other stock-based compensation......... 13
Merger with VERITAS ................... (252) (3) (2,425) (897)
---- --- ------ ------
Balance at November 22, 2000 .......... -- $ -- $ -- $ --
==== ==== ====== ======
ACCUMULATED
OTHER TREASURY
COMPREHENSIVE DEFERRED COMMON
INCOME COMPENSATION STOCK TOTAL
--------------- -------------- --------- -----------
Amortization of deferred
compensation ......................... 6 6
Compensation expense related to
employee separations ................. 28
Income tax benefit from stock
options exercised .................... 57
Other stock-based compensation......... 5
---
Balance at June 30, 2000 .............. 86 (33) (708) 3,847
Comprehensive income
Net loss ............................. (1,564)
Unrealized gain on marketable
securities .......................... (102) (102)
------------
Comprehensive income ................. (1,666)
Stock options exercised and
employee stock purchase plan.......... 259 236
Accelerated vesting of stock
options .............................. 280 377
Amortization of deferred
compensation ......................... 5 5
Income tax benefit from stock
options exercised .................... 115
Adjustment to tax liability related
to Canadian reorganization ........... 185
Other stock-based compensation......... 13
Merger with VERITAS ................... 16 28 169 (3,112)
------- ------ ---- ------------
Balance at November 22, 2000 .......... $ -- $ -- $ -- $ --
======= ====== ==== ============
FOR THE PERIOD FROM NOVEMBER 23, 2000 THROUGH DECEMBER 29, 2000
(IN MILLIONS, EXCEPT SHARE DATA WHICH IS PRESENTED IN THOUSANDS)
ORDINARY SHARES PREFERRED SHARES ADDITIONAL
----------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------------- ---------- -------- -----------
Comprehensive income
Net loss ............................ -- $-- $ -- $-- $ --
Unrealized loss on marketable
securities .........................
Comprehensive income ................
Issuance of restricted ordinary
and preferred shares related to
management rollover ................. 1,843 48 23
Ordinary shares issued ............... 9,157 223
Preferred shares issued .............. -- 9,157 692
----- ------- ----
Balance at December 29, 2000 ......... 11,000 $-- $ 9,205 $-- $938
====== === ======= === ====
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE DEFERRED
DEFICIT INCOME COMPENSATION TOTAL
------------- --------------- ------------- ------------
Comprehensive income
Net loss ............................ $ (153) $-- $ -- $(153)
Unrealized loss on marketable
securities ......................... (3) (3)
--------
Comprehensive income ................ (156)
Issuance of restricted ordinary
and preferred shares related to
management rollover ................. (23) --
Ordinary shares issued ............... 223
Preferred shares issued .............. 692
-------
Balance at December 29, 2000 ......... $ (153) $(3) $ (23) $ 759
====== ===== ===== =======
See notes to consolidated financial statements
F-12
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On November 22, 2000, Seagate Technology, Inc., which we refer to herein
as Seagate Technology, Seagate Software Holdings, Inc. which we refer to herein
as Seagate Software Holdings, a subsidiary of Seagate Technology, and Suez
Acquisition Company (Cayman) Limited, which we refer to herein as SAC,
completed the stock purchase agreement and Seagate Technology and VERITAS
Software Corporation ("VERITAS") completed the agreement and plan of merger and
reorganization, or the Merger Agreement. SAC was a limited liability company
organized under the laws of the Cayman Islands and formed solely for the
purpose of entering into the stock purchase agreement and related acquisitions.
SAC assigned all of its rights under the stock purchase agreement to New SAC.
Under the stock purchase agreement, SAC agreed to purchase for $1.840
billion cash, including transaction costs of $25 million, all of the operating
assets of Seagate Technology and its consolidated subsidiaries, including
Seagate Technology's rigid disc drive, storage area network, removable tape
storage solutions, and enterprise management software businesses and operations
and certain cash balances, but excluding the approximately 128 million shares
of VERITAS common stock held by Seagate Software and Seagate's equity
investments in Gadzoox Networks, Inc. and Lernout & Hauspie Speech Products
N.V. ("LHSP"). Under the stock purchase agreement, SAC also agreed to assume
substantially all of the operating liabilities of Seagate Technology and its
consolidated subsidiaries. In addition, the SAC acquired Seagate Technology
Investments, Inc., a subsidiary of Seagate Technology, which holds certain
strategic equity investments in various companies.
Immediately following the consummation of the stock purchase agreement,
under the terms of a Merger Agreement, VERITAS acquired Seagate Technology and
a wholly-owned subsidiary of VERITAS merged with and into Seagate Technology,
with Seagate Technology becoming a wholly-owned subsidiary of VERITAS. We refer
to this transaction as the VERITAS Merger. VERITAS did not acquire Seagate
Technology's disc drive business or any other Seagate Technology operating
business. In the VERITAS Merger, the Seagate Technology stockholders received
merger consideration consisting of VERITAS stock and cash.
We refer to the transactions relating to the stock purchase agreement, the
Merger Agreement and the VERITAS Merger as the transactions.
Seagate Technology is considered to be the Predecessor of New SAC because
New SAC did not have significant operations or assets prior to consummation of
the stock purchase agreement. We refer to New SAC and its Predecessor, Seagate
Technology, as the Company in these financial statements.
Nature of Operations -- The Company designs, manufactures and markets
products for storage, retrieval and management of data on computer and data
communications systems. The Company has three operating segments, rigid disc
drives and Storage Area Networks (SAN), enterprise management software, and
tape drives, however, only the rigid disc drive and SAN, and software
businesses are reportable segments under the criteria of SFAS No. 131. The
Company sells its products to original equipment manufacturers ("OEM") for
inclusion in their computer systems or subsystems, and to distributors who
typically sell to small OEMs, dealers, system integrators and other resellers.
Accounting Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
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.
F-13
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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
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 2000
ended on June 30, 2000, fiscal 1999 ended on July 2, 1999, and fiscal 1998
ended on July 3, 1998. Fiscal year 2000 comprised 52 weeks, fiscal year 1999
comprised 52 weeks and fiscal year 1998 comprised 53 weeks. All references to
years in these notes to consolidated financial statements represent fiscal
years unless otherwise noted.
Reclassifications -- Certain costs aggregating $72 million in the period
from July 1, 2000 to November 22, 2000, $138 million in fiscal 2000, $74
million in 1999, $42 million in 1998, and $73 million (unaudited) in the six
months ended December 31, 1999, associated with: (1) searching for or
evaluating product or process alternatives; (2) modifying the formulation or
design of products or processes; and (3) activities required to advance the
design of products that were previously classified by the Predecessor in cost
of sales have been reclassified to product developement.
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 -- On July 1, 2000, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The standard requires that all
derivatives be recorded on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The
cumulative effect of adopting SFAS 133 as of July 1, 2000 was not material to
the Company's consolidated financial statements.
The Company is exposed to foreign currency exchange rate risk inherent in
forecasted sales, cost of sales, and assets and liabilities denominated in
currencies other than the U.S. dollar, principally for cash flows in Asia and
in certain European countries. The Company is also exposed to interest rate
risk inherent in its debt and investment portfolios. The Company's risk
management strategy considers the use of derivative financial instruments,
including forwards, swaps and purchased options, to hedge certain foreign
currency and interest rate exposures. The Company's intent is to offset gains
and losses that occur on the underlying exposures, with gains and losses on the
derivative contracts hedging these exposures. The Company does not enter into
any speculative
F-14
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
positions with regard to derivative instruments. The Company may enter into
foreign exchange contracts, primarily forwards and purchased options, to hedge
against exposure to changes in foreign currency exchange rates. Such contracts
are designated at inception to the related foreign currency exposures being
hedged, which include sales by subsidiaries, and assets and liabilities that
are denominated in currencies other than the U.S. dollar. Interest rate swaps
are used to modify the market risk exposures in connection with any long term
debt issued to achieve primarily U.S. dollar LIBOR-based floating interest
expense. The swap transactions generally involve the exchange of fixed for
floating interest payment obligations.
Under SFAS 133 the Company records all derivatives on the balance sheet at
fair value. For derivative instruments that are designated and qualify as cash
flow hedges, the effective portion of the gain or loss on the derivative
instrument is recorded in accumulated other comprehensive income as a separate
component of stockholders' equity and reclassified into earnings in the period
during which the hedged transaction affects earnings. For derivative
instruments that are designated and qualify as fair value hedges, the gain or
loss on the derivative instrument, as well as the offsetting gain or loss on
the hedged item attributable to the hedged risk, are recognized in earnings in
the current period. For derivative instruments not designated as hedging
instruments, changes in their fair values are recognized in earnings in the
current period.
For foreign currency forward contracts, hedge effectiveness is measured by
comparing the cumulative change in the hedged contract with the cumulative
change in the hedged item, both of which are based on forward rates. For
foreign currency option contracts, only the intrinsic value of the option based
on spot rates is used in assessing hedge effectiveness. Accordingly, the time
value of the option is excluded in calculating effectiveness and reported in
earnings immediately. For interest rate swaps, the critical terms of the
interest rate swap and hedged item are designed to match up when possible,
enabling the short-cut method of accounting as defined by SFAS 133. To the
extent that the critical terms of the hedged item and the derivative are not
identical, hedge ineffectiveness is reported in earnings immediately.
The Company reports hedge ineffectiveness from foreign currency
derivatives for both options and forward contracts in other income or expense.
Ineffectiveness related to interest rate swaps is reported in interest income
or expense. The effective portion of all derivatives is reported in the same
financial statement line item as the changes in the hedged item.
During 1998 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 assets purchases in Singapore, Thailand,
Malaysia, and Northern Ireland. These local currency cash flows were designated
as either firm commitments or as anticipated transactions depending upon the
contractual or legal nature of local currency commitments in Singapore,
Thailand, Malaysia, and Northern Ireland. Anticipated transactions were hedged
with purchased currency options and with foreign currency forward exchange
contracts; firm commitments were hedged with foreign currency forward exchange
contracts. The Company discontinued the use of its foreign currency hedging
program at the end of fiscal 1998.
Premiums on foreign currency option contracts used to hedge firm
commitments and anticipatory 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
F-15
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 recognized when persuasive evidence of an arrangement exists including a
fixed price to the buyer, title and risk of loss has passed to the buyer
(typically at the time of shipment) and collectibility is reasonably assured.
Estimated product returns are provided for in accordance with SFAS 48. The
Company warrants its products against defects in design, materials and
workmanship generally for two 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 revenue is recorded.
The Company's software revenue is primarily derived from the sale of
product licenses, software maintenance, technical support, training and
consulting. During the first quarter of fiscal 1999, the Company began
recognizing license revenue in accordance with the American Institute of
Certified Public Accountant's Statement of Position 97-2, "Software Revenue
Recognition." Revenue from software license agreements is primarily recognized
at the time of product delivery, provided that fees are fixed or determinable,
evidence of an arrangement exists, collectibility is probable and the Company
has vendor-specific objective evidence of fair value. Revenue from resellers,
including VARs, OEMs and distributors, are primarily recognized at the time of
product delivery to the reseller. The Company's policy is to defer such revenue
if resale contingencies exist. Some of the factors that are considered to
determine the existence of such contingencies include payment terms,
collectibility and past history with the customer. Product returns are reserved
for in accordance with SFAS 48. Such returns are estimated based on historical
return rates. The Company considers other factors such as fixed and
determinable fees, resale contingencies, arms length contract terms and the
ability to reasonably estimate returns to ensure compliance with SFAS 48.
Service revenue from customer maintenance fees for ongoing customer support and
product updates is recognized ratably over the maintenance term, which is
typically 12 months. Service revenue from training and consulting is recognized
when such services are performed.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. SOP 98-9
amends SOP 97-2 Software Revenue Recognition to require recognition of revenue
using the "residual method" when certain criteria are met. The Company
implemented the provisions of SOP 98-9 during its fiscal year ending June 30,
2000. The adoption of this pronouncement did not have a material impact on the
Company's financial statements and results of operations.
Inventories -- Inventories are valued at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market.
Market value is based upon an estimated average selling price reduced by
estimated cost of completion.
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.
F-16
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Advertising Expense -- The cost of advertising is expensed as incurred.
Advertising costs were approximately $2 million and $8 million for the period
from November 23, 2000 to December 29, 2000 and July 1, 2000 to November 22,
2000, and $12 million for the six months ended December 31, 1999 (unaudited).
Advertising costs were $21 million, $56 million and $68 million in 2000, 1999
and 1998, 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.
Compensation expense for fixed awards granted with an exercise price at less
than fair value is amortized on a straight line basis, using the multiple grant
approach, over the vesting period.
Impact of Recently Issued Accounting Standards -- Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") is effective for all fiscal quarters beginning
after June 15, 2000 and will be adopted by the Company in its fiscal year 2001.
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. The adoption of SFAS 133 did not have a material impact
on the Company's consolidated results of operations, financial position and
cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. All registrants are expected to
apply the accounting and disclosures described in SAB 101. The adoption of SAB
101 is not expected to have a material impact on the Company's consolidated
results of operations, financial position and cash flows. The Company is
required to adopt SAB 101 in the fourth quarter of fiscal 2001, retroactive to
the beginning of the year.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN
44 clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000. The adoption of FIN 44 did not have a material
impact on the Company's consolidated results of operations, financial position,
and cash flows.
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 accumulated
other comprehensive income which is a component of stockholders' equity. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts
F-17
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
Equity Investments -- The Company enters into certain equity investments
for the promotion of business and strategic objectives, and typically does not
attempt to reduce or eliminate the inherent market risks on these investments.
Both marketable and non-marketable investments are included in other assets. A
substantial majority of the Company's marketable investments are classified as
available-for-sale as of the balance sheet date and are reported at fair value,
with unrealized gains and losses, net of tax, recorded in stockholders' equity.
The cost of securities sold is based on the specific identification method.
Realized gains or losses and declines in value, if any, judged to be other than
temporary on available-for-sale securities are reported in other income or
expense. Non-marketable investments are recorded at cost.
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.
Supplier Concentration -- Certain of the raw materials used by the Company
in the manufacture of its products are available from a limited number of
suppliers. Shortages could occur in these essential materials due to an
interruption of supply or increased demand in the industry. For example, all of
the Company's disc drive products require ASIC chips which are produced by a
limited number of manufacturers. During the fourth quarter of fiscal 2000 and
through the first half of fiscal 2001 the Company experienced shortages and
delays with regards to receipt of such chips and expects similar delays and
shortages may continue in fiscal 2001. If the Company were unable to procure
certain of such materials, it would be required to reduce its manufacturing
operations which could have a material adverse effect upon its results of
operations.
F-18
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION
FINANCIAL INSTRUMENTS
The following is a summary of the fair value of available-for-sale
securities at December 29, 2000:
AMORTIZED GROSS
COST UNREALIZED LOSS FAIR VALUE
----------- ----------------- -----------
(IN MILLIONS)
Money market mutual funds ........................... $ 28 $-- $ 28
U.S. government and agency obligations .............. 28 -- 28
Auction rate preferred stock ........................ 75 -- 75
Corporate securities ................................ 486 -- 486
Mortgage-backed and asset-backed securities ......... 4 -- 4
---- --- ----
Subtotal ............................................ 621 -- 621
Marketable equity securities ........................ 39 (5) 34
---- ------ ----
Total available-for-sale securities ................. $660 $(5) $655
==== ===== ====
Included in other assets ............................ $ 34
Included in cash and cash equivalents ............... 503
Included in short-term investments .................. 118
----
$655
====
The following is a summary of the fair value of available-for-sale
securities at June 30, 2000:
AMORTIZED GROSS GROSS
COST UNREALIZED GAIN UNREALIZED LOSS FAIR VALUE
----------- ----------------- ----------------- -----------
(IN MILLIONS)
Money market mutual funds ................... $ 266 $ -- $ -- $ 266
U.S. government and agency
obligations ............................... 323 -- (6) 317
Repurchase agreements ....................... 16 -- -- 16
Auction rate preferred stock ................ 374 -- -- 374
Municipal bonds ............................. 1 -- -- 1
Corporate securities ........................ 733 -- (2) 731
Mortgage-backed and asset-backed
securities ................................ 218 -- (4) 214
Euro/Yankee time deposits ................... 12 -- -- 12
------ ---- ------- ------
Subtotal .................................... 1,943 -- (12) 1,931
Marketable equity securities ................ 334 471 (376) 429
------ ---- ------- ------
Total available-for-sale securities ......... $2,277 $471 $(388) $2,360
====== ==== ======= ======
Included in other assets .................... $ 429
Included in cash and cash
equivalents ............................... 791
Included in short-term investments .......... 1,140
------
$2,360
======
F-19
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
The following is a summary of the fair value of available-for-sale
securities at July 2, 1999:
AMORTIZED GROSS
COST UNREALIZED LOSS FAIR VALUE
----------- ----------------- -----------
(IN MILLIONS)
Money market mutual funds .................. $ 74 $ -- $ 74
U.S. government and agency
obligations .............................. 314 (4) 310
Repurchase agreements ...................... -- -- --
Auction rate preferred stock ............... 222 -- 222
Municipal bonds ............................ 109 -- 109
Corporate securities ....................... 515 (1) 514
Mortgage-backed and asset-backed
securities ............................... 302 (2) 300
Euro/Yankee time deposits .................. 48 -- 48
------ ----- ------
$1,584 $(7) $1,577
====== ===== ======
Included in cash and cash
equivalents .............................. $ 350
Included in short-term investments ......... 1,227
------
$1,577
======
F-20
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
The fair value of the Company's investment in debt securities, by
contractual maturity, is as follows:
NEW SAC SEAGATE TECHNOLOGY
------------------- -------------------------------
DECEMBER 29, 2000 JUNE 30, 2000 JULY 2, 1999
------------------- --------------- -------------
(IN MILLIONS)
Due in less than 1 year ......... $736 $ 939 $ 486
Due in 1 to 3 years ............. -- 352 794
---- ------ ------
$736 $1,291 $1,280
==== ====== ======
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 Credit Facilities 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:
NEW SAC SEAGATE TECHNOLOGY
----------------------- ----------------------------------------------
DECEMBER 29, 2000 JUNE 30, 2000 JULY 2, 1999
----------------------- ----------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- ------------ ---------- -----------
(IN MILLIONS)
Cash equivalents ........................... $503 $503 $ 791 $ 791 $ 350 $ 350
Short-term investments ..................... 118 118 1,140 1,140 1,227 1,227
Marketable equity securities ............... 34 34 429 429 -- --
121/2% senior subordinated notes,
due 2007 ................................. 210 201 -- -- -- --
Senior Credit Facilities
Libor plus 2.5% Term Loan A ............... 200 200 -- -- -- --
Libor plus 3% Term Loan B ................. 500 500 -- -- -- --
7.125% senior notes, due 2004 .............. -- -- (200) (187) (200) (194)
7.37% senior notes, due 2007 ............... -- -- (200) (180) (200) (189)
7.45% senior debentures, due 2037 .......... -- -- (200) (177) (200) (188)
7.875% senior debentures, due 2017 ......... -- -- (100) (85) (100) (92)
Derivative Financial Instruments -- The Company may enter into foreign
currency forward exchange and option contracts to manage exposure related to
certain foreign currency commitments, certain foreign currency denominated
balance sheet positions and anticipated foreign currency denominated
expenditures. The Company does not enter into derivative financial instruments
for trading purposes. Based on uncertainty in the Southeast Asian foreign
currency markets, beginning in the second quarter of 1998 the Company
temporarily suspended its hedging program. At July 3, 1998, the Company had
effectively closed out all of its foreign currency forward exchange contracts
by purchasing offsetting contracts. As of December 29, 2000, the Company had no
outstanding foreign currency forward exchange or purchased currency option
contracts.
Net foreign currency transaction gains and losses included in the
determination of net income (loss) were a gain of $1 million for the period
from July 1, 2000 to November 22, 2000, $1 million for fiscal 2000 and losses
of $1 million and $252 million for fiscal 1999, and fiscal 1998, respectively.
The Company transacts business in various foreign countries. Its primary
foreign currency cash flows
F-21
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
are in emerging market countries in Asia and in certain European countries.
During fiscal 1998, the Company employed a foreign currency hedging program
utilizing foreign currency forward exchange contracts and purchased currency
options to hedge local currency cash flows for payroll, inventory, other
operating expenditures and fixed asset purchases in Singapore, Thailand and
Malaysia. During fiscal 1998 the Singapore dollar, Thai baht, and Malaysian
ringgit declined in value relative to the U.S. dollar. The transaction loss of
$252 million for fiscal 1998 primarily included losses incurred on closing out
these foreign currency forward exchange contracts.
ACCOUNTS RECEIVABLE
Accounts receivable are summarized below:
NEW SAC SEAGATE TECHNOLOGY
------------- ------------------
DECEMBER 29,
2000 2000 1999
------------- -------- -------
(IN MILLIONS)
Accounts receivable .......................... $ 973 $ 752 $ 925
Less allowance for doubtful accounts ......... (80) (74) (53)
----- ----- -----
$ 893 $ 678 $ 872
===== ===== =====
Activity in the allowance for doubtful accounts is as follows:
ADDITIONS
----------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER ACCOUNTS-- DEDUCTIONS-- END OF
PERIOD EXPENSES DESCRIBE DESCRIBE(1) PERIOD
-------------- ------------ ------------------ -------------- -----------
(IN MILLIONS)
Period from November 23, to
December 29, 2000: ........... $79 $ 1 $ -- $-- $ 80
=== === ==== === ====
Period from July 1, 2000 to
November 22, 2000 ............ $74 $ 6 $ -- $ 1 $ 79
===
Year Ended June 30, 2000: ..... $53 $24 $ -- $ 3 $ 74
=== === ==== === ====
Year Ended July 2, 1999: ...... $54 $-- $ -- $ 1 $ 53
=== === ==== === ====
Year Ended July 3, 1998: ...... $60 $ 1 $ -- $ 7 $ 54
=== === ==== === ====
- ----------
(1) Uncollectible accounts written off, net of recoveries.
F-22
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
INVENTORIES
Inventories are summarized below:
NEW SAC SEAGATE TECHNOLOGY
-------------- ---------------------
DECEMBER 29, JUNE 30, JULY 2,
2000 2000 1999
-------------- ---------- --------
(IN MILLIONS)
Components .............. $136 $142 $143
Work-in-process ......... 62 51 54
Finished goods .......... 250 237 254
---- ---- ----
$448 $430 $451
==== ==== ====
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following:
NEW SAC SEAGATE TECHNOLOGY
-------------- ----------------------
DECEMBER 29, JUNE 30, JULY 2,
USEFUL LIFE IN YEARS 2000 2000 1999
---------------------- -------------- ---------- -----------
(IN MILLIONS)
Land .................................. $ 23 $ 48 $ 40
Equipment ............................. 3 - 4 438 2,472 2,365
Building and leasehold improvements.... Life of lease - 30 246 982 932
Construction in progress .............. 114 252 196
----- -------- --------
821 3,754 3,533
Less accumulated depreciation and
amortization ........................ (32) (2,146) (1,846)
----- -------- --------
$ 789 $ 1,608 $ 1,687
===== ======== ========
Equipment and leasehold improvements include assets under capitalized
leases. Amortization of leasehold improvements is included in depreciation
expense. Depreciation expense was $242 million for the period from July 1, 2000
to November 22, 2000, $47 million for the period from November 23, 2000 to
December 29, 2000 and $597 million, $574 million and $549 million in fiscal
year 2000, 1999 and 1998, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and specifically identified
intangible net assets acquired. Other intangible assets consist of trademarks,
assembled workforces, distribution networks, developed technology, and customer
bases 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, and 12 to 36 months
for customer bases. In-process research and development without alternative
future use is expensed when acquired.
In accordance with SFAS 121, the carrying value of other intangibles and
related goodwill is reviewed if the facts and circumstances suggest that they
may be permanently impaired. If this
F-23
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
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 intangible assets (generally based on an estimate of
discounted future net cash flows). Prior to November 22, 2000, goodwill and
other intangibles were generally amortized on a straight-line basis over
periods ranging from two to fifteen years. Subsequent to November 22, 2000,
intangible assets are being amortized over periods ranging from 4 months to 10
years. Accumulated amortization was $7 million, $205 million and $177 million
as of December 29, 2000, June 30, 2000 and July 2, 1999, respectively.
3. LONG-TERM DEBT AND CREDIT FACILITIES
The Seagate Technology 7.125% senior notes due 2004, 7.37% senior notes
due 2007 and 7.875% senior debentures due 2017 were redeemable at the option of
Seagate Technology 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 Seagate Technology 7.45% senior debentures due 2037 were redeemable
at the option of Seagate Technology at any time, at a redemption price equal to
or 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
Seagate Technology 7.45% senior debentures due 2037 would have been 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
Seagate Technology 7.125% senior notes due 2004, 7.37% senior notes due 2007
and 7.875% senior debentures due 2017 would 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.
Under the stock purchase agreement, Seagate Technology was required to
call the four series of its outstanding debt and to redeem these existing
senior notes at the closing of the transactions. The irrevocable notice of
redemption Seagate Technology and the deposit of funds sufficient to redeem the
existing senior notes was a condition to the closing of the transactions and
the issuance of the outstanding notes to New SAC.
Upon the closing of the transactions, New SAC entered into senior credit
facilities with a syndicate of banks and other financial institutions. The
senior credit facilities provide senior secured financing of up to $900
million, consisting of:
o a $200 million revolving credit facility for general corporate purposes,
with a sublimit of $100 million for letters of credit, which will
terminate in five years;
o a $200 million term loan A facility with a maturity of five years; and
o a $500 million term loan B facility with a maturity of six years.
At the closing of the transactions, New SAC did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because
F-24
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
approximately $45 million of existing letters of credit were outstanding and
reduced availability under it. New SAC drew the full amount of the term loan A
facility and the term loan B facility on the closing of the transactions to
finance the acquisition of Seagate Technology's operating assets.
Long-term debt consisted of the following:
NEW SAC SEAGATE TECHNOLOGY
-------------- ---------------------
DECEMBER 29, JUNE 30, JULY 2,
2000 2000 1999
-------------- ---------- --------
(IN MILLIONS)
LIBOR plus 2.5% term loan A ......................... $200 -- --
LIBOR plus 3% term loan B ........................... 500 -- --
12.5% Senior subordinated notes ..................... 201 -- --
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
Capitalized lease obligations with interest at 14% to
19.25% collateralized by certain manufacturing
equipment and buildings ........................... 3 4 4
---- ---- ----
904 704 704
Less current portion ................................ 11 1 1
---- ---- ----
$893 $703 $703
==== ==== ====
At December 29, 2000, future minimum principal payments on long-term debt
and capital lease obligations were as follows:
(IN MILLIONS)
--------------
2001 ........................ $ 5
2002 ........................ 23
2003 ........................ 40
2004 ........................ 50
2005 ........................ 60
After 2005 .................. 726
----
$904
====
New SAC loans bear interest at variable rates dependent upon market
interest rates and the nature of the borrowings, as well as the Company's
consolidated financial position at applicable measurement dates. The average
interest rates being charged under these borrowings from the date of the
transactions ranged from 9.18% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC, and certain of its subsidiaries are guarantors on a joint and
several, whole and unconditional basis under the senior credit facilities (see
Note 18 Condensed Consolidating Financial Information). New SAC, and certain of
its subsidiaries have agreed to certain covenants under the loan agreements
including restrictions on future equity and borrowing transactions, business
acquisitions and disposals, making certain restricted payments and dividends,
making certain capital expenditures, incurring guarantee obligations and
engaging in mergers or consolidations.
In connection with the closing and financing of the transactions, Seagate
Technology International, a subsidiary of Seagate Technology Holdings, which is
a subsidiary of New SAC,
F-25
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
issued unsecured senior subordinated notes under an Indenture Agreement dated
November 22, 2000, at a discount to the aggregate principal amount of $210
million, for gross proceeds of approximately $201 million. The notes mature on
November 15, 2007 and bear interest payable semi-annually at a rate of 12.5%
per annum. New SAC and certain of its subsidiaries are guarantors on a joint
and several, whole and unconditional basis, of the notes. In addition, New SAC,
and certain of its subsidiaries have agreed to certain restrictive covenants
under the terms of these notes including restrictions on future equity and
borrowing transactions, business acquisitions and disposals, making certain
restricted payments and dividends, making certain capital expenditures,
incurring guarantee obligations and engaging in mergers or consolidations.
As of December 29, 2000, the Company had committed lines of credit of $200
million that can be used for standby letters of credit or bankers' guarantees.
At December 29, 2000, $56 million of these lines of credit were utilized.
4. COMPENSATION
TAX-DEFERRED SAVINGS PLAN
The Company has a tax-deferred savings plan, the Seagate 401(k) Plan ("the
401(k) plan"), for the benefit of qualified employees. The 401(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. For the period from November 23, 2000
to December 29, 2000 and the period from July 1, 2000 to November 22, 2000 the
Company made contributions of $1 million and $5 million, respectively. During
the fiscal years ended June 30, 2000 and July 2, 1999, the Company made
contributions totaling approximately $14 million to the 401(k) plan in each
year. No material contributions were made by the Company during fiscal year
1998.
STOCK-BASED BENEFIT PLANS
Stock Option Plans -- Options granted under Seagate Technology's stock
option plans were granted at fair market value, expired ten years from the date
of the grant and generally vested in four equal annual installments, commencing
one year from the date of the grant.
F-26
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPENSATION (CONTINUED)
The following is a summary of stock option activity for the three years
ended June 30, 2000 and the period from July 1, 2000 to November 22, 2000:
OPTIONS OUTSTANDING
----------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
-------------- -----------------
(IN MILLIONS)
Balance June 27, 1997 ................. 22.0 $ 22.92
Granted ............................. 18.3 27.10
Exercised ........................... ( 2.4) 13.34
Canceled ............................ (11.9) 32.62
------
Balance July 3, 1998 .................. 26.0 22.30
Granted ............................. 14.1 23.98
Exercised ........................... ( 4.3) 15.15
Canceled ............................ ( 1.9) 25.49
------
Balance July 2, 1999 .................. 33.9 23.73
Granted ............................. 8.3 30.97
Exercised ........................... ( 7.3) 21.48
Canceled ............................ ( 2.0) 26.12
------
Balance June 30, 2000 ................. 32.9 25.80
------
Exercised ........................... ( 9.0) 23.54
Canceled ............................ ( .1) 31.16
------ --------
Balance November 22, 2000 (prior to the
transactions) ....................... 23.8 $ 26.63
====== ========
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 12.6 million at November 22, 2000, 13.0
million at June 30, 2000, 5.0 million at July 2, 1999, and 13.6 million at July
3, 1998. 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.
On November 22, 2000, in connection with the VERITAS merger Seagate
Technology accelerated the vesting on 11.7 million options to purchase Seagate
Technology stock. In addition, options representing 10.7 million shares were
exercised on a cashless basis, net of the exercise price and employee
withholding taxes. Seagate Technology recorded $584 million of compensation
expense in connection with this net exercise of stock options.
Executive Stock Plan -- Seagate Technology had an Executive Stock Plan
under which senior executives of the Company were granted the right to purchase
shares of Seagate Technology common stock at $.01 per share. The difference
between the fair market value of the shares on the measurement date and the
exercise price was recorded as deferred compensation and was charged to
operations over the vesting period of four to seven years. The Company had the
right to repurchase the restricted stock from an executive upon his or her
voluntary or involuntary termination of employment with the Company for any
reason at the same price paid by the executive. If an
F-27
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPENSATION (CONTINUED)
executive voluntarily resigned at or above age 65, the Company could release
from the repurchase option, or if his or her employment terminated 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 would release from the repurchase option a pro rata number
of shares based on the number of months that have passed since the grant date
divided by the number of months in the vesting period. The following is a
summary of restricted stock activity under the Executive Stock Plan for the
three years ended June 30, 2000 and period from July 1, 2000 to November 22,
2000:
RESTRICTED SHARES OUTSTANDING
------------------------------
(IN THOUSANDS)
Balance June 27, 1997 ................. 2,185
Granted .............................. 454
Repurchased .......................... (254)
Released from restrictions ........... (44)
-----
Balance July 3, 1998 .................. 2,341
Granted .............................. 145
Repurchased .......................... (216)
Released from restrictions ........... (357)
-----
Balance July 2, 1999 .................. 1,913
Granted .............................. 30
Repurchased .......................... (135)
Released from restrictions ........... (53)
-----
Balance June 30, 2000 ................. 1,755
Granted .............................. --
Repurchased .......................... (15)
Released from restrictions ........... (150)
-----
Balance November 22, 2000 (prior to the
transactions) ....................... 1,590
=====
In addition, Seagate Technology had a Restricted Stock Plan which also had
a deferred compensation component. Under this plan the deferred compensation
was amortized over a period of seven years. At November 22, 2000, there were
two employees remaining in the plan and no shares were available for future
grant. The aggregate amount charged to operations for amortization of deferred
compensation under both plans was $6 million, $10 million, and $8 million in
2000, 1999 and 1998, respectively.
On November 22, 2000, and in connection with the merger with VERITAS,
Seagate Technology accelerated vesting on 207,000 restricted shares and
recorded $3.4 million compensation expense in connection with the exchange of
such shares for merger consideration. All remaining restricted stock was
cancelled and holders of such stock received the participation in a deferred
cash compensation plan and ordinary and preferred shares of New SAC. (See Note
17, Equity)
Stock Purchase Plan -- Seagate Technology also maintained an Employee
Stock Purchase Plan. A total of 19,600,000 shares of common stock were
authorized for issuance under the Purchase Plan. The Purchase Plan permitted
eligible employees who had 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
F-28
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPENSATION (CONTINUED)
beginning or at the end of each six-month offering period. Under the plan,
1,515,000; 1,604,000; and 1,348,000 shares of common stock were issued from
treasury shares in fiscal 2000, 1999, and 1998, respectively. The stock
purchase plan was terminated in October 2000.
Treasury Shares -- During fiscal 2000, 1999, and 1998, Seagate Technology
repurchased 25 million, 27 million, and 4 million shares of common stock at an
average price of $30.76, $31.82, and $28.31 per share, respectively.
Pro Forma Information -- The Company follows 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, Seagate Technology 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:
2000 1999 1998
Stock Option Plan Shares
Expected life (in years) ......... 3.9 3.8 3.2
Risk-free interest rate ......... 6.0% 5.3% 5.5%
Volatility ...................... .60 .56 .45
Employee Stock Purchase Plan
Shares
Expected life (in years) ......... .5 .5 .6
Risk-free interest rate .......... 5.9% 4.6% 5.5%
Volatility ....................... .78 .68 .63
F-29
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPENSATION (CONTINUED)
The weighted average fair value of stock options granted under the
Company's Stock Option Plans was $16.66, $11.09, and $10.05 per share in 2000,
1999, and 1998, respectively. The weighted average fair value of shares granted
under the Company's Employee Stock Purchase Plan was $11.47, $10.18, and $12.03
per share in fiscal 2000, 1999, and 1998, respectively. The weighted average
purchase price of shares granted under the Company's Employee Stock Purchase
Plan was $23.38, $22.72, and $26.99 per share in 2000, 1999, and 1998,
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:
PERIOD FROM
JULY 1, 2000 TO
NOVEMBER 22, 2000 2000 1999 1998
------------------- -------- --------- ----------
Pro forma net income (loss) ......... $ (1,523) $ 217 $1,018 $ (600)
The effects on pro forma disclosures of applying SFAS 123 may not be
representative of the effects on pro forma disclosures of future years. Because
SFAS 123 is applicable only to options granted subsequent to June 30, 1995, the
pro forma effect was not fully reflected in fiscal years prior to 1999.
POST-RETIREMENT HEALTH CARE PLAN
In fiscal 2000, the Company adopted a post-retirement health care plan
which offers medical coverage to eligible U.S. retirees and their eligible
dependents.
Substantially all U.S. employees become eligible for these benefits after
15 years of service and attaining age 60 and older.
The following table provides a reconciliation of the changes in the
post-retirement health care plan's benefit obligation and a statement of the
funded status as of December 29, 2000:
NEW SAC SEAGATE TECHNOLOGY
-------------- -------------------
DECEMBER 29, JUNE 30,
2000 2000
Change in Benefit Obligation
Benefit obligation at beginning of year (period) ........... $-- $--
Acquired benefit obligation ................................ 30 --
Service cost ............................................... -- 4
Amortization of unrecognized prior service cost ............ -- 2
--- ---
Benefit obligation at end of year .......................... $30 $ 6
=== ===
Funded Status of the Plan
Fair value of plan assets at end of year ................... $-- $--
Unrecognized prior service cost ............................ -- 22
Accrued benefit liability recognized in the balance sheet at
end of year (period) ..................................... 30 6
--- ---
Accrued benefit cost ....................................... $30 $28
=== ===
F-30
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPENSATION (CONTINUED)
Net periodic benefit cost for the period from July 1, 2000 to November 22,
2000 and for fiscal 2000 as follows:
SEAGATE TECHNOLOGY
-------------------------
PERIOD FROM
JULY 1, 2000 TO
NOVEMBER 22, 2000 2000
------------------- -----
(IN MILLIONS)
Service cost ............................... $-- $2
Interest cost .............................. 1 2
Amortization of prior service cost ......... 1 2
--- --
Net periodic benefit cost .................. $ 2 $6
=== ==
Net periodic benefit cost for the period from November 23, 2000 to
December 29, 2000 was immaterial.
WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS
A discount rate of 7.0% was used in the determination of the accumulated
benefit obligation.
The Company's future medical benefit costs were estimated to increase at
an annual rate of 10% during 2000, decreasing to an annual growth rate of 5% in
2010 and thereafter. The Company's cost is capped at 200% of the fiscal 1999
employer cost and, therefore, will not be subject to medical and dental trends
after the capped cost is attained. A 1% change in these annual trend rates
would not have a significant impact on the accumulated post-retirement benefit
obligation at December 29, 2001, 2000, or benefit expense for the period July
1, 2000 to December 29, 2000. Claims are paid as incurred.
F-31
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The provision for (benefit from) income taxes consisted of the following:
NEW SAC SEAGATE TECHNOLOGY
-------------- -------------------------------------------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
NOVEMBER 23, JULY 1, ENDED FOR THE YEARS ENDED
2000 2000 DECEMBER 31, -----------------------------------
TO TO
DECEMBER 29, NOVEMBER 22, 1999 JUNE 30, JULY 2, JULY 3,
2000 2000 (UNAUDITED) 2000 1999 1998
-------------- ------------- ------------- ---------- --------- ----------
(IN MILLIONS)
Current Tax Expense
(Benefit):
Federal $16 $ 74 $ 226 $ 367 $ 20 $ (157)
State 4 2 32 50 1 --
Foreign 1 7 7 3 15 16
--- ------ ------ ------ ---- ------
21 83 265 420 36 (141)
Deferred Tax Expense
(Benefit):
Federal -- (175) (174) (121) 573 (19)
State -- 16 (21) -- 86 (20)
Foreign -- -- -- -- 2 6
--- ------ ------ ------ ---- ------
-- (159) (195) (121) 661 (33)
--- ------ ------ ------ ---- ------
Provision for (Benefit
from) Income Taxes $21 $ (76) $ 70 $ 299 $697 $ (174)
=== ====== ====== ====== ==== ======
Income (loss) before income taxes consisted of the following:
NEW SAC SEAGATE TECHNOLOGY
-------------- -------------------------------------------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
NOVEMBER 23, JULY 1, ENDED FOR THE YEARS ENDED
2000 2000 DECEMBER 31, -----------------------------------
TO TO
DECEMBER 29, NOVEMBER 22, 1999 JUNE 30, JULY 2, JULY 3,
2000 2000 (UNAUDITED) 2000 1999 1998
-------------- ------------- ------------- ---------- --------- ----------
(IN MILLIONS)
Domestic $ (33) $ (410) $11 $526 $1,547 $ (778)
Foreign (99) (1,230) 2 83 326 74
------ -------- --- ---- ------ ------
$ (132) $ (1,640) $13 $609 $1,873 $ (704)
====== ======== === ==== ====== ======
The proforma information assuming a tax provision/(benefit) based on a
separate return basis is as follows:
NEW SAC
--------------
FOR THE
PERIOD FROM
NOVEMBER 23,
2000 TO
DECEMBER 29,
2000
--------------
(IN MILLIONS)
Loss before income taxes $ (132)
Provision (benefit) for income taxes 21
------
Net Loss $ (153)
======
The income tax benefits related to the exercise of certain employee stock
options decreased accrued income taxes and were credited to additional paid-in
capital. Such amounts approximated $136.4 million, $57 million, $26 million,
and $12 million for the period from July 1, 2000 through November 22, 2000,
fiscal 2000, 1999, and 1998, respectively.
F-32
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At December 29, 2000, accrued income taxes includes $125 million for tax
indemnification amounts due to VERITAS Software Corporation pursuant to the
Indemnification Agreement between Seagate Technology, Suez Acquisition Company
and VERITAS Software Corporation. The tax indemnification amount was recorded
by the Company in connection with the purchase of the operating assets of
Seagate Technology and represents tax liabilities previously recorded by
Seagate Technology for periods prior to the acquisition date of the operating
assets.
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:
NEW SAC SEAGATE TECHNOLOGY
------------- ------------------------
FOR THE YEARS ENDED
------------------------
DECEMBER 29, JUNE 30, JULY 2,
2000 2000 1999
------------- ---------- -----------
(IN MILLIONS)
DEFERRED TAX ASSETS
Accrued warranty $ 100 $ 97 $ 114
Inventory valuation accounts 27 35 31
Receivable reserves 25 26 28
Accrued compensation and benefits 33 45 31
Depreciation 150 20 32
Restructuring reserve 20 27 17
Other reserves and accruals 29 28 42
Acquisition related items 19 32 38
Net operating losses and tax credit carryforwards 5 5 69
Other assets 2 13 3
------ -------- --------
Total Deferred Tax Assets 410 328 405
Valuation allowance (372) (38) (56)
------ -------- --------
Net Deferred Tax Assets 38 290 349
DEFERRED TAX LIABILITIES
Unremitted income of foreign subsidiaries -- (542) (558)
Acquisition related items (38) (171) (14)
Deferred gain on VERITAS -- (378) (615)
Other liabilities -- -- (13)
------ -------- --------
Total Deferred Tax Liabilities (38) (1,091) (1,200)
------ -------- --------
Net Deferred Tax Assets/(Liabilities) $ -- $ (801) $ (851)
====== ======== ========
AS REPORTED ON THE BALANCE SHEET
Deferred Income Tax Assets 38 219 252
Deferred Income Tax Liabilities (38) (1,020) (1,103)
------ -------- --------
Net Deferred Tax Liability $ -- $ (801) $ (851)
====== ======== ========
In connection with the purchase of the operating assets of Seagate
Technology, we recorded a $338 million valuation allowance for deferred tax
assets. The $338 million of deferred tax assets subject to the valuation
allowance arose primarily as a result of the excess tax basis over the fair
values of acquired property, plant and equipment, and liabilities assumed for
which we expect to receive tax deductions in our federal and state returns in
future periods. We also recorded $38 million of deferred tax liabilities as a
result of the excess of the fair market value of inventory, long-term
investments, and acquired intangible assets over their related tax bases. Our
realization of the tax
F-33
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
benefits for the federal and state deferred tax assets subject to the valuation
allowance will depend primarily on our ability to generate sufficient taxable
income in the United States in future periods, the timing and amount of which
are uncertain. We anticipate that the tax benefits of the deferred tax assets
if realized, will first result in an increase in unamortized negative goodwill
that has been allocated on a pro rata basis to the long-lived assets. Any
excess tax benefits would then be realized as reductions of future income tax
expense.
The valuation allowance increased by $34 million for the period from
November 23, 2000 to December 29, 2000. There was no change in the valuation
allowance for the period July 1, 2000 to November 22, 2000. The valuation
allowance decreased by $18 million and $26 million in fiscal 2000 and 1999,
respectively, and increased by $25 million in 1998.
The reconciliation between the provision for (benefit from) income taxes
at the U.S. federal statutory rate and the effective rate are summarized as
follows:
NEW SAC SEAGATE TECHNOLOGY
-------------- ---------------------------------------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, JULY 1, SIX MONTHS
2000 2000 ENDED FOR THE YEARS ENDED
TO TO DECEMBER 31, ------------------------------------
DECEMBER 29, NOVEMBER 22, 1999 JUNE 30, JULY 2, JULY 3,
2000 2000 (UNAUDITED) 2000 1999 1998
-------------- -------------- ------------- ----------- --------- ----------
(IN MILLIONS)
Provision (benefit) at U.S.
statutory rate $(46) $ (574) $ 5 $213 $ 656 $ (246)
State income tax provision
(benefit), net of federal
income tax benefit 2 11 7 33 72 (15)
Foreign taxes in excess of the
U.S. statutory rate -- -- (2) -- -- --
Write-off of in-process research
and development -- -- -- 37 21 75
Compensation expense for SSI
exchange offer -- -- 56 62 -- --
Nondeductible acquisition
related items 33 -- -- -- -- --
Sale of operating assets -- 488 -- -- -- --
VERITAS -- -- -- (6) (10) --
Valuation reserve 34 -- -- (18) 17 25
Nondeductible goodwill -- 9 3 -- -- --
Foreign losses not benefited -- 13 3 -- -- --
Benefit from net earnings of
foreign subsidiaries
considered to be permanently
reinvested in non-U.S.
operations -- (31) -- -- (68) --
Use of R&D credit
carryforwards -- -- -- (17) -- --
Other individually immaterial
items (2) 8 (2) (5) 9 (13)
------- ------ ------ ------- ----- ------
Provision for (benefit from)
income taxes $ 21 $ (76) $70 $299 $ 697 $ (174)
====== ====== ===== ====== ===== ======
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NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
A substantial portion of the Company's Asia Pacific manufacturing
operations in Singapore, Thailand, Malaysia and China operate under various tax
holidays which expire in whole or in part during fiscal years 2001 through
2010. Certain tax holidays may be extended if specific conditions are met. As
of November 22, 2000, Seagate Technology's foreign manufacturing subsidiaries
had approximately $3.050 billion of undistributed foreign earnings of which
approximately $1.722 billion were considered permanently reinvested offshore.
In connection with the sale of the operating assets of Seagate Technology,
approximately $1.650 billion of the unremitted foreign earnings were deemed to
be distributed for U.S. tax purposes to Seagate Technology's U.S. parent.
Seagate Technology had previously recorded deferred income tax liabilities of
approximately $542 million for its foreign earnings not considered permanently
reinvested offshore. As a result of the sale of the operating assets of Seagate
Technology and the ensuing corporate structure, the Company now has a foreign
parent holding company with various foreign and U.S. subsidiaries. The deferred
tax liabilities were eliminated and the remaining unremitted earnings of the
Company's foreign subsidiaries will no longer be subject to U.S. tax if
remitted to the Company's foreign parent holding company.
The tax holidays had no impact on net income for the period November 23,
2000 to December 29, 2000 and increased net income by $9 million for the period
July 1, 2000 to November 22, 2000. The tax holidays had no impact on net income
in fiscal 2000. The net impact of these tax holidays was to increase net income
by approximately $35 million in fiscal 1999. The tax holidays had no impact on
the net loss in fiscal 1998.
During fiscal 2000, Seagate Technology settled a number of the disputed
tax matters reflected in the statutory notices of deficiencies dated June 27,
1997 and June 12, 1998 that were received from the Internal Revenue Service
relative to Seagate Technology's taxable years 1991 through 1993 and Conner
Peripherals, Inc.'s taxable years 1991 and 1992, respectively. Seagate
Technology and the Company believe that Seagate Technology has meritorious
defenses against the remaining asserted deficiencies and that the likely
outcome of a re-determination of these asserted deficiencies by the United
State Tax Court will not result in an additional provision for income taxes
pursuant to the Indemnification Agreement.
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.
6. BUSINESS COMBINATIONS (SEE NOTE 16 PURCHASE ACCOUNTING)
The Company has a history of business combinations and during the three
most recent fiscal years these included the acquisition of XIOtech Corporation
in fiscal 2000, the contribution of NSMG to VERITAS in fiscal 1999, and the
acquisition of Quinta Corporation and Eastman Storage Software Management Group
in fiscal 1998. In connection with certain business combinations, the Company
has recognized significant write-offs of in-process research and development.
The completion of the underlying in-process projects acquired within each
business combination was the most significant and uncertain assumption utilized
in the valuation of the in-process research and development. Such uncertainties
could give rise to unforseen 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 business combinations accounted for under the purchase
method. The nature of research and development projects acquired, the estimated
time and costs to complete the projects and significant risks associated with
the projects are described below.
VALUATION METHODOLOGY
In accordance with the provisions of APB Opinion 16, all identifiable
assets, including identifiable intangible assets, were assigned a portion of
the cost of the acquired enterprise (purchase price) on
F-35
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
the basis of their respective fair values. This included the portion of the
purchase price properly attributed to incomplete research and development
projects expensed according to the requirements of Interpretation 4 of SFAS No.
2.
Valuation of acquired intangible assets -- Intangible assets were
identified through (i) analysis of the acquisition agreement, (ii)
consideration of the Company's intentions for future use of the acquired
assets, and (iii) analysis of data available concerning XIOtech's, Quinta's and
Eastman's (collectively referred to as the "Targets") products, technologies,
markets, historical financial performance, estimates of future performance and
the assumptions underlying those estimates. The economic and competitive
environment in which the Company and the Targets operate was also considered in
the valuation analysis.
To determine the value of in-process research and development, the Company
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, associated
risks which included the inherent difficulties and uncertainties in completing
each project and thereby achieving technological feasibility and risks related
to the viability of and potential changes to future target markets. This
analysis resulted in amounts assigned to in-process research and development
for projects that had not yet reached technological feasibility and which did
not have alternative future uses. The Income Approach, which includes analysis
of markets, cash flows, and risks associated with achieving such cash flows,
was the primary technique utilized in valuing each in-process research and
development project. The underlying in-process projects acquired were the most
significant and uncertain assumptions utilized in the valuation analysis of
in-process research and development projects.
To determine the value of developed technologies, the expected future cash
flows of existing product technologies were evaluated, taking into account
risks related to the characteristics and applications of each product, existing
and future markets and assessments of the life cycle stage of each product.
Based on this analysis, the existing technologies that had reached
technological feasibility were capitalized.
To determine the value of the distribution networks and customer bases,
the Company 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 the Company 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, the Company
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 revenue shortfalls in the event that the Company is unable to
F-36
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
successfully complete a certain research and development project. The Company's
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 XIOTECH CORPORATION:
In January 2000, the Company acquired XIOtech, for 8,031,804 shares of
Seagate common stock, issued from treasury shares, and options, with a combined
fair value of $359 million. XIOtech designs, manufactures and markets a
centralized data storage system. This system is based on an exclusive set of
sophisticated data management and data movement tools. It offers storage
virtualization, multi-node server clustering, and zero backup window solutions.
The main component of the system is MAGNITUDE, a fully implemented storage area
network ("SAN"). MAGNITUDE is sold in a cabinet containing software-based
architecture that allows the incorporation of all of the components of a SAN in
one centralized configuration.
XIOtech also designs, develops and produces software, namely the REDI
suite of software, which runs MAGNITUDE's software based architecture. The REDI
software suite is application specific and gives customers the capability of
better managing their data. XIOtech is currently developing the next generation
technologies for both products, named Thunderbolt and REDI 7.0, respectively.
At the time of completing the XIOtech acquisition, the Company estimated
the cost to complete both Thunderbolt and REDI 7.0 at approximately $1 million.
The anticipated release date for the Thunderbolt is the first half of fiscal
2002 and for the REDI 7.0 is in the second half of fiscal 2001.
Assumptions used in estimating the fair value of intangible assets:
Revenue
Future revenue estimates were generated for the following technologies:
(i) MAGNITUDE, (ii) REDI, (iii) Thunderbolt, the next generation development of
MAGNITUDE and (iv) REDI 7.0, the next generation development of REDI. Aggregate
revenue was estimated to be approximately $47.6 million in fiscal 2000 and to
increase to approximately $230 million for fiscal year 2001 when the in-process
projects were expected to be complete and shipping. Revenue was estimated to
increase to approximately $650 million and $1,060 million in fiscal years 2002
and 2003, respectively. Estimated revenues decreased 29% in fiscal 2004 to $750
million. 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 revenue, (iii)
growth rates for the storage management software market, (iv) the aggregate
size of the storage management software market, (v) anticipated product
development and introduction schedules, (vi) product sales cycles, and (vii)
the estimated life of a product's underlying technology.
Operating expenses
Estimated operating expenses used in the valuation analysis of XIOtech
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 and XIOtech'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.
F-37
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
Cost of goods sold -- Estimated cost of goods sold, expressed as a
percentage of revenue, for the developed and in-process technologies ranged
from approximately 46% to 55%.
General and administrative ("G&A") -- expense. Estimated G&A expense,
expressed as a percentage of revenue, for the developed and in-process
technologies ranged from 5% in fiscal 2000 to less than 1% in fiscal 2004
declining as production levels and related revenue increased and thus
efficiencies in production are assumed to be attained.
Selling and marketing ("S&M") expense. -- Estimated S&M expense, expressed
as a percentage of revenue, for the developed and in-process technologies
ranged from 20% in fiscal 2001 to a sustainable 15% in fiscal 2002 and beyond.
For fiscal 2000, however, when the Thunderbolt and REDI 7.0 technology was
estimated to become commercially available, S&M expense was estimated to be 45%
due to the relatively low revenue expectation in the initial commercialization
period.
Research and development ("R&D") expense -- Estimated R&D expense consists
of the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the
product updated with current information. These activities include routine
changes and additions. The maintenance R&D expense was estimated to be 2% of
revenue for the developed and in-process technologies in fiscal 2000 and 3%
throughout the remainder of the estimation period.
In addition, as of the date of the acquisition, Seagate's management and
XIOtech's management anticipated the costs to complete the in-process
technologies at approximately $0.95 million.
Effective tax rate
The effective tax rate utilized in the analysis of the in-process
technologies was 40%, 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 XIOtech's developed and in-process
technologies was 16% and 23%, respectively. In the selection of the appropriate
discount rates, consideration was given to the Weighted Average Cost of Capital
("WACC") of approximately 16% at the date of acquisition. The discount rate
utilized for the in-process technology was determined to be higher than
Seagate's WACC due to the fact that the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than 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 $105 million. 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.
F-38
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
The following is a summary of the purchase price allocation:
(IN MILLIONS)
Tangible assets less liabilities assumed .......... $ 12
Developed technology .............................. 37
Tradenames ........................................ 5
Assembled workforce ............................... 2
Customer list ..................................... 2
In-process research and development ............... 105
Goodwill .......................................... 214
Deferred tax liability ............................ (18)
-----
$ 359
=====
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 the
Company, received cash payments aggregating $230 million upon the closing of
the acquisition and were eligible to receive additional cash payments
aggregating $96 million upon the achievement of certain product development and
early production milestones. Of the $96 million, $19 million was charged to
operations in fiscal 1998. Of the $19 million charged to operations, $5 million
was paid in fiscal 1998 In July 1998, the Company and Quinta amended the
purchase agreement to eliminate the product development and early production
milestones and provide that the former shareholders of Quinta will be eligible
to receive the remaining $77 million and the $14 million that had been accrued
but unpaid in fiscal 1998. In the first quarter of fiscal 1999, the Company
recorded a charge to operations for the remaining $77 million.
Quinta's research and development project revolves around an OAW
technology. OAW refers to Quinta's newly designed recording technology that,
upon completion, would be implemented into Winchester hard disk drives. OAW
combines traditional magnetic recording technology with Winchester hard disc
drives and optical recording capabilities; optical recording technology enables
greater data storage capacity. By integrating advanced optical features along
with a highly fine and sophisticated tracking and delivery system within the
head design, OAW would multiply the real density of disc drives.
Through August 8, 1997, the acquisition date, Quinta had demonstrated
significant achievements in developing its technology. However, further
technological milestones were required before technological feasibility could
be achieved. Quinta's development process consists of the following development
milestones: (i) route light (optical fiber), (ii) flying head use, (iii)
recording media, (iv) mirror creation and demonstration (two stage servo), (v)
complete assembly, (vi) form factor containment, (vii) design verification
test, (viii) customer qualification, and (ix) delivery.
ASSUMPTIONS USED IN ESTIMATING THE FAIR VALUE OF INTANGIBLE ASSETS:
Revenue
Future revenue estimates were generated for the following product that the
OAW technology would be utilized in: (i) fixed drives, (ii) removable drive,
(iii) fixed/removable drives, and (iv)
F-39
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
cartridges. No revenue was expected through fiscal 1998 since the underlying
technology was anticipated not to be technologically feasible until fiscal
1999. Revenue was estimated to be approximately $26.6 million in fiscal 1999
and to increase to approximately $212 million for fiscal year 2000 when the
in-process project was expected to be complete and shipping. Revenue growth was
expected to decline to a sustainable 20% growth by fiscal 2005. The estimated
revenue growth is consistent with the introduction of new technology. Revenue
estimates were based on (i) aggregate revenue growth rates for the business as
a whole, (ii) individual product revenue, (iii) growth rates for the disc drive
market, (iv) the aggregate size of the disc drive market, (v) anticipated
product development and introduction schedules, (vi) product sales cycles, and
(vii) the estimated life of a product's underlying technology. Quinta's
development cycle, in total, was expected to take approximately 18 to 24
months.
Operating expenses
Estimated operating expenses used in the valuation analysis of Quinta
included (i) cost of goods sold, (ii) general and administrative expense, (iii)
selling and marketing expense, and (iv) research and development expense. In
developing future expense estimates, an evaluation of the Company's overall
business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted. Due to Quinta's limited operating history, an
analysis of Quinta's historical performance was not meaningful.
Cost of goods sold -- Estimated cost of goods sold, expressed as a
percentage of revenue, for the in-process technologies ranged from
approximately 65% to 80%.
General and administrative ("G&A") expense -- Estimated G&A expense,
expressed as a percentage of revenue, for the in-process technologies ranged
from 2.6% in fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For
fiscal 1999, however, when the OAW technology would become commercially
available, G&A expense was estimated to be 6.4% due to the relatively low
revenue expectation in the initial commercialization period.
Selling and marketing ("S&M") expense -- Estimated S&M expense, expressed
as a percentage of revenue, for the in-process technologies ranged from 3.3% in
fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For fiscal 1999,
however, when the OAW technology would become commercially available, S&M
expense was estimated to be 8.7% due to the relatively low revenue expectation
in the initial commercialization period.
Research and development ("R&D") expense -- Estimated R&D expense consists
of the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the
product updated with current information. These activities include routine
changes and additions. The maintenance R&D expense was estimated to be 0.5% of
revenue for the in-process technologies throughout the estimation period.
Effective tax rate
The effective tax rate utilized in the analysis of the in-process
technologies was 38%, which reflects the Company's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
Discount rate
The discount rates selected for Quinta's in-process technology was 25%. In
the selection of the appropriate discount rates, consideration was given to (i)
the WACC of approximately 15% at the
F-40
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
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):
Tangible assets less liabilities assumed ......... $ 34
In-process research and development .............. 214
Assembled workforce .............................. 2
----
$250
====
CONTRIBUTION OF NSMG TO VERITAS AND THE PURCHASE OF OUTSTANDING SHARES OF
SEAGATE SOFTWARE HOLDINGS BY SEAGATE TECHNOLOGY:
Contribution of NSMG to VERITAS
On May 28, 1999, Seagate Technology and Seagate Software Holdings closed
and consummated an Agreement and Plan of Reorganization dated as of October 5,
1998 with VERITAS. The transaction provided for the contribution by Seagate
Technology, Seagate Software Holdings, and certain of their respective
subsidiaries to VERITAS of (a) the outstanding stock of NSMG and certain other
subsidiaries of Seagate Software Holdings and (b) those assets used primarily
in the NSMG business of Seagate Software Holdings, in consideration for the
issuance of shares of common stock of VERITAS to Seagate Software Holdings and
the offer by VERITAS to grant options to purchase common stock of VERITAS to
certain of Seagate Software Holding's employees who become employees of VERITAS
or its subsidiaries. As part of the transaction, VERITAS assumed certain
liabilities of the NSMG business. The transaction was structured to qualify as
a tax-free exchange.
Subsequent to the transaction, all outstanding securities of VERITAS
Operating Corporation were assumed and converted into common stock of VERITAS
with identical rights, preferences and privileges, on a share for share basis.
As a result of the contribution of the NSMG business to VERITAS, Seagate
Software Holdings received a total of 155,583,468 shares of VERITAS common
stock and former employees of the NSMG business received options to purchase an
aggregate of 15,626,358 shares of VERITAS common stock. Share and option
amounts for VERITAS have been adjusted to reflect the two-for-one stock split
effective July 9, 1999 by VERITAS, and the subsequent three-for-two stock
splits on November 22, 1999 and March 6, 2000.
Seagate Technology accounted for the contribution of NSMG to VERITAS as a
non-monetary transaction using the fair value of the assets and liabilities
exchanged. Immediately after the transaction, Seagate Software Holdings owned
approximately 41.63% (155,583,468 shares) of the outstanding shares of VERITAS.
Because Seagate Technology still owns a portion of the NSMG business through
its ownership of VERITAS, Seagate Technology did not recognize 100% of the gain
F-41
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
on the exchange. The gain recorded is equal to the difference between 58.37% of
the fair value of the VERITAS common stock received and 58.37% of Seagate
Technology's basis in the NSMG assets and liabilities exchanged. Seagate
Technology is accounting for its ongoing investment in VERITAS using the equity
method. The difference between the recorded amount of Seagate Technology's
investment in VERITAS and the amount of its underlying equity in the net assets
of VERITAS was allocated based upon the fair value of the underlying tangible
and intangible assets and liabilities of VERITAS. The intangible assets
included amounts allocated to in-process research and development and resulted
in a $85 million write-off in 1999 included in activity related to equity
interest in VERITAS in the accompanying statement of operations. Intangible
assets including goodwill are being amortized over four years.
Seagate Technology includes in its financial results its share of the net
income or loss of VERITAS, excluding certain NSMG purchase accounting related
amounts recorded by VERITAS, but including Seagate Technology's amortization of
the difference between its recorded investment and the underlying assets and
liabilities of VERITAS. Because of practicality considerations, the net income
or loss of VERITAS is included in the results of Seagate Technology on a one
quarter lag basis. Thus, the results of VERITAS for the period from May 29,
1999 to June 30, 1999, the period subsequent to the contribution of NSMG to
VERITAS, and for the period from July 1, 1999 through March 31, 2000 were
included in the Company's results for the fiscal year ended June 30, 2000. The
Company eliminates from VERITAS" income (loss) the effect of VERITAS"
accounting for the NSMG business contribution, including VERITAS" amortization
expenses related to intangible assets. Excluding amortization of intangibles,
the total equity income recorded by Seagate Technology related to VERITAS in
fiscal 2000 was $30 million.
Seagate exchange offer
In a separate but related transaction to the NSMG contribution to VERITAS,
on June 9, 1999, the Company exchanged 5,275,772 shares of its common stock for
3,267,255 of the outstanding shares of Seagate Software Holdings common stock
owned by employees, directors and consultants of Seagate Software Holdings. The
exchange ratio was determined based on the estimated value of Seagate Software
Holdings common stock divided by the fair market value of Seagate common stock.
The estimated value of Seagate Software Holdings common stock exchanged
into Seagate Technology common stock was determined based upon the sum of the
fair value of the NSMG business, as measured by the fair value of the shares
received from VERITAS, plus the estimated fair value of the Information
Management Group of Seagate Software Holdings as determined by Seagate
Technology's Board of Directors, plus the assumed proceeds from the exercise of
all outstanding Seagate Software Holdings stock options, divided by the number
of fully converted shares of Seagate Software Holdings. The Board of Directors
of Seagate Technology considered a number of factors in determining the
estimated fair value of the IMG business, including historical and projected
revenues, earnings and cash flows, as well as other factors and consultations
with financial advisors.
The fair value of the Seagate Software Holdings shares acquired less the
original purchase price paid by the employees was recorded as compensation
expense for those shares outstanding and vested less than six months. The
purchase of Seagate Software Holdings shares outstanding and vested more than
six months was accounted for as the purchase of a minority interest and,
accordingly, the fair value of the shares exchanged has been allocated to all
of the identifiable tangible and intangible assets and liabilities of Seagate
Software Holdings. In connection with the acquisition, Seagate Software
Holdings recorded the acquisition of the minority interest. Seagate
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NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
Technology recorded compensation expense amounting to approximately $124
million and wrote off purchased research and development amounting to $2
million in the fourth quarter of fiscal 1999. Associated intangible assets and
goodwill are being amortized to operations over three to four years.
Computation of pro rata gain on contribution of NSMG to VERITAS
(IN MILLIONS)
--------------
Fair value of shares received ................................... $ 3,151
Times: pro rata percentage accounted for at fair value .......... 58.37%
--------
Adjusted fair value of securities received ...................... $ 1,839
--------
Book value of NSMG .............................................. $ 57
Times: pro rate percentage accounted for at fair value .......... 58.37%
--------
Book value exchanged ............................................ 33
--------
Pro rata gain ................................................... $ 1,806
========
Computation of original investment in VERITAS
(IN MILLIONS)
--------------
Book value of NSMG ................................................. $ 57
Times: pro rata percentage accounted for at fair value ............. 41.63%
--------
Portion of investment in VERITAS with no step up in basis .......... 24
Plus: Adjusted fair value of securities received ................... 1,839
--------
Investment in VERITAS .............................................. $ 1,863
========
Allocation of original investment in VERITAS
(IN MILLIONS)
--------------
Allocation of investment to VERITAS assets and liabilities:
Net tangible assets ...................................... $ 114
Intangible assets:
Distribution channel ................................... 9
Developed technology ................................... 46
Trademark and workforce ................................ 16
In-process research and development .................... 40
Allocation of investment to NSMG assets and liabilities:
Net tangible assets ...................................... 24
Intangible assets:
Distribution channel ................................... 66
Developed technology ................................... 92
Trademark and workforce ................................ 14
In-process research and development .................... 45
Goodwill .................................................. 1,397
-------
Total original investment in VERITAS ...................... $ 1,863
=======
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NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
Value of minority interest acquired in October 1999
(IN MILLIONS,
EXCEPT PER SHARE DATA)
-----------------------
Number of Seagate Software Holdings shares and options
exchanged for Seagate Technology stock held by former
employees, consultants and shares held more than six
months by employees ....................................... 1,010,010
Times: Exchange ratio into Seagate Technology stock ......... 1.699
----------
Number of Seagate Technology shares issued .................. 1,716,007
Value per share of Seagate Technology common stock as of
June 9, 1999 .............................................. $ 30.75
-----------
Total value Seagate Technology shares issued ................ $ 53
Less: Proceeds from assumed exercise of Seagate Software
Holdings stock options .................................... (1)
-------------
Total value of minority interest ............................ $ 52
============
Allocation of minority interest purchase price to the intangible assets of
Seagate Software Holdings
(IN MILLIONS)
--------------
Distribution channel ......................... $ 2
Developed technology ......................... 4
Trademark and workforce ...................... 1
In-process research and development .......... 2
Goodwill ..................................... 45
---
Subtotal .................................... 54
Deferred tax liability ....................... (2)
------
Total ....................................... $52
=====
Compensation relating to stock purchased from employees
(IN MILLIONS,
EXCEPT PER SHARE DATA)
-----------------------
Seagate Software Holdings options exercised and exchanged
for Seagate stock ........................................... 2,240,470
Plus: Seagate Software Holdings stock held for less than 6
months and exchanged for Seagate Technology stock ........... 16,775
---------
Total Seagate Software Holdings shares exchanged .............. 2,257,245
Times: Exchange ratio into Seagate Technology stock ........... 1.699
----------
Number of Seagate Technology shares issued .................... 3,835,060
----------
Value per share of Seagate Technology common stock on
June 9, 1999 ................................................ $ 30.75
Less: Average price paid per Seagate Technology share ......... $ (4.01)
------------
Average compensation expense per Seagate Technology share
issued ...................................................... $ 26.74
------------
Total compensation expense .................................... $ 103
============
F-44
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
Reconciliation of amounts included in Gain on contribution of NSMG to VERITAS,
net
(IN MILLIONS)
--------------
Pro rata gain ......................................... $1,806
Less:
Compensation expense ................................. 124
Transaction costs .................................... 12
------
Gain on contribution of NSMG to VERITAS, net .......... $1,670
======
Activity related to equity interest in VERITAS
2000 1999
-------- -------
(IN MILLIONS)
Write-off of in-process research and development ............. $ -- $ 85
Equity interest in VERITAS net income/loss ................... (30) --
Amortization of intangible assets including goodwill ......... 356 34
----- ----
Activity related to equity interest in VERITAS ............... $ 326 $119
===== ====
All activity related to the equity interest in VERITAS in 1999 was
recorded in the fourth quarter of that year.
ALLOCATION OF TANGIBLE AND INTANGIBLE ASSETS AND LIABILITIES RELATED TO NSMG
AND VERITAS
OVERVIEW
NSMG offers network and storage management software solutions, which focus
on the information availability component of Enterprise Information Management
("EIM") by enabling IT professionals to manage distributed network resources
and to secure and protect enterprise data. NSMG's products include features
such as system backup, disaster recovery, migration, replication, automated
client protection, storage resource management, scheduling, event correlation
and desktop management.
VERITAS develops, markets and supports advanced storage management and
high availability products for open system environments. VERITAS' products
provide performance improvement and reliability enhancement features that are
critical for many commercial applications. Some of the key features of storage
management products include protection against data loss and file corruption,
rapid recovery after disk or system failure, the ability to process large files
efficiently and the ability to manage the storage systems without interrupting
users. The high availability products provide an automated failover between
computer systems organized in clusters sharing disk resources.
In accordance with the provisions of Accounting Principles Board ("APB")
Opinions No. 16 and 17, all identifiable assets acquired were analyzed to
determine their Fair Market Values. As the basis for identifying the in-process
research and development ("R&D"), the development projects were evaluated in
the context of Interpretation 4 of Financial Accounting Standards Board
Statement No. 2. In accordance with these provisions, the developmental
projects were examined to determine if there were any alternative future uses.
Such evaluation consisted of a specific review of the efforts, including the
overall objectives of the project, progress toward the objectives, and the
uniqueness of the developments of these objectives. Further, each in-process
R&D project was reviewed to determine if technological feasibility had been
achieved.
F-45
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
DESCRIPTION OF METHODOLOGY
Tangible net assets of VERITAS principally include cash and investments,
accounts receivable, fixed assets and other current assets. Liabilities
principally include accounts payable, accrued compensation, and other accrued
liabilities.
To estimate the value of the developed technology, the expected future
cash flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the
technology, existing and future markets, and assessments of the life cycle
stage of the technology. The developed technology is being amortized on the
straight-line basis over its estimated useful life (four years) which is
expected to exceed the ratio of current revenues to the total of current and
anticipated revenues.
The value of the distribution networks and original equipment manufacturer
agreements was estimated by considering, among other factors, the size of the
current and potential future customer bases, the quality of existing
relationships with customers, the historical costs to develop customer
relationships, the expected income and associated risks. Associated risks
included the inherent difficulties and uncertainties in transitioning business
relationships and risks related to the viability of and potential changes to
future target markets.
The value of trademarks was estimated by considering, among other factors,
the assumption that in lieu of ownership of a trademark, a company would be
willing to pay a royalty in order to exploit the related benefits of such
trademark.
The value of the assembled workforce was estimated as the costs to replace
the existing employees, including recruiting, hiring, and training costs for
each category of employee.
The value allocated to projects identified as in-process technology at
VERITAS and Seagate Software Holdings, for the minority interest acquired, were
charged to expense in the fourth quarter of fiscal 1999. These write-offs were
necessary because the acquired technologies had not reached technological
feasibility at the date of purchase and have no future alternative uses.
Seagate Software Holdings expects that the acquired in-process research and
development will be successfully developed, but there can be no assurance that
commercial viability of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The value of the purchased in-process technology for
VERITAS was estimated as the projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products, excluding
revenues attributable to future development efforts. These cash flows were then
discounted back to their net present value. The projected net cash flows from
such projects were based on management's estimates of revenues and operating
profits related to such projects.
Goodwill is calculated as the residual difference between the estimated
amount paid and the values assigned to identified tangible and intangible
assets and liabilities.
F-46
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
VALUATION ASSUMPTIONS
Revenue
Revenue estimates were based on (i) aggregate revenue growth rates for the
businesses as a whole, (ii) growth rates for the storage management software
market, (iii) the aggregate size of the storage management software market,
(iv) anticipated product development and introduction schedules, (v) product
sales cycles, and (vi) the estimated life of a product's underlying technology.
Future revenue estimates were generated based on the worldwide storage
management software market and the backup, restore and archive market. The
overall storage management software market is forecasted to increase at a
compound annual growth rate of 14.2%, from a 1997 value of $2.543 billion to a
2002 value of $4.941 billion. The backup, restore and archive software sector
of storage management software, in which NSMG competes, is expected to grow
much faster than other sectors.
NSMG is positioned for continued growth in its backup, restore, and
archive software products. The backup, restore, and archive segment is the
fastest growing in the storage management software market. Moreover, NSMG
competes, and is one of the leaders in providing this type of software for the
Windows NT operating environment. Revenue for Windows 95 and Windows NT is
projected to grow at a 43.3% compound annual growth rate (1997 through 2002),
higher than for any other operating environment.
Revenue for NSMG was forecasted by product line for the years 1999 through
2001. Revenue was expected to be $350 million for the 1999 calendar year.
Thereafter, NSMG is expected to grow slightly greater than the 43.3% industry
average through 2003. The revenue by product was allocated between existing,
in-process, and future technology; indicating a four-year life cycle (revenue
contribution from technology), which is consistent with NSMG's past experience
with technology life cycles.
VERITAS is an open systems supplier. The market for open systems suppliers
grew 101.2% between 1996 and 1997. In addition, VERITAS looks to grow and
increase its market share through positioning itself as a provider of software
services in the Windows NT operating environment. As above, revenue for Windows
NT is projected to grow at a 43.3% compound annual growth rate (1997 through
2002).
Revenue for VERITAS was forecasted by product line for the years 1999
through 2001. Revenue was expected to be $270 million for the 1999 calendar
year. Thereafter, VERITAS is expected to grow at 67.9% and 58.4% for years 2000
and 2001, respectively, a rate greater than the 43.3% industry average. For
years 2002 through 2005, revenues are expected to level off at a 40% growth
rate. The revenue by product was allocated between existing, in-process, and
future technology indicating a four-year life cycle (revenue contribution from
technology) for Windows NT based products and a three-year life cycle for Unix
based products which is consistent with VERITAS' past experience with
technology life cycles.
OPERATING EXPENSES
Estimated operating expenses used in the valuation analysis of NSMG and
VERITAS included (i) cost of goods sold, (ii) general and administrative
expense, (iii) sales and marketing expense, and (iv) research and development
expense. In developing future expense estimates, an evaluation of both NSMG and
VERITAS's overall business models, specific product results, including both
historical and expected direct expense levels (as appropriate), and an
assessment of general industry metrics was conducted.
F-47
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
Cost of goods sold. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 8.6% of revenues from 2000 to
2006 for NSMG. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 14.7% of revenues from 2000 to
2005 for VERITAS.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 9.2% in 1999 and expected to be reduced to 6.7% by 2002 for
NSMG. G&A expense for VERITAS, expressed as a percentage of revenue, for the
developed and in-process technologies was held constant at 4.4% of revenues for
the forecast period of 2000 to 2005.
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 37.4% for years 2000 to 2006 related to NSMG. S&M expense for
VERITAS, expressed as a percentage of revenue, for the developed and in-process
technologies was estimated to be 34.7% for years 2000 to 2005.
Research and development ("R&D") expense. R&D expense consists of the
costs associated with activities undertaken to correct errors or keep products
updated with current information (also referred to as "maintenance" R&D).
Maintenance R&D includes all activities undertaken after a product is available
for general release to customers to correct errors or keep the product updated
with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 2% of revenue for
the developed and in-process technologies for the years 2000 to 2006 for NSMG.
R&D expense for VERITAS was estimated as 18.2% of revenue in 1999 and was
reduced to 16% by 2002, continuing at that rate until 2005.
In addition, as of the date of the contribution of NSMG to VERITAS,
Seagate Software's management and VERITAS' management anticipated the costs to
complete the in-process technologies at approximately $5.8 million and $44.2
million, respectively.
EFFECTIVE TAX RATE
The effective tax rate utilized in the analysis of developed and
in-process technologies was 33%, which reflects VERITAS' combined effective
federal and state statutory income tax rates, exclusive of non-recurring
charges at the time of the contribution and estimated for future years.
DISCOUNT RATE
The discount rates selected for the developed and in-process technologies
were 12% and 17%, respectively. In the selection of the appropriate discount
rates, consideration was given to (i) the Weighted Average Rate of Return
(approximately 14% at the date of acquisition) and (ii) the Weighted Average
Return on Assets (approximately 18% at the end of contribution) that investors
expect for companies with similar anticipated growth rates and other
characteristics as the NSMG and VERITAS businesses. The discount rate utilized
for the in-process technology was determined to be higher than the WARR due to
the fact that the technology had not yet reached technological feasibility as
of the date of valuation. In utilizing a discount rate greater than the WARR,
management has reflected the risk premium associated with achieving the
forecasted cash flows associated with these projects. The discount rate was
adjusted downward from the WARR for the developed technologies to reflect less
technological and/or market risk associated with forecasted sales of the
existing products.
ALLOCATION OF TANGIBLE AND INTANGIBLE ASSETS AND LIABILITIES RELATED TO THE
SEAGATE SOFTWARE MINORITY INTEREST ACQUIRED BY SEAGATE TECHNOLOGY
Seagate Software Holdings' investment in VERITAS comprises over 85% of the
fair value of Seagate Software Holdings. Accordingly, the assumptions utilized
in the allocation of the purchase
F-48
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS COMBINATIONS (CONTINUED)
price of the minority interest of Seagate Software Holdings acquired by Seagate
Technology were materially the same as those used in the allocation of the
tangible and intangible assets and liabilities of NSMG and VERITAS.
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
contribution of NSMG to VERITAS and the purchase of the Seagate Software
Holdings minority interest by Seagate Technology had occurred at the beginning
of fiscal 1998. The pro forma statements of operations for the twelve months
ended July 2, 1999 and July 3, 1998, include the historical results of Seagate
Technology less the historic results of the NSMG business, plus Seagate
Technology's equity interest in the pro forma results of VERITAS, including
recurring amortization of related goodwill and intangibles plus recurring
amortization of goodwill and intangibles associated with the purchase of shares
of Seagate Software Holdings stock by Seagate Technology. Non-recurring
transactions, such as the gain on the NSMG contribution to VERITAS,
compensation expense relating to the acquisition of stock held less than six
months by employees of Seagate Software Holdings, transaction costs and the
write-off of in-process research and development are excluded from the pro
forma presentation. The pro forma financial results are as follows:
FOR THE YEARS ENDED
------------------------------
JULY 2, 1999 JULY 3, 1998
-------------- -------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
Revenue ......................................... $ 6,600 $ 6,644
Loss before income taxes ........................ (110) (1,127)
Net loss ........................................ (34) (789)
Net loss per share -- basic and diluted ......... $ (0.14) $ (3.27)
As of June 30, 2000, the Company held approximately 32% of the outstanding
common stock of VERITAS. The Company accounts for its investment in VERITAS
under the equity method and records its equity interest in VERITAS' net income
(loss) on a one-quarter lag. The Company's recorded equity in the net income of
VERITAS for the year ended June 30, 2000 was $30 million, and differs from the
Company's proportionate share of VERITAS' reported net loss for the twelve
months ended March 31, 2000. This difference is primarily because the Company
eliminates from VERITAS' net income (loss) the effect of VERITAS' accounting
for the NSMG business contribution, including VERITAS' amortization expense
related to intangible assets. The Company was not required to record its equity
interest in VERITAS' net income (loss) in fiscal 1999 because the NSMG business
contribution occurred late in the fourth quarter.
The Company's activity related to equity interest in VERITAS for the year
ended June 30, 2000 consisted of recorded equity in the net income of VERITAS
of $30 million, as described above, and the Company's amortization expense for
goodwill and other intangible assets relating to the investment in VERITAS
amounting to $356 million. The Company's activity related to equity interest in
VERITAS for the year ended July 2, 1999 consisted of amortization of goodwill
and other intangible assets relating to the investment in VERITAS of $34
million and in-process research and development of $85 million.
7. SEAGATE SOFTWARE HOLDINGS REORGANIZATION
On October 20, 1999, the stockholders of Seagate Software Holdings, then a
majority-owned subsidiary of the Company, approved the merger of Seagate
Daylight Merger Corp., a wholly-owned subsidiary of the Company, with and into
Seagate Software Holdings. Seagate Software Holdings'
F-49
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SEAGATE SOFTWARE HOLDINGS REORGANIZATION (CONTINUED)
assets consisted of the assets of IMG and its investment in the common stock of
VERITAS Software Corporation. The merger was effected on October 20, 1999. As a
result of the merger, Seagate Software Holdings became a wholly-owned
subsidiary of the Company. In connection with the merger, Seagate Software
Holdings' stockholders and optionees received payment in the form of 3.23
shares of the Company's common stock per share of Seagate Software Holdings
common stock less any amounts due for the payment of the exercise price for
such options. All outstanding Seagate Software Holdings stock options were
accelerated immediately prior to the merger. Seagate Technology issued
9,124,046 shares of its common stock from treasury shares to optionees and
minority stockholders of Seagate Software Holdings.
In connection with the reorganization, Seagate Software Holdings also
formed Seagate Software Information Management Group Holdings, Inc., or IMG,
a wholly-owned subsidiary. Seagate Software Holdings transferred the IMG assets
into Crystal Decisions. This new company, Crystal Decisions, is now the
operating entity for the IMG business. Crystal Decisions has established stock
option plans. Total shares available for issuance under these plans are
22,700,000. As of June 30, 2000, Crystal Decisions had granted 9,501,899
options to purchase common stock to employees of Crystal Decisions at an
average exercise price of $4 per share, and 1,050 shares had been exercised.
Seagate Software Holdings accounted for the exchange of shares of its
common stock as the acquisition of a minority interest for Seagate Software
Holdings common stock outstanding and vested more than six months held by
employees and all stock held by former employees and consultants. The fair
value of the shares of Seagate Technology issued was $19 million and was
recorded as purchase price and allocated to the assets and liabilities
received. The Company accounted for the exchange of shares of its common stock
for stock options in Seagate Software Holdings held by employees and stock held
and vested by employees less than six months as the settlement of an earlier
stock award. During the quarter ended December 31, 1999, the Company recorded
compensation expense of $284 million, plus $2 million in payroll taxes, related
to the purchase of minority interest in Seagate Software.
Allocation of minority interest purchase price to the intangible assets of
Seagate Software
(IN MILLIONS)
--------------
Distribution channel ............ $ 1
Developed technology ............ 1
Goodwill ........................ 18
---
Subtotal ....................... 20
Deferred tax liability .......... (1)
------
Total .......................... $19
=====
F-50
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SEAGATE SOFTWARE HOLDINGS REORGANIZATION (CONTINUED)
Compensation relating to stock purchased from employees
(IN MILLIONS,
EXCEPT SHARE AND PER SHARE DATA)
---------------------------------
Seagate Software options exercised and exchanged for
Seagate stock ................................................ 3,723,015
Plus: Seagate Software stock held for less than 6 months
and exchanged for Seagate stock .............................. 17,952
---------
Total Seagate Software shares exchanged ....................... 3,740,967
Times: Exchange ratio into Seagate stock ...................... 3.23
---------
Number of Seagate shares issued ............................... 12,083,323
----------
Value per share of Seagate common stock on
October 20, 1999 ............................................. $ 29.00
Less: Average price paid per Seagate share .................... $ (5.50)
-----------
Average compensation expense per Seagate share issued ......... $ 23.50
-----------
Total compensation expense ................................... $ 284
===========
8. RESTRUCTURING
As part of the transactions, the Company assumed all restructuring
liabilities previously recorded by Seagate Technology including $41 million
related to restructuring activities announced in fiscal 2000 and $3 million
related to restructuring activities announced in fiscal 2001. During the period
from July 1, 2000 to November 22, 2000, Seagate Technology recorded
restructuring charges totaling $20 million. Of the $20 million, $11 million was
a result of a restructuring plan established to continue the alignment of
Seagate Technology's global workforce and manufacturing capacity with existing
and anticipated future market requirements, specifically in its recording head
operations in Thailand (the "fiscal 2001 restructuring plan"). The remaining $9
million consisted of a $3 million employee termination benefit adjustment to
the original estimate related to the fiscal 2000 restructuring plan and $6
million in additional restructuring charges for adjustments to original
estimates to the fiscal 1998 restructuring plan. The fiscal 2001 restructuring
plan includes workforce reductions, capacity reductions including closure of
facilities or portions of facilities, write-off of excess equipment and
consolidation of operations. The restructuring charges were comprised of $3
million for employee termination costs; $6 million for the write-off of owned
facilities located in Thailand; $1 million for the write-off of excess
manufacturing, assembly and test equipment; and $1 million in other expenses.
Prior to these restructuring activities, there was no indication of permanent
impairment of the assets associated with the closure and consolidation of
facilities.
In the third fiscal quarter of 2001, the Company announced restructuring
activities at disc drive plants in Perai and Ipoh, Malaysia and the customer
service operations in Oklahoma City. The Company estimates these restructuring
activities will include $23 million in severance, $12 million in excess
equipment, $17 million in lease termination and residual rental payments, and
$2 million in other costs. The Company believes these activities will be
substantially complete by December 28, 2001.
In connection with the fiscal 2001 restructuring plan, the Company plans
to reduce its workforce by approximately 6,000 employees, primarily in
manufacturing. Approximately 100 of the 6,000 employees had been terminated as
of December 29, 2000. As a result of employee terminations and the write-off of
equipment and facilities in connection with the fiscal 2001 restructuring plan,
the Company estimates that after completion of these restructuring activities,
annual salary and
F-51
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING (CONTINUED)
depreciation expense will be reduced by approximately $7 million and $2
million, respectively. However, the Company expects that reduction in annual
salary expense will be substantially offset by increases of headcount in
certain other recording head operations facilities. The Company intends to
implement additional actions pursuant to the fiscal 2001 restructuring plan,
and, when such additional actions are implemented, the Company anticipates that
additional charges would be taken related to these actions. The Company expects
the fiscal 2001 restructuring plan will be substantially complete by June 29,
2001.
In connection with the fiscal 2000 restructuring plan, Seagate Technology
recorded an adjustment of $3 million in the quarter ended September 29, 2000 as
a result of an increase in the estimated number of employees to be terminated.
The Company now plans to reduce its workforce by approximately 24,000 employees
primarily in manufacturing. Approximately 22,000 of the 24,000 employees had
been terminated as of December 29, 2000. As a result of employee terminations
and the write-off of equipment and facilities in connection with the fiscal
2000 restructuring plan, the Company estimates that after completion of these
restructuring activities, annual salary and depreciation expense will be
reduced by approximately $151 million and $48 million, respectively. The fiscal
2000 restructuring plan was substantially complete as of December 29, 2000.
In connection with the restructuring plan implemented in fiscal 1998,
Seagate Technology revised its original lease termination cost estimates on
certain of its facilities and recorded an additional $6 million in
restructuring charges.
In fiscal 2000, the Company recorded restructuring charges of $218
million. The $218 million restructuring charge was a result of a restructuring
plan established to align the Company's global workforce and manufacturing
capacity with existing and anticipated future market requirements and
necessitated by the Company's improved productivity and operating efficiencies
(the "fiscal 2000 restructuring plan"). These actions included workforce
reductions, capacity reductions including closure of facilities or portions of
facilities, write-off of excess equipment and consolidation of operations in
the Company's recording media operations, disc drive assembly and test
facilities, printed circuit board assembly manufacturing, recording head
operations, software operations, customer service operations, sales and
marketing activities, and research and development activities. The
restructuring charges were comprised of $81 million for the write-off of excess
manufacturing, assembly and test equipment formerly utilized in Singapore,
Thailand and Northern California; $90 million for employee termination costs;
$29 million for the write-off of owned facilities located in Singapore; $11
million in lease termination and holding costs; $5 million in renovation costs
to restore facilities in Singapore and Northern California to their pre-lease
condition; and $2 million in contract cancellations associated with one of the
Singapore facilities. Prior to this period, there was no indication of
permanent impairment of the assets associated with the closure and
consolidation of facilities. In connection with the fiscal 2000 restructuring
plan, the Company plans to reduce its workforce by approximately 23,000
employees primarily in manufacturing. Approximately 18,300 of the 23,000
employees had been terminated as of June 30, 2000. As a result of employee
terminations and the write-off of equipment and facilities in connection with
the restructuring charges recorded during the year ended June 30, 2000 related
to the fiscal 2000 restructuring plan, the Company estimates that after the
completion of these restructuring activities, annual salary and depreciation
expense will be reduced by approximately $151 million and $88 million,
respectively. The Company anticipates that the implementation of the fiscal
2000 restructuring plan will be substantially complete by December 29, 2000.
In fiscal 2000, the Company reversed $11 million of its restructuring
accruals comprised of $2 million of restructuring reserves recorded in the same
period, $5 million of restructuring reserves recorded in fiscal 1999 and $4
million of restructuring reserves recorded in fiscal 1998. This reversal
F-52
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING (CONTINUED)
included $3 million of valuation reserves classified elsewhere on the balance
sheet and the reversal of amounts included in the restructuring reserve for
facility lease costs. In addition, reclassifications between cost categories
within the restructuring reserve were made as a result of differences between
original estimates and amounts actually incurred or expected to be incurred.
During the third quarter of fiscal 1999, the Company recorded a
restructuring charge of $72 million as a result of steps the Company is taking
to further improve the efficiency of its operations. These actions included
closure of the Company's microchip manufacturing facility in Scotland;
discontinuance of the Company's recording head suspension business located in
Malaysia and Minnesota; consolidation of global customer service operations by
relocating such operations in Singapore, Scotland and Costa Mesa, California to
Reynosa, Mexico; and closure of the Company's recording media substrate
facility in Mexico. The restructuring charges were comprised of $37 million for
the write-off or write-down of excess manufacturing, assembly and test
equipment formerly utilized in Scotland, Malaysia and Minnesota; $16 million
for lease termination and holding costs for facilities located in Scotland and
Singapore; $10 million for employee termination costs; $3 million for the
write-off of goodwill associated with the recording media substrate operation
in Mexico; $2 million for the write-down of owned facilities located in
Malaysia; $1 million for the write-down of leasehold improvements in Singapore;
$1 million for the write-off of tooling; $1 million for contract cancellations
associated with the suspension business; and $1 million for repayment of
various grants previously received from the Scottish government. Prior to this
period, there was no indication of permanent impairment of the assets
associated with the closure and consolidation of facilities. Evaluations of the
resale market for certain assets were used to estimate fair value.
As of July 2, 1999, all of the equipment located at the microchip facility
in Scotland had been sold and the lease on this facility had been terminated
The Company is in the final stages of disposing all of the assets for its
suspension business. The facility that was previously occupied by the
suspension operations is currently being used for other operations.
In connection with the fiscal 1999 restructuring, the Company's planned
workforce reduction had been completed as of March 31, 2000 and the other
restructuring activities were substantially complete as of March 31, 2000.
In fiscal 1999, the Company reversed $12 million of its restructuring
accruals originally recorded in fiscal year 1998 as a result of the Company
abandoning its plan to seek an agreement with an external vendor to supply
parts currently manufactured at a facility in Thailand. This reversal included
$10 million of valuation reserves classified elsewhere on the balance sheet and
reversal of amounts included in the restructuring reserve of $1 million for
facility lease costs and $1 million for contract cancellations. In addition,
reclassifications between cost categories within the restructuring reserve were
made as a result of differences between original estimates and amounts actually
incurred or expected to be incurred. This was primarily a result of an increase
in the period of time estimated to obtain a suitable sub-lessee for certain
leased buildings located at the former San Jose, California design facility
offset by lower severance and benefits costs than originally estimated.
In the second and third quarters of fiscal 1998, the Company recorded
restructuring charges aggregating $347 million. The Company had experienced
reductions in revenue from the third quarter of fiscal year 1997 to the fourth
quarter of fiscal year 1997 of 21%, from the fourth quarter of fiscal year 1997
to the first quarter of fiscal year 1998 of 4% and from the first quarter of
fiscal year 1998 to the second quarter of fiscal year 1998 of an additional
12%. During the second quarter of fiscal 1998, forecasted production needs were
much lower than the current capacity of the Company and the Company recognized
that the recent oversupply in the marketplace was not a short-term
F-53
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING (CONTINUED)
anomaly. In this period, the Company also decided to discontinue production of
several products, rendering test and manufacturing equipment unique to those
products obsolete. Prior to this period, there was no indication of permanent
impairment of these assets associated with the recent excess capacity of the
Company or the products to be discontinued These charges reflect steps the
Company is taking to align worldwide operations with current market conditions
by reducing existing capacity in all areas of the Company and improving the
productivity of its operations and the efficiency of its development efforts by
consolidating manufacturing and R&D operations. Actions include exiting
production of mobile products; early discontinuation of several other products;
closing and selling the Clonmel, Ireland drive manufacturing facility; closing
and subleasing the San Jose and Moorpark, California design center facilities;
aborting production expansion projects in Cork, Ireland; and divesting the
Company of the new Philippines manufacturing facility, which was nearing
completion. Included in the restructuring charge are the write-down and
write-off of tangible assets comprised of manufacturing, assembly and test
equipment and tooling formerly utilized in California, Singapore, Thailand,
Ireland and facilities located in California, the Philippines and Thailand
totaling $200 million and intangible assets totaling $2.5 million for goodwill
associated with permanently impaired media manufacturing equipment.
The majority of the tangible assets have been disposed of or sold
including the disposal of the Clonmel, Ireland facility in May 1998 and the
sublease of one of the five buildings at the San Jose, California design
center. The Company is marketing three additional buildings in the San Jose,
California design center for sublease. The fifth building has a remaining lease
term so short as to make a sublease impractical. Equipment formerly utilized at
these facilities, in addition to equipment associated with restructuring
actions in Singapore and Thailand, has been relocated to other sites or
scrapped. Of the $137 million in write-offs and write-downs of equipment, $109
million was scrapped and $28 million is awaiting final disposition. In
addition, $10 million of equipment was transferred at net book value for use in
operations at other sites. Subsequent to the recording of the restructuring
reserve, depreciation related to certain assets that continued in use, was
included in operations. At the time these assets were identified as available
for sale no further depreciation was recorded. The write-off of intangibles and
other assets includes capital equipment deposits and goodwill associated with
permanently impaired equipment. Costs associated with aborting production
expansion projects in Cork, Ireland include primarily architect costs, lease
termination costs associated with equipment leased by contractors, and lease
termination costs for temporary housing used by contractor personnel.
Certain facilities including design centers in California, as well as
manufacturing facilities in Thailand continued in use after restructuring
amounts were recorded. The Moorpark, California product design center remained
in use for six months after the write-down of leasehold improvements and
equipment totaling $9 million. This facility has been subleased for a portion
of the remaining minimum lease term. One Thailand manufacturing facility
continues to be utilized until a satisfactory agreement can be made with an
external vendor to supply parts currently manufactured at this location. At the
time the decision to exit this facility was made, the Company believed that it
had identified a supplier for parts. It was subsequently determined that the
supplier could not meet the Company's quality standards.
As of January 1, 1999, the Company's planned workforce reduction
associated with the fiscal 1998 restructuring had been completed. The
implementation of the 1998 restructuring plan was substantially complete as of
July 2, 1999.
F-54
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING (CONTINUED)
The following table summarizes the Company's restructuring activities:
SEVERANCE INTANGIBLES &
AND EXCESS OTHER CONTRACT
BENEFITS FACILITIES EQUIPMENT ASSETS CANCELLATIONS OTHER TOTAL
----------- ------------ ----------- -------------- --------------- ---------- -----------
(IN MILLIONS)
FY1998 restructuring
charge ..................... $ 57 $ 78 $ 137 $ 11 $ 43 $ 21 $ 347
FY1999 restructuring
charge ..................... 10 19 37 4 1 1 72
Cash charges ................ (60) (23) -- -- (38) (12) (133)
Non-cash charges ............ -- (59) (174) (15) -- -- (248)
Adjustments and
reclassifications .......... (3) 3 -- -- (3) 1 (2)
------- ---- ----- ----- ------- ---- --------
Reserve balances, July 2,
1999 ....................... 4 18 -- -- 3 11 36
FY2000 restructuring
charge ..................... 90 40 81 -- 2 5 218
Cash charges ................ (69) (11) -- -- -- (2) (82)
Non-cash charges ............ -- (29) (81) -- -- -- (110)
Adjustments and
reclassifications .......... (2) (8) -- -- -- 2 (8)
------- ------- ----- ----- ------ ------ --------
Reserve balances,
June 30, 2000 .............. 23 10 -- -- 5 16 54
------ ------ ----- ----- ------ ------ -------
FY2001 restructuring
charge ..................... 3 6 1 -- -- 1 11
Cash charges ................ (14) (5) -- -- -- (3) (22)
Non-cash charges ............ -- (6) (1) -- -- -- (7)
Adjustments ................. 3 6 -- -- -- -- 9
------ ------ ------- ----- ------ ------ -------
Reserve balances,
November 22, 2000 .......... 15 11 -- -- 5 14 45
NEW SAC
Cash charges ................ (3) (1) -- -- -- -- (4)
------- ------- ------- ----- ------ ------ --------
Reserve balances,
December 29, 2000 .......... $ 12 $ 10 $ -- $ -- $ 5 $ 14 $ 41
====== ====== ======= ===== ====== ====== =======
The Company may not be able to realize all of the expected savings from
its restructuring activities and cannot insure that the restructuring
activities and transfers will be implemented on a cost-effective basis without
delays or disruption in its production and without adversely affecting its
results of operations.
9. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company designs, manufactures and markets products for storage,
retrieval and management of data on computer and data communications systems.
These products include rigid disc drives and disc drive components, tape drives
and software. The Company has three operating segments: disc drives, software
and tape drives, however, only the disc drive and software businesses are
reportable segments under the criteria of SFAS No. 131. The "other" category in
the following revenue and gross profit tables consists of tape drives and
out-of-warranty repair. The CEO
F-55
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
evaluates performance and allocates resources based on revenue and gross profit
from operations. Gross profit from operations is defined as revenue less cost
of sales. The Company does not evaluate or allocate assets or depreciation by
operating segment, nor does the CEO evaluate segments on these criteria. The
CEO has been identified as the Chief Operating Decision Maker as defined by
SFAS No. 131.
The following table summarizes the Company's operations by business
segment:
NEW SAC SEAGATE TECHNOLOGY
-------------- ---------------------------------------------------------
PERIOD
FROM PERIOD FROM SIX
NOVEMBER 23, JULY 1, MONTHS
2000 2000 ENDED
TO TO DECEMBER 31,
DECEMBER 29, NOVEMBER 22, 1999
2000 2000 (UNAUDITED) 2000 1999(1) 1998(1)
-------------- -------------- ------------- --------- --------- --------
(IN MILLIONS)
Revenue:
Disc Drives .......... $ 962 $2,286 $3,100 $6,013 $6,101 $6,152
Software ............. 20 57 58 127 343 293
Other ................ 35 106 169 308 358 374
------ ------ ------ ------ ------ ------
Consolidated ......... $1,017 $2,449 $3,327 $6,448 $6,802 $6,819
====== ====== ====== ====== ====== ======
Gross Profit:
Disc Drives .......... $ 107 $ 268 $ 583 $1,238 $1,250 $ 722
Software ............. 12 39 36 83 291 242
Other ................ 2 23 44 71 85 67
------ ------ ------ ------ ------ ------
Consolidated ......... $ 121 $ 319 $ 662 $1,392 $1,626 $1,031
====== ====== ====== ====== ====== ======
NEW SAC SEAGATE TECHNOLOGY
------------- ------------------------------------------
DECEMBER 29,
2000 2000 1999 1998(2)
------------- ------------ ------------ ------------
Total Assets:
Disc Drives ................... $ 21,469 $ 19,900 $ 16,553 $ 16,685
Software ...................... 345 688 287 212
Other ......................... 187 378 299 80
--------- --------- --------- ---------
Operating Segments............. 22,001 20,966 17,139 16,977
Investment in VERITAS ......... -- 1,122 1,745 --
Eliminations .................. (18,478) (14,921) (11,812) (11,332)
--------- --------- --------- ---------
Consolidated .................. $ 3,523 $ 7,167 $ 7,072 $ 5,645
========= ========= ========= =========
- ----------
(1) Includes results of operations of Seagate Software, Inc., including NSMG,
and Crystal Decisions.
(2) Includes assets of the Network and Storage Management Group.
For the period from November 23, 2000 to December 29, 2000, Compaq
Computer Corporation and EMC Corporation accounted for more than 10% of
consolidated revenue for a total of $147 million and $145 million,
respectively. For the period from July 1, 2000 to November 22, 2000, Compaq
Computer Corporation and EMC Corporation accounted for more than 10 % of
consolidated revenue for a total of $429 million and $328 million,
respectively. Sales to Compaq Computer Corporation and EMC Corporation were
primarily from the Company's disk drive segment.
In fiscal 2000, 1999 and 1998, Compaq Computer Corporation accounted for
more than 10% of consolidated revenue for a total of $1.100 billion, $1.144
billion, and $873 million, respectively. Sales to Compaq Computer Corporation
were from the Company's disc drive segment.
F-56
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Enterprise-wide information is provided in accordance with SFAS No. 131.
Long-lived assets consist of property, equipment and leasehold improvements,
capital leases, equity investments, goodwill and other intangibles, and other
non-current assets as recorded by the Company's operations in each area.
The following table summarizes the Company's operations by geographic
area:
NEW SAC SEAGATE TECHNOLOGY
-------------- ----------------------------------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
NOVEMBER 23, JULY 1, 2000 ENDED
2000 TO TO DECEMBER 31,
DECEMBER 29, NOVEMBER 22, 1999
2000 2000 (UNAUDITED) 2000 1999 1998
-------------- -------------- ------------- --------- --------- ---------
(IN MILLIONS)
Revenue from external
customers: (1)
United States ................. $ 396 $1,199 $1,521 $2,917 $3,440 $3,641
The Netherlands ............... 271 465 674 1,312 1,361 1,447
Singapore ..................... 245 456 635 1,378 1,194 1,119
Other ......................... 105 329 497 841 807 612
------ ------ ------ ------ ------ ------
Consolidated .................. $1,017 $2,449 $3,327 $6,448 $6,802 $6,819
====== ====== ====== ====== ====== ======
Long-lived Assets: (2)
United States ................. $ 556 $1,521 $ 826 $ 771
Singapore ..................... 196 392 546 607
Malaysia ...................... 146 285 303 304
Investment in VERITAS ......... -- 1,122 1,745 --
Other ......................... 166 338 340 348
------ ------ ------ ------
Consolidated .................. $1,064 $3,658 $3,760 $2,030
====== ====== ====== ======
- ----------
(1) Revenue is attributed to countries based on the shipping location.
(2) All assets belonging to Seagate Technology, Inc. were acquired by New SAC
as of November 22, 2000.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company records unrealized gains and losses on the mark-to-market of
its investments as a component of accumulated other comprehensive income. As of
June 30, 2000 and July 2, 1999, total accumulated other comprehensive income
(loss) was $86 million and $(7) million, respectively. During fiscal 2000,
several marketable equity securities held by the Company including SanDisk
Corporation, Gadzoox Networks, Inc., Veeco Instruments, Inc., and Lernout &
Hauspie Speech Products N.V. were included in this mark-to-market calculation
resulting in a $95 million unrealized gain, net of taxes. No such similar
amounts were recorded in fiscal 1999. Such investments are subject to changes
in valuation based upon the market price of their common stock. Between June
30, 2000 and August 9, 2000, these investments, excluding the investment in
SanDisk which was sold during the same period, had temporarily decreased in
fair value by $56 million, net of taxes. In July 2000, the Company sold its
remaining investment in SanDisk for net proceeds of approximately $105 million.
Accumulated other comprehensive loss as of December 29, 2000, represents
the temporary loss on mark-to-market of marketable securities.
F-57
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (CONTINUED)
The components of accumulated other comprehensive income (loss), net of
related tax, at December 29, 2000, June 30, 2000 and July 2, 1999 were as
follows:
NEW SAC SEAGATE TECHNOLOGY
-------------- -----------------------
DECEMBER 29, JUNE 30, JULY 2,
2000 2000 1999
-------------- ---------- ----------
(IN MILLIONS)
Unrealized gain (loss) on securities .................. $ (3) $88 $(5)
Foreign currency translation adjustments .............. -- (2) (2)
---- ------ ------
Accumulated other comprehensive income (loss) ......... $ (3) $86 $(7)
==== ===== =====
- ----------
Accumulated other comprehensive income as of June 30, 2000 includes deferred
tax liabilities of $57 million.
11. SEAGATE TECHNOLOGY, INC.'S PREVIOUSLY HELD EQUITY INVESTMENT IN VERITAS
SOFTWARE CORPORATION
In connection with the transactions, the investment in VERITAS was not
acquired by the Company. It was acquired by VERITAS in connection with the
merger. Seagate Technology accounted for its investment in VERITAS under the
equity method and recorded its equity interest in VERITAS' net income (loss) on
a one-quarter lag. Summarized income statement information for VERITAS for the
six months ended September 29, 2000 is as follows:
SIX MONTHS
ENDED
SEPTEMBER 29,
2000
--------------
(IN MILLIONS)
Revenue .............. $ 593
Gross profit ......... 502
Net loss ............. (320)
Seagate Technology's recorded equity in the net income of VERITAS for the
period from July 1, 2000 through November 22, 2000 was $30 million, and differs
from Seagate Technology's proportionate share of VERITAS' reported net loss for
the six months ended September 29, 2000. This difference is primarily because
Seagate eliminated from VERITAS' net income (loss) the effect of VERITAS'
purchase accounting for the Network & Storage Management Group business
contribution, including VERITAS' amortization expense related to intangible
assets. As this investment was not acquired by the Company under the terms of
the stock purchase agreement, no further accounting of the investment occurred
after November 22, 2000.
Seagate Technology's activity related to equity interest in VERITAS for
the period from July 1, 2000 to November 22, 2000 consisted of Seagate
Technology's amortization expense for goodwill and other intangible assets
relating to the investment in VERITAS of $129 million partially offset by
recorded equity in the net income of VERITAS of $30 million as described above.
12. EXCHANGE OF INVESTMENTS IN EQUITY SECURITIES
During fiscal 2000, several marketable equity securities held by the
Company including Dragon Systems, CVC and iCompression were exchanged for other
investments in publicly traded companies. The Company's equity investment in
Dragon Systems was exchanged for a 2.5%
F-58
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EXCHANGE OF INVESTMENTS IN EQUITY SECURITIES (CONTINUED)
ownership in Lernout & Hauspie. The Company's equity investment in CVC was
exchanged for an approximate 6% ownership in Veeco Instruments and equity
investment in iCompression was exchanged for shares of Globespan Semiconductor.
These exchanges were accounted for under APB 29, Accounting for Nonmonetary
Transactions. As a result, the Company recognized a $231 million gain on the
exchange of shares in those companies for the shares in the new companies.
In November 2000, Lernout & Hauspie declared bankruptcy after a
substantial deterioration in its financial condition. As a result, the Company
wrote-off its entire investment in Lernout & Hauspie in November 2000,
amounting to $138 million.
13. COMMITMENTS
Leases -- The Company leases certain property, facilities and equipment
under non-cancelable lease agreements. Land and facility leases expire at
various dates through 2015 and contain various provisions for rental
adjustments including, in certain cases, a provision based on increases in the
Consumer Price Index. All of the leases require the Company to pay property
taxes, insurance and normal maintenance costs.
Future minimum lease payments for operating leases with initial or
remaining terms of one year or more were as follows at December 29, 2000:
OPERATING
LEASES
--------------
(IN MILLIONS)
2001 ......................... $ 18
2002 ......................... 34
2003 ......................... 31
2004 ......................... 25
2005 ......................... 19
2006 ......................... 15
After 2006 ................... 117
----
$259
====
Total rent expense for all land, facility and equipment operating leases
was approximately $3 million, $16 million and $22 million for the period from
November 23, 2000 to December 29, 2000, July 1, 2000 to November 22, 2000 and
for the six months ended December 31, 1999, respectively. Total rent expense
for all land, facility and equipment operating leases was approximately $44
million, $56 million, and $58 million for 2000, 1999 and 1998, respectively.
Capital Expenditures -- The Company's commitments for construction of
manufacturing facilities and equipment approximated $18 million at December 29,
2000.
Joint Venture -- In July 2000, the Company and Thomson Multimedia formed
an independent company called CacheVision. CacheVision brings together the
Company's product development activities and Thomson Multimedia's A/V
technologies expertise and marketing presence to develop cost-optimized,
time-to-market integrated systems to be incorporated into consumer electronic
products such as televisions, set-top boxes, personal video recorders, and DVD
players. The Company expects to sell rigid disc drive products to CacheVision
as an OEM customer. This information is unaudited.
F-59
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION
NEW SAC SEAGATE TECHNOLOGY
-------------- --------------------------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, JULY 1, SIX
2000 2000 MONTHS
TO TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999 2000 1999 1998
-------------- -------------- ------------- ------ --------- ----------
(IN MILLIONS)
Cash Transactions:
Cash paid for interest .......... $-- $ 26 $ 26 $ 52 $ 52 $52
Cash paid (received) for income
taxes, net of refunds ......... -- (63) 261 577 (109) (1)
Non-Cash Transactions:
Contribution of NSMG to
VERITAS ......................... $-- $ -- $ -- $ -- $1,806 $--
Acquisition of minority interest -- -- 19 19 52 --
Acquisition of XIOtech
Corporation ..................... -- -- -- 359 -- --
The components of depreciation and amortization expense are as follows:
NEW SAC SEAGATE TECHNOLOGY
-------------- ----------------------------------------------------------
PERIOD FROM PERIOD FROM SIX
NOVEMBER 23, JULY 1, MONTHS
2000 2000 ENDED
TO TO DECEMBER 31,
DECEMBER 29, NOVEMBER 22, 1999
2000 2000 (UNAUDITED) 2000 1999 1998
-------------- -------------- ------------- ------ ------ -------
(IN MILLIONS)
Depreciation ...................... $47 $242 $298 $597 $574 $549
Amortization:
Goodwill and intangibles ......... 7 30 19 52 51 56
Deferred compensation ............ 1 4 3 6 10 8
Other assets ..................... 14 (5) 31 38 61 51
--- ------ ---- ---- ---- ----
$69 $271 $351 $693 $696 $664
=== ===== ==== ==== ==== ====
15. LITIGATION
LEGAL PROCEEDINGS
SECURITIES CLASS ACTIONS
Following our announcement of the transactions, a number of our
stockholders filed lawsuits against us, the individual members of our board of
directors, some of our executive officers, VERITAS and Silver Lake. The
complaints filed in Delaware were consolidated into one action on April 18,
2000. On May 22, 2000, the Delaware Chancery Court certified the Delaware
action as a class action. The Delaware plaintiffs filed an amended complaint
and moved for a preliminary injunction on September 11, 2000. In California,
three complaints were filed in Santa Clara County Superior Court and two
complaints were filed in Santa Cruz County Superior Court. The complaints in
both jurisdictions all essentially allege that the members of our board of
directors breached their fiduciary duties to our shareholders by entering into
the transactions. The complaints also allege that the directors and executive
officers have conflicting financial interests and did not secure the highest
possible price for our shares. All the complaints were styled as class actions,
and sought to enjoin the transactions and secure damages from all defendants.
Between March 30 and October 27, 2000, one of the California complaints was
voluntarily dismissed and the others were coordinated in Santa
F-60
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. LITIGATION (CONTINUED)
Clara County. On October 13, 2000, a Memorandum of Understanding, or MOU, was
signed regarding settlement with all defendants on behalf of the shareholder
class. The shareholders approved the transactions on November 21, 2000 and the
transactions closed on November 22, 2000. After the transactions closed in
November 2000, the four remaining California actions were dismissed with
prejudice.
A final Stipulation of Settlement was executed in early January 2001. The
Delaware Chancery Court approved the settlement and entered an order of
judgement on April 12, 2001. If no appeal is filed within 30 days, the judgment
will be final. The primary elements of the Stipulation of Settlement are the
following:
o Suez Acquisition Company and the investor group agreed to increase the
cash purchase price under the stock purchase agreement by $50 million.
This amount:
- was funded by the investor group on the closing of the transactions
into an escrow account held by VERITAS, pending its distribution to our
shareholders, if specified conditions are satisfied as discussed below;
- will be paid to our shareholders as additional consideration if the
order of judgment by the Delaware Chancery Court is not appealed and
becomes final and the Delaware lawsuit and the California lawsuits are
dismissed with prejudice; and
- plus interest, will be returned to New SAC in the event that VERITAS
determines, in its reasonable judgment, that the conditions to the
release of the amount have become incapable of being satisfied.
o New SAC paid $15.25 million in attorneys' fees awarded to plaintiffs'
counsel by the Delaware Chancery Court into an escrow account. That amount
will be paid from escrow to plaintiffs' counsel when the judgment is
final.
o The merger agreement was amended to 1) reduce the maximum amount that
may be required to be held in escrow to cover our potential tax
liabilities from $300 million to $150 million, and 2) change some
provisions regarding VERITAS' payment of the consideration for the merger.
o The settlement is binding on all members of the shareholder class.
INTELLECTUAL PROPERTY LITIGATION
Papst Licensing, GmbH -- Papst has given us notice that it believes
various of our former Conner Peripherals, Inc. rigid disc drives infringe
several of its patents covering the use of spindle motors in rigid disc drives.
We believe that the accused former Conner disc drives do not infringe any valid
and/or enforceable claims of the Papst patents. We believe that subsequent to
the merger with Conner, our earlier paid-up license under Papst's patents
extinguished any ongoing liability. We also believe we enjoy the benefit of
licenses granted by Papst to motor vendors of Conner. After closing of the
transactions, Papst indicated that it could not consent to the assignment of
the 1993 Papst-Seagate license to the new entity until it receives further
information about the new business structure and that any of our drives would
be assumed to be unlicensed. We are providing Papst with additional information
regarding the new business structure.
Convolve, Inc. -- On July 13, 2000, Convolve, Inc., and Massachusetts
Institute of Technology filed a lawsuit, captioned Convolve, Inc. and
Massachusetts Institute of Technology v. Compaq Computer Corp. and Seagate
Technology, Inc. against Compaq Computer Corporation and Seagate Technology in
the U.S. District Court for the Southern District of New York. It alleged
patent infringement, misappropriation of trade secrets, breach of contract,
tortious interference with contract
F-61
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. LITIGATION (CONTINUED)
and fraud relating to Convolve's Input Shaping (Registered Trademark) and
Quick and QuietTM technology. The plaintiffs claim their technology is
incorporated in our sound barrier technology, which was publicly announced on
June 7, 2000. The complaint seeks injunctive relief, $800 million in
compensatory damages and punitive damages. We answered the complaint on August
2, 2000 and filed cross-claims for declaratory judgment that two Convolve/MIT
patents are invalid and not infringed and that we own any intellectual property
based on the information that we disclosed to Convolve. Plaintiffs' motion for
expedited discovery was denied by the court. The court ordered plaintiffs to
identify their trade secrets to defendants before discovery can begin. Convolve
served a trade secrets disclosure on August 4, 2000, and Seagate Technology has
challenged that disclosure as not containing any trade secrets. The court will
appoint a Special Master to review the trade secret issues, and the parties
have presented candidates to the court. We believe this matter is without merit
and intend to defend it vigorously.
Storage Computer Corporation -- On March 22, 2001, Storage Computer
Corporation filed suit in the U.S. District Court for the Northern District of
Texas, Civil Action No. 3-01CV0555-M, entitled Storage Computer Corporation v.
XIOtech Corporation and Seagate Technology, Inc. The complaint alleges that
XIOtech's MAGNITUDETM product infringes U.S. Patent No. 5,893,919 and that
Seagate Technology induces infringement of the patent by promoting and
marketing XIOtech's MAGNITUDETM product, particularly through a hyperlink on
Seagate Technology's internet website to XIOtech's internet website. The
plaintiff alleges willful infringement and seeks unspecified damages and an
injunction. We have engaged outside counsel to evaluate the claims in the suit.
LABOR LITIGATION
White -- On March 15, 2000 Royston White filed a breach of contract action
against Seagate Technology in Oklahoma State Court. The complaint is styled as
a class action, and White, as the sole named defendant, alleges that some 600
former employees have been damaged through breach of separation and release
agreements entered into in connection with a work force reduction. Discovery is
ongoing and a trial date has not yet been set. We have filed a summary judgment
motion, although the court has not set a hearing date yet. We believe we have
substantive defenses and will pursue such defenses vigorously.
OTHER MATTERS
We are involved in a number of other judicial and administrative
proceedings incidental to our business. Although occasional adverse decisions
or settlements may occur, we believe that the final disposition of such matters
will not have a material adverse effect on our financial position or results of
operations.
16. PURCHASE ACCOUNTING
On November 22, 2000, under the stock purchase agreement, New SAC
completed the purchase of all of the operating assets and assumption of
operating liabilities of Seagate Technology and its consolidated subsidiaries.
The net purchase price was $1.840 billion in cash, including transaction costs
of approximately $25 million. Immediately thereafter, in a separate and
independent transaction, Seagate Technology and VERITAS completed their merger
under the Merger Agreement. At the time of the merger, Seagate Technology's
assets included a specified amount of cash, an investment in VERITAS, and
certain specified investments and liabilities. In connection with the Merger
Agreement, Seagate Technology, VERITAS and New SAC entered into an
Indemnification
F-62
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PURCHASE ACCOUNTING (CONTINUED)
Agreement, pursuant to which these entities and certain other subsidiaries of
Seagate Technology, including RSS, agreed to certain indemnification provisions
regarding tax and other matters that may arise in connection with the stock
purchase agreement and Merger Agreement.
We accounted for the transactions as a purchase in accordance with
Accounting Principles Board, or APB, Opinion No. 16, "Business Combinations."
All acquired tangible assets, identifiable intangible assets as well as assumed
liabilities were valued based on their relative fair values and reorganized
into the following businesses: (1) the rigid disc drive business (HDD, which is
now Seagate Technology Holdings), which includes the storage area networks
business (SAN, which is now Seagate Technology SAN Holdings), (2) the removable
storage solutions business (RSS, which is now Seagate Removable Storage
Solutions Holdings), (3) the software business (Crystal Decisions), and (4) an
investment holding company (STIH). The fair value of the net assets exceeded
the net purchase price by approximately $909 million. Accordingly, the
resultant negative goodwill was allocated on a pro rata basis to the acquired
long-lived assets and reduced the recorded amounts by approximately 46%.
Seagate Technology recorded a loss on the sale of its operating assets of
$889 million related to this transaction on November 22, 2000.
The table below summarizes the allocation of net purchase price by
business. Amounts for HDD include SAN.
ESTIMATED FAIR VALUE
-------------------------------------------------------------------
(IN MILLIONS)
USEFUL TOTAL
LIFE NEW CRYSTAL
DESCRIPTION IN YEARS SAC HDD SAN RSS DECISIONS STIH
- ----------------------------------------- ---------- ---------- --------- -------- --------- ----------- -----
Net current assets (1) (4) .............. $ 939 $ 873 $ 27 $32 $ 9 $25
Long-term investments (2) ............... 42 -- -- -- -- 42
Other long-lived assets ................. 42 42 -- -- -- --
Property, plant & equipment (3) up to 30 778 764 2 9 5 --
Identified intangibles:
Trade names (5) ......................... 10 47 47 1 -- -- --
Developed technologies (5) .............. 3-7 76 50 5 11 15 --
Assembled workforces (5) ................ 1-3 53 43 1 3 7 --
Other ................................... 5 1 1 1 -- -- --
------ ------ ----- ---- --- ---
Total identified intangibles ......... 177 141 8 14 22 --
Long-term deferred taxes (4) ............ (75) (70) -- (3) (2) --
Long term liabilities ................... (122) (122) (10) -- -- --
------ ------ ----- ----- ----- ---
Net assets ........................... 1,781 1,628 27 52 34 67
In-process research &
development (4) ........................ 59 52 25 -- 7 --
------ ------ ----- ----- ----- ---
Net Purchase Price ................... $1,840 $1,680 $ 52 $52 $41 $67
====== ====== ===== ===== ===== ===
- ----------
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book values
of Seagate Technology. Short-term investments were valued based on quoted
market prices. Inventory values were estimated based on the current
market value of the inventories less completion costs and less a normal
profit margin based on activities remaining to be completed until the
inventory is sold. Valuation allowances were established for current
deferred tax assets in excess of long-term deferred tax liabilities.
F-63
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PURCHASE ACCOUNTING (CONTINUED)
Assumed current liabilities included accounts payable, accrued compensation
and expenses and accrued income taxes. The fair values of current
liabilities generally approximated the historic recorded book values of
Seagate Technology because of the monetary nature of most of the
liabilities.
Details of the net current assets are as follows (in millions):
Cash and cash equivalents $1,116
Accounts receivable, net 494
Inventories 766
Other current assets 202
Accounts payable (711)
Accrued employee compensation (180)
Accrued expenses (576)
Accrued income taxes (168)
------
Total tangible assets acquired $ 943
======
(2) The value of individual long-term equity investments was based upon
quoted market prices, where available, and when such market prices were
not available an independent appraisal was performed to estimate the fair
values of the individual investments.
(3) New SAC obtained an independent valuation of the acquired property, plant
and equipment. In arriving at the determination of market value for the
assets, the appraisers considered the estimated cost to construct or
acquire comparable property. Machinery and equipment was assessed using
replacement cost estimates reduced by depreciation factors representing
the condition, functionality and operability of the assets. The sales
comparison approach was used for office and data communication equipment.
Land, land improvements, buildings, and building and leasehold
improvements were valued based upon discussions with knowledgeable
personnel.
(4) Long-term deferred tax liabilities arose as a result of the excess of the
fair values of inventory, long-term investments, and acquired intangible
assets over their related tax basis. New SAC has $350 million of federal
and state deferred tax assets for which a full valuation allowance has
been established.
(5) New SAC obtained an independent valuation of acquired identified
intangibles. The significant assumptions relating to each category are
discussed in the following paragraphs. Also, these assets are being
amortized on the straight-line basis over their estimated useful life and
resultant amortization is included in amortization of goodwill and other
intangibles.
Trade names -- The value of the trade names was based upon discounting to
their net present value the licensing income that would arise by charging the
operating businesses that use the trade names.
Developed technologies -- The value of this asset for each operating
business was determined by discounting the expected future cash flows
attributable to all existing technologies which had reached technological
feasibility, after considering risks relating to: 1) the characteristics and
applications of the technology, 2) existing and future markets, as well as 3)
life cycles of the technologies. Estimates of future revenues and expenses used
to determine the value of developed technology was consistent with the
historical trends in the industry and expected outlooks.
Assembled workforces -- The value of the assembled work force was
determined by estimating the recruiting, hiring and training costs to replace
each group of existing employees.
F-64
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PURCHASE ACCOUNTING (CONTINUED)
In-process research & development (IPR&D) -- The value of IPR&D was based
on an evaluation of all developmental projects using the guidance set forth in
Interpretation No. 4 of Financial Accounting Standards Board Statement FAS No.
2, "Accounting for Research and Development Costs" and FAS No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed".
The amount was determined by: 1) obtaining management estimates of future
revenues and operating profits associated with existing developmental projects
2) projecting the cash flows and costs to complete of the underlying
technologies and resultant products, and 3) discounting these cash flows to
their net present value.
Estimates of future revenues and expenses used to determine the value of
IPR&D was consistent with the historical trends in the industry and expected
outlooks. The entire amount was charged to operations because related
technologies had not reach technological feasibility and they had no
alternative future use.
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
acquisition of substantially all of the operating assets of Seagate Technology
had occurred at the beginning of fiscal 1999. The pro forma statements of
operations for the six months ended December 29, 2000 and December 31, 1999 and
for the fiscal years ended June 30, 2000 and July 2, 1999 are adjusted to
reflect the new accounting basis for the assets and liabilities of New SAC, and
exclude acquisition related charges for recurring amortization of goodwill and
intangibles related to Seagate Technology's prior acquisitions, as well as
charges recorded by Seagate Technology to reflect the loss on sale to New SAC
and compensation expense related to option accelerations associated with the
transactions. The pro forma financial results are as follows:
SIX MONTHS ENDED FISCAL YEAR
------------------------------ -----------------------
DECEMBER 31,
DECEMBER 29, 1999 JUNE 30, JULY 2,
2000 (UNAUDITED) 2000 1999
-------------- ------------- ---------- ----------
(IN MILLIONS)
Revenue ................................... $3,466 $3,327 $ 6,448 $ 6,600
Income (loss) before income taxes ......... 262 (22) 176 464
Net income (loss) ......................... 210 (29) 176 (233)
17. EQUITY
CAPITAL STOCK
New SAC's authorized share capital is $22,000 and consists of 100 million
ordinary shares, par value $0.0001, of which 9,409,000 shares (including
1,843,000 unvested shares) were outstanding as of December 29, 2000, 20 million
non-voting ordinary shares, par value $0.0001, of which 1,591,000 were
outstanding as of December 29, 2000, and 100 million preferred shares, par
value $0.0001, of which 9,205,000 shares (including 48,500 unvested shares)
were outstanding as of December 29, 2000.
Ordinary Shares -- Holders of ordinary shares are entitled to receive
dividends and distributions when and as declared by New SAC's Board of
Directors, subject to the rights of holders of New SAC's preferred shares. Upon
any liquidation, dissolution, or winding up of New SAC, after required payments
are made to holders of preferred shares, any remaining assets of New SAC will
be
F-65
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. EQUITY (CONTINUED)
distributed ratably to holders of the ordinary shares. Holders of ordinary
shares are entitled to one vote per share on all matters presented to New SAC's
shareholders.
Non-Voting Ordinary Shares -- Holders of non-voting ordinary shares have
the same rights as holders of New SAC's ordinary shares except they have no
voting rights. Holders of non-voting ordinary shares can convert their shares,
on a share-for-share basis, into New SAC's ordinary shares. Specified entities,
however, cannot exercise this conversion option if, in the aggregate, they
would hold more than 9.6% of the shares in New SAC that are entitled to vote or
they would be subject to specified tax liabilities.
Preferred Shares -- New SAC's Board of Directors may issue one or more
series of preferred shares, at the time and for the consideration determined by
the Board of Directors. Holders of the outstanding preferred shares are
entitled to receive dividends and distributions when and as declared by New
SAC's Board of Directors and in preference to holders of New SAC's ordinary
shares in certain situations. Upon any liquidation, dissolution, or winding up
of New SAC, the holders of preferred shares shall receive, out of any
remaining, legally available assets of SAC, a liquidation preference of $100.00
per preferred share, less the aggregate amount of any distributions or
dividends already made per preferred share. To the extent there are not
sufficient remaining assets of New SAC to pay the liquidation preference,
holders of preferred shares shall share ratably in the distribution of New
SAC's remaining assets. Upon payment of the liquidation preference on each
preferred share, the preferred shares shall be redeemed in full and cancelled.
Holders of preferred shares have no voting rights.
NEW SAC 2000 AND 2001 RESTRICTED SHARE PLANS AND DEFERRED COMPENSATION PLANS
At the closing of the transactions, the Board of Directors of New SAC
adopted the New SAC 2000 Restricted Share Plan (2000 Restricted Share Plan).
The 2000 Restricted Share Plan allows for grants of ordinary and preferred
shares awards to key employees, directors, and consultants. The Company has
authorized 1,843,000 ordinary shares and 48,500 preferred shares to be granted
under the 2000 Restricted Share Plan.
Members of the management group entered into rollover agreements in
connection with the transactions. Under these agreements, members of the
management group agreed not to receive the merger consideration for a portion
of their Seagate Technology restricted common stock and options to purchase
shares of Seagate Technology common stock, valued at approximately $184
million. In exchange for the management rollover, the members of the management
group received the right to participate in a deferred compensation plan and
receive unvested ordinary and preferred shares of New SAC granted under the
2000 Restricted Share Plan. The unvested preferred and ordinary shares vest as
follows:
o one-third will vest on the first anniversary of the closing of the
transactions;
o one-third will vest proportionately each month over the next 18 months;
and
o the final one-third will vest on the date which is 30 months after the
closing of the transactions.
Of the total value of the management rollover, approximately $179 million
relates to the restricted award grants. With respect to the restricted ordinary
and preferred shares received in connection with the rollover agreements, New
SAC will recognize compensation expense of approximately $23 million, based on
the fair value of the ordinary and preferred shares at the date of issuance,
amortized over the 30 month vesting period using the graded vesting method.
In connection with the management rollover, members of the management
group also received interests in deferred compensation plans adopted at Seagate
Technology Holdings, Seagate SAN
F-66
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. EQUITY (CONTINUED)
Holdings, and Seagate Removable Storage Solutions Holdings, depending on which
subsidiary employed the individual. Under the terms of the deferred
compensation plans the employee vests in certain deferred compensation at the
same rate as vesting in the ordinary and preferred shares. However, such
vesting can be accelerated at any time at the election of the subsidiary.
Payments, if any, under the deferred compensation plan are contingent and will
be made only when distributions are made to preferred shareholders and only to
the extent of vesting. New SAC's ability to make distributions is subject to
limitations under the debt agreement. As a result, compensation expense for the
deferred cash compensation plan will be deferred until distributions are made
to preferred shareholders. Payment will be made in cash, securities or other
property at the discretion of the Company.
In February 2000, the Board of Directors approved the adoption of the New
SAC 2001 Restricted Share Plan (the 2001 Restricted Share Plan). Under the
terms of the 2001 Restricted Share Plan key employees, directors, and
consultants, may be awarded restricted ordinary shares. Such shares are subject
to vesting provisions to be defined at the date of grant and are subject to
repurchase by the Company. 500,000 ordinary shares are available for grant
under the plan. The Board of Directors also approved the grant of up to 440,830
restricted ordinary shares to various key employees and directors under this
plan.
SUBSIDIARY STOCK OPTION PLANS
In December 2000, the Board of Directors of Seagate Technology Holdings, a
subsidiary of New SAC, adopted the Seagate Technology Holdings Stock Option
Plan (the HDD Option Plan). Under the terms of the HDD Option Plan eligible
employees, directors, and consultants can be awarded options to purchase shares
of common stock of Seagate Technology Holdings under vesting terms to be
determined at the date of grant. Seventy-two (72) million common shares have
been reserved for issuance under the HDD Option Plan. The HDD Option Plan is
subject to approval by the senior subordinated noteholders. In February 2001,
the Board of Directors approved the issuance of up to approximately 17 million
options to purchase common stock of Seagate Technology Holdings.
In December 2000, the Board of Directors of Removable Storage Solutions
Holdings, a subsidiary of New SAC, adopted the Removable Storage Solutions
Holdings Stock Option Plan (the RSS Option Plan). Under the terms of the RSS
Option Plan eligible employees, directors, and consultants can be awarded
options to purchase shares of common stock of Removable Storage Solutions
Holdings under vesting terms to be determined at the date of grant. Seventy-two
(72) million common shares have been reserved for issuance under the RSS Option
Plan. In February 2001, the Board of Directors approved the issuance of up to
approximately 1 million options to purchase common stock of Removable Storage
Solutions Holdings.
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
New SAC is a holding company and has no independent operations or assets.
New SAC holds investments in four primary subsidiaries as follows:
o Seagate Technology Holdings, (which we refer to as "STH") is a
subsidiary and is comprised of the disc drive operating business and
storage area network operating business of the Company.
o Seagate Removable Storage Solutions Holdings, (which we refer to as
"RSS") is a subsidiary and is comprised of the tape drive operating
business of the Company.
F-67
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
o Crystal Decisions, Inc., formerly Seagate Software Information
Management Group Holdings, Inc., (which we refer to as "Crystal
Decisions") is a subsidiary comprised of the software operating business
of the Company.
o Seagate Technology Investment Holdings LLC, (which we refer to as
"STIH") is a subsidiary that manages certain strategic equity security
investments.
New SAC currently owns all of the currently outstanding shares of STH, RSS
and STIH, and over 99 percent of the outstanding shares of Crystal Decisions.
The senior subordinated notes mentioned in Note 3 are wholly and
unconditionally guaranteed on a joint and several basis by STH, RSS and Crystal
Decisions. The senior subordinated notes are not guaranteed by STIH. The
following tables present the condensed consolidating financial position of New
SAC and its Predecessor, Seagate Technology, at December 29, 2000, June 30,
2000, and July 1, 1999, and the condensed consolidating results of their
operations and their cash flows for the period from November 23, 2000 to
December 29, 2000, the period from July 1, 2000 to November 22, 2000, and the
six months ended December 31, 1999 (unaudited), and for each of the years in
the three year period ended June 30, 2000. The information is presented with
separate columns for each of the parent, the non-wholly owned guarantor
(Crystal Decisions), the wholly owned guarantor subsidiaries (RSS and STH), and
the wholly owned non-guarantor subsidiary (STIH). In addition, the historical
operating results of Seagate Technology include the operations of the
non-wholly owned NSMG business, prior to its contribution to VERITAS in June
1999. Subsequent to the contribution of NSMG to VERITAS, the investment in
VERITAS was accounted for on the equity method. Seagate Technology's investment
in VERITAS was not purchased by New SAC and all amounts relating to NSMG and
the investment in VERITAS are presented in a separate column.
The information classifies the historic businesses of the hard disc drive
operations, the removable storage solutions business, the software business,
and the strategic equity investments business, and their subsidiaries, based
upon the current classification of those subsidiaries and their successors
under the current provisions of the Senior Subordinated Notes. The condensed
consolidating financial information is included below for New SAC, and then
separately for each of Seagate Technology Holdings (STH) and its predecessor,
Seagate Removable Storage Solutions Holdings (RSS) and its predecessor and
Crystal Decisions, Inc (Crystal). Separate condensed consolidating financial
information for Seagate Technology SAN Holdings and its predecessors is not
provided because all of its subsidiaries have guaranteed the senior
subordinated debt on a joint and several, whole and unconditional basis. In
addition, Seagate Technology SAN Holdings is a subsidiary of, and is
consolidated with all financial information of Seagate Technology Holdings.
F-68
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 29, 2000
(IN MILLIONS)
NON-
WHOLLY
WHOLLY-OWNED OWNED WHOLLY OWNED
GUARANTORS GUARANTOR NON-GUARANTOR
----------------- CRYSTAL --------------
STH RSS DECISIONS STIH ELIMINATIONS NEW SAC
--------- ------- ---------- -------------- -------------- -----------
ASSETS
Cash and cash equivalents ............... $ 689 $ 11 $ 7 $25 $ -- $ 732
Intercompany loan receivable ............ 31 (31) --
Short-term investments .................. 118 118
Accounts receivable, net. ............... 851 21 21 893
Affiliate accounts receivable ........... 1 6 (7) --
Inventories ............................. 424 24 448
Deferred income taxes ................... 36 2 38
Other current assets .................... 207 6 3 216
------ ---- --- ------ -------
Total Current Assets ................... 2,326 62 65 30 (38) 2,445
------ ---- ---- --- ------ -------
Property, equipment, and leasehold
improvements, net ...................... 772 11 6 789
Goodwill and other intangibles, net ..... 133 14 22 169
Other assets ............................ 69 37 106
------ --- -------
Total Assets ........................... $3,300 $ 87 $ 93 $67 $(38) $ 3.509
====== ==== ==== === ====== =======
LIABILITIES
Accounts payable ........................ $ 739 $ 20 $ 10 $ $ $ 769
Affiliate accounts payable .............. 37 1 (38) --
Accrued employee compensation ........... 162 4 9 175
Accrued expenses ........................ 507 13 36 (3) 553
Accrued income taxes .................... 193 193
Current portion of long-term debt ....... 10 1 11
------ ---- -------
Total Current Liabilities .............. 1,648 38 55 (2) (38) 1,701
Deferred income taxes ................... 36 2 38
Other liabilities ....................... 117 1 118
Long-term debt, less current portion..... 893 893
------ -------
Total Liabilities ...................... 2,694 39 57 (2) (38) 2,750
------ ---- ---- ------ ------ -------
SHAREHOLDERS' EQUITY .................... 606 48 36 69 -- 759
------ ---- ---- ----- ------ -------
Total Liabilities and Shareholders'
Equity ............................... $3,300 $ 87 $ 93 $67 $(38) $ 3,509
====== ==== ==== ===== ====== =======
F-69
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN MILLIONS)
NON-
WHOLLY
WHOLLY-OWNED OWNED WHOLLY OWNED
GUARANTORS GUARANTOR NON-GUARANTOR
-------------------------- CRYSTAL --------------
STH RSS DECISIONS STIH NEW SAC
------------- ---------- ---------- -------------- -------------
Revenue .............................. $ 969 $ 28 $ 20 $ -- $ 1,017
Cost of revenue ...................... 862 29 5 896
Product development .................. 68 2 3 73
Marketing and administrative ......... 88 3 9 1 101
Amortization of goodwill and other
intangibles ......................... 5 5
Unusual items ........................ 52 7 59
------ ---- ---- -------
Total operating expenses ............ 1,075 34 24 1 1,134
------ ---- ---- ---- -------
(Loss) from operations .............. (106) (6) (4) (1) (117)
Interest income ...................... 3 3
Interest expense ..................... (10) (10)
Other, net ........................... (8) (8)
--------- ---------
Other (expense), net ................ (15) _ (15)
-------- ------ --------
(Loss) before income taxes. .......... (121) (6) (4) (1) (132)
-------- ------- ------- ------- --------
(Provision) for income taxes ......... (20) (1) (21)
-------- ------- --------
Net (loss) .......................... $ (141) $ (6) $ (5) $ (1) $ (153)
======== ====== ====== ====== ========
F-70
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN MILLIONS)
NON-WHOLLY
WHOLLY-OWNED OWNED WHOLLY OWNED
GUARANTORS GUARANTOR NON-GUARANTOR
--------------------------- CRYSTAL --------------
PARENT STH RSS DECISIONS STIH NEW SAC
-------- ----------- ------------- ------------- -------------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............... $ -- $ (88) $ (3) $ 3 $ (1) $ (89)
INVESTING ACTIVITIES
Acquisition of property, equipment
and leasehold improvements ......... -- (32) (1) (1) (34)
Purchases of short-term
investments ........................ -- (129) (129)
Maturities and sales of short-term
investments ........................ -- 130 130
Purchase of Seagate operating
assets ............................. (918) (918)
Other, net .......................... -- (2) (2)
------ -------- ------ ------ ----- --------
NET CASH (USED IN) INVESTING
ACTIVITIES ....................... (918) (33) (1) (1) -- (953)
FINANCING ACTIVITIES
Issuance of long-term debt, net of
issuance costs ..................... -- 860 860
Short-term borrowings ............... -- 66 66
Repayment of short-term
borrowings ......................... -- (66) (66)
Sale of ordinary and preferred
shares ............................. 914 914
Net change in investment by
New SAC ............................ 4 (51) 15 6 26 --
Other, net .......................... 1 (1) --
------- ------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ............. 918 810 15 5 26 1,774
Increase in cash and cash
equivalents ........................ -- 689 11 7 25 732
Cash and cash equivalents at the
beginning of the year .............. -- -- -- -- -- --
------ ------- ------ ------ ----- --------
Cash and cash equivalents at the
end of the year .................... $ -- $ 689 $ 11 $ 7 $ 25 $ 732
====== ======= ====== ====== ===== ========
F-71
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN MILLIONS)
WHOLLY-OWNED WHOLLY OWNED
GUARANTORS NON- NON-GUARANTOR
------------------------ WHOLLY --------------
OWNED
GUARANTOR
CRYSTAL NSMG
PARENT STH RSS DECISIONS STIH AND VERITAS NEW SAC
------------ ------------- ---------- ---------- -------------- ------------- -------------
Revenue ...................... $ -- $ 2,302 $ 90 $ 57 $ -- $ -- $ 2,449
Cost of revenue .............. -- 2,034 77 18 1 2,130
Product development .......... -- 408 23 11 442
Marketing and
administrative .............. -- 440 13 35 2 490
Amortization of goodwill
and other intangibles........ -- 20 6 26
Restructuring ................ -- 19 1 20
Unusual items ................ -- (2) 2 --
-------- --------- ---- ---------
Total operating
expenses .................. -- 2,919 113 67 2 7 3,108
-------- -------- ------ ---- ----- ----- ---------
Income (loss) from
operations ................ -- (617) (23) (10) (2) (7) (659)
Interest income .............. -- 58 58
Interest expense ............. -- (24) (24)
Gain on sale of Veeco
stock ....................... -- 20 20
Gain on sale of
SanDisk stock ............... -- 102 102
Loss on LHSP
investment .................. -- (138) (138)
Activity related to equity
interest in VERITAS ......... -- (99) (99)
Loss on sale of
operating assets to
New SAC ..................... (889) (889)
Other, net ................... -- (12) 1 1 (1) -- (11)
-------- -------- ------ ---- -------- ------- ---------
Other income
(expense), net ............ (889) 6 1 1 (1) (99) (981)
-------- -------- ------ ---- -------- ------- ---------
Income (loss) before
income taxes ................ (889) (611) (22) (9) (3) (106) (1,640)
Benefit (provision) for
income taxes ................ (182) 206 9 4 39 76
-------- -------- ------ ------ ------- ---------
Net income (loss) ........... $ (1,071) $ (405) $ (13) $ (5) $ (3) $ (67) $ (1,564)
======== ======== ====== ====== ======= ======= =========
F-72
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN MILLIONS)
NON-WHOLLY
OWNED
WHOLLY-OWNED GUARANTORS GUARANTOR
--------------------------- CRYSTAL
PARENT STH RSS DECISIONS NEW SAC
----------- ------------- ----------- ----------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .............. $ -- $ 128 $(26) $ 3 $ 105
INVESTING ACTIVITIES
Acquisition of property,
equipment and leasehold
improvements ...................... -- (265) (5) (2) (272)
Purchases of short-term
investments ....................... -- (1,612) (1,612)
Maturities and sales of
short-term investments. ........... -- 2,628 2,628
Purchase of Seagate operating
assets and assumed liabilities..... 918 918
Restricted cash .................... -- (150) (150)
Proceeds from sale of certain
investments ....................... -- 234 234
Merger with VERITAS ................ (2,144) (2,144)
Other, net ......................... -- (6) (6)
-------- ---------- ----------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES .......... (1,226) 829 (5) (2) (404)
FINANCING ACTIVITIES
Sale of common stock ............... 236 236
Repayment of long term debt ........ -- (812) (812)
Net change in investment by
New SAC and its predecessor 990 (1,014) 28 (4) --
Other, net ......................... -- 1 (1)
-------- --------- ------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .............. 1,226 (1,825) 28 (5) (576)
(Decrease) in cash and cash
equivalents ....................... -- (868) (3) (4) (875)
Cash and cash equivalents at
the beginning of the year ......... -- 868 3 4 875
-------- --------- ------ ----- ---------
Cash and cash equivalents at
the end of the year ............... $ -- $ -- $ -- $-- $ --
======== ========= ====== ===== =========
F-73
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN MILLIONS)
(UNAUDITED)
WHOLLY-OWNED WHOLLY OWNED
GUARANTORS NON- NON-GUARANTOR
------------------------- WHOLLY --------------
OWNED
GUARANTOR
CRYSTAL NSMG SEAGATE
STH RSS DECISIONS STIH AND VERITAS TECHNOLOGY
------------- ----------- ------------- -------------- ------------- -------------
Revenue .................................. $ 3,117 $ 152 $ 58 $ -- $ -- $ 3,327
Cost of revenue .......................... 2,534 108 23 2,665
Product development ...................... 328 18 13 359
Marketing and administrative ............. 187 12 42 2 243
Amortization of goodwill and other
intangibles ............................. 9 2 6 17
Restructuring ............................ 134 1 135
Unusual items ............................ 82 243 325
------- ------ ---- ----- -------
Total operating expenses ................ 3,274 138 324 2 6 3,744
Income (loss) from operations ........... (157) 14 (266) (2) (6) (417)
Interest income .......................... 42 42
Interest expense ......................... (26) (26)
Gain on sale of SanDisk stock ............ 62 62
Gain on sale of VERITAS stock ............ -- 537 537
Activity related to equity interest in
VERITAS ................................. -- (183) (183)
Other, net ............................... (1) (1) (2)
--------- --------- ---------
Other income (expense), net ............. 77 -- (1) -- 354 430
-------- ----- --------- ------ ------- --------
Income (loss) before income
taxes ................................... (80) 14 (267) (2) 348 13
Benefit (provision) for income
taxes ................................... 23 (5) 49 (137) (70)
-------- ------- -------- ------- --------
Net income (loss) ....................... $ (57) $ 9 $ (218) $ (2) $ 211 $ (57)
======== ====== ======== ====== ======= ========
F-74
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN MILLIONS)
(UNAUDITED)
WHOLLY-OWNED
GUARANTORS
---------------------------
PARENT STH RSS
--------- ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ....................................... $ -- $ 181 $ 14
INVESTING ACTIVITIES
Acquisition of property, equipment and
leasehold improvements ........................... -- (274) (4)
Purchases of short-term investments ............... -- (1,639)
Maturities and sales of short-term
investments ...................................... -- 1,803
Proceeds from sale of certain investments ......... -- 67
Other, net ........................................ -- (19)
------- -------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ........................... -- (62) (4)
FINANCING ACTIVITIES
Issuance of long-term debt, net of issuance
costs ............................................ -- 1
Sale of common stock .............................. 65
Purchase of treasury stock ........................ (776)
Other, net ........................................ -- (11) (7)
Net change in investment by New SAC and
its predecessor .................................. 711 (4)
------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ........................... -- (14) (7)
------- ---------- --------
Increase in cash and cash equivalents ............. -- 105 3
Cash and cash equivalents at the beginning
of the period .................................... -- 368 2
------- ---------- -------
Cash and cash equivalents at the end of the
period ........................................... $ -- $ 473 $ 5
======= ========== =======
WHOLLY OWNED
NON- NON-GUARANTOR
WHOLLY --------------
OWNED
GUARANTOR
CRYSTAL NSMG
DECISIONS STIH AND VERITAS NEW SAC
------------ -------------- ------------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ....................................... $(17) $ (2) $ (143) $ 33
INVESTING ACTIVITIES
Acquisition of property, equipment and
leasehold improvements ........................... (1) (279)
Purchases of short-term investments ............... (1,639)
Maturities and sales of short-term
investments ...................................... 1,803
Proceeds from sale of certain investments ......... 834 901
Other, net ........................................ (19)
------ ----- ------ ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ........................... (1) -- 834 767
FINANCING ACTIVITIES
Issuance of long-term debt, net of issuance
costs ............................................ 1
Sale of common stock .............................. 65
Purchase of treasury stock ........................ (776)
Other, net ........................................ 18 --
Net change in investment by New SAC and
its predecessor .................................. 2 (709) --
----- ------ ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ........................... 18 2 (709) (710)
------ ----- ------ ---------
Increase in cash and cash equivalents ............. -- -- (18) 90
Cash and cash equivalents at the beginning
of the period .................................... 8 -- 18 396
------ ----- ------ ---------
Cash and cash equivalents at the end of the
period ........................................... $ 8 $ -- $ -- $ 486
====== ===== ====== =========
F-75
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2000
(IN MILLIONS)
WHOLLY-OWNED WHOLLY OWNED
GUARANTORS NON- NON-GUARANTOR
---------------- WHOLLY --------------
OWNED
GUARANTOR
CRYSTAL NSMG SEAGATE
STH RSS DECISIONS STIH AND VERITAS ELIMINATIONS TECHNOLOGY
-------- ------- ---------- -------------- ------------- -------------- -----------
ASSETS
Cash and cash equivalents ............ $ 868 $ 3 $ 4 $ -- $ -- $ -- $ 875
Short-term investments ............... 1,140 1,140
Accounts receivable, net ............. 642 19 17 678
Affiliate accounts receivable ........ -- 26 10 (36) --
Inventories .......................... 413 17 430
Deferred income taxes ................ 211 8 219
Other current assets ................. 156 1 10 167
------ ---- ---- -------
Total Current Assets ................ 3,430 48 57 10 (36) 3,509
------ ---- ---- ------- ------ -------
Property, equipment, and
leasehold improvements, net ......... 1,585 14 9 1,608
Investments .......................... -- 1,122 1,122
Goodwill and other intangibles,
net ................................. 294 3 5 51 353
Other assets ......................... 509 66 575
------ ---- -------
Total Assets ........................ $5,818 $ 65 $ 71 $ 66 $ 1,183 $ (36) $ 7,167
====== ==== ==== ==== ======= ====== =======
LIABILITIES
Accounts payable ..................... $ 679 $ 18 $ 10 $ -- $ -- $ -- $ 707
Affiliate accounts payable ........... 36 (36) --
Accrued employee
compensation ........................ 182 7 6 195
Accrued expenses ..................... 325 7 33 365
Accrued warranty ..................... 124 5 129
Accrued income taxes. ................ 71 10 81
Current portion of long-term debt..... -- 1 1
------ ---- -------
Total Current Liabilities ........... 1,417 38 49 -- 10 (36) 1,478
------ ---- ---- ---- ------- ------ -------
Deferred income taxes ................ 640 380 1,020
Accrued warranty ..................... 109 109
Other liabilities .................... 7 3 10
Long-term debt, less current
portion ............................. 703 703
------ -------
Total Liabilities ................... 2,876 41 49 -- 390 (36) 3,320
------ ---- ---- ---- ------- ------ -------
Commitments and Contingencies
STOCKHOLDERS' EQUITY ................. 2,942 24 22 66 793 -- 3,847
------ ---- ---- ---- ------- ------ -------
Total Liabilities and
Stockholders' Equity ............... $5,818 $ 65 $ 71 $ 66 $ 1,183 $ (36) $ 7,167
====== ==== ==== ==== ======= ====== =======
F-76
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN MILLIONS)
WHOLLY-OWNED WHOLLY-OWNED
GUARANTORS NON-WHOLLY- NON-GUARANTOR
--------------------------- OWNED --------------
GUARANTOR
CRYSTAL NSMG SEAGATE
STH RSS DECISIONS STIH AND VERITAS TECHNOLOGY
------------- ----------- ------------ -------------- ------------- -----------
Revenue ......................... $ 6,058 $ 263 $ 127 $ -- $ -- $ 6,448
Cost of revenue ................. 4,820 192 44 5,056
Product development ............. 663 37 25 725
Marketing and administrative..... 409 19 87 515
Amortization of goodwill and
other intangibles. ............. 33 1 3 14 51
In-process research and
development .................... 105 105
Restructuring ................... 206 1 207
Unusual items ................... 107 243 350
------- ------- -------
Total operating expenses ....... 6,343 249 403 -- 14 7,009
Income (loss) from
operations ................... (285) 14 (276) (14) (561)
Interest income ................. 101 101
Interest expense ................ (52) (52)
Activity related to equity
interest in VERITAS ............ -- (326) (326)
Gain on sale of VERITAS
stock .......................... -- 537 537
Gain on sale of SanDisk
stock. ......................... 679 679
Gain on exchange of certain
investments in equity
securities ..................... 199 32 231
Other, net ...................... (1) 1 --
--------- ----- -------
Other income (expense),
net .......................... 926 1 -- 32 211 1,170
-------- ----- ------- ---- ------ -------
Income (loss) before income
taxes .......................... 641 15 (276) 32 197 609
Benefit (provision) for income
taxes .......................... (275) (4) 55 (75) (299)
-------- ------- ------- ------ -------
Net income (loss) .............. $ 366 $ 11 $ (221) $ 32 $ 122 $ 310
======== ====== ======= ==== ====== =======
F-77
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2000
(IN MILLIONS)
WHOLLY-OWNED
GUARANTORS NON-
------------------------- WHOLLY
OWNED
GUARANTOR
CRYSTAL NSMG SEAGATE
PARENT STH RSS DECISIONS AND VERITAS TECHNOLOGY
-------- ------------- --------- ---------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............ $ -- $ 226 $18 $(21) $ (150) $ 73
INVESTING ACTIVITIES
Acquisition of property,
equipment and leasehold
improvements .................... -- (565) (9) (6) (580)
Purchases of short-term
investments ..................... -- (3,352) (3,352)
Maturities and sales of
short-term investments .......... -- 3,429 3,429
Proceeds from sale of VERITAS
stock ........................... -- 834 834
Proceeds from sale of SanDisk
stock ........................... -- 680 680
Other, net ....................... -- (19) 1 (18)
------ ------- ----- -------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES ....... -- 173 (8) (6) 834 993
FINANCING ACTIVITIES
Sale of common stock ............. 191 191
Purchase of treasury stock ....... (776) (776)
Net change in investment by
Seagate Technology .............. 585 117 (702) --
Other, net ....................... -- (14) (9) 23 --
------ ------- ------ ------ -------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES ....... -- 103 (9) 23 (702) (585)
Effect of exchange rate changes
on cash and cash equivalents..... -- (2) (2)
------ ---------- ----------
Increase (decrease) in cash and
cash equivalents ................ -- 500 1 (4) (18) 479
Cash and cash equivalents at
the beginning of the year ....... -- 368 2 8 18 396
------ --------- ----- ------ ------ ---------
Cash and cash equivalents at
the end of the year ............. $ -- $ 868 $ 3 $ 4 $ -- $ 875
====== ========= ===== ====== ====== =========
F-78
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEETS
JULY 2, 1999
(IN MILLIONS)
WHOLLY-OWNED
GUARANTORS NON-
-------------------- WHOLLY
OWNED
GUARANTORS
CRYSTAL NSMG SEAGATE
STH RSS DECISIONS AND VERITAS ELIMINATIONS TECHNOLOGY
---------- ------- ----------- ------------- -------------- -----------
ASSETS
Cash and cash equivalents .......... $ 368 $ 2 $ 8 $ 18 $ -- $ 396
Short-term investments ............. 1,227 1,227
Accounts receivable, net ........... 794 36 42 872
Accounts receivable from
affiliates ........................ 12 5 (17) --
Inventories ........................ 439 11 1 451
Deferred income taxes .............. 240 12 252
Other current assets ............... 102 1 14 (3) 114
------- ---- ---- --------- ------
Total Current Assets .............. 3,182 62 65 20 (17) 3,312
------- ---- ---- -------- ------ ------
Property, equipment, and
leasehold improvements,
net ............................... 1,668 12 7 1,687
Investment in VERITAS
Software, net ..................... -- 1,745 1,745
Goodwill and other
intangibles, net .................. 88 4 8 44 144
Other assets ....................... 184 184
------- ------
Total Assets. ..................... $ 5,122 $ 78 $ 80 $1,809 $ (17) $7,072
======= ==== ==== ======== ====== ======
LIABILITIES
Accounts payable. .................. $ 667 $ 25 $ 12 $ 10 $ -- $ 714
Accounts payable with
affiliates ........................ -- 17 (17) --
Accrued employee
compensation ...................... 171 7 19 8 205
Accrued expenses ................... 373 13 28 414
Accrued warranty ................... 157 6 163
Accrued income taxes. .............. 43 43
Current portion of long-term
debt .............................. 1 -- 1
------- ---- ------
Total Current Liabilities ......... 1,412 51 76 18 (17) 1,540
------- ---- ---- -------- ------ ------
Deferred income taxes .............. 486 617 1,103
Accrued warranty ................... 123 3 126
Other liabilities .................. 36 1 37
Long-term debt, less current
portion ........................... 703 703
------- ------
Total Liabilities ................. 2,760 54 77 635 (17) 3,509
------- ---- ---- -------- ------ ------
STOCKHOLDERS' EQUITY 2,362 24 3 1,174 -- 3,563
------- ---- ---- -------- ------ ------
Total Liabilities and
Stockholders' Equity ............ $ 5,122 $ 78 $ 80 $ 1,809 $ (17) $7,072
======= ==== ==== ======== ====== ======
F-79
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 2, 1999
(IN MILLIONS)
WHOLLY-OWNED
GUARANTORS NON-
--------------------- WHOLLY
OWNED
GUARANTOR
CRYSTAL NSMG SEAGATE
STH RSS DECISIONS AND VERITAS TECHNOLOGY
---------- -------- ---------- ------------- -----------
Revenue ......................... $ 6,152 $ 314 $ 142 $ 194 $ 6,802
Cost of revenue ................. 4,902 225 49 5,176
Product development ............. 566 36 21 32 655
Marketing and administrative..... 317 23 79 115 534
Amortization of goodwill and
other intangibles. ............. 20 3 5 11 39
In-process research and
development .................... 2 2
Restructuring ................... 59 1 60
Unusual items ................... 75 87 (84) 78
------- ------ ------- -------
Total operating expenses........ 5,941 288 241 74 6,544
Income (loss) from
operations ................... 211 26 (99) 120 258
Interest income ................. 102 102
Interest expense ................ (48) (48)
Gain on contribution of
NSMG to VERITAS, net ........... -- 1,670 1,670
Activity related to equity
interest in VERITAS ............ -- (119) (119)
Other, net ...................... 10 10
------- -------
Other income (expense),
net .......................... 64 -- -- 1,551 1,615
Income (loss) before income
taxes .......................... 275 26 (99) 1,671 1,873
Benefit (provision) for income
taxes .......................... (61) (10) 3 (629) (697)
------- ----- ------ ------- -------
Net income (loss) .............. $ 214 $ 16 $ (96) $ 1,042 $ 1,176
======= ===== ====== ======= =======
F-80
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED JULY 2, 1999
(IN MILLIONS)
WHOLLY-OWNED
GUARANTORS NON-
--------------------------- WHOLLY
OWNED
GUARANTOR
CRYSTAL NSMG SEAGATE
PARENT STH RSS DECISIONS AND VERITAS TECHNOLOGY
--------- ------------- ----------- ---------- ------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............ $ -- $ 1,853 $ 39 $-- $ (692) $ 1,200
INVESTING ACTIVITIES
Acquisition of property,
equipment and leasehold
improvements .................... -- (591) (7) (5) (603)
Purchases of short-term
investments ..................... -- (6,596) (6,596)
Maturities and sales of
short-term investments .......... -- 6,519 6,519
Other, net ....................... -- (27) 1 (26)
------ ------- ------ -------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES ....... -- (695) (6) (5) -- (706)
FINANCING ACTIVITIES
Sale of common stock ............. 98 98
Purchase of treasury stock ....... (859) (859)
Net change in investment by
Seagate Technology .............. 761 (1,469) 708 --
Other, net ....................... -- 26 (29) 3 --
------ ------- ------ ----- ------ -------
NET CASH USED IN FINANCING
ACTIVITIES ..................... -- (1,443) (29) 3 708 (761)
Effect of exchange rate changes
on cash and cash equivalents..... -- (3) (3)
------ ---------- ----------
Increase (decrease) in cash and
cash equivalents ................ -- (288) 4 (2) 16 (270)
Cash and cash equivalents at
the beginning of the year ....... -- 656 (2) 10 2 666
------ --------- ------- ----- ------ ---------
Cash and cash equivalents at
the end of the year ............. $ -- $ 368 $ 2 $ 8 $ 18 $ 396
====== ========= ====== ===== ====== =========
F-81
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 3, 1998
(IN MILLIONS)
WHOLLY-OWNED
GUARANTORS NON-
------------------------ WHOLLY
OWNED
GUARANTOR
CRYSTAL NSMG SEAGATE
STH RSS DECISIONS AND VERITAS TECHNOLOGY
----------- ---------- ------------ ------------- -----------
Revenue ......................... $ 6,245 $286 $ 116 $172 $6,819
Cost of revenue ................. 5,523 229 36 5,788
Product development ............. 555 25 16 31 627
Marketing and administrative..... 308 27 66 101 502
Amortization of goodwill and
other intangibles .............. 21 2 3 14 40
In-process research and
development .................... 216 7 223
Restructuring ................... 347 347
Unusual items ................... (22) (22)
------- ------
Total operating expenses ....... 6,948 283 121 153 7,505
------- ---- ----- ---- ------
Income (loss) from
operations ................... (703) 3 (5) 19 (686)
Interest income ................. 98 98
Interest expense ................ (51) (51)
Other, net ...................... (66) 1 (65)
------- ---- ------
Other income (expense),
net .......................... (19) 1 -- -- (18)
------- ---- ------- ---- ------
Income (loss) before income
taxes .......................... (722) 4 (5) 19 (704)
Benefit (provision) for income
taxes .......................... 191 (2) (9) (6) 174
------- ------ -------- ------ ------
Net income (loss) .............. $ (531) $ 2 $ (14) $13 $ (530)
======= ===== ======= ===== ======
F-82
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED JULY 3, 1998
(IN MILLIONS)
WHOLLY-OWNED
GUARANTORS NON-
------------------------- WHOLLY
OWNED
GUARANTORS
CRYSTAL NSMG SEAGATE
PARENT STH RSS DECISIONS AND VERITAS TECHNOLOGY
--------- ----------- ----------- ----------- ------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES .............. $ -- $ 432 $ 25 $(3) $ 46 $ 500
INVESTING ACTIVITIES
Acquisition of property,
equipment and leasehold
improvements ...................... -- (693) (7) (5) (4) (709)
Purchases of short-term
investments ....................... -- (4,810) (4,810)
Maturities and sales of
short-term investments ............ -- 4,889 4,889
Acquisitions of businesses,
net of cash acquired .............. -- (194) (10) (204)
Other, net ......................... -- (12) 2 (2) (2) (14)
------ -------- ------ ------ ------- -------
NET CASH PROVIDED BY
(USED IN) INVESTING
ACTIVITIES ...................... -- (820) (5) (7) (16) (848)
FINANCING ACTIVITIES
Sale of common stock ............... 67 67
Purchase of treasury stock ......... (105) (105)
Other, net ......................... 38 (10) (22) 8 (15) (1)
------ -------- ------ ----- ------ ----------
Net cash used in financing
activities ...................... -- (10) (22) 8 (15) (39)
Effect of exchange rate
changes on cash and cash
equivalents ....................... -- 6 6
------ -------- ---------
Increase (decrease) in cash
and cash equivalents .............. -- (392) (2) (2) 15 (381)
Cash and cash equivalents
at the beginning of the
year. ............................. -- 1,034 1 11 1 1,047
------ -------- ------ ----- ------ ---------
Cash and cash equivalents
at the end of the year ............ $ -- $ 642 $ (1) $ 9 $ 16 $ 666
====== ======== ====== ===== ====== =========
F-83
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS
The following tables present guarantor and non-guarantor condensed
consolidating financial information for the subsidiaries of Seagate Technology
Holdings at December 29, 2000, June 30, 2000 and July 2, 1999, and the
condensed consolidating results of its operations and its cash flows for the
period from November 23, 2000 to December 29, 2000, the period from July 1,
2000 to November 22, 2000, and the six months ended December 31, 1999
(unaudited), and for each of the years ended July 3, 1998, July 2, 1999, and
June 30, 2000. The information classifies the historic subsidiaries of Seagate
Technology Hard Disc Drive Business, an Operating Business of Seagate
Technology, Inc., into parent, issuer, other guarantors, and other
non-guarantors based upon the current classification of those subsidiaries and
their successors under the provisions of the Senior Subordinated Debentures.
F-84
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 29, 2000
(IN MILLIONS)
GUARANTORS
----------------------------
WHOLLY-OWNED SUBSIDIARIES -
STH
---------------------------- WHOLLY SEAGATE
SUBSIDIARY OWNED TECHNOLOGY
ISSUER OTHER SAN NON-GUARANTORS ELIMINATION HOLDINGS
------------ --------- ----- ---------------- ------------ -----------
Cash and cash equivalents ................ $ 389 $ 253 $23 $ 24 $ -- $ 689
Short-term investments ................... 118 118
Accounts receivable, net ................. 8,289 929 16 5,749 (14,132) 851
Affiliate accounts receivable ............ (1) 1 1 1
Inventories .............................. 172 113 10 129 424
Deferred income taxes .................... -- 36 36
Other current assets ..................... 196 3 8 207
-------- ------ ----- ------
Total current assets .................... 9,163 1,335 49 5,911 (14,132) 2,326
-------- ------ --- ----- --------- ------
Property, equipment, and leasehold
improvements, net ....................... 345 291 5 131 772
Intercompany investments ................. 744 2,301 28 (3,073) --
Goodwill and other intangibles ........... -- 125 8 133
Other assets ............................. 48 3 18 69
-------- ------ ----- ------
Total Assets ............................. $10,300 $4,055 $62 $6,088 $ (17,205) $3,300
======== ====== === ====== ========= ======
Accounts payable ......................... $7,598 $1,376 $ 1 $5,896 $ (14,132) $ 739
Affiliate accounts payable ............... 1 37 (1) 37
Accrued employee compensation ............ 55 91 3 13 162
Accrued expenses ......................... 91 393 8 15 507
Accrued income taxes ..................... 41 150 2 193
Current portion of long-term debt ........ 9 1 10
-------- ------ ------
Total current liabilities ............... 7,795 2,048 12 5,925 (14,132) 1,648
Deferred income taxes .................... -- 36 36
Long-term debt, less current portion ..... 793 100 893
Other liabilities ........................ (24) 115 25 1 117
-------- ------ --- ------- ------
Total liabilities ....................... 8,564 2,299 37 5,926 (14,132) 2,694
-------- ------ --- ------- --------- ------
Shareholders' Equity ..................... 1,736 1,756 25 162 (3,073) 606
-------- ------ --- ------- --------- ------
Total Liabilities and Shareholders'
Equity .................................. $10,300 $4,055 $62 $6,088 $ (17,205) $3,300
======== ====== === ======= ========= ======
F-85
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN MILLIONS)
GUARANTORS
-------------------------------------- TOTAL
WHOLLY-OWNED SUBSIDIARIES - STH
-------------------------------------- WHOLLY SEAGATE
SUBSIDIARY OWNED TECHNOLOGY
ISSUER OTHER SAN NON-GUARANTOR ELIMINATIONS HOLDINGS
------------ ------------ -------- --------------- ------------- -----------
Revenue $1,186 $ 429 $ 11 $689 $ (1,346) $ 969
Cost of Sales 1,014 555 6 633 (1,346) 862
Product development 3 64 1 68
Marketing and administrative 5 72 7 4 88
Amortization of goodwill and other
intangibles 5 5
Restructuring 3 (4) -- 1 --
Unusual items 27 25 52
------- ----- -----
Total Operating Expenses 1,025 719 39 638 (1,346) 1,075
------ ------- ----- ---- -------- -----
Income (Loss) from Operations 161 (290) (28) 51 (106)
Interest Income -- 3 3
Interest Expense (6) (4) (10)
Other, net (1) (6) (1) (8)
-------- -------- ------ --------
Other Income (Expense), net (7) (7) -- (1) -- (15)
-------- -------- ----- ------ -------- -------
Income (loss) before income taxes 154 (297) (28) 50 -- (121)
Benefit (provision) for income taxes (1) (20) 1 -- (20)
-------- ------- ----- ----- -------
Net Income (Loss) $ 153 $(317) $ (27) $50 $ -- $(141)
======= ======= ===== ===== ======== =======
F-86
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN MILLIONS)
GUARANTORS
----------------------------------------
WHOLLY-OWNED SUBSIDIARIES - STH
---------------------------------------- WHOLLY SEAGATE
SUBSIDIARY OWNED TECHNOLOGY
ISSUER OTHER SAN NON-GUARANTOR ELIMINATION HOLDINGS
------------ ------------- --------- --------------- ------------ -----------
Net cash provided by (used in)
operating activities ............... $ (824) $ 446 $ 6 $284 $ -- $ (88)
INVESTING ACTIVITIES:
Acquisition of property, equipment
and leasehold improvements ......... (17) (7) (8) (32)
Purchases of short-term
investments ........................ (129) (129)
Maturities and sales of short-term
investments ........................ 130 130
Other, net .......................... 3 (3) (2) (2)
------ ---------- ------- --------
Net cash (used in) investing
activities ......................... (13) (3) (7) (10) -- (33)
FINANCING ACTIVITIES:
Issuance of long-term debt .......... 772 88 860
Short term borrowings ............... -- 66 66
Repayment of short term
borrowings ......................... -- (66) (66)
Net charge in investment by New
SAC and its predecessor ............ 847 (1,151) 72 236 (55) (51)
Other, net .......................... -- 1 1
------ --------- -------
Net cash provided by (used in)
financing activities ............... 1,619 (1,062) 72 236 (55) 810
Increase (decrease) in cash and
cash equivalents ................... 782 (619) 71 510 (55) 689
Cash and cash equivalents at the
beginning of the period ............ -- -- -- -- -- --
------ --------- ----- ------ ----- -------
Cash and cash equivalents at the
end of the period .................. $ 782 $ (619) $71 $510 $ (55) $ 689
====== ========= ===== ====== ===== =======
F-87
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN MILLIONS)
GUARANTORS
------------------------------------
WHOLLY-OWNED SUBSIDIARIES - STH
------------------------------------ WHOLLY SEAGATE TECHNOLOGY
SUBSIDIARY OWNED CONSOLIDATION HOLDINGS AND ITS
ISSUER OTHER SAN NON-GUARANTOR ELIMINATION PREDECESSOR
------------ -------------- -------- --------------- --------------- -------------------
REVENUE ............................... $3,532 $ 1,412 $ 21 $1,439 $ (4,102) $2,302
Cost of Goods Sold .................... 3,386 1,318 9 1,423 (4,102) 2,034
Product development ................... 12 405 3 (12) 408
Marketing and administrative .......... 18 379 28 15 440
Amortization of Goodwill .............. 2 4 14 20
Restructuring Costs ................... 11 (1) 9 19
Unusual Items ......................... -- (2) (2)
------ ---------- --------
OPERATING EXPENSES .................... 3,429 2,103 54 1,435 (4,102) 2,919
------ --------- ----- ------ -------- -------
INCOME (LOSS) FROM OPERATIONS ......... 103 (691) (33) 4 -- (617)
Interest (Income) ..................... 43 14 1 58
Interest Expense ...................... (24) (24)
Gain on sale of Veeco ................. 20 20
Gain on sale of SanDisk stock ......... 102 102
Loss on LHSP investment ............... (138) (138)
Other, net ............................ (43) (2,278) 4 2,305 (12)
------ --------- ------ -------- -------
OTHER (INCOME) EXPENSE ................ -- (2,304) -- 5 2,305 6
-- --
INCOME (LOSS) BEFORE TAXES ............ 103 (2,995) (33) 9 2,305 (611)
Benefit (provision) for taxes ......... (35) 295 9 (63) 206
------ --------- ----- ------ -------
NET INCOME ............................ $ 68 $(2,700) $ (24) $ (54) $ 2,305 $(405)
====== ========= ===== ====== ======== =======
See notes to consolidated condensed financial statements.
F-88
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN MILLIONS)
GUARANTORS
------------------------------------
WHOLLY-OWNED SUBSIDIARIES - STH
------------------------------------
SUBSIDIARY
ISSUER OTHER SAN
------------ ------------ ----------
Net cash provided by (used in) operating
activities ................................ $ (2,981) $ (1,480) $(5)
INVESTING ACTIVITIES:
Acquisition of property, equipment and
leasehold improvements .................... (69) (152) (2)
Purchases of short-term investments ........ (1,457) (155)
Maturities and sales of short-term
investments ............................... 2,442 186
Restricted cash (TRA) ...................... -- (150)
Proceeds from sale of certain
investments ............................... -- 234
Other, net ................................. 1 5
-------- --------
Net Cash Provided by (Used in) Investing
Activities ................................ 917 (32) (2)
-------- -------- ------
FINANCING ACTIVITIES:
Repayment of long-term debt ................ -- (812)
Net change in investment by New SAC
and its predecessor ....................... 1,398 2,136
Other, net ................................. -- 1
-------- --------
Net cash provided by (used in) Financing
Activities ................................ 1,398 1,325 --
-------- -------- -----
Increase (decrease) in cash and
cash equivalents .......................... (666) (187) (7)
Cash and cash equivalents at the
Beginning of the period ................... 666 187 7
-------- -------- -----
Cash and cash equivalents at the end of
the period ................................ $ -- $ -- $ --
-------- -------- -----
WHOLLY SEAGATE TECHNOLOGY
OWNED HOLDINGS AND ITS
NON-GUARANTOR ELIMINATION PREDECESSOR
--------------- ------------ -------------------
Net cash provided by (used in) operating
activities ................................ $ 2 $ 4,592 $ 128
-
INVESTING ACTIVITIES: -
Acquisition of property, equipment and
leasehold improvements .................... (42) (265)
Purchases of short-term investments ........ (1,612)
Maturities and sales of short-term
investments ............................... 2,628
Restricted cash (TRA) ...................... (150)
Proceeds from sale of certain
investments ............................... 234
Other, net ................................. (12) (6)
----- -----------
Net Cash Provided by (Used in) Investing
Activities ................................ (54) -- 829
----- --------- ----------
FINANCING ACTIVITIES:
Repayment of long-term debt ................ (812)
Net change in investment by New SAC
and its predecessor ....................... 44 (4,592) (1,014)
Other, net ................................. 1
----------
Net cash provided by (used in) Financing
Activities ................................ 44 (4,592) (1,825)
----- --------- ----------
Increase (decrease) in cash and
cash equivalents .......................... (8) (868)
Cash and cash equivalents at the
Beginning of the period ................... 8 -- 868
------- --------- ----------
Cash and cash equivalents at the end of
the period ................................ $ -- $ -- $ --
------- --------- ----------
F-89
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN MILLIONS)
GUARANTORS
---------------------------
WHOLLY OWNED SUBSIDIARY -
STH
--------------------------- WHOLLY SEAGATE TECHNOLOGY
SUBSIDIARY OWNED HOLDINGS AND
ISSUER OTHER NON-GUARANTOR ELIMINATIONS ITS PREDECESSOR
------------ ------------ --------------- ------------- -------------------
Revenue .................................. $4,546 $2,095 $1,990 $ (5,514) $3,117
Cost of revenue .......................... 4,450 1,641 1,957 (5,514) 2,534
Product development ...................... 13 315 328
Marketing and administrative ............. 17 157 13 187
Amortization of goodwill and other
intangibles ............................. 2 7 9
Restructuring ............................ 77 46 11 134
Unusual items ............................ -- 82 82
------ ------ ------
Total operating expenses ................ 4,559 2,248 1,981 (5,514) 3,274
Income (Loss) from operations ........... (13) (153) 9 -- (157)
Interest income .......................... 38 7 (3) 42
Interest expense ......................... (2) (27) 3 (26)
Gain on sale of SanDisk stock ............ 62 62
Other, net ............................... 4 (4) (1) (1)
------- -------- -------- --------
Other income (expense), net ............. 40 38 (1) 77
------- ------- -------- -------
Income (loss) before income taxes ........ 27 (115) 8 -- (80)
Benefit (provision) for income taxes ..... -- 19 4 23
------- ------- ------- -------
Net income (loss) ....................... $ 27 $ (96) $ 12 $ -- $ (57)
======= ======= ======= ========= =======
F-90
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN MILLIONS)
(UNAUDITED)
GUARANTOR
---------------------
WHOLLY OWNED
SUBSIDIARY - STH
---------------------
SEAGATE TECHNOLOGY
SUBSIDIARY HOLDINGS AND
ISSUER OTHER NON-GUARANTORS ELIMINATIONS ITS PREDECESSOR
----------- --------- ---------------- ------------- -------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ........... $ 132 $ (74) $ 52 $ 71 $ 181
INVESTING ACTIVITIES:
Acquisition of property,
equipment and leasehold
improvements ................... (80) (151) (43) (274)
Purchases of short-term
investments .................... (1,602) (37) (1,639)
Maturities and sales of
short-term investments ......... 1,647 155 1 1,803
Proceeds from sale of SanDisk
stock .......................... 67 67
Other, net ...................... 1 (20) (19)
-------- ------ -------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES ...... (34) 14 (42) (62)
FINANCING ACTIVITIES:
Issuance of long-term debt ...... 1 1
Net change in investment by
New SAC and its predecessor..... 138 (65) (8) (69) (4)
Other, net ...................... (12) 1 (11)
------ ----- ---------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES ...... 138 (76) (8) (68) (14)
Increase (decrease) in cash and
cash equivalents ............... 236 (136) 2 3 105
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF THE PERIOD..... 186 158 24 368
-------- ------ ------ ---------
CASH AND CASH EQUIVALENTS
AT THE END OF THE PERIOD ...... $ 422 $ 22 $ 26 $ 3 $ 473
======== ====== ====== ===== =========
F-91
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING BALANCE SHEET AT JUNE 30, 2000
(IN MILLIONS)
GUARANTORS
---------------------------------
WHOLLY-OWNED SUBSIDIARIES - STH
--------------------------------- SEAGATE TECHNOLOGY
SUBSIDIARY OTHER HOLDINGS AND
ISSUER OTHER SAN NON-GUARANTORS ELIMINATIONS ITS PREDECESSOR
------------ ------------ ------- ---------------- --------------- -------------------
ASSETS
Cash and cash equivalents .......... $ 665 $ 187 $ 7 $ 9 $ -- $ 868
Short term-investments ............. 1,109 31 1,140
Accounts receivable, net ........... 144 246 6 246 642
Inter company accounts
receivable ........................ 6,034 617 4,728 (11,379) --
Affiliate accounts receivable ...... 28 (99) 71 --
Inventories ........................ 165 127 5 116 413
Deferred income taxes .............. 5 208 6 (8) 211
Other current assets ............... 111 37 8 156
------ ------ ------- ------
Current assets ..................... 8,261 1,354 24 5,170 (11,379) 3,430
Property, plant and equipment,
net ............................... 712 600 3 270 1,585
Investments ........................ 699 1,562 (2,261) --
Goodwill and other intangibles ..... 18 44 234 (2) 294
Other non current assets ........... 34 445 30 509
------ ------ ------- ------
TOTAL ASSETS ....................... $9,724 $4,005 $261 $5,468 $(13,640) $5,818
====== ====== ==== ======= ======== ======
LIABILITIES
Accounts payable ................... $ 429 $ 163 $ 1 $ 86 $ -- $ 679
Inter company accounts payable...... 5,819 779 4,778 (11,376) --
Affiliate accounts payable ......... 1 54 (19) 36
Accrued employee
compensation ...................... 34 125 8 15 182
Accrued warranty ................... -- 124 124
Accrued expenses ................... 71 226 3 25 325
Accrued income taxes ............... 1 71 (1) 71
Current portion long-term debt ..... -- (4) 4
------ -------- -------
Current liabilities ................ 6,355 1,538 12 4,888 (11,376) 1,417
Deferred income taxes .............. -- 626 14 640
Inter company accounts payable...... -- -- 2 (2) --
Long term debt, less current
portion ........................... 1 702 703
Accrued warranty ................... 109 109
Other non current liabilities ...... 1 7 (1) 7
------ ------- -------- ------
TOTAL LIABILITIES .................. 6,357 2,982 28 4,887 (11,378) 2,876
Business Equity .................... 3,367 1,023 233 581 (2,262) 2,942
------ ------- ---- ------- ---------- ------
Total Liabilities and Business
Equity ............................ $9,724 $4,005 $261 $5,468 $(13,640) $5,818
====== ======= ==== ======= ========== ======
F-92
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN MILLIONS)
GUARANTORS
----------------------------------- SEAGATE
WHOLLY OWNED SUBSIDIARY-STH
----------------------------------- TECHNOLOGY
SUBSIDIARY OTHER HOLDINGS AND ITS
ISSUER OTHER SAN NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ------------ --------- ---------------- ------------- -----------------
Revenue .................................. $6,360 $3,362 13 $3,472 $ (7,149) $6,058
Cost of revenue .......................... 6,285 2,502 9 3,173 (7,149) 4,820
Cost of revenue from affiliates .......... 8 12 (20)
Product development ...................... 18 478 2 165 663
Marketing and administrative ............. 34 294 15 66 409
Amortization of goodwill and other
intangibles ............................. 4 12 17 33
In-process research and development ...... 105 105
Restructuring ............................ 113 80 13 206
Unusual items ............................ 64 43 107
------ ------ ------
Total operating expenses ................ 6,462 3,442 148 3,440 (7,149) 6,343
Income (loss) from operations ........... (102) (80) (135) 32 (285)
Interest income .......................... 59 42 101
Interest expense ......................... 2 (54) (52)
Gain on sale of SanDisk stock ............ 679 679
Gain on exchange of certain
investments in equity securities ........ 199 199
Other, net ............................... 2 (3) (1)
------ -------- --------
Other income (expense), net ............. 63 863 -- 926
------ ------- ---- -------
Income (loss) before income taxes ........ (39) 783 (135) 32 641
Benefit (provision) for income taxes ..... (2) (261) 7 (19) -- (275)
-------- ------- ---- ------ -------- -------
Net income (loss) ....................... $ (41) $ 522 $ (128) $ 13 $ -- $ 366
======= ======= ====== ====== ======== =======
F-93
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR YEAR ENDED JUNE 30, 2000
GUARANTORS
----------------------------------------
WHOLLY-OWNED SUBSIDIARIES - STH
----------------------------------------
Subsidiary
Issuer Other SAN
----- ------ ---
Net cash provided by (used in)
operating activities .................... $ 545 $ (401) $(2)
INVESTING ACTIVITIES
Acquisition of property, equipment and
leasehold improvements .................. (186) (294) (2)
Purchases of short-term investments ...... (3,069) (283)
Maturities and sales of short-term
investments ............................. 3,054 375
Proceeds from sale of SanDisk stock ...... -- 681
Intercompany investments ................. (40) (1,408)
Other, net ............................... 6 (16) (2)
---------- ------- -------
Net cash provided by (used in)
investing activities ................... (235) (945) (4)
---------- ------- -------
FINANCING ACTIVITIES
Net change in investment by Seagate
Technology, Inc. ........................ -- 117
Other, net ............................... -- (6) 2
---------- ---------- ------
Net cash provided by (used In)
financing activities ................... -- 111 2
---------- --------- ------
Effect of exchange rate changes in
cash and cash equivalents ............... (2) -- --
Increase (decrease) in cash and cash
equivalents ............................. 308 (1,235) (4)
Cash and cash equivalents at the
beginning of the year ................... 185 158 --
------------ --------- ------
Cash and cash equivalents at the
end of the year ........................ $ 493 $(1,077) $(4)
============ ========= ======
SEAGATE
TECHNOLOGY
OTHER HOLDINGS AND ITS
NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------------- ----------------- ---------------------
Net cash provided by (used in)
operating activities .................... $ 84 $ -- $ 226
INVESTING ACTIVITIES
Acquisition of property, equipment and
leasehold improvements .................. (83) (565)
Purchases of short-term investments ...... (3,352)
Maturities and sales of short-term
investments ............................. 3,429
Proceeds from sale of SanDisk stock ...... (1) 680
Intercompany investments ................. 51 1,397 --
Other, net ............................... (9) 2 (19)
--------------- ------------ --------
Net cash provided by (used in)
investing activities ................... (41) 1,398 173
-------------- ------------ --------
FINANCING ACTIVITIES
Net change in investment by Seagate
Technology, Inc. ........................ 117
Other, net ............................... (5) (5) (14)
--------------- ------------- --------
Net cash provided by (used In)
financing activities ................... (5) (5) 103
--------------- ------------- --------
Effect of exchange rate changes in
cash and cash equivalents ............... -- -- (2)
Increase (decrease) in cash and cash
equivalents ............................. 38 1,393 500
Cash and cash equivalents at the
beginning of the year ................... 25 -- 368
-------------- ------------ --------
Cash and cash equivalents at the
end of the year ........................ $ 63 $ 1,393 $ 868
============== ============ ========
F-94
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING BALANCE SHEET JULY 2, 1999
(IN MILLIONS)
SEAGATE
GUARANTORS TECHNOLOGY
------------------------ HOLDINGS
SUBSIDIARY OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
----------- ---------- --------------- ------------- ------------
ASSETS
Cash and cash equivalents .................. $ 185 $ 158 $ 25 $ -- $ 368
Short-term investments ..................... 1,103 123 1 1,227
Accounts receivable, net ................... 5,236 734 2,812 (7,988) 794
Affiliate accounts receivable .............. 71 (230) 171 12
Inventories ................................ 162 188 89 439
Deferred income taxes ...................... 3 249 (12) 240
Other current assets ....................... 22 76 4 102
------ ------ ------ ------
Total Current Assets ...................... 6,782 1,298 3,090 (7,988) 3,182
------ ------ ------ -------- ------
Property, equipment, and leasehold
improvements, net ......................... 846 543 279 1,668
Investments ................................ 659 893 37 (1,589) --
Goodwill and other intangibles, net ........ 23 65 88
Other assets ............................... 50 112 22 184
------ ------ ------ ------
Total Assets .............................. $8,360 $2,911 $3,428 $ (9,577) $5,122
====== ====== ====== ======== ======
LIABILITIES
Accounts payable ........................... $5,210 $1,114 $2,331 $ (7,988) $ 667
Accrued employee compensation .............. 40 127 4 171
Accrued expenses ........................... 59 268 46 373
Accrued warranty ........................... -- 157 157
Accrued income taxes ....................... 1 44 (2) 43
Current portion of long-term debt .......... -- 1 1
------ ------- ------
Total Current Liabilities ................. 5,310 1,710 2,380 (7,988) 1,412
------ ------ ------- -------- ------
Deferred income taxes ...................... -- 488 (2) 486
Accrued warranty ........................... -- 123 123
Other liabilities .......................... 1 10 25 36
Long-term debt, less current portion ....... 1 702 703
------ ------ ------
Total Liabilities ......................... 5,312 3,033 2,403 (7,988) 2,760
------ ------ ------- -------- ------
Business Equity ............................ 3,048 (122) 1,025 (1,589) 2,362
------ ------ ------- -------- ------
Total Liabilities and Business Equity ..... $8,360 $2,911 $3,428 $ (9,577) $5,122
====== ====== ======= ======== ======
F-95
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 2, 1999
(IN MILLIONS)
SEAGATE
GUARANTORS TECHNOLOGY
--------------------------- HOLDINGS
SUBSIDIARY OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ------------ ---------------- ------------- ------------
Revenue ................................. $6,450 $4,021 $3,727 $ (8,046) $6,152
Cost of revenue ......................... 6,200 3,156 3,592 (8,046) 4,902
------ ------ ------ -------- ------
Product development ..................... 17 549 566
Marketing and administrative ............ 33 248 36 317
Amortization of goodwill and other
intangibles ............................ 3 15 2 20
In-process research and development ..... 2 2
Restructuring ........................... 36 11 12 59
Unusual items ........................... 75 75
------ ------
Total operating expenses ............... 6,289 4,056 3,642 (8,046) 5,941
Income (loss) from operations .......... 161 (35) 85 -- 211
Interest income ......................... 65 31 6 102
Interest expense ........................ (48) (48)
Other, net .............................. (1) 11 10
-------- ------ ------
Other Income (expense), net ............ 64 (6) 6 -- 64
------- -------- ------ -------- ------
Income (loss) before income taxes ....... 225 (41) 91 -- 275
(Provision) for income taxes ............ (53) (8) (61)
------- -------- ------
Net income (loss) ...................... $ 225 $ (94) $ 83 $ -- $ 214
======= ======= ======= ======== ======
F-96
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR YEAR ENDED JULY 2, 1999
SEAGATE
GUARANTORS TECHNOLOGY
---------------------------- HOLDINGS
SUBSIDIARY OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ------------- ---------------- ------------- ------------
Net cash provided by (used in)
operating activities ....................... $ 2 $ 364 $ 838 $ 649 $ 1,853
INVESTING ACTIVITIES
Acquisition of property, equipment and
leasehold improvements ..................... (303) (83) (205) (591)
Purchases of short-term investments ......... (4,793) (1,803) (6,596)
Maturities and sales of short-term
investments ................................ 4,747 1,772 6,519
Intercompany investments .................... 630 (18) (575) (37) --
Other, net .................................. (3) 1 (25) -- (27)
---------- ------- ------- ------ -------
Net cash provided by (used in)
investing activities ...................... 278 (100) (836) (37) (695)
--------- ------- ------- ------ -------
FINANCING ACTIVITIES
Net change in investment by Seagate
Technology, Inc. ........................... (553) (1,748) 1,478 (646) (1,469)
Other, net .................................. (5) (3) 34 26
---------- ---------- ------ -------
Net cash provided by (used In)
financing activities ...................... (558) (1,748) 1,475 (612) (1,443)
--------- ------- --------- ------ -------
Effect of exchange rate changes on
cash and cash equivalents .................. (2) (1) (3)
Increase (decrease) In cash and cash
equivalents ................................ (280) (1,485) 1,477 -- (288)
Cash and cash equivalents at the
beginning of the year ...................... 466 43 147 -- 656
--------- --------- --------- ------ ---------
Cash and cash equivalents at the
end of the year ........................... $ 186 $(1,442) $ 1,624 $ -- $ 368
========= ========= ========= ====== =========
F-97
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 3, 1998
(IN MILLIONS)
SEAGATE
GUARANTORS TECHNOLOGY
------------------------ HOLDINGS
SUBSIDIARY OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ --------- ---------------- ------------- ------------
Revenue .................................. $6,314 $4,612 $4,031 $ (8,729) $6,228
Revenue from affiliates .................. 2 15 17
------ ------ ------
Total revenue ........................... 6,316 4,627 4,031 (8,729) 6,245
Cost of revenue .......................... 6,249 4,082 3,900 (8,729) 5,502
Cost of revenue from affiliates .......... 12 9 21
------ ------ ------
6,249 4,094 3,909 (8,729) 5,523
Product development ...................... 25 487 43 555
Marketing and administrative ............. 55 212 41 308
Amortization of goodwill and other
intangibles ............................. 5 14 2 21
In-process research and development ...... 216 216
Restructuring ............................ 64 259 24 347
Unusual items ............................ (16) 210 (216) (22)
------ ------ ------ ------
Total operating expenses ................ 6,382 5,276 4,019 (8,729) 6,948
------ ------ ------ -------- ------
Income (loss) from operations ........... (66) (649) 12 -- (703)
Interest income .......................... (40) 50 88 98
Interest expense ......................... 12 (49) (14) (51)
Other, net ............................... (98) (65) 97 (66)
------ ------ ------ ------
Other income (expense), net ............. (126) (64) 171 -- (19)
------ ------ ------ -------- ------
Income (loss) before income taxes ........ (192) (713) 183 -- (722)
Benefit (provision) for income taxes ..... 193 (2) 191
------ -------- ------
Net Income (loss) ....................... $ (192) $ (520) $ 181 $ -- $ (531)
====== ====== ======= ======== ======
F-98
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR YEAR ENDED JULY 3, 1998
SEAGATE
GUARANTORS TECHNOLOGY
-------------------------- HOLDINGS
SUBSIDIARY OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ----------- ---------------- ------------- ------------
Net cash provided by (used in)
operating activities ....................... $ 304 $ 433 $ (231) $ (74) $ 432
INVESTING ACTIVITIES:
Acquisition of property, equipment and
leasehold improvements ..................... (115) (306) (272) (693)
Purchases of short-term investments ......... (455) (2,713) (1,642) (4,810)
Maturities and sales of short-term
investments ................................ 382 2,481 2,026 4,889
Acquisition of Quinta ....................... (194) (194)
Equity investments .......................... (27) 27 --
Intercompany investments .................... 211 (443) (48) 280 --
Other, net .................................. 2 22 (36) (12)
------ -------- ------ --------
Net cash provided by (used in)
investing activities ....................... 25 (981) (135) 271 (820)
FINANCING ACTIVITIES:
Net change in investing by Seagate
Technology, Inc. ........................... (353) 449 105 (239) (38)
Other, net .................................. (14) -- 42 28
-------- -------- ------ --------
Net cash provided by (used In)
financing activities ...................... (353) 435 105 (197) (10)
Effect of exchange rate changes on
cash and cash equivalents .................. 6 6
Increase (decrease) In cash and cash
equivalents ................................ (24) (107) (261) -- (392)
Cash and cash equivalents at the
beginning of the period .................... 43 549 442 -- 1,034
------ -------- -------- ------ --------
End of the period .......................... $ 19 $ 442 $ 181 $ -- $ 642
====== ======== ======== ====== ========
F-99
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
The following tables present guarantor and non-guarantor condensed
consolidating financial information for the subsidiaries of Seagate Removable
Storage Solutions Holdings, at December 29, 2000 condensed consolidating
results of its operations and its cash flows for the one month ended December
29, 2000, the five months ended November 22, 2000 and six months ended December
31, 1999 (unaudited) and for each of the three years in the period ended June
30, 2000. The information is based on the guarantor and non-guarantor
classification of RSS's subsidiaries under the current provisions of the senior
subordinated notes.
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 29, 2000
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
ASSETS
Cash and cash equivalents .................. $10,150 $ 647 $ -- $10,797
Accounts receivable, net ................... 17,587 5,838 (2,129) 21,296
Affiliate accounts receivable .............. 5,131 463 -- 5,594
Inventories ................................ 21,611 2,320 -- 23,931
Other current assets ....................... 649 21 -- 670
------- -------- -------- -------
Total Current Assets ...................... 55,128 9,289 (2,129) 62,288
Property, equipment, leasehold
improvements, net ......................... 7,625 3,084 -- 10,709
Other assets ............................... 14,173 358 -- 14,531
------- -------- -------- -------
Total Assets .............................. $76,926 $ 12,731 $ (2,129) $87,528
======= ======== ======== =======
LIABILITIES
Accounts payable ........................... $17,359 $ 4,589 $ (2,129) $19,819
Accrued employee compensation .............. 4,238 389 -- 4,627
Accrued expenses ........................... 8,467 284 -- 8,751
Accrued Warranty ........................... 4,425 -- -- 4,425
Current portions of long-term debt ......... 666 -- -- 666
------- -------- -------- -------
Total Current Liabilities ................. 35,155 5,262 (2,129) 38,288
Other liabilities .......................... 2,555 -- -- 2,555
------- -------- -------- -------
Shareholders' Equity ...................... 39,216 7,469 -- 46,685
------- -------- -------- -------
Total Liabilities and Shareholders'
Equity .................................. $76,926 $ 12,731 $ (2,129) $87,528
======= ======== ======== =======
F-100
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
Revenue ........................................... $ 30,749 $3,955 $ (6,333) $ 28,371
Cost of revenue ................................... 31,625 3,933 (6,333) 29,225
Product development ............................... 2,372 -- -- 2,372
Marketing and administrative ...................... 2,420 136 -- 2,556
Amortization of goodwill and other intangibles .... 91 -- -- 91
Restructuring ..................................... -- -- -- --
-------- ------ --------- --------
Total operating expenses ....................... 36,508 4,069 (6,333) 34,244
-------- ------ --------- --------
Income (loss) from operations .................. (5,759) (114) -- (5,873)
Other income (expense), net ....................... (31) -- -- (31)
-------- ------ --------- --------
Income (loss) before income taxes ................. (5,790) (114) -- (5,904)
-------- ------ --------- --------
Benefit (provision) for income taxes .............. 366 -- -- 366
-------- ------ --------- --------
Net Income (loss) .............................. $ (5,424) $ (114) $ -- $ (5,538)
======== ====== ========= ========
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED COMBINING STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
Revenues ..................................... $ 97,606 $ 13,551 $ (21,170) $ 89,987
Costs of sales ............................... 83,457 14,233 (21,170) 76,520
Product development .......................... 22,578 -- -- 22,578
Marketing and administrative ................. 12,507 724 -- 13,231
Amortization of goodwill and other
intangibles ................................. 323 -- -- 323
Restructuring ................................ 755 21 -- 776
--------- -------- --------- ---------
Total operating expense ................... 119,620 14,978 (21,170) 113,428
Income (loss) from operations ............. (22,014) (1,427) -- (23,441)
Other income (expense), net .................. 830 4 -- 834
--------- -------- --------- ---------
Income (loss) before income taxes ............ (21,184) (1,423) -- (22,607)
Benefit (provision) for income taxes ......... 9,132 -- -- 9,132
--------- -------- --------- ---------
Net income (loss) ......................... $ (12,052) $ (1,423) $ -- $ (13,475)
========= ======== ========= =========
F-101
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED COMBINING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................... $ (3,788) $ 659 $ -- $ (3,129)
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements, net ............ (995) (260) -- (1,255)
Proceeds from sale of property, equipment
and leasehold improvements ............. 334 -- -- 334
Other, net .............................. 2 -- -- 2
-------- ------ ----- --------
Net cash provided by (used in) investing
activities ........................... (659) (260) -- (919)
FINANCING ACTIVITIES
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................. -- -- -- --
Increase (decrease) in cash and cash
equivalents ............................ (4,447) 399 -- (4,048)
Cash and cash equivalents at the
beginning of the year .................. 14,597 248 -- 14,845
-------- ------ ----- --------
Cash and cash equivalents at the end of
the year ............................... $ 10,150 $ 647 $ -- $ 10,797
======== ====== ===== ========
F-102
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED COMBINING STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
--------------- ---------------- -------------- ---------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................... $ (29,259) $ 3,553 $ -- $ (25,706)
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements, net ............ (3,507) (1,480) -- (4,987)
Profit on disposal of property equipment
and leasehold improvements ............. 402 -- -- 402
Other, net .............................. (251) -- -- (251)
----------- -------- ----- -----------
Net cash provided by (used in) investing
activities ........................... (3,356) (1,480) -- (4,836)
FINANCING ACTIVITIES
Other, net .............................. 44,737 (1,852) -- 42,885
----------- -------- ----- -----------
Net cash provided by (used in) financing
activities ........................... 44,737 (1,852) -- 42,885
Effect of exchange rate changes on cash
and cash equivalents ................... -- -- -- --
Increase (decrease) in cash and cash
equivalents ............................ 12,122 221 -- 12,343
Cash and cash equivalents at the
beginning of the year .................. 2,475 27 -- 2,502
----------- -------- ----- -----------
Cash and cash equivalents at the end of
the year ............................... $ 14,597 $ 248 $ -- $ 14,845
=========== ======== ===== ===========
F-103
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED COMBINING STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
(UNAUDITED)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
Revenue ...................................... $137,234 $26,430 $ (11,593) $152,071
Costs of revenue ............................. 94,775 24,344 (11,598) 107,521
Product development .......................... 17,799 -- -- 17,799
Marketing and administrative ................. 11,230 525 -- 11,755
Amortization of goodwill and other
intangibles ................................. 438 -- -- 438
Restructuring ................................ 128 241 -- 369
-------- ------- --------- --------
Total operating expense ................... 142,370 25,110 (11,598) 137,882
Income (loss) from operations ............. 12,864 1,320 5 14,189
Other income (expense), net .................. 33 5 38
-------- ------- --------
Income (loss) before income taxes ............ 12,897 1,325 5 14,227
Benefit (provision) for income taxes ......... (4,674) (218) -- (4,892)
-------- ------- --------- --------
Net income (loss) ......................... $ 8,223 $ 1,107 $ 5 $ 9,335
======== ======= ========= ========
F-104
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED COMBINING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
(UNAUDITED)
GUARANTORS NON-GUARANTORS ELIMINATIONS COMBINED
------------ ---------------- -------------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................... $ (7,462) $6,494 $-- $ 13,956
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements ................. (5,248) -- -- (5,248)
Proceeds from sale of property, equipment
and leasehold improvements ............. 40 -- -- 40
Other, net .............................. 3 -- -- 3
-------- ------ --- --------
Net cash provided by (used in) investing
activities ........................... (5,245) 1,349 -- (5,208)
FINANCING ACTIVITIES
Net cash change in investment by
Seagate Technology Inc., ............... (6,597) -- -- (6,597)
Net cash provided by (used in) financing
activities ........................... 6,597 -- -- 6,597
Increase (decrease) in cash and cash
equivalents ............................ 2,173 (22) -- 2,151
Cash and cash equivalents at the
beginning of the year .................. 2,389 22 -- 2,411
-------- ------ --- --------
Cash and cash equivalents at the end of
the year ............................... $ 4,562 $ -- $-- $ 4,562
======== ====== === ========
F-105
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
CONDENSED COMBINING BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
ASSETS
Cash and cash equivalents ...................... $ 2,475 $ 27 $ -- $ 2,502
Accounts receivable, net ....................... 20,554 6,719 (8,056) 19,217
Inventories .................................... 15,899 967 -- 16,866
Deferred income taxes .......................... 7,675 -- -- 7,675
Other current assets ........................... 1,590 186 -- 1,776
-------- -------- --------- --------
Total Current Assets ........................ 48,193 7,899 (8,056) 48,036
Property, equipment, leasehold improvements,
net ........................................... 12,328 2,104 -- 14,432
Goodwill and other intangibles ................. 3,170 -- -- 3,170
-------- -------- --------- --------
Total Assets ................................ $ 63,691 $ 10,003 $ (8,056) $ 65,638
======== ======== ========= ========
LIABILITIES
Accounts payable ............................... $ 23,577 $ 2,457 $ (8,056) $ 17,978
Accrued employee compensation .................. 6,270 463 -- 6,733
Accrued expenses ............................... 6,646 631 -- 7,277
Accrued warranty ............................... 5,276 -- -- 5,276
Current portions of long-term debt ............. 666 -- -- 666
-------- -------- --------- --------
Total Current Liabilities ................... 42,435 3,551 (8,056) 37,930
Other liabilities .............................. 2,839 -- -- 2,839
-------- -------- --------- --------
BUSINESS EQUITY ................................ 18,417 6,452 -- 24,869
-------- -------- --------- --------
Total Liabilities and Business Equity ....... $ 63,691 $ 10,003 $ (8,056) $ 65,638
======== ======== ========= ========
F-106
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
CONDENSED COMBINING STATEMENT OF OPERATIONS
JUNE 30, 2000
(IN THOUSANDS)
REMOVABLE
STORAGE
SOLUTIONS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
Revenue ............................................ $ 227,847 $ 57,387 $ (22,420) $ 262,814
Cost of revenue .................................... 162,184 53,429 (22,420) 193,193
Product development ................................ 37,444 37,444
Marketing and administrative ....................... 17,338 1,240 18,578
Amortization of goodwill and other intangibles ..... 877 877
Restructuring ...................................... 627 627
--------- -------- ----------- ---------
Total operating expense ......................... 218,470 54,669 (22,420) 250,719
Income (loss) from operations ................... 9,377 2,718 12,095
Other, net ......................................... 1,576 1,576
--------- --------- ----------- ---------
Income (loss) before income taxes .................. 10,953 2,718 13,671
Benefit (provision) for income taxes ............... (3,762) (670) (4,432)
--------- -------- ----------- ---------
Net income (loss) ............................... $ 7,191 $ 2,048 $ -- $ 9,239
========= ======== =========== =========
F-107
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................... $ 15,748 $ 1,838 $ -- $ 17,586
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements, net .................. (7,947) (1,136) -- (9,083)
Proceeds from sale of property, equipment and
leasehold improvements ....................... 670 -- -- 670
Net cash provided by (used in) investing
activities ................................ (7,277) (1,136) -- (8,413)
FINANCING ACTIVITIES
Net cash change in investments by Seagate
Technology, Inc. ............................. (8,385) (697) -- (9,082)
-------- -------- ---- --------
Net cash provided by (used in) financing
activities ................................... (8,385) (697) -- (9,082)
Increase (decrease) in cash and cash
equivalents .................................. 86 5 -- 91
Cash and cash equivalents at the beginning of
the year ..................................... 2,389 22 -- 2,411
-------- -------- ---- --------
Cash and cash equivalents at the end of the
year ......................................... $ 2,475 $ 27 $ -- $ 2,502
======== ======== ==== ========
F-108
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED COMBINING BALANCE SHEET JULY 2, 1999
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
ASSETS
Cash and cash equivalents ..................... $ 2,389 $ 22 $ -- $ 2,411
Accounts receivable, net ...................... 88,297 12,419 (65,030) 35,686
Inventories ................................... 10,124 998 -- 11,122
Other current assets .......................... 823 135 -- 958
Deferred income taxes ......................... 12,373 -- -- 12,373
-------- ------- ---------- --------
Total Current Assets ....................... 114,006 13,574 (65,030) 62,550
Property, equipment, leasehold improvements,
net .......................................... 9,176 2,996 -- 12,172
Other assets .................................. 3,612 -- -- 3,612
-------- ------- ---------- --------
Total Assets ............................... $126,794 $16,570 $ (65,030) $ 78,334
======== ======= ========== ========
LIABILITIES
Accounts payable .............................. $ 84,264 $ 5,460 $ (65,030) $ 24,694
Accrued employee compensation ................. 1,710 5,583 -- 7,293
Accrued expenses .............................. 12,994 423 -- 13,417
Accrued warranty .............................. 5,951 -- -- 5,951
-------- ------- ---------- --------
Total Current Liabilities .................. 104,919 11,466 (65,030) 51,355
Other liabilities ............................. 2,267 -- -- 2,267
-------- ------- ---------- --------
BUSINESS EQUITY ............................... 19,608 5,104 -- 24,712
-------- ------- ---------- --------
Total Liabilities and Business Equity ...... $126,794 $16,570 $ (65,030) $ 78,334
======== ======= ========== ========
F-109
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
CONDENSED COMBINING STATEMENT OF OPERATIONS
JULY 2, 1999
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE SOLUTIONS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------------
Revenue ................................................ $311,101 $ 63,307 $ (60,402) $ 314,006
Cost of revenue ........................................ 228,008 57,545 (60,402) 225,151
Product development .................................... 36,081 36,081
Marketing and administrative ........................... 22,651 273 22,924
Amortization of goodwill and other intangibles ......... 3,207 3,207
Restructuring .......................................... 711 711
-------- -------- ----------- ---------
Total operating expense ............................. 290,658 57,818 (60,402) 288,074
Income (loss) from operations ....................... 20,443 5,489 25,932
Other, net ............................................. 2 2
-------- -------- ----------- ---------
Income (loss) before income taxes ...................... 20,445 5,489 25,934
Benefit (provision) for income taxes ................... (9,307) (249) (9,556)
-------- -------- ----------- ---------
Net income (loss) ................................... $ 11,138 $ 5,240 $ -- $ 16,378
======== ======== =========== =========
F-110
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 2, 1999
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................. $ 31,222 $ 7,469 $ -- $ 38,691
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements ..................... (5,377) (1,196) -- (6,573)
Proceeds from sale of property, equipment and
leasehold improvements ..................... 935 23 -- 958
Net cash provided by (used in) investing
activities .............................. (4,442) (1,173) -- (5,615)
FINANCING ACTIVITIES
Net change in investments by Seagate
Technology ................................. (22,725) (6,336) -- (29,061)
--------- -------- ---- ---------
Net cash provided by (used in) financing
activities .............................. (22,725) (6,336) -- 29,061
Increase (decrease) in cash and cash
equivalents ................................ 4,055 (40) -- 4,015
Cash and cash equivalents at the beginning
of the year ................................ (1,666) 62 -- (1,604)
--------- -------- ---- ---------
Cash and cash equivalents at the end
of the year ................................ $ 2,389 $ 22 $ -- $ 2,411
========= ======== ==== =========
F-111
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
CONDENSED COMBINING STATEMENT OF OPERATIONS
JULY 3, 1998
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
Revenues ........................................... $ 232,589 $ 98,046 $ (44,549) $ 286,086
Cost of sales ...................................... 180,010 93,440 (44,549) 228,901
Product development ................................ 24,981 24,981
Marketing and administrative ....................... 26,757 418 27,175
Amortization of goodwill and other intangibles ..... 2,181 2,181
Restructuring ...................................... 686 686
--------- ---------
Total operating expense ......................... 234,615 93,858 (44,549) 283,924
Income (loss) from operations ................... (2,026) 4,188 -- 2,162
Other, net ......................................... 887 887
--------- ---------
Income (loss) before income taxes .................. (1,139) 4,188 -- 3,049
Benefit (provision) for income taxes ............... (1,571) (1,571)
--------- ---------
Net income (loss) ............................... $ (2,710) $ 4,188 $ -- $ 1,478
========= ======== ========== =========
F-112
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 3, 1998
(IN THOUSANDS)
SEAGATE
REMOVABLE
STORAGE
SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................... $ 22,902 $ 1,628 $ -- $ 24,530
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements, net .................. (6,232) (991) (7,223)
Proceeds from sale of property, equipment and
leasehold improvements ....................... 667 1,282 1,949
--------- -------- ---------
Net cash provided by (used in) investing
activities ................................ (5,565) 291 -- (5,274)
FINANCING ACTIVITIES
Net change in investments by Seagate
Technology ................................... (19,625) (2,203) -- (21,828)
--------- -------- ---- ---------
Net cash provided by (used in) financing
activities ................................ (19,625) (2,203) -- (21,828)
Increase (decrease) in cash and cash
equivalents .................................. (2,288) (284) -- (2,572)
Cash and cash equivalents at the beginning of
the year ..................................... 622 346 -- 968
--------- -------- ---- ---------
Cash and cash equivalents at the end of the
year ......................................... $ (1,666) $ 62 $ -- $ (1,604)
========= ======== ==== =========
F-113
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
The following tables present guarantor and non-guarantor condensed
consolidating financial information for the subsidiaries of Crystal Decisions,
Inc., at December 29, 2000, June 30, 2000 and July 2, 1999 and the condensed
consolidating results of its operations and its cash flows for the period from
November 23, 2000 to December 29, 2000, period from July 1, 2000 to November
22, 2000, six months ended December 31, 1999 and for each of the years in the
three year period ended June 30, 2000. The information is based on the
guarantor and non-guarantor classification of the subsidiaries of Crystal
Decisions, Inc., under the current provisions of the senior subordinating
notes.
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 29, 2000
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS DECISIONS
------------ ---------------- -------------- ----------
ASSETS
Cash ................................................ $ 4,133 $ 2,231 $ 180 $ 6,544
Loan receivable from Seagate Technology ............. 31,331 -- -- 31,331
Accounts receivable, net ............................ 24,795 9,754 (13,466) 21,083
Inventories ......................................... 357 -- -- 357
Current deferred income taxes ....................... -- 17 (17) --
Income tax receivable ............................... 1,599 -- -- 1,599
Other current assets ................................ 3,667 514 -- 4,181
------- ------- --------- -------
Current assets ..................................... 65,882 12,516 (13,303) 65,095
Capital assets, net ................................. 5,684 271 -- 5,955
Investments ......................................... 1,781 -- (1,781) --
Intangibles ......................................... 21,687 -- -- 21,687
------- ------- --------- -------
Total assets ....................................... 95,034 12,787 (15,084) 92,737
------- ------- --------- -------
LIABILITIES
Accounts payable .................................... 17,834 5,516 (13,286) 10,064
Accrued employee compensation ....................... 7,536 913 -- 8,449
Accrued expenses .................................... 8,967 2,036 -- 11,003
Deferred revenue .................................... 23,122 1,849 -- 24,971
Current deferred income taxes ....................... 17 -- (17) --
Accrued income taxes ................................ (665) 665 -- --
------- ------- --------- -------
Current liabilities ................................ 56,811 10,979 (13,303) 54,487
Other liabilities ................................... 2,060 27 -- 2,087
------- ------- --------- -------
Total liabilities .................................. 58,871 11,006 (13,303) 56,574
STOCKHOLDERS' EQUITY ............................... 36,163 1,781 (1,781) 36,163
------- ------- --------- -------
Total liabilities and stockholders' equity ......... $95,034 $12,787 $ (15,084) $92,737
======= ======= ========= =======
F-114
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN THOUSANDS)
CRYSTAL
GUARANTOR NON-GUARANTOR ELIMINATIONS DECISIONS
------------- --------------- -------------- ------------
Revenues ..................................... $ 18,673 $ 1,201 $ -- $ 19,874
Costs of revenues ............................ 4,404 233 -- 4,637
Research and development ..................... 2,754 31 -- 2,785
Sales, marketing and administrative .......... 8,653 881 -- 9,534
Amortization of goodwill and other
intangibles ................................. 196 -- -- 196
Restructuring costs .......................... -- 14 -- 14
Unusual items ................................ 7,073 -- -- 7,073
--------- ------- ------- ---------
Total operating expenses .................... 23,080 1,159 -- 24,239
--------- ------- ------- ---------
Income (loss) from operations ............... (4,407) 42 -- (4,365)
Interest income (expense) .................... 251 (22) -- 229
Intercompany charges, net .................... (342) 342 -- --
Equity investment income (loss) .............. 320 -- (320) --
--------- ------- ------- ---------
Other income (expense), net ................. 229 320 (320) 229
--------- ------- ------- ---------
Income (loss) before income taxes ............ (4,178) 362 (320) (4,136)
Benefit (provision) for income taxes ......... (1,357) (42) -- (1,399)
--------- ------- ------- ---------
Net income (loss) ........................... $ (5,535) $ 320 $ (320) $ (5,535)
========= ======= ======= =========
F-115
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS DECISIONS
------------ ---------------- -------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ..................................... $ 4,244 $ (620) $180 $ 3,804
INVESTING ACTIVITIES
Acquisition of capital assets, net .............. (1,024) (41) -- (1,065)
--------- ------ ---- ---------
Net cash provided by (used in) investing
activities ................................... (1,024) (41) -- (1,065)
FINANCING ACTIVITIES
Issuance of common stock ........................ 178 -- -- 178
Borrowings from Seagate Technology .............. 22,433 -- -- 22,433
Payments to Seagate Technology .................. (23,925) -- -- (23,925)
--------- ------ ---- ---------
Net cash provided by (used in) financing
activities ................................... (1,314) -- -- (1,314)
Effect of exchange rate changes on cash ......... (32) 236 -- 204
--------- ------ ---- ---------
Increase (decrease) in cash ..................... 1,874 (425) 180 1,629
Cash at the beginning of the period ............. 2,259 2,656 0 4,915
--------- ------ ---- ---------
Cash at the end of the period ................... $ 4,133 $2,231 $180 $ 6,544
========= ====== ==== =========
F-116
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLDIATING CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS DECISIONS
------------ ---------------- -------------- ------------
Revenues ............................................... $ 52,914 $ 4,260 $ -- $ 57,174
Costs of revenues ...................................... 16,831 1,253 -- 18,084
Research and development ............................... 10,887 113 -- 11,000
Sales, marketing and administrative .................... 30,319 4,478 (17) 34,780
Amortization of goodwill and other intangibles ......... 648 -- -- 648
Restructuring costs .................................... (45) 604 -- 559
Unusual items .......................................... 1,851 -- -- 1,851
--------- -------- ------- ---------
Total Operating Expenses .............................. 60,491 6,448 (17) 66,922
--------- -------- ------- ---------
Income (Loss) from Operations ......................... (7,577) (2,188) 17 (9,748)
Interest income (expense) .............................. 540 368 (17) 891
Intercompany charges, net .............................. (2,451) 2,451 -- --
Equity investment income (loss) ........................ 354 -- (354) --
--------- -------- ------- ---------
Other Income (Expense), net ........................... (1,557) 2,819 (371) 891
--------- -------- ------- ---------
Income (loss) before income taxes ...................... (9,134) 631 (354) (8,857)
Benefit (provision) for income taxes ................... 4,182 (277) -- 3,905
--------- -------- ------- ---------
Net Income (Loss) ..................................... $ (4,952) $ 354 $ (354) $ (4,952)
========= ======== ======= =========
F-117
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS DECISIONS
------------ ---------------- -------------- ------------
Net cash provided by (used in) operating
activities ..................................... $ 2,641 $ 179 $ -- $ 2,820
INVESTING ACTIVITIES
Acquisition of capital assets, net .............. (1,916) 15 -- (1,901)
--------- ------ ------ ---------
Net cash provided by (used in) investing
activities ................................... (1,916) 15 -- (1,901)
FINANCING ACTIVITIES
Issuance of common stock ........................ 949 -- -- 949
Borrowings from Seagate Technology .............. 54,279 -- -- 54,279
Payments to Seagate Technology .................. (54,459) -- -- (54,459)
--------- ------ ------ ---------
Net cash provided by (used in) financing
activities ................................... 769 -- -- 769
Effect of exchange rate changes on cash ......... (79) (315) -- (394)
--------- ------ ------ ---------
Increase (decrease) in cash ..................... 1,415 (121) -- 1,294
Cash at the beginning of the period ............. 844 2,777 -- 3,621
--------- ------ ------ ---------
Cash at the end of the period ................... $ 2,259 $2,656 $ -- $ 4,915
========= ====== ====== =========
F-118
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT
OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
CRYSTAL
GUARANTOR NON-GUARANTOR ELIMINATIONS DECISIONS
--------------- --------------- -------------- ---------------
Revenue ...................................... $ 50,541 $ 7,634 $ -- $ 58,175
Costs of revenue ............................. 20,384 2,127 -- 22,511
Research and development ..................... 12,841 -- -- 12,841
Sales, marketing and administrative .......... 35,274 7,161 -- 42,435
Amortization of goodwill and other
intangibles ................................. 2,002 -- -- 2,002
Restructuring costs .......................... 838 463 -- 1,301
Unusual items ................................ 221,601 20,968 -- 242,569
----------- ---------- -------- -----------
Total operating expenses .................... 292,940 30,719 -- 323,659
----------- ---------- -------- -----------
Income (loss) from operations ............... (242,399) (23,085) -- (265,484)
Interest income (expense) .................... (1,311) 28 -- (1,283)
Intercompany Charges, net .................... (2,692) 2,692 -- --
Equity investment income (loss) .............. (20,542) 20,542 --
----------- -------- -----------
Other income (expense), net ................. (24,545) 2,720 20,542 (1,283)
----------- ---------- -------- -----------
Income (loss) before income taxes ............ (266,944) (20,365) 20,542 (266,767)
Benefit (provision) for income taxes ......... 49,058 (177) -- 48,881
----------- ---------- -------- -----------
Net income (loss) ........................... $ (217,886) $ (20,542) $ 20,542 $ (217,886)
=========== ========== ======== ===========
F-119
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS DECISIONS
------------ ---------------- -------------- -------------
Net cash provided by (used in) operating
activities ..................................... $ (18,719) $1,345 $ -- $ (17,374)
INVESTING ACTIVITIES
Acquisition of capital assets, net .............. (1,359) (95) -- (1,454)
--------- ------ ------ ---------
Net cash provided by (used in) investing
activities ................................... (1,359) (95) -- (1,454)
FINANCING ACTIVITIES
Issuance of common stock ........................ 1 -- -- 1
Borrowings from Seagate Technology .............. 94,895 -- -- 94,895
Payments to Seagate Technology .................. (77,075) -- -- (77,075)
--------- ------ ------ ---------
Net cash provided by (used in) financing
activities ................................... 17,821 -- -- 17,821
Effect of exchange rate changes on cash ......... 596 18 -- 614
--------- ------ ------ ---------
Increase (decrease) in cash ..................... (1,661) 1,268 -- (393)
Cash at the beginning of the period ............. 4,895 2,524 -- 7,419
--------- ------ ------ ---------
Cash at the end of the period ................... $ 3,234 $3,792 $ -- $ 7,026
========= ====== ====== =========
F-120
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
CRYSTAL
GUARANTOR NON-GUARANTOR ELIMINATIONS DECISIONS
----------- --------------- -------------- ----------
ASSETS:
Cash ........................................... $ 844 $ 2,777 $ -- $ 3,621
Loan receivable from Seagate Technology......... 25,681 -- -- 25,681
Accounts Receivable, net ....................... 24,141 12,638 (20,201) 16,578
Inventories .................................... 674 -- 674
Deferred Income Taxes .......................... -- -- -- --
Income Tax Receivable .......................... 6,134 -- (63) 6,071
Other Current Assets ........................... 1,832 2,189 4,021
-------- -------- --------
Current Assets ................................. 59,306 17,604 (20,264) 56,646
Capital Assets, net ............................ 9,095 253 -- 9,348
Investments .................................... 1,436 -- (1,436) --
Goodwill and Other Intangible Assets ........... 5,286 -- -- 5,286
-------- -------- ---------- --------
TOTAL ASSETS ................................... $ 75,123 $ 17,857 $ (21,700) $ 71,280
======== ======== ========== ========
LIABILITIES:
Accounts Payable ............................... 20,677 9,714 (20,201) 10,190
Accrued Employee Compensation .................. 5,239 765 -- 6,004
Accrued Expenses ............................... 8,279 3,818 -- 12,097
Deferred Revenue ............................... 18,038 1,457 -- 19,495
Deferred Income Taxes .......................... -- 63 (63) --
Accrued Income Taxes ........................... (573) 573 -- --
-------- -------- ---------- --------
Current Liabilities ............................ 51,660 16,390 (20,264) 47,786
Deferred Income Taxes .......................... 350 31 -- 381
-------- -------- ---------- --------
TOTAL LIABILITIES .............................. 52,010 16,421 (20,264) 48,167
STOCKHOLDERS' EQUITY ........................... 23,113 1,436 (1,436) 23,113
======== ======== ========== ========
Total Liabilities and Stockholders' Equity ..... $ 75,123 $ 17,857 $ (21,700) $ 71,280
======== ======== ========== ========
F-121
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS DECISIONS
--------------- ---------------- -------------- ---------------
Revenue ...................................... $ 113,094 $ 13,424 $ -- $ 126,518
Costs of revenue ............................. 40,417 3,558 -- 43,975
Research and development ..................... 24,874 -- -- 24,874
Sales, marketing and administrative .......... 72,205 14,793 -- 86,998
Amortization of goodwill and other
intangibles ................................. 3,038 -- 3,038
Restructuring costs .......................... 855 446 -- 1,301
Unusual items ................................ 221,601 20,968 242,569
----------- ---------- -----------
Total operating expenses .................. 362,990 39,765 -- 402,755
----------- ---------- -------- -----------
Loss from Operations ...................... (249,896) (26,341) -- (276,237)
Equity Investment income (loss) .............. (21,128) 21,128 --
Other income (expense) ....................... (5,561) 5,581 20
----------- ---------- -----------
Other Income (Expense), net ............... (26,689) 5,581 21,128 20
----------- ---------- -------- -----------
Income (loss) before income taxes ............ (276,585) (20,760) 21,128 (276,217)
Benefit (provision) for income taxes ......... 55,423 (368) -- 55,055
----------- ---------- -------- -----------
Net Income (Loss) ......................... $ (221,162) $ (21,128) $ 21,128 $ (221,162)
=========== ========== ======== ===========
F-122
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS DECISIONS
------------ ---------------- -------------
Net cash provided by (used in) operating activities ......... $(21,717) $ 68 $ (21,649)
INVESTING ACTIVITIES
Acquisition of capital assets, net .......................... (6,272) (84) (6,356)
-------- ------ ----------
Net cash (used in) investing activities .................. (6,272) (84) (6,356)
FINANCING ACTIVITIES
Issuance of common stock .................................... 5 -- 5
Borrowings from Seagate Technology .......................... 176,714 -- 176,714
Payments to Seagate Technology .............................. (152,667) -- (152,667)
-------- ------ ----------
Net cash provided by (used in) financing
activities .............................................. 24,052 -- 24,052
Effect of exchange rate changes on cash ..................... (114) 269 155
-------- ------ ----------
Increase (decrease) in cash ................................. (4,051) 253 (3,798)
Cash at the beginning of the year ........................... 4,895 2,524 7,419
-------- ------ ----------
Cash at the end of the year ................................. $ 844 $2,777 $ 3,621
======== ====== ==========
F-123
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED BALANCE SHEET
JULY 2, 1999
(IN THOUSANDS)
CRYSTAL
GUARANTOR NON-GUARANTORS ELIMINATIONS DECISIONS
--------- -------------- ------------ ---------
ASSETS:
Cash ............................................... $ 4,895 $ 2,524 $ -- $ 7,419
Accounts Receivable, net ........................... 46,910 8,343 (12,526) 42,727
Inventories ........................................ 981 -- -- 981
Income Tax Receivable .............................. 11,655 -- -- 11,655
Other Current Assets ............................... (1,747) 4,280 -- 2,533
-------- ------- --------- -------
Current Assets ..................................... 62,694 15,147 (12,526) 65,315
Capital Assets, net ................................ 6,933 360 -- 7,293
Investments ........................................ 1,320 -- (1,320) --
Goodwill and Other Intangible Assets ............... 7,212 -- -- 7,212
Other Assets ....................................... -- -- -- --
-------- ------- --------- -------
TOTAL ASSETS ....................................... $ 78,159 $15,507 $ (13,846) $79,820
======== ======= ========= =======
LIABILITIES:
Accounts Payable ................................... 15,752 9,005 (12,526) 12,231
Accrued Employee Compensation ...................... 18,393 906 -- 19,299
Accrued Expenses ................................... 24,673 4,089 (331) 28,431
Loan Payable to Seagate Technology ................. 16,517 -- -- 16,517
Accrued Other Taxes ................................ (293) (38) 331 --
-------- ------- --------- -------
Current Liabilities ................................ 75,042 13,962 (12,526) 76,478
-------- ------- --------- -------
Deferred income taxes .............................. 234 -- -- 234
Other Liabilities .................................. -- 225 -- 225
-------- ------- --------- -------
TOTAL LIABILITIES .................................. 75,276 14,187 (12,526) 76,937
STOCKHOLDERS' EQUITY ............................... 2,883 1,320 (1,320) 2,883
-------- ------- --------- -------
Total Liabilities and Stockholders' Equity ......... $ 78,159 $15,507 $ (13,846) $79,820
======== ======= ========= =======
F-124
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 2, 1999
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS DECISIONS
-------------- ---------------- -------------- --------------
Revenues ..................................... $ 126,265 $ 15,492 $ -- $ 141,757
Costs of revenues ............................ 45,407 3,294 -- 48,701
Research and development ..................... 21,224 -- -- 21,224
Sales, marketing and administrative .......... 66,305 12,998 -- 79,303
Amortization of goodwill and other
intangibles ................................. 4,772 -- -- 4,772
Restructuring costs .......................... -- -- -- --
Unusual items ................................ 79,157 7,557 86,714
---------- --------- ----------
Total operating expenses .................. 216,865 23,849 -- 240,714
---------- --------- ------- ----------
Income (Loss) from Operations ............. (90,600) (8,357) -- (98,957)
Interest income (expense) .................... 816 (760) -- 56
Equity Investment income (loss) .............. (9,274) -- 9,274 --
---------- --------- ------- ----------
Other Income (Expense), net ............... (8,458) (760) 9,274 56
---------- --------- ------- ----------
Income (loss) before income taxes ............ (99,058) (9,117) 9,274 (98,901)
Benefit (provision) for income taxes ......... 2,683 (157) -- 2,526
---------- --------- ------- ----------
Net Income (Loss) ......................... $ (96,375) $ (9,274) $ 9,274 $ (96,375)
========== ========= ======= ==========
F-125
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 2, 1999
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS DECISIONS
------------ ---------------- -------------
Net cash provided by (used in) operating
activities ..................................... $ (2,322) $1,413 $ (909)
INVESTING ACTIVITIES
Acquisition of capital assets, net .............. (4,731) (125) (4,856)
-------- ------ ----------
Net cash provided by (used in)
investing activities ........................ (4,731) (125) (4,856)
FINANCING ACTIVITIES
Borrowings from Seagate Technology .............. 131,194 -- 131,194
Payments to Seagate Technology .................. (128,233) -- (128,233)
-------- ------ ----------
Net cash provided by (used in)
financing activities ........................ 2,961 -- 2,961
Effect of exchange rate changes on cash ......... -- -- --
-------- ------ ----------
Increase (decrease) in cash ..................... (4,092) 1,288 (2,804)
Cash at the beginning of the year ............... 8,987 1,236 10,223
-------- ------ ----------
Cash at the end of the year ..................... $ 4,895 $2,524 $ 7,419
======== ====== ==========
F-126
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 3, 1998
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS DECISIONS
-------------- ---------------- -------------- --------------
Revenues ............................................... $ 103,955 $ 11,997 $ -- $ 115,952
Costs of revenues ...................................... 35,067 689 -- 35,756
Research and development ............................... 16,237 -- -- 16,237
Sales, marketing and administrative .................... 55,222 10,565 -- 65,787
Amortization of goodwill and other intangibles ......... 3,165 -- -- 3,165
Restructuring costs .................................... -- -- -- --
Unusual items .......................................... -- -- -- --
---------- -------- ------ ----------
Total operating expenses ............................ 109,691 11,254 -- 120,945
---------- -------- ------ ----------
Income (loss) from operations ....................... (5,736) 743 -- (4,993)
Interest income (expense) .............................. 742 (208) 534
Equity investment income (loss) ........................ 188 -- (188) --
---------- -------- ------ ----------
Other income (expense), net ......................... 930 (208) (188) 534
---------- -------- ------ ----------
Income (loss) before income taxes ...................... (4,806) 535 (188) (4,459)
Benefit (provision) for income taxes ................... (8,453) (347) -- (8,800)
---------- -------- ------ ----------
Net income (loss) ................................... $ (13,259) $ 188 $ (188) $ (13,259)
========== ======== ====== ==========
F-127
NEW SAC AND ITS PREDECESSOR, SEAGATE TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 3, 1998
(IN THOUSANDS)
CRYSTAL
GUARANTORS NON-GUARANTORS DECISIONS
------------ ---------------- ------------
Net cash provided by (used in) operating activities ............ $ (4,235) $1,772 $ (2,463)
INVESTING ACTIVITIES
Acquisition of capital assets, net ............................. (4,122) (643) (4,765)
Acquisition of intangible assets ............................... (1,950) -- (1,950)
-------- ------ --------
Net cash provided by (used in) investing activities ......... (6,072) (643) (6,715)
FINANCING ACTIVITIES
Borrowings from Seagate Technology ............................. 108,469 -- 108,469
Payments to Seagate Technology ................................. (100,243) -- (100,243)
-------- ------ --------
Net cash provided by (used in) financing activities ......... 8,226 -- 8,226
Effect of exchange rate changes on cash ........................ -- 11 11
-------- ------ --------
Increase (decrease) in cash .................................... (2,081) 1,140 (941)
Cash at the beginning of the year .............................. 11,068 96 11,164
-------- ------ --------
Cash at the end of the year .................................... $ 8,987 $1,236 $ 10,223
======== ====== ========
F-128
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATED AND CONDENSED COMBINED BALANCE SHEETS
(IN MILLIONS)
SEAGATE
TECHNOLOGY
HOLDINGS PREDECESSOR
-------------- ------------
DECEMBER 29, JUNE 30,
2000 2000 (1)
-------------- ------------
(UNAUDITED)
ASSETS (see Note 10)
Cash and cash equivalents .................................... $ 689 $ 868
Short-term investments ....................................... 118 1,140
Accounts receivable, net ..................................... 851 642
Affiliate accounts receivable ................................ 1 --
Inventories .................................................. 424 413
Deferred income taxes ........................................ 36 211
Other current assets ......................................... 207 156
------ ------
Total Current Assets ........................................ 2,326 3,430
Property, equipment and leasehold improvements, net .......... 772 1,585
Goodwill and other intangibles, net .......................... 133 294
Other assets ................................................. 69 509
------ ------
Total Assets (see Note 10) .................................. $3,300 $5,818
====== ======
LIABILITIES
Accounts payable ............................................. $ 739 $ 679
Affiliate accounts payable ................................... 37 36
Accrued employee compensation ................................ 162 182
Accrued expenses ............................................. 381 325
Accrued warranty ............................................. 126 124
Accrued income taxes ......................................... 193 71
Current portion of long-term debt ............................ 10
------
Total Current Liabilities ................................... 1,648 1,417
Deferred income taxes ........................................ 36 640
Accrued warranty ............................................. 107 109
Other liabilities ............................................ 10 7
Long-term debt, less current portion ......................... 893 703
------ ------
Total Liabilities ........................................... 2,694 2,876
------ ------
SHAREHOLDER'S/BUSINESS EQUITY
Contributed capital .......................................... 747 --
Accumulated deficit .......................................... (141) --
------ ------
Total Shareholder's/Business Equity ......................... 606 2,942
------ ------
Total Liabilities and Shareholder's/Business Equity ......... $3,300 $5,818
====== ======
- ----------
(1) The information in this column was derived from the Seagate Technology
Hard Disc Drive Business, an operating business of Seagate Technology,
Inc. audited consolidated combined balance sheet as of June 30, 2000.
See notes to condensed consolidated and condensed combined financial
statements.
F-129
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATED AND CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS)
SEAGATE
TECHNOLOGY
HOLDINGS PREDECESSOR
---------------------- ---------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
NOVEMBER 23, 2000 TO JULY 1, 2000 TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
---------------------- ----------------- -------------
Revenue ................................................ $ 969 $2,302 $3,117
Cost of revenue ........................................ 862 2,034 2,534
Product development .................................... 68 408 328
Marketing and administrative ........................... 88 440 187
Amortization of goodwill and other intangibles ......... 5 20 9
Restructuring costs .................................... -- 19 134
Unusual items .......................................... 52 (2) 82
----- -------- ------
Total operating expenses .............................. 1,075 2,919 3,274
----- ------- ------
Loss from operations .................................. (106) (617) (157)
Interest income ........................................ 3 58 42
Interest expense ....................................... (10) (24) (26)
Gain on sale of SanDisk stock .......................... -- 102 62
Gain on sale of Veeco stock ............................ -- 20 --
Loss on LHSP investment ................................ -- (138) --
Other, net ............................................ (8) (12) (1)
-------- ------- --------
Other Income (expense), net ............................ (15) 6 77
------- ------- -------
Loss before income taxes ............................... (121) (611) (80)
Benefit (provision) for income taxes ................... (20) 206 23
------- ------- -------
Net loss .............................................. $(141) $(405) $ (57)
======= ======= =======
See notes to condensed consolidated and condensed combined financial statements
F-130
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATED AND CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
SEAGATE
TECHNOLOGY
HOLDINGS PREDECESSOR
---------------------- -------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
NOVEMBER 23, 2000 TO JULY 1, 2000 TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
---------------------- ----------------- -------------
OPERATING ACTIVITIES:
Net loss ................................................ $(141) $ (405) $ (57)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................... 68 261 344
In-process research and development .................... 59 --
Deferred income taxes .................................. (38) (320) (195)
Non-cash portion of restructuring charge ............... -- 7 76
(Gain) loss on certain investments, net ................ -- 18 (62)
Compensation expense related to accelerated
vesting of stock options ............................. -- 584 --
Compensation expense for SSI exchange offer ............ -- 44
Other, net ............................................. (5) 24 50
Changes in operating assets and liabilities:
Accounts receivable .................................... (399) 181 61
Inventories ............................................ 296 (195) 65
Accounts payable ....................................... 48 40 (78)
Accrued income taxes ................................... 62 212 51
Accrued expenses and employee compensation
and warranty ......................................... (59) (218) (137)
Other assets and liabilities, net ...................... 21 (61) 19
------- ------- -------
Net cash provided by (used in) operating activities..... (88) 128 181
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net ...................................... (32) (265) (274)
Purchases of short-term investments ..................... (129) (1,612) (1,639)
Maturities and sales of short-term investments .......... 130 2,628 1,803
Restricted cash (TRA) ................................... -- (150) --
Proceeds from sale of certain investments ............... -- 234 67
Other, net .............................................. (2) (6) (19)
-------- ---------- -------
Net cash provided by (used in) investing activities..... (33) 829 (62)
FINANCING ACTIVITIES:
Issuance of long-term debt, net of issuance costs ....... 860 -- 1
Repayment of long-term debt ............................. -- (812) --
Short-term borrowings ................................... 66 -- --
Repayment of short-term borrowings ...................... (66) -- --
Net change in investment by New SAC and its
predecessor ............................................ (51) (1,014) (4)
Other, net .............................................. 1 1 (11)
------- --------- ---------
Net cash provided by (used in) financing activities..... 810 (1,825) (14)
Increase (decrease) in cash and cash equivalents ........ 689 (868) 105
Cash and cash equivalents at the beginning of the
period ................................................. -- 868 368
------- --------- ---------
Cash and cash equivalents at the end of the period ...... $ 689 $ -- $ 473
======= ========= =========
See notes to condensed consolidated and condensed combined financial
statements.
F-131
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Seagate Technology Holdings (the "Company") was formed in August 2000, to
be a holding company for the rigid disc drive operating business and the
storage area networks operating business of Seagate Technology, Inc. (which we
refer to as Seagate Technology). Prior to November 22, 2000, the Company did
not have significant operations. As a result, the Company's Predecessor,
Seagate Technology Hard Disc Drive Business, an operating business of Seagate
Technology, Inc. ("HDD" or "Predecessor") is the combined rigid disc drive and
storage area networks operating businesses of Seagate Technology, and the
combined financial position, results of operations, and cash flows of HDD are
presented in these financial statements on a comparative basis.
On November 22, 2000, Seagate Technology, Seagate Software Holdings, Inc.,
which we refer to herein as Seagate Software Holdings, a subsidiary of Seagate
Technology, and Suez Acquisition Company (Cayman) Limited, which we refer to
herein as SAC, completed the stock purchase agreement, and Seagate and VERITAS
Software Corporation, which we refer to as VERITAS, completed the agreement and
plan of merger and reorganization, or the Merger Agreement. SAC was a limited
liability company organized under the laws of the Cayman Islands and formed
solely for the purpose of entering into the stock purchase agreement and
related transactions. SAC assigned all of its rights under the stock purchase
agreement to New SAC, the parent of the Company. In addition, the rigid disc
drive operating business was formed as a subsidiary of the Company, and was
named Seagate Technology HDD Holdings and the storage area networks business
was formed also as a subsidiary of the Company and was named Seagate Technology
SAN Holdings.
The condensed consolidated and condensed combined financial statements
have been prepared by the Company, without audit. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. Because New SAC acquired all the operating assets of Seagate
Technology as of November 22, 2000, Seagate Technology is considered to be the
predecessor of New SAC and HDD is considered to be the prececessor of the
Company. Accordingly, for comparative purposes, the financial statement
presentation includes the operations of HDD through November 22, 2000, and the
Company's operations from November 23, 2000 to December 29, 2000. Prior to
November 23, 2000, the Company's operations were not significant. The Company
believes the disclosures included in the unaudited condensed consolidated and
condensed combined financial statements, when read in conjunction with the
combined financial statements of HDD as of June 30, 2000 and notes thereto, are
adequate to make the information presented not misleading.
The condensed consolidated and condensed combined financial statements
reflect, in the opinion of management, all material adjustments necessary to
summarize fairly the consolidated financial position, results of operations and
cash flows for such periods. Such adjustments are of a normal recurring nature.
The results of operations for HDD for the period from July 1, 2000 through
November 22, 2000 and for the Company from November 23, 2000 through December
29, 2000 are not necessarily indicative of the results that may be expected for
the entire fiscal year ending June 29, 2001.
HDD operated and reported financial results on a fiscal year of 52 or 53
weeks ending on the Friday closest to June 30. The Company will operate and
report financial results on the same basis. Fiscal 2001 will be 52 weeks for
the combined Company and will end on June 29, 2001.
F-132
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
2. BALANCE SHEET INFORMATION
SEAGATE
TECHNOLOGY
HOLDINGS PREDECESSOR
-------------- ------------
DECEMBER 29, JUNE 30,
2000 2000
-------------- ------------
(IN MILLIONS)
Accounts Receivable:
Accounts receivable .................................... $ 929 $ 712
Allowance for non-collection ........................... (78) (70)
----- --------
$ 851 $ 642
===== ========
Inventories:
Components ............................................. $ 126 $ 139
Work-in-process ........................................ 61 48
Finished goods ......................................... 237 226
----- --------
$ 424 $ 413
===== ========
Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements ......... $ 804 $ 3,686
Allowance for depreciation and amortization ............ (32) (2,101)
----- --------
$ 772 $ 1,585
===== ========
3. INCOME TAXES
The federal tax Allocation Agreement ("Tax Allocation Agreement") between
the Company and Seagate Technology terminated on November 22, 2000. The Company
will no longer file federal income tax returns on a consolidated basis with
Seagate Technology and certain of the Company's affiliates. The Company will
enter into a state tax allocation agreement with affiliates of New SAC, as
applicable. There are no outstanding tax related intercompany balances relating
to taxes between the Company and Seagate Technology or New SAC and its
affiliates.
F-133
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
3. INCOME TAXES (CONTINUED)
The Provision for (Benefit from) income taxes consisted of the following:
SEAGATE TECHNOLOGY
HOLDINGS PREDECESSOR
CURRENT TAX EXPENSE (BENEFIT) ------------------- ----------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, 2000 JULY 1, 2000 SIX MONTHS
TO TO ENDED
DECEMBER 29, 2000 NOVEMBER 22, 2000 DECEMBER 31, 1999
------------------- ------------------- ------------------
(IN MILLIONS)
Federal ...................................... $17 $ (188) $ 141
State ........................................ 2 (75) 16
Foreign ...................................... 1 12 17
--- ------ ------
20 (251) 174
Deferred Tax Expense (Benefit)
Federal ...................................... -- 7 (176)
State ........................................ -- 38 (21)
Foreign ...................................... -- -- --
-- 45 (197)
--- ------ ------
Provision for (Benefit from) Income Taxes..... $20 $ (206) $ (23)
=== ====== ======
Income (loss) before income taxes consisted of the following:
SEAGATE TECHNOLOGY
HOLDINGS PREDECESSOR PRE-PREDECESSOR
------------------- ------------------- ------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, 2000 JULY 1,2000 SIX MONTHS
TO TO ENDED
DECEMBER 29, 2000 NOVEMBER 22, 2000 DECEMBER 31, 1999
------------------- ------------------- ------------------
(IN MILLIONS)
Domestic $ (24) $ 616 $ (81)
Foreign ......... (97) (1,227) 1
------ -------- -----
$ (121) $ (611) $ (80)
------ -------- -----
The proforma information assuming a tax provision/(benefit) based on a
seperate return basis is as follows:
SEAGATE TECHNOLOGY
HOLDINGS
---------------------
PERIOD FROM
NOVEMBER 23, 2000 TO
DECEMBER 29, 2000
Loss before income taxes ..................... $ (121)
Provision (benefit) for income taxes ......... 20
------
Net Loss ..................................... $ (141)
------
The income tax benefits related to the exercise of certain employee stock
options decreased accrued income taxes and were credited to additional paid-in
capital. Such amounts approximated $133.8 million for the period from July 1,
2000 to November 22, 2000.
At December 29, 2000, accrued income taxes includes $125 million for tax
indemnification amounts due to VERITAS Software Corporation pursuant to the
Indemnification Agreement between Seagate Technology, Suez Acquisition Company
and VERITAS Software Corporation. The tax indemnification amount was recorded
by the Company in connection with the purchase of the operating assets of
Seagate Technology and represents tax liabilities previously recorded by
Seagate Technology for periods prior to the acquisition date of the operating
assets.
F-134
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
3. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities were as
follows.
SEAGATE TECHNOLOGY
HOLDINGS PREDECESSOR
---------------------- -------------------
FOR THE PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 29, 2000 JUNE 30, 2000
---------------------- -------------------
(IN MILLIONS)
DEFERRED TAX ASSETS
Accrued warranty .................................. $ 97 $ 97
Inventory valuation accounts ...................... 25 33
Receivable reserves ............................... 22 21
Accrued compensation and benefits ................. 31 44
Depreciation ...................................... 150 20
Restructuring reserve ............................. 19 28
Other reserves and accruals ....................... 22 25
Acquisition related items ......................... 10 --
Other assets ...................................... 6 14
Total Deferred Tax Assets ......................... 382 282
Valuation allowance ............................... (346)
------ ------
Net Deferred Tax Assets ........................... 36 282
DEFERRED TAX LIABILITIES
Unremitted income of foreign subsidiaries ......... (542)
Acquisition related items ......................... (36) (169)
Other Liabilities .................................
Total Deferred Tax Liabilities .................... (36) (711)
------ ------
Net Deferred Tax Assets/ (Liabilities) ............ $ -- $ (429)
====== ======
In connection with the purchase of the operating assets of Seagate
Technology, we recorded a $316 million valuation allowance for deferred tax
assets. The $316 million of deferred tax assets subject to the valuation
allowance arose primarily as a result of the excess of tax basis over the fair
values of acquired property, plant and equipment, and liabilities assumed for
which we expect to recieve tax deductions in our federal and state returns in
future periods. We also recorded $36 million of deferred tax liabilities as a
result of the excess of the fair market value of inventory, long-term
investments, and acquired intangable assets over their related tax bases. Our
realization of the tax benefits for the federal and state deferred tax assets
subject to the valuation allowance will depend primarily on our ability to
generate sufficient taxable income in the United States in future periods, the
timing and amount of which are uncertain. We anticipate that the tax benefits
of the deferred tax assets when realized, will first result in an increase in
unamortized negative goodwill that has been allocated on a pro rata basis to
the long-lived assets. Any excess tax benefit would then be realized as a
reduction of future income tax expense.
F-135
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
3. INCOME TAXES (CONTINUED)
The reconciliation between the provision for (benefit from) income taxes
at the U.S. federal statutory rate and the effective rate are summarized as
follows:
SEAGATE TECHNOLOGY
HOLDINGS PREDECESSOR
------------------- --------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, 2000 JULY 1, 2000 SIX MONTHS
TO TO ENDED
DECEMBER 29, 2000 NOVEMBER 22, 2000 DECEMBER 31, 1999
------------------- ------------------- ------------------
(IN MILLIONS)
Provision (benefit) at U.S. statutory rate ................ (42) (214) (28)
State income tax provision (benefit), net of federal income 2 (24) (3)
tax bennefit .............................................
Foreign income taxes (benefit) in excess of the U.S. -- -- (2)
statutory rate ...........................................
Foreign losses not benefited .............................. -- 13 3
Nondeductible acquisition related items ................... 33 -- --
Sale of operating assets .................................. -- 28 --
Compensation expense for SSI exchange offer ............... -- -- 7
Valuation reserve ......................................... 30 -- --
Benefit from net earnings of foreign subsidiaries -- (30) --
considered to be permanently reinvested in non-US
operations ...............................................
Non-deductible goodwill ................................... -- 9 3
Other individually immaterial items ....................... (3) 12 (3)
------ ---- ------
Provision for (benefit from) income taxes ................. 20 (206) (23)
===== ==== =====
A substantial portion of the Company's Asia Pacific manufacturing
operations in Singapore and Malaysia operate under various tax holidays which
expire in whole or in part during fiscal years 2001 through 2010. Certain tax
holidays may be extended if specific conditions are met. As of November 22,
2000, Seagate Technology Hard Disc Drive's foreign manufacturing subsidiaries
had approximately $3.050 billion of undistributed foreign earnings of which
approximately $1.722 billion were considered permanently reinvested offshore.
In connection with the sale of the operating assets of Seagate Technology,
approximately $1.650 billion of foreign earnings were deemed to be distributed
for U.S. tax purposes to Seagate Technology's U.S. parent. Seagate Technology
had previously recorded deferred income tax liabilities of approximately $542
million for these foreign earnings. As a result of the sale of the operating
assets of Seagate Technology and the ensuing corporate structure, the Company
now has a foreign parent holding company with various foreign U.S.
subsidiaries. The deferred tax liabilities were eliminated and the remaining
unremitted earnings of the Company's foreign subsidiaries will no longer be
subject to U.S. tax if remitted to the Company's foreign parent holding
company.
F-136
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
4. SUPPLEMENTAL CASH FLOW INFORMATION
SEAGATE
TECHNOLOGY
HOLDINGS PREDECESSOR
-------------- ----------------------------
PERIOD FROM
NOVEMBER 23, PERIOD FROM SIX
2000 JULY 1, 2000 MONTHS
TO TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
-------------- -------------- -------------
(IN MILLIONS)
Cash Transactions:
Cash paid for interest .................................... $ -- $ 26 $ 26
Cash paid (received) for income taxes, net of refunds ..... -- (125) 261
Non-Cash Transactions:
Acquisition of minority interest .......................... -- -- 19
5. RESTRUCTURING COSTS
As part of the transactions, the Company assumed all restructuring
liabilities previously recorded by Seagate Technology relating to HDD,
including $41 million for restructuring activities announced in fiscal 2000 and
$3 million for restructuring activities announced in fiscal 2001. During the
period from July 1, 2000 to November 22, 2000, HDD recorded restructuring
charges totaling $20 million. Of the $20 million, $11 million was a result of a
restructuring plan established to continue the alignment of HDD's global
workforce and manufacturing capacity with existing and anticipated future
market requirements, specifically in its recording head operations in Thailand
(the "fiscal 2001 restructuring plan"). The remaining $9 million consisted of a
$3 million employee termination benefit adjustment to the original estimate
related to the fiscal 2000 restructuring plan and $6 million in additional
restructuring charges for adjustments to original estimates to the fiscal 1998
restructuring plan. The fiscal 2001 restructuring plan includes workforce
reductions, capacity reductions including closure of facilities or portions of
facilities, write-off of excess equipment and consolidation of operations. The
restructuring charges were comprised of $3 million for employee termination
costs; $6 million for the write-off of owned facilities located in Thailand; $1
million for the write-off of excess manufacturing, assembly and test equipment;
and $1 million in other expenses. Prior to these restructuring activities,
there was no indication of permanent impairment of the assets associated with
the closure and consolidation of facilities.
In connection with the fiscal 2001 restructuring plan, the Company plans
to reduce its workforce by approximately 2000 employees, primarily in
manufacturing. Approximately 100 of the 2000 employees had been terminated as
of December 29, 2000. As a result of employee terminations and the write-off of
equipment and facilities in connection with the fiscal 2001 restructuring plan,
the Company estimates that after completion of these restructuring activities,
annual salary and depreciation expense will be reduced by approximately $7
million and $2 million, respectively. However, the reduction in annual salary
expense will be substantially offset by increases of headcount in certain other
recording head operations facilities. The Company may implement additional
actions pursuant to the fiscal 2001 restructuring plan, and, if such additional
actions are implemented, the Company anticipates that additional charges would
be taken related to these actions. The Company expects the fiscal 2001
restructuring plan will be substantially complete by June 29, 2001.
F-137
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
5. RESTRUCTURING COSTS (CONTINUED)
In connection with the fiscal 2000 restructuring plan, HDD recorded an
adjustment of $3 million in the quarter ended September 29, 2000 as a result of
an increase in the estimated number of employees to be terminated. The Company
now plans to reduce its workforce by approximately 24,000 employees primarily
in manufacturing. Approximately 22,000 of the 24,000 employees had been
terminated as of December 29, 2000. As a result of employee terminations and
the write-off of equipment and facilities in connection with the fiscal 2000
restructuring plan, the Company estimates that after completion of these
restructuring activities, annual salary and depreciation expense will be
reduced by approximately $151 million and $40 million, respectively. The fiscal
2000 restructuring plan was substantially complete as of December 29, 2000.
In connection with the restructuring plan implemented in fiscal 1998, HDD
revised its original lease termination cost estimates on certain of its
facilities and recorded an additional $6 million in restructuring charges.
F-138
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
5. RESTRUCTURING COSTS (CONTINUED)
The following table summarizes the Company's and HDD's restructuring
activities for the period from July 1, 2000 to November 22, 2000 and for the
period from November 23, 2000 to December 29, 2000: and
SEVERANCE INTANGIBLES
AND EXCESS & OTHER CONTRACT
BENEFITS FACILITIES EQUIPMENT ASSETS CANCELLATIONS OTHER TOTAL
----------- ------------ ----------- ------------ --------------- --------- ----------
(IN MILLIONS)
HDD
Reserve balances,
June 30, 2000 ............... $ 23 $10 $ -- $ -- $ 5 $15 $ 53
FY2001 restructuring ......... 3 6 1 -- -- 1 11
Cash charges ................. (14) (5) -- -- -- (3) (22)
Non-cash charges ............. -- (6) (1) -- -- -- (7)
Adjustments .................. 3 6 -- -- -- -- 9
---- ----- ----- ---- --- ----- ------
Reserve balances,
November 22, 2000 ........... $ 15 $11 $ -- $ -- $ 5 $13 $ 44
SEAGATE TECHNOLOGY HOLDINGS
Cash charges ................. (4) (1) -- -- -- -- (5)
------- ------ ----- ---- --- ----- -------
Reserve balances,
December 29, 2000 ........... $ 11 $10 $ -- $ -- $ 5 $13 $ 39
====== ===== ===== ==== === ===== ======
6. BUSINESS SEGMENTS
The Company designs, manufactures and markets products for storage,
retrieval and management of data on computer and data communications systems.
These products include disc drives and disc drive components. The Company
operates in a single industry segment, disc drives. The CEO evaluates
performance and allocates resources based on revenue and gross profit from
operations. Gross profit from operations is defined as revenue less cost of
sales. The Company does not evaluate or allocate assets or depreciation by
operating segment, nor does the CEO evaluate segments on these criteria. The
CEO has been identified as the Chief Operating Decision Maker as defined by
Statement of financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information".
F-139
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
7. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, for the
periods presented below were as follows:
SEAGATE
TECHNOLOGY
HOLDINGS PREDECESSOR
-------------- ------------------------------
PERIOD FROM PERIOD FROM SIX
NOVEMBER 23, JULY 1, MONTHS
2000 TO 2000 TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
-------------- -------------- -------------
(IN MILLIONS)
Net loss ..................................... $ (141) $ (405) $ (57)
Unrealized gain (loss) on securities ......... -- (102) --
Foreign currency translation adjustment -- -- --
------ ------ -----
Comprehensive income (loss) .................. $ (141) $ (507) $ (57)
====== ====== =====
The components of accumulated other comprehensive income (loss), net of
related tax, at December 29, 2000 and June 30, 2000 were as follows:
SEAGATE
TECHNOLOGY
HOLDINGS PREDECESSOR
-------------- ------------
DECEMBER 29, JUNE 30,
2000 2000
-------------- ------------
(IN MILLIONS)
Unrealized gain (loss) on securities .................. $-- $88
Foreign currency translation adjustments .............. -- (2)
--- ------
Accumulated other comprehensive income (loss) ......... $-- $86
=== =====
Components of accumulated other comprehensive income at June 30, 2000 are
included in division equity. Accumulated other comprehensive income as of June
30, 2000 includes deferred tax liabilities of $57 million.
8. PURCHASE ACCOUNTING
On November 22, 2000, under the stock purchase agreement, the Company's
parent, New SAC, completed the purchase of all of the operating assets and
assumption of operating liabilities of Seagate Technology and its consolidated
subsidiaries. The net purchase price was $1.840 billion in cash, including
transaction costs of approximately $25 million. Immediately thereafter, in a
separate transaction, Seagate Technology and VERITAS completed their merger
under the Merger Agreement. At the time of the merger, Seagate Technology's
assets included a specified amount of cash, an investment in VERITAS, and
certain specified investments and liabilities. In connection with the Merger
Agreement, Seagate Technology, VERITAS and New SAC entered into an
Indemnification Agreement, pursuant to which these entities and certain other
subsidiaries of Seagate Technology agreed to certain indemnification provisions
regarding tax and other matters that may arise in connection with the stock
purchase agreement and merger.
New SAC accounted for this transaction as a purchase in accordance with
Account Principles Board Opinion No. 16 "Business Combinations." All acquired
tangible assets, identifiable intangible assets as well as assumed liabilities
were valued based on their relative fair values and reorganized
F-140
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. PURCHASE ACCOUNTING (CONTINUED)
into the following businesses: 1) the rigid disc drive business (HDD), which
includes the storage area networks business, 2) the removable storage solutions
business, 3) the software business, and 4) an investment holding company. The
fair value of the net assets exceeded the net purchase price by approximately
$909 million. Accordingly, the resultant negative goodwill was allocated on a
pro rata basis to acquired long-lived assets of New SAC primarily property,
plant and equipment, and identified intangible assets, and reduced the recorded
fair value amounts by approximately 46% for all the acquired businesses. In
accordance with Staff Accounting Bulletin (SAB) 73, Push Down Basis of
Accounting, the Company has reflected its parent company's basis in the rigid
disc drive and storage area networks operating businesses in the related
balance sheet at the date of acquisition.
The table below summarizes the preliminary allocation of net purchase
price as it relates to HDD, which includes SAN.
LIFE ESTIMATED
DESCRIPTION IN YEARS FAIR VALUE
- ---------------------------------------------------------- ---------- -----------
(IN MILLIONS)
Net current assets (1) (4) .................... $ 885
Other long-lived assets ....................... 42
Property, plant and equipment (3) ............. 764
Identified intangible assets:
Trade names (5) ............................... 10 47
Developed technologies (5) .................... 3-7 50
Assembled workforces (5) ...................... 1-3 43
Other ......................................... 5 1
------
Total identified intangibles ........................... 141
Long-term deferred taxes (4) .................. (71)
Long term liabilities ......................... (122)
------
Net assets ............................................. 1,639
In-process research & development (5) ......... 52
------
Net Purchase Price ..................................... $1,691
======
- ----------
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book values.
Short-term investments were valued based on quoted market prices.
Inventory values were estimated based on the current market value of the
inventories less completion costs and less a normal profit margin based
on activities remaining to be completed until the inventory is sold.
Valuation allowances were established for current deferred tax assets in
excess of long-term deferred tax liabilities (See Note 4 Income Taxes).
Assumed current liabilities included accounts payable, accrued
compensation and expenses and accrued income taxes. The fair values of
current liabilities generally approximated the historic recorded book
values because of the monetary nature of most of the liabilities.
(2) Other long-lived assets consisted principally of security deposits and
service repair inventories recorded with estimated fair values generally
approximating the recorded historic book value.
F-141
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. PURCHASE ACCOUNTING (CONTINUED)
(3) The Company, through its parent, obtained an independent valuation of the
acquired property, plant and equipment. In arriving at the determination
of market value for the assets, the appraisers considered the estimated
cost to construct or acquire comparable property. Machinery and equipment
was assessed using replacement cost estimates reduced by depreciation
factors representing the condition, functionality and operability of the
assets. The sales comparison approach was used for office and data
communication equipment. Land, land improvements, buildings, and building
and leasehold improvements were valued considering location, size,
expected use physical condition and current market conditions and
discussions with knowledgeable company personnel.
(4) Long-term deferred tax liabilities arose as a result of the excess of the
fair values of inventory, long-term investments, and acquired intangible
assets over their related tax basis. The Company has $350 million of
federal and state deferred tax assets for which a full valuation
allowance has been established.
(5) The Company obtained an independent valuation of acquired identified
intangibles. The significant assumptions relating to each category are
discussed in the following paragraphs. Also, these assets are being
amortized on the straight-line basis over their estimated useful life and
resultant amortization is included in amortization of goodwill and other
intangibles.
Trade names -- The fair value of trade names was estimated based upon
discounting to net present value the licensing income that would arise by
charging the operating businesses that use the trade names.
Developed technologies -- The value of this asset for each operating
business was determined by discounting the expected future cash flows
attributable to all existing technologies which had reached technological
feasibility, after considering risks relating to: 1) the characteristics and
applications of the technology, 2) existing and future markets, as well as 3)
life cycles of the technologies. Estimates of future revenues and expenses used
to determine the value of developed technology was consistent with the
historical trends in the industry and expected outlooks.
Assembled workforces -- The value of the assembled work force was
determined by estimating the recruiting, hiring and training costs to replace
each group of existing employees.
In-process research & development (IPR&D) -- The value of IPR&D was based
on an evaluation of all developmental projects using the guidance set forth in
Interpretation No. 4 of Financial Accounting Standards Board Statement No. 2,
"Accounting for Research and Development Costs and FAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed."
The amount was determined by: 1) obtaining management estimates of future
revenues and operating profits associated with existing developmental projects
2) projecting the cash flows and costs to complete of the underlying
technologies and resultant products, and 3) discounting these cash flows to
their net present value.
Estimates of future revenues and expenses used to determine the value of
IPR&D was consistent with the historical trends in the industry and expected
outlooks.
The entire amount was charged to operations because related technologies
had not reach technological feasibility and they had no alternative future use.
F-142
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. PURCHASE ACCOUNTING (CONTINUED)
At the valuation date, the Company's Seagate Technology HDD Holdings
subsidiary's developmental projects focused on increasing capacity, reducing
size and power consumption, improving performance and reliability, and reducing
production costs. They were grouped into three categories. Those included in
category one had completed conceptualization and there was substantial progress
in coding, building, simulating, and testing the technologies functionality and
performance. For those included in category two, subsystem requirements had
been identified, design plans had been completed, and substantial progress had
been made in coding and/or building the technologies. Those included in
category three had completed design plans and system requirements. Based upon
an analysis of efforts to date, developmental projects in these three
categories were 70%, 50%, and 30% complete, respectively, and were scheduled
for completion through out the period ended in fiscal 2003 at an additional
estimated cost of $107 million.
At the valuation date, the Company's other subsidiary, Seagate Technology
SAN Holdings ("SAN"), was in the process of developing two next generation
versions of existing technologies, which, based on an effort to date, were 50%
and 75% complete. Activities necessary to covert this IPR&D into commercially
viable technologies include the writing and testing of code diagnostic software
design development testing and system integration. SAN expects resultant
products will be successfully developed in fiscal 2002 at an additional
estimated cost of $1 million.
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
acquisition of substantially all of the operating assets of HDD had occurred at
the beginning of fiscal 2000. The pro forma statements of operations for the
six months ended December 29, 2000 and December 31, 1999, include the
historical results of the Company in addition to the historical results of the
Predecessor and are adjusted to reflect the new accounting basis for the assets
and liabilities of the Company, and exclude acquisition related charges for
recurring amortization of goodwill and intangibles related to the Predecessor's
prior acquisitions. The pro forma financial results are as follows:
SIX MONTHS ENDED
------------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
(IN MILLIONS)
Revenue ................................... $3,279 $3,118
Income (loss) before income taxes ......... (308) (4)
Net income (loss) ......................... (449) (11)
9. EQUITY INCENTIVE PLANS
NEW SAC 2000 RESTRICTED SHARE PLAN
At the closing of the transactions, the Board of Directors of New SAC
adopted the New SAC 2000 Restricted Share Plan (2000 Restricted Share Plan).
The 2000 Restricted Share Plan allows for grants of ordinary and preferred
shares awards to key employees, directors, and consultants. The Company has
authorized 1,843,000 ordinary shares and 48,500 preferred shares to be granted
under the 2000 Restricted Share Plan.
F-143
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
9. EQUITY INCENTIVE PLANS (CONTINUED)
Members of the management group entered into rollover agreements in
connection with the transactions. Under these agreements, members of the
management group agreed not to receive the merger consideration for a portion
of their Seagate Technology restricted common stock and options to purchase
shares of Seagate Technology common stock, valued at approximately $184
million. In exchange for the management rollover, the members of the management
group received the right to participate in a deferred compensation plan and
receive unvested ordinary and preferred shares of New SAC granted under the
2000 Restricted Share Plan. The unvested preferred and ordinary shares vest as
follows:
o one-third will vest on the first anniversary of the closing of the
transactions;
o one-third will vest proportionately each month over the next 18 months;
and
o the final one-third will vest on the date which is 30 months after the
closing of the transactions.
Of the total value of the management rollover, approximately $179 million
relates to the restricted award grants. With respect to the restricted ordinary
and preferred shares received in connection with the rollover agreements, the
Company will recognize a push-down of compensation expense from New SAC of
approximately $23 million, based on the fair value of the ordinary and
preferred shares at the date of issuance, amortized over the 30 month vesting
period using the graded vesting method.
In December 2000, the Board of Directors of the Company adopted the
Seagate Technology Holdings Stock Option Plan (the HDD Option Plan). Under the
terms of the HDD Option Plan eligible employees, directors, and consultants can
be awarded options to purchase shares of common stock of Seagate Technology
Holdings under vesting terms to be determined at the date of grant. Seventy-two
million common shares have been reserved for issuance under the HDD Option
Plan. The HDD Option Plan is subject to approval by the senior subordinated
noteholders.
In February 2001, the Board of Directors approved the issuance of up to
approximately 17 million options to purchase common stock of Seagate Technology
Holdings.
NEW SAC 2001 RESTRICTED SHARE PLAN
In February 2000, the Board of Directors approved the adoption of the New
SAC 2001 Restricted Share Plan (the 2001 Restricted Share Plan). Under the
terms of the 2001 Restricted Share Plan key employees, directors, and
consultants, may be awarded restricted ordinary shares. Such shares are subject
to vesting provisions to be defined at the date of grant and are subject to
repurchase by the Company. 500,000 ordinary shares are available for grant
under the plan. The Board of Directors also approved the grant of up to 440,830
restricted ordinary shares to various key employees and directors under this
plan.
In connection with the management rollover, members of the management
group also received interests in deferred compensation plans adopted at Seagate
Technology Holdings, Seagate SAN Holdings, and Seagate Removable Storage
Solutions Holdings, depending on which subsidiary employed the individual.
Under the terms of the deferred compensation plans the employee vests in
certain deferred compensation at the same rate as vesting in the ordinary and
preferred shares. However, such vesting can be accelerated at any time at the
election of the subsidiary. Payments, if any, under the deferred compensation
plan are contingent and will be made only when distributions
F-144
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
9. EQUITY INCENTIVE PLANS (CONTINUED)
are made to preferred shareholders and only to the extent of vesting. New SAC's
ability to make distributions is subject to limitations under the debt
agreement. As a result, compensation expense for the deferred cash compensation
plan will be deferred until distributions are made to preferred shareholders.
Payment will be made in cash, securities or other property at the discretion of
the Company.
DEFERRED COMPENSATION PLAN
On January 1, 2001, the Company adopted a deferred compensation plan for
the benefit of eligible employees. Company assets earmarked to pay benefits
under the plan are held by a rabbi trust. The Company will be adopting the
provisions of EITF Issue No. 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust". As a result, the
Company will be revising its consolidation of the assets and liabilities of the
rabbi trust. The Company has classified the diversified assets held by the
rabbi trust and recorded them at fair value. Under current accounting rules,
assets of a rabbi trust must be accounted for as if they are assets of the
Company; therefore, all earnings and expenses will be recorded in the Company's
financial statements. This plan is designed to permit certain discretionary
employer contributions in excess of the tax limits applicable to the 401(k)
plan and to permit employee deferrals in excess of certain tax limits. The
first contribution period will close at the end of May 2001.
10. LONG-TERM DEBT AND CREDIT FACILITIES
Upon the closing of the transactions, the Company, through a wholly owned
subsidiary, entered into senior credit facilities with a syndicate of banks and
other financial institutions. The senior credit facilities provide senior
secured financing of up to $900 million, consisting of:
a. a $200 million revolving credit facility for general corporate
purposes, with a sublimit of $100 million for letters of credit, which
will terminate in five years;
b. a $200 million term loan A facility with a maturity of five years; and
c. a $500 million term loan B facility with a maturity of six years.
At the closing of the transactions, the Company did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because approximately $45 million of
existing letters of credit were outstanding and reduced availability under it.
The Company drew the full amount of the term loan A facility and the term loan
B facility on the closing of the transactions to finance the acquisition of
Seagate Technology's operating assets by New SAC.
The $700 million of outstanding loans under the term loan A and B
facilities are repayable in semi-annual payments due as follows:
F-145
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
10. LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
(IN MILLIONS)
--------------
Fiscal 2001 ............ $ 5
2002 ................... 23
2003 ................... 40
2004 ................... 50
2005 ................... 60
Thereafter ............. 522
----
Total .................. $700
====
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as the Company's and its
parent's consolidated financial position at applicable measurement dates. The
average interest rates being charged under these borrowings from the date of
the transactions ranged from 9.1875% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus
3%).
The Company, New SAC, and certain subsidiaries and affiliates, are
guarantors under the senior credit facilities. In addition, New SAC's, the
majority of the Company's, and certain subsidiaries' and affiliates' assets,
have been pledged for the debt under this credit agreement, see Note 12,
Condensed Consolidating Financial Information. The Company, New SAC, and
certain subsidiaries and affiliates, have agreed to certain covenants under
this agreement including restrictions on future equity and borrowing
transactions, business acquisitions and disposals, making certain restricted
payments and dividends, making certain capital expenditures, incurring
guarantee obligations and engaging in mergers or consolidations.
In connection with the closing and financing of the transactions, Seagate
Technology International, a wholly owned subsidiary of the Company, issued
unsecured senior subordinated notes under an Indenture Agreement dated November
22, 2000 at a discount to the aggregate principal amount of $210 million, for
gross proceeds of approximately $201 million. The notes mature on November 15,
2007 and bear interest payable semi-annually at a rate of 12.5% per annum. The
Company, New SAC, and certain subsidiaries and affiliates, are guarantors of
the notes on a joint and several, whole and unconditional basis. In addition,
the Company, New SAC, and certain subsidiaries and affiliates including the
Company, have agreed to certain restrictive covenants under the terms of these
notes including restrictions on future equity and borrowing transactions,
business acquisitions and disposals, making certain restricted payments and
dividends, making certain capital expenditures, incurring guarantee obligations
and engaging in mergers or consolidations.
11. LITIGATION
SECURITIES CLASS ACTIONS
Following the announcement of the transactions, a number of stockholders
of Seagate Technology Inc. filed lawsuits the individual members of our Board
of Directors, certain executive officers, VERITAS and Silver Lake. The
complaints filed in Delaware were consolidated into one action on April 18,
2000. On May 22, 2000, the Delaware Chancery Court certified the Delaware
action as a class action. The Delaware plaintiffs filed an amended complaint
and moved for a preliminary injunction on September 11, 2000. In California,
three complaints were filed in Santa Clara County Superior Court and two
complaints were filed in Santa Cruz County Superior Court.
F-146
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
11. LITIGATION (CONTINUED)
The complaints in both jurisdictions all essentially allege that the members of
our Board of Directors breached their fiduciary duties to our shareholders by
entering into the transactions. The complaints also allege that the directors
and executive officers have conflicting financial interests and did not secure
the highest possible price for our shares All the complaints are styled as
class actions, and sought to enjoin the transactions and secure damages from
all defendants. On October 13, 2000, a Memorandum of Understanding, or MOU, was
signed regarding settlement with all defendants on behalf of the shareholders.
The shareholders approved the transactions on November 21, 2000 and the
transactions closed on November 22, 2000. A final Stipulation of Settlement was
executed in early January 2001. A hearing on approval of the settlement by the
Delaware Chancery Court is scheduled for April 9, 2001. The primary elements of
the Stipulation of Settlement are the following:
o Suez Acquisition Company and the investor group, agreed to increase the
cash purchase price under the stock purchase agreement by $50 million.
This amount:
o was funded by the investor group on the closing of the transactions
into an escrow account held by VERITAS, pending its distribution to our
shareholders, if specified conditions are satisfied as discussed below;
o will be paid to our shareholders as additional consideration on approval
by the Delaware Chancery Court of the settlement and dismissal with
prejudice of the Delaware lawsuit and the dismissal with prejudice of
the California lawsuits; and
o plus interest, will be returned to us in the event that VERITAS
determines, in its reasonable judgment, that the conditions to the
release of the amount have become incapable of being satisfied.
o We, or the defendants jointly will pay any attorneys' fees that may be
awarded to plaintiffs' counsel on approval of the Delaware Chancery Court
of the settlement and dismissal with prejudice of the Delaware and
California lawsuits. The Delaware plaintiffs' counsel will ask the
Delaware Chancery Court to award $15.25 million in attorneys' fees.
o The merger agreement was amended to 1) reduce the maximum amount that
may be required to be held in escrow to cover our potential tax
liabilities from $300 million to $150 million, and 2) change some
provisions regarding VERITAS' payment of the consideration for the merger.
The settlement is conditioned on, among other things, final court
approval.
Between March 30 and October 27, 2000, one of the California complaints
was voluntarily dismissed and the others were coordinated, with the venue in
Santa Clara County. After the transactions closed in November 2000, the two
remaining actions originally filed in Santa Clara County filed for court
approval of dismissal with prejudice. The two actions originally filed in Santa
Cruz County are still pending. Defendants have not yet answered the complaints.
INTELLECTUAL PROPERTY LITIGATION
Papst Licensing, GmbH -- Papst has given us notice that it believes
certain former Conner Peripherals, Inc. disc drives infringe several of its
patents covering the use of spindle motors in disc drives. It is the opinion of
our patent counsel that the former Conner disc drives do not infringe any valid
claims of the patents. We also believe that subsequent to the merger with
Conner, our earlier paid-up license under Papst's patents extinguishes any
ongoing liability. We also believe we enjoy the benefit of a license under
Papst's patents since Papst Licensing had granted a license to motor
F-147
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
11. LITIGATION (CONTINUED)
vendors of Conner. Papst is currently involved in litigation with other disc
drive and disc drive motor manufacturers. After the closing of the
transactions, Papst indicated that it could not consent to the assignment of
the 1993 Papst-Seagate license to the new entity until it receives further
information about the new business structure and that any Seagate disc drives
would be assumed to be unlicensed. We have provided additional information
regarding the new business structure.
Convolve, Inc. -- On July 13, 2000, Convolve and Massachusetts Institute
of Technology filed suit against Compaq Computer Corporation and Seagate in the
U.S. District Court for the Southern District of New York, alleging patent
infringement, misappropriation of trade secrets, breach of contract, tortious
interference with contract and fraud relating to Convolve's Input Shaping
(Registered Trademark) and Quick and Quiet (Trade Mark) technology. The
plaintiffs claim their technology is incorporated in Seagate's sound barrier
technology, which was publicly announced on June 7, 2000. The complaint seeks
injunctive relief, $800 million in compensatory damages and punitive damages.
We answered the complaint on August 2, 2000 and filed cross-claims for
declaratory judgment that two Convolve/MIT patents are invalid and not
infringed and that we own any intellectual property based on the information
that was disclosed to Convolve. Plaintiffs' motion for expedited discovery was
denied by the court. The court ordered plaintiffs to identify their trade
secrets to defendants before discovery can begin. Convolve served a trade
secrets disclosure on August 4, 2000. We filed a motion challenging Convolve's
trade secrets disclosure statement and a hearing is expected to take place on
March 9, 2001. We believe this matter is without merit and intend to defend it
vigorously.
LABOR LITIGATION
White -- On March 15, 2000, Royston White filed a breach of contract
action against Seagate in Oklahoma State Court. The complaint is styled as a
class action, and White, as the sole named defendant, alleges that some 600
former employees have been damaged through Seagate's breach of separation and
release agreements entered into in connection with a reduction in force.
Discovery is ongoing and a trial date has not yet been set, but we believe we
have substantive defenses and will pursue such defenses vigorously.
OTHER MATTERS
We are involved in a number of other judicial and administrative
proceedings incidental to our business. Although occasional adverse decisions
or settlements may occur, we believe that the final disposition of such matters
will not have a material adverse effect on our financial position or results of
operations.
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Seagate Technology Holdings, ("STH"), is a subsidiary of New SAC. The
senior subordinated notes, see Note 10 Long-Term Debt and Credit Facilities,
were issued by Seagate Technology International (Cayman), a wholly owned
subsidiary of STH. The senior subordinated notes are full and unconditional,
and are made on a joint and several basis by the guarantering subsidiaries.
F-148
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
The following tables present guarantor and non-guarantor condensed
consolidating financial information for the combined rigid disc drive and
storage area network operations of Seagate Technology, the predecessor to the
Company, at December 29, 2000 and June 30, 2000, and the condensed
consolidating results of its operations and its cash flows for the period from
November 23, 2000 to December 29, 2000, the period from July 1, 2000 to
November 22, 2000, and the six month period ending December 31, 1999. The
information classifies the historic subsidiaries of the rigid disc drive
operations and the storage area networks operations into issuer, other wholly
and non-wholly owned guarantors, and other wholly owned non-guarantors based
upon the current classification of those subsidiary guarantors and their
successors under the provisions of the senior subordinated notes.
F-149
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 29, 2000
(IN MILLIONS)
GUARANTORS WHOLLY
----------------------------- OWNED SEAGATE
WHOLLY-OWNED SUBSIDIARIES -
STH
----------------------------- NON- TECHNOLOGY
ISSUER OTHER SAN GUARANTORS ELIMINATION HOLDINGS
------------- --------- ----- ------------ ------------ -----------
Cash and cash equivalents ................ $ 389 $ 253 $23 $ 24 $ -- $ 689
Short-term investments ................... 118 118
Accounts receivable, net ................. 8,289 929 16 5,749 (14,132) 851
Affiliate accounts receivable ............ (1) 1 1 1
Inventories .............................. 172 113 10 129 424
Deferred income taxes .................... -- 36 36
Other current assets ..................... 196 3 8 207
-------- ------ ------ ------
Total current assets .................... 9,163 1,335 49 5,911 (14,132) 2,326
-------- ------ --- ------ --------- ------
Property, equipment, and leasehold
improvements, net ....................... 345 291 5 131 772
Intercompany investments ................. 744 2,301 28 (3,073) --
Goodwill and other intangibles ........... -- 125 8 133
Other assets ............................. 48 3 18 69
-------- ------ ------ ------
Total assets ............................. $10,300 $4,055 $62 $6,088 $ (17,205) $3,300
======== ====== === ====== ========= ======
Accounts payable ......................... $7,598 $1,376 $ 1 $5,896 $ (14,132) $ 739
Affiliate accounts payable ............... 1 37 (1) 37
Accrued employee compensation ............ 55 91 3 13 162
Accrued expenses ......................... 91 393 8 15 507
Accrued income taxes ..................... 41 150 2 193
Current portion of long-term debt ........ 9 1 10
-------- ------ ------
Total current liabilities ............... 7,795 2,048 12 5,925 (14,132) 1,648
Deferred income taxes .................... -- 36 36
Long-term debt, less current portion ..... 793 100 893
Other liabilities ........................ (24) 115 25 1 117
-------- ------ --- ------- ------
Total liabilities ....................... 8,564 2,299 37 5,926 (14,132) 2,694
-------- ------ --- ------- --------- ------
Shareholders' equity ..................... 1,736 1,756 25 162 (3,073) 606
-------- ------ --- ------- --------- ------
Total Liabilities and Shareholders'
Equity .................................. $10,300 $4,055 $62 $6,088 $ (17,205) $3,300
======== ====== === ======= ========= ======
F-150
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN MILLIONS)
GUARANTORS
-------------------------------------- WHOLLY SEAGATE
WHOLLY-OWNED SUBSIDIARIES - STH
-------------------------------------- OWNED TECHNOLOGY
ISSUER OTHER SAN NON-GUARANTOR ELIMINATION HOLDINGS
------------ ------------ -------- --------------- ------------ -----------
Revenue $1,186 $ 429 $ 11 $689 $ (1,346) $ 969
Cost of Sales 1,014 555 6 633 (1,346) 862
Product development 3 64 1 68
Marketing and administrative 5 72 7 4 88
Amortization of goodwill and other
intangibles -- 5 5
Restructuring 3 (4) 1 --
Unusual items 27 25 52
------- ----- -----
Total Operating Expenses 1,025 719 39 638 (1,346) 1,075
------ ------- ----- ---- -------- -----
Income (Loss) from Operations 161 (290) (28) 51 (106)
Interest Income -- 3 3
Interest Expense (6) (4) (10)
Other, net (1) (6) (1) (8)
-------- -------- ------ --------
Other Income (Expense), net (7) (7) -- (1) -- (15)
-------- -------- ----- ------ -------- -------
Income (loss) before income taxes 154 (297) (28) 50 -- (121)
Benefit (provision) for income taxes (1) (20) 1 -- (20)
-------- ------- ----- ----- -------
Net Income (Loss) $ 153 $(317) $ (27) $50 $ -- $(141)
======= ======= ===== ===== ======== =======
F-151
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN MILLIONS)
GUARANTORS
-------------------------------------- WHOLLY SEAGATE
WHOLLY-OWNED SUBSIDIARIES - STH
-------------------------------------- OWNED TECHNOLOGY
ISSUER OTHER SAN NON-GUARANTOR ELIMINATION HOLDINGS
---------- ------------- --------- --------------- ------------ -----------
Net cash provided by (used in)
operating activities ............... $ (824) $ 446 $ 6 $284 $ -- $ (88)
INVESTING ACTIVITIES:
Acquisition of property, equipment
and leasehold improvements ......... (17) (7) (8) (32)
Purchases of short-term
investments ........................ (129) (129)
Maturities and sales of short-term
investments ........................ 130 130
Other, net .......................... 3 (3) (2) (2)
------ ---------- ------- --------
Net cash (used in) investing
activities ......................... (13) (3) (7) (10) -- (33)
FINANCING ACTIVITIES:
Issuance of long-term debt .......... 772 88 860
Short term borrowings ............... -- 66 66
Repayment of short term
borrowings ......................... -- (66) (66)
Net change in investment by New
SAC and its predecessor ............ 847 (1,151) 72 236 (55) (51)
Other, net .......................... -- 1 1
------ --------- -------
Net cash provided by (used in)
financing activities ............... 1,619 (1,062) 72 236 (55) 810
Increase (decrease) in cash and
cash equivalents ................... 782 (619) 71 510 (55) 689
Cash and cash equivalents at the
beginning of the Period ............ -- -- -- -- -- --
------ --------- ----- ------ ----- -------
Cash and cash equivalents at the
end of the Period .................. $ 782 $ (619) $71 $510 $ (55) $ 689
====== ========= ===== ====== ===== =======
F-152
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN MILLIONS)
SEAGATE
GUARANTORS TECHNOLOGY
------------------------------------ WHOLLY HOLDINGS
WHOLLY-OWNED SUBSIDIARIES - STH
------------------------------------ OWNED AND ITS
ISSUER OTHER SAN NON-GUARANTOR ELIMINATION PREDECESSOR
-------- -------------- -------- -------------- ------------ ------------
REVENUE ............................... 3,532 1,412 21 1,439 (4,102) 2,302
Cost of revenue ....................... 3,386 1,318 9 1,423 (4,102) 2,034
Product development ................... 12 405 3 (12) 408
Marketing and administrative .......... 18 379 28 15 440
Amortization of goodwill .............. 2 4 14 20
Restructuring costs ................... 11 (1) 9 19
Unusual items ......................... -- (2) (2)
----- -------- --------
OPERATING EXPENSES .................... 3,429 2,103 54 1,435 (4,102) 2,919
----- ------- -- ----- ------ -------
INCOME (LOSS) FROM OPERATIONS ......... 103 (691) (33) 4 -- (617)
Interest (income) ..................... 43 14 1 58
Interest expense ...................... -- (24) (24)
Gain on sale of Veeco stock ........... -- 20 20
Gain on sale of SanDisk stock ......... -- 102 102
Loss on LHSP investment ............... -- (138) (138)
Other, net ............................ (43) (2,278) 4 2,305 (12)
----- -------- ----- ------ -------
OTHER (INCOME) EXPENSE ................ -- (2,304) -- 5 2,305 6
INCOME (LOSS) BEFORE TAXES ............ 103 (2,995) (33) 9 2,305 (611)
Benefit (provision) for taxes ......... (35) 295 9 (63) 0 206
NET INCOME ............................ $ 68 $(2,700) $ (24) $ (54) $ 2,305 $(405)
====== ========= ===== ====== ======== =======
See notes to consolidated condensed financial statements.
F-153
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN MILLIONS)
GUARANTORS
------------------------------------
WHOLLY-OWNED SUBSIDIARY - STH
------------------------------------
ISSUER OTHER SAN
------------ ------------ ----------
Net cash provided by (used in) operating
activities ................................ $ (2,981) $ (1,480) $ (5)
INVESTING ACTIVITIES:
Acquisition of property, equipment and
leasehold improvements .................... (69) (152) (2)
Purchases of short-term investments ........ (1,457) (155)
Maturities and sales of short-term
investments ............................... 2,442 186
Restricted cash ............................ - (150)
Proceeds from sale of certain
investments ............................... - 234
Other, net ................................. 1 5
-------- --------
Net cash provided by (used in) investing
activities ................................ 917 (32) (2)
-------- -------- ------
FINANCING ACTIVITIES:
Repayment of long-term debt ................ - (812)
Net change in investment by New SAC
and its predecessor ....................... 1,398 2,136
Other, net ................................. - 1
-------- --------
Net cash provided by (used in) financing
activities ................................ 1,398 1,325 --
-------- -------- -----
(Decrease) in cash and
cash equivalents .......................... (666) (187) (7)
Cash and cash equivalents at the
beginning of the period ................... 666 187 7
-------- -------- -----
Cash and cash equivalents at the end of
the period ................................ $ - $ - $ -
-------- -------- -----
SEAGATE
WHOLLY TECHNOLOGY
OWNED HOLDINGS
NON-GUARANTOR ELIMINATION AND ITS PREDECESSOR
--------------- ------------ --------------------
Net cash provided by (used in) operating
activities ................................ $ 2 $ 4,592 $ 128
INVESTING ACTIVITIES:
Acquisition of property, equipment and
leasehold improvements .................... (42) (265)
Purchases of short-term investments ........ (1,612)
Maturities and sales of short-term
investments ............................... 2,628
Restricted cash ............................ (150)
Proceeds from sale of certain
investments ............................... 234
Other, net ................................. (12) (6)
----- -----------
Net cash provided by (used in) investing
activities ................................ (54) -- 829
----- --------- ----------
FINANCING ACTIVITIES:
Repayment of long-term debt ................ (812)
Net change in investment by New SAC
and its predecessor ....................... 44 (4,592) (1,014)
Other, net ................................. 1
----------
Net cash provided by (used in) financing
activities ................................ 44 (4,592) (1,825)
----- --------- ----------
(Decrease) in cash and
cash equivalents .......................... (8) -- (868)
Cash and cash equivalents at the
beginning of the period ................... 8 -- 868
------- --------- ----------
Cash and cash equivalents at the end of
the period ................................ $ - $ - $ -
------- --------- ----------
F-154
SEAGATE TECHNOLOGY HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN MILLIONS)
SEAGATE
GUARANTORS TECHNOLOGY
--------------------------- WHOLLY HOLDINGS
WHOLLY OWNED SUBSIDIARIES -
STH
--------------------------- OWNED AND ITS
ISSUER OTHER NON-GUARANTOR ELIMINATIONS PREDECESSOR
------------ ------------ -------------- ------------- ------------
Revenue .................................. $4,546 $2,095 $1,990 $(5,514) $3,117
Cost of revenue .......................... 4,450 1,641 1,957 (5,514) 2,534
Product development ...................... 13 315 328
Marketing and administrative ............. 17 157 13 187
Amortization of goodwill and other
intangibles ............................. 2 7 9
Restructuring ............................ 77 46 11 134
Unusual items ............................ -- 82 82
------ ------ ------
Total operating expenses ................ 4,559 2,248 1,981 (5,514) 3,274
Income (loss) from operations ........... (13) (153) 9 -- (157)
Interest income .......................... 38 7 (3) 42
Interest expense ......................... (2) (27) 3 (26)
Gain on sale of SanDisk stock ............ 62 62
Other, net ............................... 4 (4) (1) (1)
------- -------- -------- --------
Other income (expense), net ............. 40 38 (1) 77
------- ------- -------- -------
Income (loss) before income taxes ........ 27 (115) 8 -- (80)
Benefit (provision) for income taxes ..... -- 19 4 23
------- ------- ------- -------
Net income (loss) ....................... $ 27 $ (96) $ 12 $ -- $ (57)
======= ======= ======= ========= =======
F-155
SEAGATE TECHNOLOGY
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN MILLIONS)
GUARANTORS
---------------------
WHOLLY OWNED SEAGATE
SUBSIDIARIES - STH WHOLLY TECHNOLOGY
--------------------- OWNED HOLDINGS AND
ISSUER OTHER NON-GUARANTORS ELIMINATIONS ITS PREDECESSOR
----------- --------- ---------------- ------------- ----------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ....................... $ 132 $ (74) $ 52 $ 71 $ 181
INVESTING ACTIVITIES:
Acquisition of property, equipment and
leasehold improvements ..................... (80) (151) (43) (274)
Purchases of short-term investments ......... (1,602) (37) (1,639)
Maturities and sales of short-term
investments ................................ 1,647 155 1 1,803
Proceeds from sale of SanDisk stock ......... 67 67
Other, net .................................. 1 (20) (19)
-------- ------ -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ..................... (34) 14 (42) (62)
FINANCING ACTIVITIES:
Issuance of long-term debt .................. 1 1
Net change in investment by New SAC
and its predecessor ........................ 138 (65) (8) (69) (4)
Other, net .................................. (12) 1 (11)
------ ----- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ..................... 138 (76) (8) (68) (14)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................ 236 (136) 2 3 105
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD .................... 186 158 24 368
-------- ------ ------ ---------
CASH AND CASH EQUIVALENTS AT THE END
OF THE PERIOD .............................. $ 422 $ 22 $ 26 3 473
======== ====== ====== ===== =========
F-156
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Seagate Technology Holdings.
We have audited the accompanying combined balance sheets of Seagate
Technology Hard Disc Drive Business, an operating business of Seagate
Technology, Inc. as of June 30, 2000 and July 2, 1999, and the related combined
statements of operations, accumulated other comprehensive income (loss) and
business equity, and cash flows for each of the three years in the period ended
June 30, 2000. These combined 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 auditing standards generally
accepted in the United States. 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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Seagate Technology Hard Disc Drive Business, an operating business of Seagate
Technology, Inc. at June 30, 2000 and July 2, 1999, and the combined results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
April 18, 2001
F-157
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF
SEAGATE TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
COMBINED BALANCE SHEETS
(In millions)
JUNE 30, JULY 2,
2000 1999
---------- --------
ASSETS (see Note 12)
Cash and cash equivalents ................................... $ 868 $ 368
Short-term investments ...................................... 1,140 1,227
Accounts receivable, net .................................... 642 794
Accounts receivable from affiliates ......................... -- 12
Inventories ................................................. 413 439
Deferred income taxes ....................................... 211 240
Other current assets ........................................ 156 102
------ ------
Total Current Assets ....................................... 3,430 3,182
------ ------
Property, equipment and leasehold improvements, net ......... 1,585 1,668
Goodwill and other intangibles, net ......................... 294 88
Other assets................................................. 509 184
------ ------
Total Assets (see Note 12) ................................. $5,818 $5,122
====== ======
LIABILITIES
Accounts payable ............................................ $ 679 $ 667
Accounts payable to affiliates .............................. 36 --
Accrued employee compensation ............................... 182 171
Accrued expenses ............................................ 325 373
Accrued warranty ............................................ 124 157
Accrued income taxes ........................................ 71 43
Current portion of long-term debt ........................... -- 1
------ ------
Total Current Liabilities .................................. 1,417 1,412
------ ------
Deferred income taxes ....................................... 640 486
Accrued Warranty ............................................ 109 123
Other liabilities ........................................... 7 36
Long-term debt, less current portion ........................ 703 703
------ ------
Total Liabilities .......................................... 2,876 2,760
Commitments and Contingencies
BUSINESS EQUITY ............................................. 2,942 2,362
------ ------
Total Liabilities and Business Equity ...................... $5,818 $5,122
====== ======
See notes to combined financial statements.
F-158
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF
SEAGATE TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
COMBINED STATEMENTS OF OPERATIONS
(In millions)
FOR THE YEARS ENDED
-------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
------------ --------- ----------
Revenue .............................................................. $6,058 $6,152 $6,245
Cost of revenue ...................................................... 4,820 4,902 5,523
Product development .................................................. 663 566 555
Marketing and administrative ......................................... 409 317 308
Amortization of goodwill and other intangibles ....................... 33 20 21
In-process research and development .................................. 105 2 216
Restructuring ........................................................ 206 59 347
Unusual items ........................................................ 107 75 (22)
------ ------ ------
Total operating expenses ............................................ 6,343 5,941 6,948
------ ------ ------
Income (loss) from operations ....................................... (285) 211 (703)
Interest income ...................................................... 101 102 98
Interest expense ..................................................... (52) (48) (51)
Gain on sale of SanDisk stock ........................................ 679 -- --
Gain on exchange of certain investments in equity securities ......... 199 -- --
Other, net ........................................................... (1) 10 (66)
-------- ------ ------
Other income (expense), net ......................................... 926 64 (19)
------- ------ ------
Income (loss) before income taxes .................................... 641 275 (722)
Benefit (provision) for income taxes ................................. (275) (61) 191
------- ------ ------
Net income (loss) ................................................... $ 366 $ 214 $ (531)
======= ====== ======
See notes to combined financial statements.
F-159
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF
SEAGATE TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
COMBINED STATEMENTS OF CASH FLOWS
(In millions)
FOR THE YEARS ENDED
-------------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
-------------- ------------- ----------
OPERATING ACTIVITIES
Net income (loss) ............................................... $ 378 $ 214 $ (531)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ................................ 666 676 620
Deferred income taxes ........................................ (63) 661 (28)
In-process research and development .......................... 105 2 216
Non-cash portion of restructuring charge ..................... 109 35 203
Gain on sale of SanDisk stock ................................ (679) -- --
Gain on exchange of certain investments in equity
securities .................................................. (199) -- --
Compensation expense related to SSI exchange offer ........... 44 -- --
Other, net ................................................... 53 20 32
Changes in operating assets and liabilities:
Accounts receivable .......................................... 150 (44) 252
Inventories .................................................. (9) 26 197
Accounts payable ............................................. (45) 91 (285)
Accrued expenses, employee compensation and warranty ......... (206) (119) (261)
Accrued income taxes ......................................... (154) 50 (38)
Other assets and liabilities ................................. 76 241 55
--------- ------- --------
Net cash provided by operating activities ...................... 226 1,853 432
INVESTING ACTIVITIES
Acquisition of property, equipment and leasehold improvements (565) (591) (693)
Purchases of short-term investments ............................. (3,352) (6,596) (4,810)
Maturities and sales of short-term investments .................. 3,429 6,519 4,889
Proceeds from sale of SanDisk stock ............................. 680 -- --
Acquisitions of businesses, net of cash acquired ................ -- -- (194)
Other, net ...................................................... (19) (27) (12)
--------- ------- --------
Net cash provided by (used in) investing activities .......... 173 (695) (820)
FINANCING ACTIVITIES
Net change in investment by Seagate Technology .................. 117 (1,469) (38)
Other, net ...................................................... (14) 26 28
--------- ------- --------
Net cash used in financing activities .......................... 103 (1,443) (10)
Effect of exchange rate changes on cash and cash equivalents (2) (3) 6
---------- ---------- --------
Increase (decrease) in cash and cash equivalents ............... 500 (288) (392)
Cash and cash equivalents at the beginning of the year .......... 368 656 1,034
--------- --------- --------
Cash and cash equivalents at the end of the year ................ $ 868 $ 368 $ 642
========= ========= ========
See notes to combined financial statements.
F-160
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF
SEAGATE TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
COMBINED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) AND
BUSINESS EQUITY
(IN MILLIONS)
ACCUMULATED
OTHER COMPREHENSIVE BUSINESS
INCOME (LOSS) EQUITY
--------------------- ------------
Balance at June 27, 1997 ...................................... $ -- $3,437
Comprehensive loss:
Net loss ................................................... (531)
Unrealized gain on marketable securities ................... 1 1
Foreign currency translation ............................... (1) (1)
------ --------
Comprehensive loss ......................................... (531)
Net change in investment by Seagate Technology, Inc. ......... -- (67)
------ -------
Balance at July 3, 1998 ....................................... -- 2,839
Comprehensive income:
Net income ................................................. 214
Unrealized loss on marketable securities ................... (5) (5)
Foreign currency translation ............................... (2) (2)
------- --------
Comprehensive income ....................................... (7) 207
Net change in investment by Seagate Technology, Inc. ......... (684)
-------
Balance at July 2, 1999 ....................................... (7) 2,362
Comprehensive income:
Net income ................................................. 366
Unrealized gain on marketable securities ................... 93 93
-------- -------
Comprehensive income ....................................... 459
Net change in investment by Seagate Technology, Inc. ......... 121
-------
Balance at June 30, 2000 ...................................... $ 86 $2,942
======== =======
See notes to combined financial statements.
F-161
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Seagate Technology Hard Drive Disc Business (the
"Company" or "HDD") operated as an operating business of Seagate Technology,
Inc. ("Seagate Technology") during the three years ended June 30, 2000. On
November 22, 2000, all the operating assets and liabilities of Seagate
Technology, including all the operating assets and liabilities of the Company
were acquired by Suez Acquisition Company and assigned to New SAC. New SAC is
the parent company of Seagate Technology Holdings and the operating assets and
liabilities of the Company are now organized into various subsidiaries of
Seagate Technology Holdings. Seagate Technology Holdings had no operations
prior to November 22, 2000, and the Company is considered the predecessor of
Seagate Technology Holdings. See Note 12, Subsequent Events, for a further
description of the current organizational structure of the Company.
The Company designs, manufactures and markets products for storage,
retrieval and management of data on computer and data communications systems.
The Company sells its products to original equipment manufacturers ("OEM") for
inclusion in their computer systems or subsystems, and to distributors who
typically sell to small OEMs, dealers, system integrators and other resellers.
HDD is an operating division of Seagate Technology, Inc., a data
technology company that provides products for storing, managing, and accessing
digital information on computer systems.
Basis of Presentation -- These financial statements have been prepared
using the historical basis of accounting and are presented as if HDD existed as
an entity separate from Seagate Technology during the periods presented. These
financial statements include the historical assets, liabilities, revenues and
expenses that are directly related to HDD's operations. For certain assets and
liabilities, revenues and expenses that are directly related to HDD's
operations. For certain assets and liabilities that are not specifically
identifiable with HDD, estimates have been used to allocate such assets and
liabilities to HDD by applying methodologies management believes are
appropriate.
The statements of operations include all revenues and expenses
attributable to HDD, including allocations of certain corporate administration,
finance, and management costs. Such costs were proportionately allocated to HDD
based on detailed inquiries and estimates of time incurred by Seagate
Technology's corporate marketing and general administrative departmental
managers. In addition, certain of Seagate Technology's operations are shared
locations involving activities that pertain to HDD as well as to other
businesses of Seagate Technology. Costs incurred in shared locations are
allocated based on specific identification, or where specific identification is
not possible, such costs are allocated between HDD and other businesses of
Seagate Technology based on the volume of activity, head count, square footage,
and other methodologies that management believes are reasonable. Transactions
and balances between entitites and locations within HDD have been eliminated.
Management believes that the foregoing allocations were made on a reasonable
basis.
Certain non-operating assets and related non-operating income and expense
are included in the historical results of the Company but are not part of
continuing assets of the Company subsequent to the transaction (see Note 12).
These assets and non-operating income and expense relate to equity investments
in SanDisk Corporation, Gadzoox Networks, Inc., Veeco Instruments, Inc. and
Lernout & Hauspie Speech Products N.V.
Basis of Consolidation -- The combined consolidated financial statements
include the accounts of HDD and its wholly-owned subsidiary, XIOtech
Corporation, after eliminations.
F-162
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 2000
ended on June 30, 2000, fiscal 1999 ended on July 2, 1999, and fiscal 1998
ended on July 3, 1998. Fiscal year 2000 comprised 52 weeks, fiscal year 1999
comprised 52 weeks and fiscal year 1998 comprised 53 weeks. All references to
years in these notes to combined consolidated financial statements represent
fiscal years unless otherwise noted.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles generally accepted in
the United States 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.
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 business equity for those operations
whose functional currency is the local currency.
Derivative Financial Instruments -- HDD 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, HDD
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, Malaysia and Northern Ireland. These local
currency cash flows were designated as either firm commitments or as
anticipated transactions depending upon the contractual or legal nature of
local currency commitments in Singapore, Thailand, Malaysia and Northern
Ireland. Anticipated transactions were hedged with purchased currency options
and with foreign currency forward exchange contracts; firm commitments were
hedged with foreign currency forward exchange contracts.
The Company may enter into foreign currency forward exchange and option
contracts to manage exposure related to certain foreign currency commitments;
certain foreign currency denominated balance sheet positions and anticipated
foreign currency denominated expenditures. The Company does not enter into
derivative financial instruments for trading purposes. Foreign currency forward
exchange contracts designated and effective as hedges of firm commitments and
option contracts designated and effective as hedges of firm commitments or
anticipated transactions are treated as
F-163
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
hedges for accounting purposes. Gains and losses related to qualified
accounting hedges of firm commitments or anticipated transactions are deferred
and are recognized in income or as adjustments to the carrying amounts when the
hedged transaction occurs. All other foreign currency forward exchange
contracts are marked-to-market and unrealized gains and losses are included in
current period net income as a component of other income (expense).
Premiums on foreign currency option contracts used to hedge firm
commitments and anticipated transactions are amortized on a straight-line basis
over the life of the contract. Forward points on foreign currency forward
exchange contracts which qualify as hedges of firm commitments are recognized
in income as adjustments to the carrying 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 recognized when persuasive evidence of an arrangement exists including a
fixed price to the buyer, delivery has occurred, and collectibility is
reasonably assured. Estimated product returns are provided for in accordance
with Statements of Financial Accounting Standards No. 48 "Revenue Recognition
when Right of Return Exists". The Company warrants its products against defects
in design, materials and workmanship generally for two 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 are recorded when revenue is recorded.
Shipping and handling costs are included in cost of sales.
Inventories -- Inventories are valued at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market.
Market value is based upon an estimated average selling price reduced costs to
complete.
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 $9 million, $29 million and $45 million in 2000, 1999
and 1998, 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 is a disclosure 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 combined consolidated financial statements.
F-164
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Impact of Recently Issued Accounting Standards -- Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") is effective for all fiscal quarters beginning
after June 15, 2000 and will be adopted by the Company in its fiscal year 2001.
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. The Company does not expect that the adoption of SFAS
133 will have a material impact on its financial statements and related
results.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company is expected to apply
the accounting and disclosures described in SAB 101. The Company does not
expect the adoption of SAB 101 will have a material effect on its consolidated
results of operations, financial position and cash flows. The Company is
required to adopt SAB 101 in the fourth quarter of fiscal 2001, retroactive to
the beginning of the year.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN
44 clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000. The Company does not expect the adoption of FIN 44
will have a material effect on its combined consolidated results of operations,
financial position, and cash flows.
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 accumulated
other comprehensive income which is a component of 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.
Equity Investments -- The Company has historically entered into certain
equity investments for the promotion of business and strategic objectives, and
typically does not attempt to reduce or eliminate the inherent market risks on
these investments. Both marketable and non-marketable investments are included
in other assets. A substantial majority of the Company's marketable investments
are classified as available-for-sale as of the balance sheet date and are
reported at fair value, with unrealized gains and losses, net of tax, recorded
in stockholders' equity. The cost of securities sold is based on the specific
identification method. Realized gains or losses and declines in value, if any,
judged to be other than temporary on available-for-sale securities are reported
in other income or expense. Non-marketable investments are recorded at cost.
F-165
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
Supplier Concentration -- Certain of the raw materials used by the Company
in the manufacture of its products are available from a limited number of
suppliers. Shortages could occur in these essential materials due to an
interruption of supply or increased demand in the industry. For example, all of
the Company's disc drive products require ASIC chips which are produced by a
limited number of manufacturers. During the fourth quarter of fiscal 2000 the
Company experienced shortages and delays with regards to receipt of such chips
and similar delays and shortages continued in fiscal 2001. If the Company were
unable to procure certain of such materials, it would be required to reduce its
manufacturing operations which could have a material adverse effect upon its
results of operations.
2. BALANCE SHEET INFORMATION
FINANCIAL INSTRUMENTS
The following is a summary of the fair value of available-for-sale
securities at June 30, 2000:
AMORTIZED GROSS GROSS
COST UNREALIZED GAIN UNREALIZED LOSS FAIR VALUE
----------- ----------------- ----------------- -----------
(IN MILLIONS)
Money market mutual funds .................. $ 266 $ -- $ -- $ 266
U.S. government and agency obligations ..... 323 -- (6) 317
Repurchase agreements ...................... 16 -- -- 16
Auction rate preferred stock ............... 374 -- -- 374
Municipal bonds ............................ 1 -- -- 1
Corporate securities ....................... 733 -- (2) 731
Mortgage-backed and asset-backed
securities ................................ 218 -- (4) 214
Euro/Yankee time deposits .................. 12 -- -- 12
------ ---- ------- ------
Subtotal ................................... 1,943 -- (12) 1,931
Marketable equity securities* .............. 334 471 (376) 429
------ ---- ------- ------
Total available-for-sale securities ........ $2,277 $471 $(388) $2,360
====== ==== ======= ======
Included in other assets ................... $ 429
Included in cash and cash equivalents ...... 791
Included in short-term investments ......... 1,140
------
$2,360
======
- ----------
* No such similar amounts were recorded in fiscal 1999.
F-166
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
The following is a summary of the fair value of available-for-sale
securities at July 2, 1999:
GROSS GROSS
UNREALIZED GAIN UNREALIZED LOSS FAIR VALUE
----------------- ----------------- -----------
(IN MILLIONS)
Money market mutual funds .................. $ 74 $-- $ 74
U.S. government and agency obligations ..... 314 (4) 310
Repurchase agreements ...................... -- -- --
Auction rate preferred stock ............... 222 -- 222
Municipal bonds ............................ 109 -- 109
Corporate securities ....................... 515 (1) 514
Mortgage-backed and asset-backed
securities ............................... 302 (2) 300
Euro/Yankee time deposits .................. 48 -- 48
------ ----- ------
$1,584 $(7) $1,577
====== ===== ======
Included in cash and cash equivalents ...... $ 350
Included in short-term investments ......... 1,227
------
$1,577
======
The fair value of the Company's investment in debt securities, by
contractual maturity, is as follows:
JUNE 30, 2000 JULY 2, 1999
--------------- -------------
(IN MILLIONS)
Due in less than 1 year ......... $ 939 $ 486
Due in 1 to 3 years ............. 352 794
------ ------
$1,291 $1,280
====== ======
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:
JUNE 30, 2000 JULY 2, 1999
------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
(IN MILLIONS)
Cash equivalents ........................... $ 791 $ 791 $ 350 $ 350
Short-term investments ..................... 1,140 1,140 1,227 1,227
Marketable equity securities ............... 429 429 -- --
7.125% senior notes, due 2004 .............. (200) (187) (200) (194)
7.37% senior notes, due 2007 ............... (200) (180) (200) (189)
7.45% senior debentures, due 2037 .......... (200) (177) (200) (188)
7.875% senior debentures, due 2017 ......... (100) (85) (100) (92)
Derivative Financial Instruments -- The Company may enter into foreign
currency forward exchange and option contracts to manage exposure related to
certain foreign currency commitments,
F-167
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
certain foreign currency denominated balance sheet positions and anticipated
foreign currency denominated expenditures. The Company does not enter into
derivative financial instruments for trading purposes. Based on uncertainty in
the Southeast Asian foreign currency markets, beginning in the second quarter
of 1998 the Company temporarily suspended its hedging program. At July 3, 1998,
the Company had effectively closed out all of its foreign currency forward
exchange contracts by purchasing offsetting contracts. As of June 30, 2000, the
Company had no outstanding foreign currency forward exchange or purchased
currency option contracts.
Net foreign currency transaction gains and losses included in the
determination of net income (loss) were a gain of $1 million for fiscal 2000
and losses of $1 million and $252 million for fiscal 1999, and fiscal 1998,
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 fiscal 1998, the Company employed a
foreign currency hedging program utilizing foreign currency forward exchange
contracts and purchased currency options to hedge local currency cash flows for
payroll, inventory, other operating expenditures and fixed asset purchases in
Singapore, Thailand and Malaysia. During fiscal 1998 the Singapore dollar, Thai
baht, and Malaysian ringgit declined in value relative to the U.S. dollar. The
transaction loss of $252 million for fiscal 1998 primarily included losses
incurred on closing out these foreign currency forward exchange contracts.
ACCOUNTS RECEIVABLE
Accounts receivable are summarized below:
2000 1999
-------- -------
(IN MILLIONS)
Accounts receivable ...................... $ 712 $ 844
Less allowance for noncollection ......... (70) (50)
----- -----
$ 642 $ 794
===== =====
Activity in the allowance for doubtful accounts is as follows:
BALANCE AT ADDITIONS CHARGED BALANCE AT
BEGINNING TO COST END OF
OF PERIOD AND EXPENSE DEDUCTIONS PERIOD
------------ ------------------- ------------ -----------
(IN MILLIONS)
2000 ......... $50 $20 $-- $70
1999 ......... 52 -- 2 50
1998 ......... 58 -- 6 52
INVENTORIES
Inventories are summarized below:
2000 1999
------ -------
(IN MILLIONS)
Components .............. $139 $141
Work-in-process ......... 48 54
Finished goods .......... 226 244
---- ----
$413 $439
==== ====
F-168
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following:
ESTIMATED USEFUL LIFE 2000 1999
--------------------------- ----------- -----------
(IN MILLIONS)
Land ........................................ $ 47 $ 39
Equipment ................................... 3 - 4 years 2,415 2,321
Building and leasehold improvements ......... Life of lease -- 30 years 974 924
Construction in progress .................... 250 193
-------- --------
3,686 3,477
Less accumulated depreciation and
amortization .............................. (2,101) (1,809)
-------- --------
$ 1,585 $ 1,668
======== ========
Equipment and leasehold improvements include assets under capitalized
leases. Amortization of leasehold improvements is included in depreciation
expense. Depreciation expense was $587 million, $558 million and $531 million
in 2000, 1999 and 1998, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and specifically identified
intangible net assets acquired. Other intangible assets consist of trademarks,
assembled workforces, distribution networks, developed technology, and customer
bases 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 60
months for assembled workforces and distribution networks, and 12 to 48 months
for customer bases. In-process research and development without alternative
future use is expensed when acquired.
In accordance with the Statement of financial Accounting Standards No.121
"Acounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of", the carrying value of other intangibles and related goodwill
is reviewed if the facts and circumstances suggest that they may be permanently
impaired. If this review indicates these assets' carrying value will not be
recoverable, as determined based on the undiscounted net cash flows of the
entity acquired over the remaining amortization period, the Company's carrying
value is reduced to its estimated fair value, first by reducing goodwill, and
second by reducing long-term assets and other intangibles (generally based on
an estimate of discounted future net cash flows). Goodwill and other
intangibles are being amortized on a straight-line basis over periods ranging
from two to fifteen years. Accumulated amortization was $173 million and $147
million as of June 30, 2000 and July 2, 1999, respectively.
DEVELOPED TECHNOLOGY
The Company applies Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed" ("SFAS 86"), 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
F-169
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
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. As of June 30, 2000 there are no capitalized internal
development costs on the Company's balance sheet. Capitalized costs are
amortized based on the greater of the straight-line basis over the estimated
product life or the ratio of current revenue to the total of current and
anticipated future revenue.
Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life (30 to 48 months) or the
ratio of current revenue to the total of current and anticipated future
revenue. The recoverability of the carrying value of purchased developed
technology is reviewed periodically. The carrying value of developed technology
is compared to the estimated future gross revenue from that product reduced by
the estimated future costs of completing and disposing of that product,
including the costs of performing maintenance and customer support (net
undiscounted cash flows) and to the extent that the carrying value exceeds the
undiscounted cash flows the difference is written off.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. It also provides guidance for
determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. SOP 98-1
was adopted by the Company in fiscal 2000 and the adoption of this statement
did not have a material impact on its financial statements.
LONG-TERM DEBT AND LINES OF CREDIT (see Note 14 Subsequent Events)
Long-term debt consisted of the following:
2000 1999
------ -------
(IN MILLIONS)
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
Capitalized lease obligations with interest at 14% to 19.25%
collateralized by certain manufacturing equipment and buildings.... 4 4
---- ----
704 704
Less current portion ................................................ 1 1
---- ----
$703 $703
==== ====
F-170
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET INFORMATION (CONTINUED)
At June 30, 2000, future minimum principal payments on long-term debt and
capital lease obligations were as follows:
(IN MILLIONS)
--------------
2001 .......................... $ 1
2002 .......................... 1
2003 .......................... 1
2004 .......................... 201
2005 .......................... --
After 2005 .................... 500
----
$704
====
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.
See Note 12, the senior notes of $700 million were repaid as part of the
transaction.
As of June 30, 2000, the Company had committed lines of credit of $71
million that can be used for standby letters of credit or bankers' guarantees.
At June 30, 2000, $42 million of these lines of credit were utilized. In
addition, the Company has a $300 million credit facility that can be used for
borrowings. As of June 30, 2000, this facility was unutilized.
3. COMPENSATION
TAX-DEFERRED SAVINGS PLAN
Qualified employees of the Company participate in a tax-deferred savings
plan, the Seagate Technology, Inc. Savings and Investment Plan ("the 401(k)
plan"). The 401(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. Seagate Technology may make annual
contributions to the 401(k) plan at the discretion of the Board of Directors.
During the fiscal years
F-171
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. COMPENSATION (CONTINUED)
ended June 30, 2000 and July 2, 1999, Seagate Technology made contributions
totaling approximately $13 million and $12 million to the 401(k) plan in each
year, respectively. No material contributions were made by Seagate Technology
during fiscal year 1998.
STOCK-BASED BENEFIT PLANS
Stock Option Plans -- Employees are eligible to participate in Seagate
Technology's stock option plans. Options granted under Seagate Technology's
stock option plans are granted to employees of the Company 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. As of June 30, 2000, 22 million options were outstanding.
Executive Stock Plan -- Seagate Technology has an Executive Stock Plan
under which senior executives of the Company were granted the right to purchase
shares of the Seagate Technology'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 by Seagate
Technology and was charged to operations of the Company over the vesting period
of four to seven years. Seagate Technology has the right to repurchase the
restricted stock from an executive upon his or her voluntary or involuntary
termination of employment with the Company for any reason at the same price
paid by the executive. If an executive voluntarily resigns at or above age 65,
Seagate Technology 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. At June 30, 2000, 1,755,000 restricted shares were outstanding
to employees of the Company.
In addition, Seagate Technology 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 $6 million, $10 million, and $8 million in 2000, 1999 and 1998,
respectively.
Stock Purchase Plan -- Seagate Technology also maintained an Employee
Stock Purchase Plan in which employees of HDD were eligible to participate. The
Purchase Plan permitted 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, 1,515,000; 1,604,000; and 1,348,000
shares of Seagate Technology common stock were issued to employees of the
Company in fiscal 2000, 1999, and 1998, respectively.
Pro Forma Information --The Company has elected to follow APBO 25 and
related interpretations in accounting for employee stock options granted by
Seagate Technology 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
options granted by Seagate Technology.
As a result of the consummation of the transactions, all stock options
other than stock options included in the management rollover, were accelerated
and exercised. The full fair value of their stock options amounting to $16.9
million was recorded as compensation in the period from
F-172
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. COMPENSATION (CONTINUED)
November 22, 2000. In these circumstances and because of the significant change
in the Company's ownership and equity structure, the Company believes the pro
forma net income (loss) information as required by SFAS 123, Accounting for
Stock Based Stock Compensation, is not meaningful and such information has not
been provided.
POST-RETIREMENT HEALTH CARE PLAN
In fiscal 2000, Seagate Technology adopted a post-retirement health care
plan which offers medical coverage to eligible U.S. retirees and their eligible
dependents including eligible employees of HDD. Substantially all U.S.
employees become eligible for these benefits after 15 years of service and
attaining age 60 and older.
F-173
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. COMPENSATION (CONTINUED)
The following table provides a reconciliation of the changes in the
post-retirement health care plan's benefit obligation and a statement of the
funded status as it relates to employees of the Company as of June 30, 2000:
(IN MILLIONS)
--------------
Change in Benefit Obligation
Benefit obligation at beginning of year .................... $ --
Service cost ............................................... 4
Amortization of unrecognized prior service cost ............ 2
----
Benefit obligation at end of year .......................... $ 6
====
Funded Status of the Plan
Fair value of plan assets at end of year ................... $ --
Unrecognized prior service cost ............................ (22)
Accrued benefit liability recognized in the balance sheet at
June 30, 2000 ............................................. (6)
-------
Accrued benefit cost ....................................... $(28)
======
Net periodic benefit cost for the year ended June 30, 2000 was as follows:
(IN MILLIONS)
--------------
Service cost ................................ $ 2
Interest cost ............................... 2
Amortization of prior service cost .......... 2
----
Net periodic benefit cost ................... $ 6
====
WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS
A discount rate of 7.0% was used in the determination of the accumulated
benefit obligation.
The Company's future share of medical benefit costs were estimated to
increase at an annual rate of 10% during 2000, decreasing to an annual growth
rate of 5% in 2010 and thereafter. The Company's cost is capped at 200% of the
fiscal 1999 employer cost and, therefore, will not be subject to medical and
dental trends after the capped cost is attained. A 1% change in these annual
trend rates would not have a significant impact on the accumulated
post-retirement benefit obligation at June 30, 2000, or 2000 benefit expense.
Claims are paid as incurred.
F-174
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC., THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The Seagate Technology Hard Disc Drive Business is included in the
consolidated federal and certain combined and consolidated foreign and state
income tax returns of Seagate Technology. Seagate Technology Hard Disc Drive
Busines has entered into a tax sharing agreement (the "Tax Allocation
Agreement") pursuant to which Seagate Technology Hard Disc Drive Business
computes hypothetical tax returns as if Seagate Technology Hard Disc Drive
Business was not joined in consolidated or combined returns with non-HDD
affiliates of Seagate Technology. Seagate Technology Hard Disc Drive Business
must pay Seagate Technology the positive amount of any such hypothetical taxes.
If the hypothetical tax returns show entitlement to refunds, including any
refunds attributable to a carryback, then Seagate Technology will pay Seagate
Technology Hard Disc Drive Business the amount of such refunds. At the end of
fiscal 2000, there were no inter-company tax related balances due from Seagate
Technology Hard Disc Drive Business to Seagate Technology.
The provision for (benefit from) income taxes consisted of the following:
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- --------- -------------
(IN MILLIONS)
Current Tax Expense (Benefit)
Federal ..................................... $ 140 $ 29 $ (166)
State ....................................... 19 (12) (5)
Foreign ..................................... 3 12 7
----- ----- --------
$ 162 $ 29 $ (164)
----- ----- --------
Deferred Tax Expense (Benefit)
Federal ..................................... $ 88 $ 10 (14)
State ....................................... 25 20 (19)
Foreign ..................................... 2 6
----- --------
113 32 (27)
----- ----- --------
Provision for (Benefit from) Income Taxes..... $ 275 $ 61 $ (191)
----- ----- --------
Income (loss) before income taxes consisted of the following:
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- --------- -----------
(IN MILLIONS)
Domestic .............. $ 562 $ (33) $ (772)
Foreign ............... 79 308 50
----- ------ -------
$ 641 $ 275 $ (722)
===== ====== =======
The proforma information assuming a tax provision (benefit) calculated on
a separate return basis is as follows:
FOR THE
YEAR ENDED
JUNE 30, 2000
--------------
Income before income taxes ................... 641
Provision (benefit) for income taxes ......... 275
---
Net Income ................................... 366
---
F-175
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC., THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The income tax benefits related to the exercise of certain employee stock
options decreased income taxes payable and were credited to additional paid-in
capital. Such amounts approximated for $54,992,000, $24,193,000 and $11,754,000
in fiscal 2000, 1999, and 1998 respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities were as
follows:
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- ----------- ----------
(IN MILLIONS)
DEFERRED TAX ASSETS
Accrued warranty ......................................... $ 97 $ 113 151
Inventory valuation accounts ............................. 33 29 35
Receivable reserves ...................................... 21 23 23
Accrued compensation and benefits ........................ 44 29 25
Depreciation ............................................. 20 32 37
Restructuring reserves ................................... 28 17 25
Other reserves and accruals .............................. 25 38 35
Acquisition related items ................................
Net operating loss and tax credit carry-forwards ......... 3 58 65
Other assets.............................................. 11 1 4
------ ----- ---
Total Deferred Tax Assets ............................... 282 340 400
------ ----- ---
Valuation allowance ...................................... (4) (16)
-------- ---
Net Deferred Tax Assets ................................. 282 336 384
DEFERRED TAX LIABILITIES
Unremitted income of foreign subsidiaries ................ (542) (558) (549)
Acquisition related items ................................ (169) (12) (17)
Other liabilities ........................................ (12) (21)
------- ----
Total Deferred Tax Liabilities .......................... (711) (582) (587)
------ ------- ----
Net Deferred Tax Assets/(Liabilities) ................... $ (429) $(246) $ (203)
------ ------- ------
AS REPORTED ON THE BALANCE SHEET
Deferred Income Tax Assets .............................. $ 211 $ 240 $ 230
------ ------- ------
Deferred Income Tax Liabilities ......................... (640) (486) (433)
------ ------- ------
Net Deferred Tax Liability ............................... $ (429) $(246) $ (203)
====== ======= ======
A valuation allowance has been provided for deferred tax assets as of the
end of fiscal 1999 and fiscal 1998 related to certain foreign net operating
loss carryforwards. The valuation allowance decreased by $4 million and $12
million in 2000 and 1999, respectively, and increased by $16 million in 1998.
The reconciliation between the provision for (benefit from) income taxes
at the U.S. federal statutory rate and the effective rate are summarized as
follows:
F-176
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
----------- --------- ------------
(IN MILLIONS)
Provision (benefit) at U.S. statutory rate ......... $224 $ 96 $(253)
State income tax provision (benefit), net of
federal income tax benefit ....................... 29 5 (15)
Foreign income taxes (benefit) in excess of the
U.S. statutory rate .............................. (2)
Write-off of in-process research and
development ...................................... 37 21 75
Valuation reserve .................................. (4) 3 17
Use of R&D credit carryforwards .................... (16) (5)
Benefit from net earnings of foreign subsidiaries
considered to be permanently reinvested in
non-U.S. operations .............................. (67)
Other .............................................. 5 3 (8)
------- ----- --------
Provision for (benefit from) income taxes .......... $275 $ 61 $(191)
------ ----- -------
A substantial portion of the Company's Asia Pacific manufacturing
operations in Singapore, Thailand, Malaysia and China operate under various tax
holidays which expire in whole or in part during fiscal years 2001 through
2010. Certain tax holidays may be extended if specific conditions are met. The
tax holidays had no impact on net income in 2000. The net impact of these tax
holidays was to increase net income by approximately $34.3 million in 1999. The
tax holidays had no impact on the net income in 1998. Cumulative undistributed
earnings of the Company's Asia Pacific subsidiaries for which no income taxes
have been provided aggregated approximately $1.631 billion at June 30, 2000.
These earnings are considered to be permanently invested in non-U.S.
operations. As of June 30, 2000, additional federal and state taxes of
approximately $584 million would have to be provided if these earnings were
repatriated to the U.S.
5. BUSINESS COMBINATIONS
The Company has a history of business combinations and during the three
most recent fiscal years these included the acquisition of XIOtech Corporation
in fiscal 2000 and the acquisition of Quinta Corporation in fiscal 1998. In
connection with these business combinations, the Company has recognized
significant write-offs of in-process research and development. The completion
of the underlying in-process projects acquired within each business combination
was the most significant and uncertain assumption utilized in the valuation of
the in-process research and development. Such uncertainties could give rise to
unforseen 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 business combinations accounted for under the purchase method. The nature
of research and development projects acquired, the estimated time and costs to
complete the projects and significant risks associated with the projects are
described below.
VALUATION METHODOLOGY
In accordance with the provisions of Accounting Principles Board Opinion
No. 16, "Business Combinations" (APB 16), all identifiable assets, including
identifiable intangible assets, were assigned
F-177
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. BUSINESS COMBINATIONS (CONTINUED)
a portion of the cost of the acquired enterprise (purchase price) on the basis
of their respective fair values. This included the portion of the purchase
price properly attributed to incomplete research and development projects
expensed according to the requirements of Interpretation 4 of Statements of
Financial Accounting Standards No. 2 "Accounting for Research and Developments
Costs" 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 XIOtech's and Quinta's
(collectively referred to as the "Targets") products, technologies, markets,
historical financial performance, estimates of future performance and the
assumptions underlying those estimates. The economic and competitive
environment in which the Company and the Targets operate was also considered in
the valuation analysis.
To determine the value of in-process research and development, the Company
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, associated
risks which included the inherent difficulties and uncertainties in completing
each project and thereby achieving technological feasibility and risks related
to the viability of and potential changes to future target markets. This
analysis resulted in amounts assigned to in-process research and development
for projects that had not yet reached technological feasibility and which did
not have alternative future uses. The Income Approach, which includes analysis
of markets, cash flows, and risks associated with achieving such cash flows,
was the primary technique utilized in valuing each in-process research and
development project. The underlying in-process projects acquired were the most
significant and uncertain assumptions utilized in the valuation analysis of
in-process research and development projects.
To determine the value of developed technologies, the expected future cash
flows of existing product technologies were evaluated, taking into account
risks related to the characteristics and applications of each product, existing
and future markets and assessments of the life cycle stage of each product.
Based on this analysis, the existing technologies that had reached
technological feasibility were capitalized.
To determine the value of the distribution networks and customer bases,
the Company 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 the Company 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, the Company
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
F-178
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. BUSINESS COMBINATIONS (CONTINUED)
unforeseen budget over runs and/or revenue shortfalls in the event that the
Company is unable to successfully complete a certain research and development
project.
The following details specific information about significant acquisitions
including related assumptions used in the purchase price allocation.
ACQUISITION OF XIOTECH CORPORATION:
In January 2000, the Company through its parent Seagate Technology,
acquired XIOtech, for 8,031,804 shares of Seagate Technology common stock,
issued from treasury shares, and options, with a combined fair value of $359
million. XIOtech designs, manufactures and markets a centralized data storage
system. This system is based on an exclusive set of sophisticated data
management and data movement tools. It offers storage virtualization,
multi-node server clustering, and zero backup window solutions. The main
component of the system is MAGNITUDE, a fully implemented storage area network
("SAN"). MAGNITUDE is sold in a cabinet containing software-based architecture
that allows the incorporation of all of the components of a SAN in one
centralized configuration.
XIOtech also designs, develops and produces software, namely the REDI
suite of software, which runs MAGNITUDE's software based architecture. The REDI
software suite is application specific and gives customers the capability of
better managing their data. XIOtech is currently developing the next generation
technologies for both products, named Thunderbolt and REDI 7.0, respectively.
At the time of completing the XIOtech acquisition, the Company estimated
the cost to complete both Thunderbolt and REDI 7.0 at approximately $1 million.
The anticipated release date for the Thunderbolt is the first half of
fiscal 2002 and for the REDI 7.0 is in the second half of fiscal 2001.
Assumptions used in estimating the fair value of intangible assets:
Revenue
Future revenue estimates were generated for the following technologies:
(i) MAGNITUDE, (ii) REDI, (iii) Thunderbolt, the next generation development of
MAGNITUDE and (iv) REDI 7.0, the next generation development of REDI. Aggregate
revenue was estimated to be approximately $47.6 million in fiscal 2000 and to
increase to approximately $230 million for fiscal year 2001 when the in-process
projects were expected to be complete and shipping. Revenue was estimated to
increase to approximately $650 million and $1,060 million in fiscal years 2002
and 2003, respectively. Estimated revenues decreased 29% in fiscal 2004 to $750
million. 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 revenue, (iii)
growth rates for the storage management software market, (iv) the aggregate
size of the storage management software market, (v) anticipated product
development and introduction schedules, (vi) product sales cycles, and (vii)
the estimated life of a product's underlying technology.
Operating expenses
Estimated operating expenses used in the valuation analysis of XIOtech
included (i) cost of goods sold, (ii) general and administrative expense, (iii)
selling and marketing expense, and (iv)
F-179
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. BUSINESS COMBINATIONS (CONTINUED)
research and development expense. In developing future expense estimates, an
evaluation of Seagate and XIOtech's overall business model, specific product
results, including both historical and expected direct expense levels (as
appropriate), and an assessment of general industry metrics was conducted.
Cost of goods sold -- Estimated cost of goods sold, expressed as a
percentage of revenue, for the developed and in-process technologies ranged
from approximately 46% to 55%.
General and administrative ("G&A") expense -- Estimated G&A expense,
expressed as a percentage of revenue, for the developed and in-process
technologies ranged from 5% in fiscal 2000 to less than 1% in fiscal 2004
declining as production levels and related revenue increased and thus
efficiencies in production are assumed to be attained.
Selling and marketing ("S&M") expense -- Estimated S&M expense, expressed
as a percentage of revenue, for the developed and in-process technologies
ranged from 20% in fiscal 2001 to a sustainable 15% in fiscal 2002 and beyond.
For fiscal 2000, however, when the Thunderbolt and REDI 7.0 technology was
estimated to become commercially available, S&M expense was estimated to be 45%
due to the relatively low revenue expectation in the initial commercialization
period.
Research and development ("R&D") expense -- Estimated R&D expense consists
of the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the
product updated with current information. These activities include routine
changes and additions. The maintenance R&D expense was estimated to be 2% of
revenue for the developed and in-process technologies in fiscal 2000 and 3%
throughout the remainder of the estimation period.
In addition, as of the date of the acquisition, Seagate Technology's
management and XIOtech's management anticipated the costs to complete the
in-process technologies at approximately $0.95 million.
Effective tax rate.
The effective tax rate utilized in the analysis of the in-process
technologies was 40%, which reflects Seagate Technology'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 XIOtech's developed and in-process
technologies was 16% and 23%, respectively. In the selection of the appropriate
discount rates, consideration was given to the Weighted Average Cost of Capital
("WACC") of Seagate Technology of approximately 16% at the date of acquisition.
The discount rate utilized for the in-process technology was determined to be
higher than Seagate Technology's WACC due to the fact that the technology had
not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than Seagate Technology'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 $105 million. This
acquisition was accounted for as a purchase and, accordingly, the results of
operations of XIOtech have been included in the Company's combined consolidated
financial statements from the date of acquisition.
F-180
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. BUSINESS COMBINATIONS (CONTINUED)
The following is a summary of the purchase price allocation (in millions):
Tangible assets less liabilities assumed ......... $ 12
Developed technology ............................. 37
Tradenames ....................................... 5
Assembled workforce .............................. 2
Customer list .................................... 2
In-process research and development .............. 105
Goodwill ......................................... 214
Deferred tax liability ........................... (18)
-----
$ 359
=====
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 the
Company, received cash payments aggregating $230 million upon the closing of
the acquisition and were eligible to receive additional cash payments
aggregating $96 million upon the achievement of certain product development and
early production milestones. Of the $96 million, $19 million was charged to
operations in fiscal 1998. Of the $19 million charged to operations, $5 million
was paid in fiscal 1998 In July 1998, the Company and Quinta amended the
purchase agreement to eliminate the product development and early production
milestones and provide that the former shareholders of Quinta will be eligible
to receive the remaining $77 million and the $14 million that had been accrued
but unpaid in fiscal 1998. In the first quarter of fiscal 1999, the Company
recorded a charge to operations for the remaining $77 million.
Quinta's research and development project revolves around an OAW
technology. OAW refers to Quinta's newly designed recording technology that,
upon completion, would be implemented into Winchester hard disk drives. OAW
combines traditional magnetic recording technology with Winchester hard disc
drives and optical recording capabilities; optical recording technology enables
greater data storage capacity. By integrating advanced optical features along
with a highly fine and sophisticated tracking and delivery system within the
head design, OAW would multiply the real density of disc drives.
Through August 8, 1997, the acquisition date, Quinta had demonstrated
significant achievements in developing its technology. However, further
technological milestones were required before technological feasibility could
be achieved. Quinta's development process consists of the following development
milestones: (i) route light (optical fiber), (ii) flying head use, (iii)
recording media, (iv) mirror creation and demonstration (two stage servo), (v)
complete assembly, (vi) form factor containment, (vii) design verification
test, (viii) customer qualification, and (ix) delivery.
Assumptions used in estimating the fair value of intangible assets:
Revenue
Future revenue estimates were generated for the following product that the
OAW technology would be utilized in: (i) fixed drives, (ii) removable drive,
(iii) fixed/removable drives, and (iv)
F-181
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. BUSINESS COMBINATIONS (CONTINUED)
cartridges. No revenue was expected through fiscal 1998 since the underlying
technology was anticipated not to be technologically feasible until fiscal
1999. Revenue was estimated to be approximately $26.6 million in fiscal 1999
and to increase to approximately $212 million for fiscal year 2000 when the
in-process project was expected to be complete and shipping. Revenue growth was
expected to decline to a sustainable 20% growth by fiscal 2005. The estimated
revenue growth is consistent with the introduction of new technology. Revenue
estimates were based on (i) aggregate revenue growth rates for the business as
a whole, (ii) individual product revenue, (iii) growth rates for the disc drive
market, (iv) the aggregate size of the disc drive market, (v) anticipated
product development and introduction schedules, (vi) product sales cycles, and
(vii) the estimated life of a product's underlying technology. Quinta's
development cycle, in total, was expected to take approximately 18 to 24
months.
Operating expenses
Estimated operating expenses used in the valuation analysis of Quinta
included (i) cost of goods sold, (ii) general and administrative expense, (iii)
selling and marketing expense, and (iv) research and development expense. In
developing future expense estimates, an evaluation of Seagate's overall
business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted. Due to Quinta's limited operating history, an
analysis of Quinta's historical performance was not meaningful.
Cost of goods sold -- Estimated cost of goods sold, expressed as a
percentage of revenue, for the in-process technologies ranged from
approximately 65% to 80%.
General and administrative ("G&A") expense -- Estimated G&A expense,
expressed as a percentage of revenue, for the in-process technologies ranged
from 2.6% in fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For
fiscal 1999, however, when the OAW technology would become commercially
available, G&A expense was estimated to be 6.4% due to the relatively low
revenue expectation in the initial commercialization period.
Selling and marketing ("S&M") expense -- Estimated S&M expense, expressed
as a percentage of revenue, for the in-process technologies ranged from 3.3% in
fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For fiscal 1999,
however, when the OAW technology would become commercially available, S&M
expense was estimated to be 8.7% due to the relatively low revenue expectation
in the initial commercialization period.
Research and development ("R&D") expense -- Estimated R&D expense consists
of the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the
product updated with current information. These activities include routine
changes and additions. The maintenance R&D expense was estimated to be 0.5% of
revenue for the in-process technologies throughout the estimation period.
Effective tax rate
The effective tax rate utilized in the analysis of the in-process
technologies was 38%, which reflects Seagate Technology'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.
F-182
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. BUSINESS COMBINATIONS (CONTINUED)
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 WACC of Seagate Technology 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 Technology's WACC due to the fact that the technology had
not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than Seagate Technology of 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 combined consolidated financial statements from the
date of acquisition.
The following is a summary of the purchase price allocation:
(IN MILLIONS)
--------------
Tangible assets less liabilities assumed .......... $ 34
In-process research and development ............... 214
Assembled workforce ............................... 2
----
$250
====
6. RESTRUCTURING
In fiscal 2000, the Company recorded restructuring charges of $214
million. The restructuring charge was a result of a restructuring plan
established to align the Company's global workforce and manufacturing capacity
with existing and anticipated future market requirements and necessitated by
the Company's improved productivity and operating efficiencies (the "fiscal
2000 restructuring plan"). These actions included workforce reductions,
capacity reductions including closure of facilities or portions of facilities,
write-off of excess equipment and consolidation of operations in the Company's
recording media operations, disc drive assembly and test facilities, printed
circuit board assembly manufacturing, recording head operations, customer
service operations, sales and marketing activities, and research and
development activities. The restructuring charges were comprised of $81 million
for the write-off of excess manufacturing, assembly and test equipment formerly
utilized in Singapore, Thailand and Northern California; $88 million for
employee termination costs; $29 million for the write-off of owned facilities
located in Singapore; $11 million in lease termination and holding costs; $5
million in renovation costs to restore facilities in Singapore and Northern
California to their pre-lease condition; and $2 million in contract
cancellations associated with one of the Singapore facilities. Prior to this
period, there was no indication of permanent impairment of the assets
associated with the closure and consolidation of facilities. In connection with
the fiscal 2000 restructuring plan, the Company plans to reduce its workforce
by approximately 23,000 employees primarily in manufacturing. Approximately
18,300 of the 23,000 employees had been terminated as of June 30, 2000. As a
result of employee terminations and the write-off of equipment and facilities
in connection with the restructuring charges recorded during the year ended
June 30, 2000 related to the fiscal 2000 restructuring plan, the Company
estimates that after the completion of these restructuring activities, annual
salary and depreciation expense will be reduced by approximately
F-183
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. RESTRUCTURING (CONTINUED)
$151 million and $40 million, respectively. The Company anticipates that the
implementation of the fiscal 2000 restructuring plan will be substantially
complete by December 29, 2000.
In fiscal 2000, the Company reversed $11 million of its restructuring
accruals comprised of $2 million of restructuring reserves recorded in the same
period, $5 million of restructuring reserves recorded in fiscal 1999 and $4
million of restructuring reserves recorded in fiscal 1998. This reversal
included $3 million of valuation reserves classified elsewhere on the balance
sheet and the reversal of amounts included in the restructuring reserve for
facility lease costs. In addition, reclassifications between cost categories
within the restructuring reserve were made as a result of differences between
original estimates and amounts actually incurred or expected to be incurred.
During the third quarter of fiscal 1999, the Company recorded a
restructuring charge of $71 million as a result of steps the Company is taking
to further improve the efficiency of its operations. These actions included
closure of the Company's microchip manufacturing facility in Scotland;
discontinuance of the Company's recording head suspension business located in
Malaysia and Minnesota; consolidation of global customer service operations by
relocating such operations in Singapore, Scotland and Costa Mesa, California to
Reynosa, Mexico; and closure of the Company's recording media substrate
facility in Mexico. The restructuring charges were comprised of $37 million for
the write-off or write-down of excess manufacturing, assembly and test
equipment formerly utilized in Scotland, Malaysia and Minnesota; $16 million
for lease termination and holding costs for facilities located in Scotland and
Singapore; $9 million for employee termination costs; $3 million for the
write-off of goodwill associated with the recording media substrate operation
in Mexico; $2 million for the write-down of owned facilities located in
Malaysia; $1 million for the write-down of leasehold improvements in Singapore;
$1 million for the write-off of tooling; $1 million for contract cancellations
associated with the suspension business; and $1 million for repayment of
various grants previously received from the Scottish government. Prior to this
period, there was no indication of permanent impairment of the assets
associated with the closure and consolidation of facilities. Evaluations of the
resale market for certain assets were used to estimate fair value.
As of July 2, 1999, all of the equipment located at the microchip facility
in Scotland had been sold and the lease on this facility had been terminated.
The Company is in the final stages of disposing all of the assets for its
suspension business. The facility that was previously occupied by the
suspension operations is currently being used for other operations.
In connection with the fiscal 1999 restructuring, the Company's planned
workforce reduction had been completed as of March 31, 2000 and the other
restructuring activities were substantially complete as of March 31, 2000.
In fiscal 1999, the Company reversed $12 million of its restructuring
accruals originally recorded in fiscal year 1998 as a result of the Company
abandoning its plan to seek an agreement with an external vendor to supply
parts currently manufactured at a facility in Thailand. This reversal included
$10 million of valuation reserves classified elsewhere on the balance sheet and
reversal of amounts included in the restructuring reserve of $1 million for
facility lease costs and $1 million for contract cancellations. In addition,
reclassifications between cost categories within the restructuring reserve were
made as a result of differences between original estimates and amounts actually
incurred or expected to be incurred. This was primarily a result of an increase
in the period of time estimated to obtain a suitable sub-lessee for certain
leased buildings located at the former San Jose, California design facility
offset by lower severance and benefits costs than originally estimated.
F-184
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. RESTRUCTURING (CONTINUED)
In the second and third quarters of fiscal 1998, the Company recorded
restructuring charges aggregating $347 million. The Company had experienced
reductions in revenue from the third quarter of fiscal year 1997 to the fourth
quarter of fiscal year 1997 of 21%, from the fourth quarter of fiscal year 1997
to the first quarter of fiscal year 1998 of 4% and from the first quarter of
fiscal year 1998 to the second quarter of fiscal year 1998 of an additional
12%. During the second quarter of fiscal 1998, forecasted production needs were
much lower than the current capacity of the Company and the Company recognized
that the recent oversupply in the marketplace was not a short-term anomaly. In
this period, the Company also decided to discontinue production of several
products, rendering test and manufacturing equipment unique to those products
obsolete. Prior to this period, there was no indication of permanent impairment
of these assets associated with the recent excess capacity of the Company or
the products to be discontinued These charges reflect steps the Company is
taking to align worldwide operations with current market conditions by reducing
existing capacity in all areas of the Company and improving the productivity of
its operations and the efficiency of its development efforts by consolidating
manufacturing and R&D operations. Actions include exiting production of mobile
products; early discontinuation of several other products; closing and selling
the Clonmel, Ireland drive manufacturing facility; closing and subleasing the
San Jose and Moorpark, California design center facilities; aborting production
expansion projects in Cork, Ireland; and divesting the Company of the new
Philippines manufacturing facility, which was nearing completion. Included in
the restructuring charge are the write-down and write-off of tangible assets
comprised of manufacturing, assembly and test equipment and tooling formerly
utilized in California, Singapore, Thailand, Ireland and facilities located in
California, the Philippines and Thailand totaling $200 million and intangible
assets totaling $2.5 million for goodwill associated with permanently impaired
media manufacturing equipment.
The majority of the tangible assets have been disposed of or sold
including the disposal of the Clonmel, Ireland facility in May 1998 and the
sublease of one of the five buildings at the San Jose, California design
center. The Company is marketing three additional buildings in the San Jose,
California design center for sublease. The fifth building has a remaining lease
term so short as to make a sublease impractical. Equipment formerly utilized at
these facilities, in addition to equipment associated with restructuring
actions in Singapore and Thailand, has been relocated to other sites or
scrapped. Of the $137 million in write-offs and write-downs of equipment, $109
million was scrapped and $28 million is awaiting final disposition. In
addition, $10 million of equipment was transferred at net book value for use in
operations at other sites. Subsequent to the recording of the restructuring
reserve, depreciation related to certain assets that continued in use, was
included in operations. At the time these assets were identified as available
for sale no further depreciation was recorded. The write-off of intangibles and
other assets includes capital equipment deposits and goodwill associated with
permanently impaired equipment. Costs associated with aborting production
expansion projects in Cork, Ireland include primarily architect costs, lease
termination costs associated with equipment leased by contractors, and lease
termination costs for temporary housing used by contractor personnel.
Certain facilities including design centers in California, as well as
manufacturing facilities in Thailand continued in use after restructuring
amounts were recorded. The Moorpark, California product design center remained
in use for six months after the write-down of leasehold improvements and
equipment totaling $9 million. This facility has been subleased for a portion
of the remaining minimum lease term. One Thailand manufacturing facility
continues to be utilized until a satisfactory agreement can be made with an
external vendor to supply parts currently manufactured at this location. At the
time the decision to exit this facility was made, the Company believed that it
had identified a supplier for parts. It was subsequently determined that the
supplier could not meet the Company's quality standards.
F-185
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. RESTRUCTURING (CONTINUED)
As of January 1, 1999, the Company's planned workforce reduction
associated with the fiscal 1998 restructuring had been completed. The
implementation of the 1998 restructuring plan was substantially complete as of
July 2, 1999.
The following table summarizes the Company's restructuring activities:
SEVERANCE INTANGIBLES
AND EXCESS & OTHER CONTRACT
BENEFITS FACILITIES EQUIPMENT ASSETS CANCELLATIONS OTHER TOTAL
----------- ------------ ----------- ------------ --------------- ---------- -----------
(IN MILLIONS)
FY1998 restructuring
charge ................ $ 56 $ 78 $ 137 $ 11 $ 43 $ 21 $ 346
FY1999 restructuring
charge ................ 9 19 37 4 1 1 71
Cash charges ........... (58) (23) -- -- (38) (12) (131)
Non-cash charges ....... -- (59) (174) (15) -- -- (248)
Adjustments and
reclassifications ..... (3) 3 -- -- (3) 1 (2)
------- ---- ------ ----- ------- ---- --------
Reserve balances,
July 2, 1999 .......... $ 4 $ 18 -- $ -- $ 3 $ 11 $ 36
FY2000 restructuring
charge ................ 88 40 81 -- 2 5 216
Cash charges ........... (67) (11) -- -- -- (2) (80)
Non-cash charges ....... -- (29) (81) -- -- -- (110)
Adjustments and
reclassifications ..... (2) (8) -- -- -- 1 (9)
------- ------- ------ ----- ------ ------ --------
Reserve balances,
June 30, 2000 ......... $ 23 $ 10 $ -- $ -- $ 5 $ 15 $ 53
====== ====== ====== ===== ====== ====== =======
7. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company designs, manufactures and markets products for storage,
retrieval and management of data on computer and data communications systems.
These products include disc drives and disc drive components. The Company
operates in a single industry segment, disc drives. The CEO evaluates
performance and allocates resources based on revenue and gross profit from
operations. Gross profit from operations is defined as revenue less cost of
sales. The Company does not evaluate or allocate assets or depreciation by
operating segment, nor does the CEO evaluate segments on these criteria. The
CEO has been identified as the Chief Operating Decision Maker as defined by
Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures
about Segments of an Enterprise and related Information".
In fiscal 2000, 1999 and 1998, Compaq Computer Corporation accounted for
more than 10% of combined consolidated revenue for a total of $1.100 billion,
$1.144 billion, and $873 million, respectively.
Enterprise-wide information is provided in accordance with SFAS No. 131.
Long-lived assets consist of property, equipment and leasehold improvements,
capital leases, equity investments, goodwill and other intangibles, and other
non-current assets as recorded by the Company's operations in each area.
F-186
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
The following table summarizes the Company's operations by geographic
area:
2000 1999 1998
--------- --------- ---------
(IN MILLIONS)
Revenue from external customers: (1)
United States .................... $2,637 $2,988 $3,225
The Netherlands .................. 1,302 1,291 1,445
Singapore ........................ 1,376 1,192 1,063
Other ............................ 743 681 512
------ ------ ------
Combined consolidated ............ $6,058 $6,152 $6,245
====== ====== ======
Long-lived Assets:
United States .................... $1,391 $ 754 $ 712
Singapore ........................ 392 546 607
Other ............................ 605 640 616
------ ------ ------
Combined consolidated ............ $2,388 $1,940 $1,935
====== ====== ======
- ----------
(1) Revenue is attributed to countries based on the shipping location.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company records unrealized gains and losses on the mark-to-market of
its investments as a component of accumulated other comprehensive income. As of
June 30, 2000 and July 2, 1999, total accumulated other comprehensive income
(loss) was $86 million and $(7) million, respectively. During fiscal 2000,
several marketable equity securities held by the Company including SanDisk
Corporation, Gadzoox Networks, Inc., Veeco Instruments, Inc., and Lernout &
Hauspie Speech Products N.V. were included in this mark-to-market calculation
resulting in a $95 million unrealized gain, net of taxes. No such similar
amounts were recorded in fiscal 1999. Such investments are subject to changes
in valuation based upon the market price of their common stock. Between June
30, 2000 and August 9, 2000, these investments, excluding the investment in
SanDisk which was sold during the same period, had temporarily decreased in
fair value by $56 million, net of taxes. In July 2000, the Company sold its
remaining investment in SanDisk for net proceeds of approximately $105 million.
The components of accumulated other comprehensive income (loss), net of
related tax, at June 30, 2000 and July 2, 1999 were as follows:
JUNE 30, JULY 2,
2000 1999
---------- ----------
(IN MILLIONS)
Unrealized gain (loss) on securities .................. $ 88 $ (5)
Foreign currency translation adjustments .............. (2) (2)
------ ------
Accumulated other comprehensive income (loss) ......... $ 86 $ (7)
===== =====
Accumulated other comprehensive income as of June 30, 2000 includes
deferred tax liabilities of $57 million.
F-187
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS
Leases -- The Company leases certain property, facilities and equipment
under non-cancelable lease agreements. Land and facility leases expire at
various dates through 2019 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 June 30, 2000:
(IN MILLIONS)
2001 .......................... $ 36
2002 .......................... 29
2003 .......................... 23
2004 .......................... 20
2005 .......................... 17
After 2005 .................... 129
----
$254
====
Total rent expense for all land, facility and equipment operating leases
was approximately $36 million, $42 million, and $48 million for 2000, 1999 and
1998, respectively.
Capital Expenditures -- The Company's commitments for construction of
manufacturing facilities and equipment approximated $51 million at June 30,
2000.
10. SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998
------ --------- ---------
(IN MILLIONS)
Cash Transactions:
Cash paid for interest ..................... $ 52 $ 52 $52
Cash paid for income taxes, net of
refunds .................................. 577 (109) (1)
Non-Cash Transactions:
Acquisition of XIOtech Corporation ......... $359 $ -- $--
The components of depreciation and amortization expense are as follows:
2000 1999 1998
------ ------ -------
(IN MILLIONS)
-------------------------
Depreciation ...................... $586 $585 $540
Amortization:
Goodwill and intangibles ......... 36 20 21
Deferred compensation ............ 6 10 8
Other assets ..................... 38 61 51
---- ---- ----
$666 $676 $620
==== ==== ====
11. LITIGATION
The following discussion contains forward-looking statements. These
statements relate to our legal proceedings described below. Litigation is
inherently uncertain and may result in adverse rulings
F-188
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC., THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. LITIGATION (CONTINUED)
or decisions. Additionally, we may enter into settlements or be subject to
judgments that may, individually or in the aggregate, have a material adverse
effect on our results of operations. Accordingly, actual results could differ
materially from those projected in the forward-looking statements.
Following our announcement of the transactions, a number of our
stockholders filed lawsuits against us, the individual members of our board of
directors, some of our executive officers, VERITAS and Silver Lake. The
complaints filed in Delaware were consolidated into one action on April 18,
2000. On May 22, 2000, the Delaware Chancery Court certified the Delaware
action as a class action. The Delaware plaintiffs filed an amended complaint
and moved for a preliminary injunction on September 11, 2000. In California,
three complaints were filed in Santa Clara County Superior Court and two
complaints were filed in Santa Cruz County Superior Court. The complaints in
both jurisdictions all essentially allege that the members of our board of
directors breached their fiduciary duties to our shareholders by entering into
the transactions. The complaints also allege that the directors and executive
officers have conflicting financial interests and did not secure the highest
possible price for our shares. All the complaints were styled as class actions,
and sought to enjoin the transactions and secure damages from all defendants.
Between March 30 and October 27, 2000, one of the California complaints was
voluntarily dismissed and the others were coordinated in Santa Clara County. On
October 13, 2000, a Memorandum of Understanding, or MOU, was signed regarding
settlement with all defendants on behalf of the shareholder class. The
shareholders approved the transactions on November 21, 2000 and the
transactions closed on November 22, 2000. After the transactions closed in
November 2000, the four remaining California actions were dismissed with
prejudice.
A final Stipulation of Settlement was executed in early January 2001. The
Delaware Chancery Court approved the settlement and entered an order of
judgement on April 12, 2001. If no appeal is filed within 30 days, the judgment
will be final. The primary elements of the Stipulation of Settlement are the
following:
o Suez Acquisition Company and the investor group agreed to increase the
cash purchase price under the stock purchase agreement by $50 million.
This amount:
- was funded by the investor group on the closing of the transactions
into an escrow account held by VERITAS, pending its distribution to our
shareholders, if specified conditions are satisfied as discussed below;
- will be paid to our shareholders as additional consideration if the
order of judgment by the Delaware Chancery Court is not appealed and
becomes final and the Delaware lawsuit and the California lawsuits are
dismissed with prejudice; and -
- plus interest, will be returned to New SAC in the event that VERITAS
determines, in its reasonable judgment, that the conditions to the
release of the amount have become incapable of being satisfied.
o New SAC paid $15.25 million in attorneys' fees awarded to plaintiffs'
counsel by the Delaware Chancery Court into an escrow account. That amount
will be paid from escrow to plaintiffs' counsel when the judgment is
final.
o The merger agreement was amended to 1) reduce the maximum amount that
may be required to be held in escrow to cover our potential tax
liabilities from $300 million to $150 million, and 2) change some
provisions regarding VERITAS' payment of the consideration for the merger.
o The settlement is binding on all members of the shareholder class.
F-189
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC., THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. LITIGATION (CONTINUED)
INTELLECTUAL PROPERTY LITIGATION
Papst Licensing, GmbH -- Papst has given us notice that it believes
various of our former Conner Peripherals, Inc. rigid disc drives infringe
several of its patents covering the use of spindle motors in rigid disc drives.
We believe that the accused former Conner disc drives do not infringe any valid
and/or enforceable claims of the Papst patents. We believe that subsequent to
the merger with Conner, our earlier paid-up license under Papst's patents
extinguished any ongoing liability. We also believe we enjoy the benefit of
licenses granted by Papst to motor vendors of Conner. After closing of the
transactions, Papst indicated that it could not consent to the assignment of
the 1993 Papst-Seagate license to the new entity until it receives further
information about the new business structure and that any of our drives would
be assumed to be unlicensed. We are providing Papst with additional information
regarding the new business structure.
Convolve, Inc. -- On July 13, 2000, Convolve, Inc., and Massachusetts
Institute of Technology filed a lawsuit, captioned Convolve, Inc. and
Massachusetts Institute of Technology v. Compaq Computer Corp. and Seagate
Technology, Inc. against Compaq Computer Corporation and Seagate Technology in
the U.S. District Court for the Southern District of New York. It alleged
patent infringement, misappropriation of trade secrets, breach of contract,
tortious interference with contract and fraud relating to Convolve's Input
Shaping (Registered Trademark) and Quick and QuietTM technology. The
plaintiffs claim their technology is incorporated in our sound barrier
technology, which was publicly announced on June 7, 2000. The complaint seeks
injunctive relief, $800 million in compensatory damages and punitive damages.
We answered the complaint on August 2, 2000 and filed cross-claims for
declaratory judgment that two Convolve/MIT patents are invalid and not
infringed and that we own any intellectual property based on the information
that we disclosed to Convolve. Plaintiffs' motion for expedited discovery was
denied by the court. The court ordered plaintiffs to identify their trade
secrets to defendants before discovery can begin. Convolve served a trade
secrets disclosure on August 4, 2000, and Seagate Technology has challenged
that disclosure as not containing any trade secrets. The court will appoint a
Special Master to review the trade secret issues, and the parties have
presented candidates to the court. We believe this matter is without merit and
intend to defend it vigorously.
Storage Computer Corporation -- On March 22, 2001, Storage Computer
Corporation filed suit in the U.S. District Court for the Northern District of
Texas, Civil Action No. 3-01CV0555-M, entitled Storage Computer Corporation v.
XIOtech Corporation and Seagate Technology, Inc. The complaint alleges that
XIOtech's MAGNITUDETM product infringes U.S. Patent No. 5,893,919 and that
Seagate Technology induces infringement of the patent by promoting and
marketing XIOtech's MAGNITUDETM product, particularly through a hyperlink on
Seagate Technology's internet website to XIOtech's internet website. We have
engaged outside counsel to evaluate the claims in the suit. The ultimate
outcome of this litigation is fact intensive and cannot be determined and
remains uncertain. The ultimate resolution of this matter could have a material
adverse impact on New SAC's financial condition, results of operations, and
cash flows.
LABOR LILTIGATION
White -- On March 15, 2000 Royston White filed a breach of contract action
against Seagate Technology in Oklahoma State Court. The complaint is styled as
a class action, and White, as the sole named defendant, alleges that some 600
former employees have been damaged through breach of separation and release
agreements entered into in connection with a work force reduction. Discovery is
ongoing and a trial date has not yet been set. We have filed a summary judgment
motion, although the court has not set a hearing date yet. We believe we have
substantive defenses and will pursue such defenses vigorously.
F-190
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. LITIGATION (CONTINUED)
OTHER MATTERS
We are involved in a number of other judicial and administrative
proceedings incidental to our business. Although occasional adverse decisions
or settlements may occur, we believe that the final disposition of such matters
will not have a material adverse effect on our financial position or results of
operations.
12. SUBSEQUENT EVENTS
On November 22, 2000, under the stock purchase agreement, New SAC, the
successor to Seagate Technology, completed the purchase of all of the operating
assets and assumption of operating liabilities of Seagate Technology and its
consolidated subsidiaries. The net purchase price was $1.840 billion in cash,
including transaction costs of approximately $25 million. Seagate Technology
designed, developed and manufactured rigid disk drives, enterprise management
software, storage area networks, and removable tape storage solutions.
Immediately thereafter, in a separate transaction, Seagate Technology and
VERITAS completed their merger under the Merger Agreement. At the time of the
merger, Seagate Technology's assets included a specified amount of cash, an
investment in VERITAS, and certain specified investments and liabilities. In
connection with the Merger Agreement, Seagate Technology, VERITAS and New SAC
entered into an Indemnification Agreement, pursuant to which these entities and
certain other subsidiaries of Seagate Technology, including the Company, agreed
to certain indemnification provisions regarding tax and other matters that may
arise in connection with the stock purchase agreement and the Merger Agreement.
We accounted for the transactions as a purchase in accordance with
Accounting Principles Board, or APB, Opinion No. 16, "Business Combinations."
All acquired tangible assets, identifiable intangible assets as well as assumed
liabilities were valued based on their relative fair values and reorganized
into the following businesses: (1) the rigid disc drive business (HDD, which is
now Seagate Technology Holdings), which includes the storage area networks
business (SAN, which is now Seagate Technology SAN Holdings), (2) the removable
storage solutions business (RSS, which is now Seagate Removable Storage
Solutions Holdings), (3) the software business (Crystal Decisions), and (4) an
investment holding company (STI). The fair value of the net assets exceeded the
net purchase price by approximately $909 million. Accordingly, the resultant
negative goodwill was allocated on a pro rata basis to the acquired long-lived
assets and reduced the recorded amounts by approximately 46%.
F-191
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
The table below summarizes the allocation of net purchase price as it
relates to the Company:
LIFE ESTIMATED
DESCRIPTION IN YEARS FAIR VALUE
- ------------------------------------------------- ---------- --------------
(IN MILLIONS)
--------------
Net current assets (1) (5) ............... $ 873
Other long-lived assets (2) .............. 42
Property, plant & equipment (3) .......... 764
Identified intangibles:
Trade names (5) .......................... 10 47
Developed technologies (5) ............... 3-7 50
Assembled workforces (5) ................. 1-3 43
Other .................................... 5 1
------
Total identified intangibles ............ 141
Long-term deferred taxes (5) ............. (70)
Long term liabilities .................... (122)
------
Net assets .............................. 1,628
In-process research & development (6) .... 52
------
Net Purchase Price ...................... $1,680
======
- ----------
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book values.
Short-term investments were valued based on quoted market prices.
Inventory values were estimated based on the current market value of the
inventories less completion costs and less a normal profit margin based
on activities remaining to be completed until the inventory is sold.
Valuation allowances were established for current deferred tax assets in
excess of long-term deferred tax liabilities.
Assumed current liabilities included accounts payable, accrued
compensation and expenses and accrued income taxes. The fair values of
current liabilities generally approximated the historic recorded book
values because of the monetary nature of most of the liabilities.
(2) Acquired other long-lived assets were principally comprised of security
deposits and service repair inventories recorded with estimated fair
values generally approximating the recorded historic book value.
(3) New SAC obtained an independent valuation of the acquired property, plant
and equipment. In arriving at the determination of market value for the
assets, the appraisers considered the estimated cost to construct or
acquire comparable property. Machinery and equipment was assessed using
replacement cost estimates reduced by depreciation factors representing
the condition, functionality and operability of the assets. The sales
comparison approach was used for office and data communication equipment.
Land, land improvements, buildings, and building and leasehold
improvements were valued considering location, size, expected use,
physical condition and current market conditions and discussions with
knowledgeable company personnel.
(4) Long-term deferred tax liabilities arose as a result of the excess of the
fair values of inventory, long-term investments, and acquired intangible
assets over their related tax basis. New SAC has $350 million of federal
and state deferred tax assets for which a full valuation allowance has
been established.
(5) New SAC obtained an independent valuation of acquired identified
intangibles. The significant assumptions relating to each category are
discussed in the following paragraphs. Also, these
F-192
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
assets are being amortized on the straight-line basis over their estimated
useful life and resultant amortization is included in amortization of
goodwill and other intangibles.
Trade names -- The value of the trade names was based upon discounting to
their net present value the licensing income that would arise by charging the
operating businesses that use the trade names.
Developed technologies -- The value of this asset for each operating
business was determined by discounting the expected future cash flows
attributable to all existing technologies which had reached technological
feasibility, after considering risks relating to: 1) the characteristics and
applications of the technology, 2) existing and future markets, as well as 3)
life cycles of the technologies. Estimates of future revenues and expenses used
to determine the value of developed technology was consistent with the
historical trends in the industry and expected outlooks.
Assembled workforces -- The value of the assembled work force was
determined by estimating the recruiting, hiring and training costs to replace
each group of existing employees.
In-process research & development (IPR&D) -- The value of IPR&D was based
on an evaluation of all developmental projects using the guidance set forth in
Interpretation No. 4 of Financial Accounting Standards Board Statement FAS No.
2, "Accounting for Research and Development Costs" and FAS No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed".
The amount was determined by: 1) obtaining management estimates of future
revenues and operating profits associated with existing developmental projects
2) projecting the cash flows and costs to complete of the underlying
technologies and resultant products, and 3) discounting these cash flows to
their net present value.
Estimates of future revenues and expenses used to determine the value of
IPR&D was consistent with the historical trends in the industry and expected
outlooks. The entire amount was charged to operations because related
technologies had not reach technological feasibility and they had no
alternative future use.
At the valuation date, HDD's developmental projects focused on increasing
capacity, reducing size and power consumption, improving performance and
reliability, and reducing production costs. They were grouped into three
categories. Those included in category one had completed conceptualization and
there was substantial progress in coding, building, simulating, and testing the
technologies functionality and performance. For those included in category two,
subsystem requirements had been identified, design plans had been completed,
and substantial progress had been made in coding and/or building the
technologies. Those included in category three had completed design plans and
system requirements. Based upon an analysis of efforts to date, developmental
projects in these three categories were 70%, 50%, and 30% complete,
respectively, and were scheduled for completion through out the period ended in
fiscal 2003 at an additional estimated cost of $107 million.
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
acquisition of substantially all of the operating assets of Seagate Technology
had occurred at the beginning of fiscal 1999. The pro forma statements of
operations for the six months ended December 29, 2000 and December 31, 1999,
include the historical results of the Company in addition to the historical
results of Seagate and are adjusted to reflect the new accounting basis for the
assets and liabilities of the
F-193
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
Company, and exclude acquisition related charges for recurring amortization of
goodwill and intangibles related to Seagate's prior acquisitions. The pro forma
financial results are as follows:
FISCAL YEARS ENDED
-------------------
JUNE 30, JULY 2,
2000 1999
---------- --------
(IN MILLIONS)
Revenue ............................ $6,058 $6,152
Income before income taxes ......... 182 482
Net income (loss) .................. 164 425
CAPITAL STOCK
HDD's authorized share capital is $50,000 and consists of 50,000 common
shares, par value $1.00, of which 2,000 shares were outstanding as of December
29, 2000.
In February 2001, the Board of Directors of the Company, approved an
amendment to the Articles of Association of Seagate Technology Holdings. Under
the terms of the amendment, the Company's authorized share capital will consist
of 600 million common shares, par value $0.00001, and 450 million preferred
shares, par value $0.00001, of which 400 million shares will be designated
Series A preferred shares.
Common Shares--Holders of ordinary shares are entitled to receive
dividends and distributions when and as declared by HDD's Board of Directors.
Upon any liquidation, dissolution, or winding up of HDD, after required
payments are made to holders of preferred shares, any remaining assets of HDD
will be distributed ratably to holders of the common shares. Holders of common
shares are entitled to one vote per share on all matters presented to HDD's
shareholders.
Preferred Shares -- The Board approved amendment allows the Company's
Board of Directors to issue one or more series of preferred shares, at the time
and for the consideration determined by the Board of Directors. Holders of
preferred shares will be entitled to receive dividends and distributions when
and as declared by the Company's Board of Directors on a basis equal to the
Company's common shares. Upon any liquidation, dissolution, or winding up of
the Company, the holders of preferred shares shall receive, out of any
remaining, legally available assets of the Company, a liquidation preference of
$2.30 per preferred share, less the aggregate amount of any distributions or
dividends already made per preferred share. To the extent there are not
sufficient remaining assets of the Company to pay the liquidation preference,
holders of preferred shares shall share ratably in the distribution of the
Company's remaining assets. Upon payment of the liquidation preference on each
preferred share, the preferred shares shall be cancelled. Holders of preferred
shares will have one vote per share and all such shares are convertible on a
one-to-one basis into common shares.
DEFERRED COMPENSATION PLAN
Members of the management group entered into rollover agreements in
connection with the transactions. Under these agreements, members of the
management group agreed not to receive the merger consideration for a portion
of their Seagate Technology restricted common stock and options to purchase
shares of Seagate Technology common stock, valued at approximately $184
million. In exchange for the management rollover, the members of the management
group received the right to participate in a deferred compensation plan and
receive unvested ordinary and preferred shares of New SAC granted under the
2000 Restricted Share Plan. The unvested preferred and ordinary shares vest as
follows:
F-194
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
o one-third will vest on the first anniversary of the closing of the
transactions;
o one-third will vest proportionately each month over the next 18 months;
and
o the final one-third will vest on the date which is 30 months after the
closing of the transactions.
Of the total value of the management rollover, approximately $179 million
relates to the restricted award grants. With respect to the restricted ordinary
and preferred shares received in connection with the rollover agreements, New
SAC will record and pushdown to the Company compensation expense of
approximately $23 million, based on the fair value of the ordinary and
preferred shares at the date of issuance, amortized over the 30 month vesting
period using the graded vesting method.
LONG-TERM DEBT AND CREDIT FACILITIES
Upon the closing of the transactions, subsidiaries of the Company entered
into senior credit facilities with a syndicate of banks and other financial
institutions. The senior credit facilities provide senior secured financing of
up to $900 million, consisting of:
o a $200 million revolving credit facility for general corporate purposes,
with a sublimit of $100 million for letters of credit, which will
terminate in five years;
o a $200 million term loan A facility with a maturity of five years; and
o a $500 million term loan B facility with a maturity of six years.
At the closing of the transactions, the Company did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because approximately $45 million of
existing letters of credit were outstanding and reduced availability under it.
The Company drew the full amount of the term loan A facility and the term loan
B facility on the closing of the transactions to assist in financing the
acquisition of Seagate Technology's operating assets. Additional financing for
the acquisition was obtained by New SAC through the issuance of ordinary and
preferred shares with proceeds aggregating approximately $915.7 million.
The $700 million of outstanding loans under the term loan A and B
facilities are repayable in semi-annual payments due as follows:
(IN MILLIONS)
Fiscal 2001 ............ $ 5
2002 ..... ........... 23
2003 ..... ........... 40
2004 ..... ........... 50
2005 ..... ........... 60
Thereafter .......... 522
-----
Total .... ........... $ 700
=====
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as New SAC's consolidated
financial position at applicable measurement dates. The average interest rates
being charged under these borrowings from the date of the transactions ranged
from 9.1875% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC, and certain of its subsidiaries, including HDD, are guarantors
under the senior credit facilities. In addition, the majority of New SAC's, and
certain of its subsidiaries', including HDD, assets have been pledged against
the debt under this credit agreement New SAC, and certain of its subsidiaries
have agreed to certain covenants under this agreement including restrictions on
future
F-195
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
equity and borrowing transactions, business acquisitions and disposals, making
certain restricted payments and dividends, making certain capital expenditures,
incurring guarantee obligations and engaging in mergers or consolidations.
In connection with the closing and financing of the transactions, Seagate
Technology International, a wholly owned subsidiary of the Company, issued
unsecured senior subordinated notes under an Indenture Agreement dated November
22, 2000 at a discount to the aggregate principal amount of $210 million, for
gross proceeds of approximately $201 million. The notes mature on November 15,
2007 and bear interest payable semi-annually at a rate of 12.5% per annum. The
Company, and certain of its subsidiaries are guarantors of the notes on a joint
and several, whole and unconditional basis. In addition, New SAC, and certain
of its subsidiaries including the Company have agreed to certain restrictive
covenants under the terms of these notes including restrictions on future
equity and borrowing transactions, business acquisitions and disposals, making
certain restricted payments and dividends, making certain capital expenditures,
incurring guarantee obligations and engaging in mergers or consolidations.
13. RELATED PARTY TRANSACTIONS
Historically, HDD has provided substantial services to other affiliated
companies. Upon the closing of the stock purchase agreement by New SAC, these
services continue to be provided by the Company through New SAC. The services
provided generally include general management, treasury, tax, financial
reporting, benefits administration, insurance, information technology, legal,
accounts payable and receivable and credit functions, among others. HDD charges
the Company for these services through corporate expense allocations. The
amount of corporate expense allocations depends upon the total amount of
allocable costs incurred by HDD on behalf of the Company less amounts charged
as specific cost or expense rather than by allocation. Such costs have been
proportionately allocated to the Company based on detailed inquiries and
estimates of time incurred by HDD's corporate marketing and general
administrative departmental managers. Management believes that the allocations
charged to other affiliated companies are reasonable. Allocations charged to
other affiliated company's marketing and administrative expenses were $3.5
million for each of the three years ended June 30, 2000, July 2, 1999 and July
3, 1998 respectively.
Purchases and sales to other affiliated companies were not material for
any of the period presented.
14. CONDENSED FINANCIAL INFORMATION
Seagate Technology Holdings, ("STH" or "the Company"), is a holding
company without operations or assets. The Subordinated Debentures, see Note 12,
were issued by Seagate Technology International, a wholly owned subsidiary of
STH. The Subordinated Debentures are fully and unconditionally guaranteed on a
joint and several basis by the Company and certain, but not all of its
subsidiaries.
The following tables present guarantor and non-guarantor condensed
consolidating financial information for Seagate Technology Hard Disc Drive
Business, an Operating Business of Seagate Technology, Inc., the predecessor to
Seagate Technology Holdings, at July 2, 1999 and June 30, 2000, and the
condensed consolidating results of its operations and its cash flows for the
years ended July 3, 1998, July 2, 1999, and June 30, 2000. The information
classifies the historic
F-196
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION (CONTINUED)
subsidiaries of Seagate Technology Hard Disc Drive Business, an Operating
Business of Seagate Technology, Inc., into parent, issuer, other guarantors,
and other non-guarantors based upon the current classification of those
subsidiaries and their successors under the provisions of the Subordinated
Debentures.
Seagate Technology Holdings Condensed Consolidating Financial Information
CONDENSED CONSOLIDATING BALANCE SHEET AT JUNE 30, 2000
(IN MILLIONS)
GUARANTORS
---------------------------------
WHOLLY OWNED SUBSIDIARIES TOTAL
--------------------------------- OTHER SEAGATE
ISSUER OTHER SAN NON-GUARANTORS ELIMINATIONS TECHNOLOGY
-------- ------------ ------- ---------------- -------------- -----------
ASSETS
Cash and cash equivalents .............. $ 665 $ 187 $ 7 $ 9 $ -- $ 868
Short term-investments ................. 1,109 31 1,140
Accounts receivable, net ............... 144 246 6 246 642
Inter company accounts
receivable ............................ 6,034 617 4,728 (11,379) --
Affiliate accounts receivable .......... 28 (99) 71 --
Inventories ............................ 165 127 5 116 413
Deferred income taxes .................. 5 208 6 (8) 211
Other current assets ................... 111 37 8 156
------ ------ ------- ------
Current assets ......................... 8,261 1,354 24 5,170 (11,379) 3,430
Property, plant and equipment,
net ................................... 712 600 3 270 1,585
Investments ............................ 699 1,562 (2,261) --
Goodwill and other intangibles ......... 18 44 234 (2) 294
Other non current assets ............... 34 445 30 509
------ ------ ------- ------
Total Assets ........................... $9,724 $4,005 $261 $5,468 $(13,640) $5,818
====== ====== ==== ======= ======== ======
LIABILITIES
Accounts payable ....................... $ 429 $ 163 $ 1 $ 86 $ -- $ 679
Inter company accounts payable 5,819 779 4,778 (11,376) --
Affiliate accounts payable ............. 1 54 (19) 36
Accrued employee compensation 34 125 8 15 182
Accrued warranty ....................... -- 124 124
Accrued expenses ....................... 71 226 3 25 325
Accrued income taxes ................... 1 71 (1) 71
Current portion long-term debt ......... -- (4) 4 --
------ -------- ------- ------
Current liabilities .................... 6,355 1,538 12 4,888 (11,376) 1,417
Deferred income taxes .................. -- 626 14 640
Inter company accounts payable -- 2 (2) --
Long term debt ......................... 1 702 703
Accrued warranty ....................... 109 109
Other non current liabilities .......... 1 7 (1) 7
------ ------- -------- ------
TOTAL LIABILITIES ...................... 6,357 2,982 28 4,887 (11,378) 2,876
Business Equity ........................ 3,367 1,023 233 581 (2,262) 2,942
------ ------- ---- ------- ---------- ------
Total liabilities and business
equity ................................ $9,724 $4,005 $261 $5,468 $(13,640) $5,818
====== ======= ==== ======= ========== ======
F-197
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN MILLIONS)
GUARANTORS
-----------------------------------
SEAGATE
WHOLLY OWNED SUBSIDIARIES TECHNOLOGY
----------------------------------- OTHER AND ITS
ISSUER OTHER SAN NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ------------ --------- ---------------- -------------- ------------
Revenue ............................. $6,360 $3,362 $ 13 $3,472 $ (7,149) $6,058
Cost of revenue ..................... 6,285 2,502 9 3,173 (7,149) 4,820
Cost of revenue from affiliates ..... 8 12 (20) --
Product development ................. 18 478 2 165 663
Marketing and administrative ........ 34 294 15 66 409
Amortization of goodwill and
other intangibles .................. 4 12 17 33
In-process research and
development ........................ -- 105 105
Restructuring ....................... 113 80 13 206
Unusual items ....................... 64 43 107
------ ------ ------
Total Operating Expenses ........... 6,462 3,442 148 3,440 (7,149) 6,343
------ ------ ------ ------ -------- ------
Income (Loss) from
Operations ....................... (102) (80) (135) 32 -- (285)
Interest Income ..................... 59 42 101
Interest Expense .................... 2 (54) (52)
Gain on sale of SanDisk stock ....... 679 679
Gain on exchange of certain
investments in equity
securities ......................... 199 199
Other, net .......................... 2 (3) (1)
------ -------- --------
Other Income (Expense), net 63 863 -- -- -- 926
Income (loss) before income
taxes .............................. (39) 783 (135) 32 641
Benefit (provision) for income
taxes .............................. (2) (261) 7 (19) (275)
-------- ------- ------ ------ -------
Net Income (Loss) .................. $ (41) $ 522 $ (128) $ 13 $ -- $ 366
======= ======= ====== ====== ======== =======
F-198
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR YEAR ENDED JUNE 30, 2000
GUARANTORS SEAGATE
-------------------------------------- TECHNOLOGY
WHOLLY OWNED SUBSIDIARIES HOLDINGS
-------------------------------------- OTHER AND ITS
ISSUER OTHER SAN NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------- ------------- ---------- ---------------- -------------- ------------
Net cash provided by (used in)
operating activities ....................... 545 (401) (2) 84 -- 226
INVESTING ACTIVITIES
Acquisition of property, equipment and
leasehold improvements ..................... (186) (294) (2) (83) (565)
Purchases of short-term investments ......... (3,069) (283) (3,352)
Maturities and sales of short-term
investments ................................ 3,054 375 3,429
Proceeds from sale of SanDisk stock ......... -- 681 (1) 680
Intercompany investments .................... (40) (1,408) 51 1,397 --
Other, net .................................. 6 (16) (2) (9) 2 (19)
------ ------ --- ------ ------- ------
Net cash provided by (used in)
investing activities ...................... (235) (945) (4) (41) 1,398 173
------ ------ --- ----- ------- ------
FINANCING ACTIVITIES
Net change in investment by Seagate
Technology, Inc. ........................... -- 117 117
Other, net .................................. -- (6) 2 (5) (5) (14)
------ --------- --- ------ ------- ------
Net Cash Provided by (Used In)
Financing Activities ...................... -- 111 2 (5) (5) 103
------ -------- --- ------ ------- ------
Effect of exchange rate changes in
cash and cash equivalents .................. (2) -- -- -- -- (2)
Increase (Decrease) in Cash and Cash
Equivalents ................................ 308 (1,235) (4) 38 1,393 500
Cash and Cash equivalents at the
Beginning of the Period .................... 185 158 -- 25 -- 368
-------- -------- ---- ----- ------- --------
End of the Period .......................... $ 493 $(1,077) $ (4) $ 63 1,393 868
========= ========= ===== ====== ======= ========
F-199
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET JULY 2, 1999
(IN MILLIONS)
GUARANTORS
--------------------- SEAGATE
WHOLLY OWNED TECHNOLOGY
SUBSIDIARIES HOLDINGS
--------------------- OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
-------- ---------- ---------------- ------------- ------------
ASSETS
Cash and cash equivalents ...................... $ 185 $ 158 $ 25 $ -- $ 368
Short-term investments ......................... 1,103 123 1 1,227
Accounts receivable, net ....................... 5,236 734 2,812 (7,988) 794
Affiliate accounts receivable .................. 71 (230) 171 12
Inventories .................................... 162 188 89 439
Deferred income taxes .......................... 3 249 (12) 240
Other current assets ........................... 22 76 4 102
------ ------ ----- ------
Total Current Assets .......................... 6,782 1,298 3,090 (7,988) 3,182
------ ------ ----- -------- ------
Property, equipment, and leasehold
improvements, net ............................. 846 543 279 1,668
Investments .................................... 659 893 37 (1,589) --
Goodwill and other intangibles, net ............ 23 65 88
Other assets ................................... 50 112 22 184
------ ------ ----- ------
Total Assets .................................. $8,360 $2,911 $3,428 $ (9,577) $5,122
====== ====== ====== ======== ======
LIABILITIES
Accounts payable ............................... 5,210 1,114 2,331 (7,988) 667
Accrued employee compensation .................. 40 127 4 171
Accrued expenses ............................... 59 268 46 373
Accrued warranty ............................... -- 157 157
Accrued income taxes ........................... 1 44 (2) 43
Current portion of long-term debt .............. -- 1 1
------ ------- ------
Total Current Liabilities ..................... 5,310 1,710 2,380 (7,988) 1,412
------ ------ ------- -------- ------
Deferred income taxes .......................... -- 488 (2) 486
Accrued warranty ............................... -- 123 123
Other liabilities .............................. 1 10 25 36
Long-term debt, less current portion ........... 1 702 703
------ ------ ------
Total Liabilities ............................. 5,312 3,033 2,403 (7,988) 2,760
------ ------ ------- -------- ------
Business Equity ................................ 3,048 (122) 1,025 (1,589) 2,362
STOCKHOLDERS' EQUITY
Total Liabilities and Business Equity ......... $8,360 $2,911 $3,428 $ (9,577) $5,122
====== ====== ======= ======== ======
F-200
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 2, 1999
(IN MILLIONS)
GUARANTORS SEAGATE
--------------------------- TECHNOLOGY
WHOLLY OWNED SUBSIDIARIES HOLDINGS
--------------------------- OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ------------ ---------------- -------------- ------------
Revenue .................................. $6,450 $4,021 $3,727 $ (8,046) $6,152
Cost of revenue .......................... 6,200 3,156 3,592 (8,046) 4,902
Product development ...................... 17 549 566
Marketing and administrative ............. 33 248 36 317
Amortization of goodwill and other
intangibles ............................. 3 15 2 20
In-process research and development ...... -- 2 2
Restructuring ............................ 36 11 12 59
Unusual items ............................ -- 75 75
------ ------ ------
Total operating expenses ................ 6,289 4,056 3,642 (8,046) 5,941
Income (loss) from operations ........... 161 (35) 85 -- 211
Interest income .......................... 65 31 6 102
Interest expense ......................... -- (48) (48)
Other, net ............................... (1) 11 10
-------- ------ ------
Other income (expense), net ............. 64 (6) 6 -- 64
------- -------- ------ -------- ------
Income (loss) before income taxes ........ 225 (41) 91 -- 275
Benefit (provision) for income taxes ..... -- (53) (8) (61)
------- ------- -------- ------
Net income (loss) ....................... $ 225 $ (94) $ 83 $ -- $ 214
======= ======= ======= ======== ======
F-201
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC., THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR YEAR ENDED JULY 2, 1999
GUARANTORS SEAGATE
----------------------------- TECHNOLOGY
WHOLLY OWNED SUBSIDIARIES HOLDINGS
----------------------------- OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------- ------------- ---------------- -------------- ------------
Net cash provided by (used in)
operating activities ....................... $ 2 $ 364 $ 838 $ 649 $ 1,853
INVESTING ACTIVITIES
Acquisition of property, equipment and
leasehold improvements ..................... (303) (83) (205) (591)
Purchases of short-term investments ......... (4,793) (1,803) (6,596)
Maturities and sales of short-term
investments ................................ 4,747 1,772 6,519
Intercompany investments .................... 630 (18) (575) (37) --
Other, net .................................. (3) 1 (25) (27)
---------- ------- ------- -------
Net cash provided by (used in)
investing activities ...................... 278 (100) (836) (37) (695)
--------- ------- ------- ------ -------
FINANCING ACTIVITIES
Net change in investment by Seagate
Technology, Inc. ........................... (553) (1,748) 1,478 (646) (1,469)
Intercompany loans .......................... -- 34 (34) --
Other, net .................................. (5) (3) 34 26
---------- ---------- ------ -------
Net Cash Provided by (Used In)
Financing Activities ...................... (558) (1,748) 1,509 (646) (1,443)
--------- ------- --------- ------ -------
Effect of exchange rate changes on
cash and cash equivalents .................. (2) (1) -- -- (3)
Increase (decrease) in cash and cash
equivalents ................................ (280) (1,485) 1,511 (34) (288)
Cash and cash equivalents at the
beginning of the year ...................... 466 43 147 -- 656
--------- --------- --------- ------ ---------
Cash and cash equivalents at the
end of the year ............................ $ 186 (1,442) $ 1,658 $ (34) $ 368
========= ========= ========= ====== =========
F-202
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC., THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 3, 1998
(IN MILLIONS)
GUARANTORS
---------------------- SEAGATE
WHOLLY OWNED TECHNOLOGY
SUBSIDIARIES HOLDINGS
---------------------- OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
---------- --------- ---------------- -------------- ------------
Revenue .................................. $6,314 $4,612 $4,031 $ (8,729) $6,228
Revenue from affiliates .................. 2 15 17
------ ------ ------
Total revenue ........................... 6,316 4,627 4,031 (8,729) 6,245
Cost of revenue .......................... 6,249 4,082 3,900 (8,729) 5,502
Cost of revenue from affiliates .......... 12 9 21
------ ------ ------
6,249 4,094 3,909 (8,729) 5,523
Product development ...................... 25 487 43 555
Marketing and administrative ............. 55 212 41 308
Amortization of goodwill and other
intangibles ............................. 5 14 2 21
In-process research and development ...... 216 216
Restructuring ............................ 64 259 24 347
Unusual items ............................ (16) 210 (216) (22)
------ ------ ------ ------
Total operating expenses ................ 6,382 5,276 4,019 (8,729) 6,948
Income (loss) from operations ........... (66) (649) 12 -- (703)
Interest income .......................... (40) 50 88 98
Interest expense ......................... 12 (49) (14) (51)
Other, net ............................... (98) (65) 97 (66)
------ ------ ------ ------
Other income (expense), net ............. (126) (64) 171 -- (19)
------ ------ ------ -------- ------
Income (loss) before income taxes ........ (192) (713) 183 -- (722)
Benefit (provision) for income taxes ..... 193 (2) 191
------ -------- ------
Net Income (loss) ....................... $ (192) $ (520) $ 181 $ -- $ (531)
====== ====== ======= ======== ======
F-203
SEAGATE TECHNOLOGY HARD DISC DRIVE BUSINESS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC., THE PREDECESSOR TO SEAGATE TECHNOLOGY HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
14. CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR YEAR ENDED JULY 3, 1998
GUARANTORS
---------------------- SEAGATE
WHOLLY OWNED TECHNOLOGY
SUBSIDIARIES HOLDINGS
---------------------- OTHER AND ITS
ISSUER OTHER NON-GUARANTORS ELIMINATIONS PREDECESSOR
-------- ----------- ---------------- -------------- ------------
Net cash provided by (used in)
operating activities ....................... 304 433 (231) (74) 432
INVESTING ACTIVITIES:
Acquisition of property, equipment and
leasehold improvements ..................... (115) (306) (272) (693)
Purchases of short-term investments ......... (455) (2,713) (1,642) (4,810)
Maturities and sales of short-term
investments ................................ 382 2,481 2,026 4,889
Acquisition of Quinta ....................... (194) (194)
Equity investments .......................... (27) 27
Intercompany investments .................... 211 (443) (48) 280
Other, net .................................. 2 22 (36) (12)
---- ------ --- ------
Net cash provided by (used in)
investing activities ....................... 25 (981) (135) 271 (820)
FINANCING ACTIVITIES:
Net change in investing by Seagate
Technology, Inc. ........................... (353) 449 105 (239) (38)
Other, net .................................. (14) 42 28
------ ---- ------
Net cash provided by (used in)
financing activities ...................... (353) 435 105 (197) (10)
Effect of exchange rate changes on
cash and cash equivalents .................. -- 6 -- -- 6
Increase (decrease) in cash and cash
equivalents ................................ (24) (107) (261) -- (392)
Cash and cash equivalents at the
Beginning of the period .................... 43 549 442 -- 1,034
---- ------ ------ ---- ------
End of the period .......................... $ 19 $ 442 $ 181 -- 642
====== ======== ======== ==== ======
F-204
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSOR
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
SEAGATE TECHNOLOGY
SAN HOLDINGS PREDECESSOR
------------------- ------------
DECEMBER 29, JUNE 30,
2000 (UNAUDITED) 2000(1)
------------------- ------------
ASSETS (SEE NOTE 5)
Cash and cash equivalents .................................. $ 22,852 $ 6,968
Accounts receivable, net of allowance for bad debts
of $1,055 and $905......................................... 16,264 6,027
Inventories ................................................ 10,167 4,893
Deferred income taxes ...................................... -- 5,984
Prepaid expenses and other assets .......................... 189 259
--------- ----------
Total current assets ...................................... 49,472 24,131
Restricted cash ............................................ 300 300
Property and equipment, net ................................ 4,578 2,613
Goodwill and purchased intangibles, net .................... 7,894 233,794
--------- ----------
Total assets (See Note 5) ................................. $ 62,244 $ 260,838
========= ==========
LIABILITIES
Accounts payable ........................................... $ 1,213 $ 994
Accrued expenses ........................................... 4,925 2,517
Deferred revenue ........................................... 2,473 1,706
Accrued compensation and benefits .......................... 2,932 6,763
--------- ----------
Total current liabilities ................................. 11,543 11,980
Intercompany payable to New SAC or its Predecessor ......... 25,403 1,695
Deferred income taxes ...................................... -- 14,645
--------- ----------
Total liabilities ......................................... 36,946 28,320
--------- ----------
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIT)
Common stock ............................................... 2 --
Additional paid-in capital ................................. 52,856 359,413
Accumulated deficit ........................................ (27,560) (126,895)
--------- ----------
Total stockholders' equity (net capital deficit) .......... 25,298 232,518
--------- ----------
Total liabilities and shareholders' equity ................ $ 62,244 $ 260,838
========= ==========
- ----------
(1) Derived from audited financial statements.
See notes to consolidated condensed financial statements.
F-205
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
SEAGATE TECHNOLOGY
SAN HOLDINGS PREDECESSOR PRE-PREDECESSOR
------------------- -------------- ----------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, JULY 1, 2000 SIX MONTHS
2000 TO TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
------------------- -------------- ----------------
Revenue ........................................... $ 11,183 $ 20,588 $ 6,675
Cost of goods sold (includes $113 and $3,462 of
intangible amortization for the period from
November 23, 2000 to December 29, 2000, and
July 1, 2000 to November 22, 2000,
respectively) .................................... 6,263 8,827 3,410
--------- --------- --------
Gross profit ...................................... 4,920 11,761 3,265
Operating expenses:
Product development .............................. 969 3,011 1,133
Marketing and administrative ..................... 6,995 27,907 4,966
Amortization of goodwill and intangibles ......... 154 13,638 --
In-process research and development .............. 25,027 -- --
--------- --------- --------
Total operating expenses .......................... 33,145 44,556 6,099
--------- --------- --------
Loss from operations .............................. (28,225) (32,795) (2,834)
Interest income ................................... 133 182 185
--------- --------- --------
Loss before benefit for income taxes .............. (28,092) (32,613) (2,649)
Benefit for income taxes .......................... 532 8,464 --
--------- --------- --------
Net Loss .......................................... $ (27,560) $ (24,149) $ (2,649)
========= ========= ========
See notes to consolidated condensed financial statements.
F-206
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SEAGATE TECHNOLOGY
SAN HOLDINGS PREDECESSOR PRE-PREDECESSOR
------------------- -------------- ----------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, JULY 1, 2000 SIX MONTHS
2000 TO TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
------------------- -------------- ----------------
OPERATING ACTIVITIES
Net loss ............................................. $(27,560) $ (24,149) $ (2,649)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ....................... 362 17,441 202
In-process research and development ................. 25,027 -- --
Deferred income taxes ............................... -- (3,227) --
Compensation expense related to accelerated
vesting of stock options .......................... -- 7,009 --
Compensation expense related to options and
warrants .......................................... -- -- 717
Changes in assets and liabilities:
Accounts receivable ............................... (8,120) (2,118) (1,218)
Inventory ......................................... 3,092 (5,953) (701)
Prepaid expenses and other assets ................. 34 36 (32)
Accounts payable and accrued expenses ............. (8,354) 7,142 1,251
Deferred revenue .................................. 525 242 78
-------- --------- --------
Net cash used in operating activities ................ (14,994) (3,577) (2,352)
INVESTING ACTIVITIES
Purchase of property and equipment, net ............. (2,261) (2,321) (429)
FINANCING ACTIVITIES
Repayment of capital lease obligations ............... (2) (10) --
Changes in intercompany payable to New SAC or
its Predecessor ..................................... 15,752 8,230 --
Cash contribution from Seagate Technology ............ -- 15,067 --
Proceeds from issuance of common stock ............... -- -- 4
Proceeds from issuance of preferred stock ............ -- -- 9,892
---------- --------- --------
Net cash provided by financing activities ............ 15,750 23,287 9,896
---------- --------- --------
Net increase (decrease) in cash and cash
equivalents ......................................... (1,505) 17,389 7,115
Cash and cash equivalents at beginning of period...... 24,357 6,968 2,093
---------- --------- --------
Cash and cash equivalents at end of period ........... $ 22,852 $ 24,357 $ 9,208
========== ========= ========
See notes to consolidated condensed financial statements.
F-207
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Seagate Technology SAN Holdings (the "Company") was incorporated on August
10, 2000 in the Cayman Islands. The Company is wholly owned on an outstanding
share basis by Seagate Technology (Cayman) Holdings, which itself is wholly
owned on an outstanding share basis by New SAC (see Basis of Presentation). On
November 22, 2000, Seagate Technology SAN Holdings acquired the assets and
operations of XIOtech Corporation (the "Predecessor"), which had previously
become a wholly owned subsidiary of Seagate Technology, Inc. (Seagate
Technology) when it was acquired on January 28, 2000. The operations of the
Company prior to November 22, 2000, are not significant. Prior to the
acquisition by Seagate Technology, XIOtech Corporation was a privately held
independent company and is referred to as the "Pre-Predecessor". XIOtech was
originally incorporated on October 5, 1995 in the state of Minnesota. The
Company's Predecessor and Pre-Predecessor are jointly referred to as The
Predecessors.
The Company and its Predecessors design, manufacture and market a
centralized data storage system. This system is based on an exclusive set of
sophisticated data management and data movement tools. It offers storage
virtualization, multi-node server clustering, and zero backup window solutions.
The main component of the system is MAGNITUDE, a fully implemented SAN (Storage
Area Network). SANs are high speed data storage units that attach to servers in
a network environment. SANs enable users to store their data as a network
instead of just one server. MAGNITUDE is sold in a cabinet containing
software-based architecture that allows the incorporation of all of the
components of a SAN in one centralized configurations. The Company and its
Predecessors also design, develop, and produce software, namely the REDI suite
of software, which runs MAGNITUDE's software based architecture. The REDI
software suite is application specific and gives customers the capability of
better managing their data.
BASIS OF PRESENTATION
On November 22, 2000, Seagate Technology; Seagate Software Holdings, Inc.
("Seagate Software"), a subsidiary of Old Seagate; and Suez Acquisition Company
(Cayman) Limited ("SAC"), completed the stock purchase agreement and Seagate
and VERITAS Software Corporation ("VERITAS") completed the agreement and plan
of merger and reorganization, or the Merger Agreement. SAC was a limited
liability company organized under the laws of the Cayman Islands and formed
solely for the purpose of entering into the stock purchase agreement and
related acquisitions. SAC assigned all of its rights under the stock purchase
agreement to New SAC. New SAC owns all the outstanding shares of Seagate
Technology (Cayman) Holdings, who in turn owns all the outstanding shares of
the Company.
Under the stock purchase agreement, SAC agreed to purchase for $1.840
billion cash, including transaction costs of $25 million, all of the operating
assets of Seagate Technology and its consolidated subsidiaries, including
Seagate Technology's disc drive, storage area networks tape drive and software
businesses and operations and certain cash balances, but excluding the
approximately 128 million shares of VERITAS common stock held by Seagate
Software and Seagate Technology's equity investments in Gadzoox Networks, Inc.
and Lernout & Hauspie Speech Products N.V. In addition, under the stock
purchase agreement, SAC agreed to assume substantially all of the operating
liabilities of Seagate Technology and its consolidated subsidiaries. In
addition, the Company acquired Seagate Technology Investments, Inc., a
subsidiary of Seagate Technology, which holds strategic equity investments in
various companies.
Immediately following the consummation of the SAC transaction, VERITAS
acquired Seagate Technology and a wholly-owned subsidiary of VERITAS merged
with and into Seagate Technology,
F-208
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
with Seagate Technology becoming a wholly-owned subsidiary of VERITAS. We refer
to this transaction as the VERITAS Merger. VERITAS did not acquire Seagate
Technology's disc drive business or any other Seagate Technology operating
business. In the VERITAS Merger, the Seagate Technology stockholders received
merger consideration consisting of VERITAS stock and cash.
We refer to the transactions relating to the stock purchase agreement, the
agreement and plan of merger and the VERITAS Merger as the Transactions.
The consolidated condensed financial statements have been prepared by the
Company, without audit. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. For comparative purposes,
the financial statement presentation includes the operations of the Predecessor
through November 22, 2000 (the Pre-Predecessor before January 29, 2000), and
the Company's operations from November 23, 2000 to December 29, 2000. Prior to
November 23, 2000, the Company's operations were not significant. The Company
and its Predecessors believe the disclosures included in the unaudited
consolidated condensed financial statements, when read in conjunction with the
financial statements of XIOtech as of June 30, 2000, and notes thereto, are
adequate to make the information presented not misleading.
The consolidated condensed financial statements reflect, in the opinion of
management, all material adjustments necessary to summarize fairly the
consolidated financial position, results of operations and cash flows for such
periods. Such adjustments are of a normal recurring nature.
The combined results of operations for the six-month period ended December
29, 2000 are not necessarily indicative of the results that may be expected for
the entire fiscal year ending June 29, 2001.
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 year
2000 ended on June 30. The Pre-Predecessor's fiscal year ended on December 31.
SUPPLIER AND CUSTOMER CONCENTRATIONS
A limited number of customers historically have accounted for a
substantial portion of the Company's revenues. Percentage revenues from
customers with more than 10% of sales were as follows (as a percentage of net
sales):
PRE-PREDECESSOR
-----------------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, JULY 1, SIX MONTHS
2000 TO 2000 TO ENDED
DECEMBER NOVEMBER 22, DECEMBER 31,
2000 2000(1) 1999
-------------- -------------- -------------
Forsythe Solutions Group, Inc. ......... 10% * *
Bi-tech Solutions, Ltd. ................ * * 12%
- ----------
* Revenues from customers in these periods represent less than 10% of net
sales.
(1) There were no customers with revenues exceeding 10% of total revenues.
Sales of the Company's products will vary as a result of fluctuations in
market demand. Further, the SAN markets in which the Company competes are
characterized by rapid technological change, evolving industry standards,
declining average selling prices, and rapid technological obsolescence.
F-209
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Certain of the raw materials and components used by the Company in the
manufacture of its products are available from a limited number of suppliers.
For example, all of the Company's SAN solution products require disk drives
that are currently supplied by Seagate Technology (Cayman) Holdings.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these
estimates.
Given the volatility of the markets in which the Company and its
Predecessors participate, the Company and its Predecessors make 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, cancelations, and
rescheduling. Actual demand will inevitably differ from such anticipated
demand, and such differences may have a material effect on the financial
statements.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid financial
instruments with insignificant interest rate risk that are readily convertible
to cash and have maturities of three months or less from the date of purchase.
Cash equivalents consist of money market funds. The fair market value, based on
quoted market prices, of cash equivalents is substantially equal to their
carrying value at December 29, 2000 and June 30, 2000.
CONCENTRATION OF CREDIT RISK
The Company's concentration of credit risk consists principally of cash,
cash equivalents, and trade receivables. The Company's investment policy
restricts investments to high-credit quality investments and limits the amounts
invested with any one issuer. The Company performs ongoing credit evaluations
of its customers' financial condition and generally requires no collateral.
Reserves are maintained for potential credit losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments primarily consist of cash and cash equivalents and
short-term trade receivables and payables for which current carrying amounts
approximate fair market value.
RESEARCH AND DEVELOPMENT
Research and development expenditures are generally charged to operations
as incurred. Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's and its
Predecessors' product development process, technological feasibility is
established upon the completion of a working model. To date, no costs have
qualified for capitalization, and accordingly, the Company has charged all such
costs to research and development expense in the accompanying statements of
operations.
COMPREHENSIVE INCOME
The Company's and its Predecessors' comprehensive net loss was the same as
its net loss for all periods presented.
F-210
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STOCK-BASED COMPENSATION
The Company and its Predecessors account for employee stock-based
compensation under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APBO 25), and related interpretations.
RESTRICTED CASH
The Company and its Predecessor have cash which is restricted by an
irrevocable standby letter of credit in the amount of $400,000. Beginning on
May 31, 2001, the letter of credit will decrease by $100,000 annually, thereby
relieving the restriction of cash at the same rate. Prepaid expenses and other
assets on the consolidated condensed balance sheets include $100,000 of
restricted cash at both December 29, 2000 and June 30, 2000.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is computed on
a currently adjusted standard basis which approximates actual cost on a
first-in, first-out basis. Inventory consists of the following at December 29,
2000 and June 30, 2000:
SEAGATE TECHNOLOGY
SAN HOLDINGS PREDECESSOR
------------------- ------------
DECEMBER 29, JUNE 30
2000 2000(1)
------------------- ------------
(IN THOUSANDS)
Inventories:
Raw materials ........... $ 5,268 $1,885
Work-in-process ......... 724 566
Finished goods .......... 4,175 2,442
------- ------
$10,167 $4,893
======= ======
- ----------
(1) The information in this column was derived from XIOtech Corporation's
audited financial statements as of June 30, 2000.
LONG-LIVED ASSETS
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
are generally two to seven years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the lease.
F-211
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEAGATE TECHNOLOGY
SAN HOLDINGS PREDECESSOR
------------------- ------------
DECEMBER 29, JUNE 30,
2000 2000(1)
------------------- ------------
(IN THOUSANDS)
Computer software ...................................... $ 574 $ 491
Computer equipment ..................................... 2,450 2,149
Tooling ................................................ 21 64
Leasehold improvements ................................. 612 35
Office furniture and equipment ......................... 1,015 180
------ ------
4,672 2,919
Less accumulated depreciation and amortization ......... (94) (306)
------ ------
$4,578 $2,613
====== ======
- ----------
(1) The information in this column was derived from XIOtech Corporation's
audited financial statements as of June 30, 2000.
Purchased intangibles mainly represent developed technology, assembled
workforce, trade names and customer relationships acquired in the business
combinations. Purchased intangibles are being amortized on a straight-line
basis over their estimated useful life. The Company reviews purchased
intangibles to assess recoverability from future operations using undiscounted
cash flows. In management's opinion, no material impairment exists at December
29, 2000. Accumulated amortization of goodwill and purchased intangibles was
approximately $268,000 and $20,354,000 as of December 29, 2000 and June 30,
2000, respectively.
ECONOMIC DEPENDENCE ON NEW SAC
The Company and its Predecessors have incurred net losses since inception.
To the extent future cash flows from operations are not sufficient to fund the
Company's working capital needs and planned activities during the next twelve
months, the company believes additional funding will be available from New SAC
and Seagate Technology Holdings, an affiliated company and subsidiary of New
SAC.
PUSHDOWN AND CARVEOUT ACCOUNTING
One of New SAC's key employees provided services to the Company (prior to
November 22, 2000 this individual was an employee of Seagate, and he provided
services to the Predecessor). These services included general management,
administrative, and legal functions. Certain expenses related to these services
have been pushed down to properly reflect the operations of the Company and the
Predecessor.
SEGMENT INFORMATION
The Company and its Predecessors have applied SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or group, in deciding how to allocate resources and in
assessing performance.
F-212
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company and its Predecessor operate in one segment, storage area
network products. The Company markets its products in the United States and in
foreign countries through its sales personnel, dealers, and resellers. The
Chief Executive Officer has been identified as the Chief Operating Decision
Maker ("CODM") because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about individual components of the market.
2. INCOME TAXES
The federal Tax Allocation Agreement ("Tax Allocation Agreement") Xiotech
had with Seagate Technology was terminated on November 22,2000 and we will no
longer file federal income tax returns on a consolidated basis with Seagate
Technology or U.S. affiliates of New SAC. We will enter into a state tax
allocation agreement with affiliates of New SAC, as applicable. Therefore, the
U.S. affiliates of New SAC will not benefit from nor will they reimburse us
pursuant to the Tax Allocation Agreement for federal tax losses we sustain
subsequent to consummation of the SAC Transaction. In prior periods, we have
received substantial cash payments for our tax losses utilized by Seagate
Technology that we have used to reduce our obligation due to New SAC or its
predecessor under the revolving loan agreement. As a result of the termination
of the Tax Allocation Agreement, the Company may not be able to convert any
future tax losses into cash.
The provision for (benefit from) income taxes consisted of the following:
SEAGATE TECHNOLOGY
SAN HOLDINGS PREDECESSOR PRE-PREDECESSOR
------------------- -------------- ----------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, JULY 1, 2000 SIX MONTHS
2000 TO TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
(IN THOUSANDS) ------------------- -------------- ----------------
Current:
Federal ...................................... $ -- $ (2,382) $--
State ........................................ (532) (437) --
------ -------- ---
Total current tax expense/(benefit) .......... (532) (2,819) --
------ -------- ---
Deferred:
Federal ...................................... -- (4,710) --
State ........................................ -- (935) --
------ -------- ---
Total deferred tax expense/(benefit) ......... -- (5,645) --
------ -------- ---
Benefit from income taxes .................... $ (532) $ (8,464) $--
====== ======== ===
The proforma information assuming a tax provision/(benefit) based on a separate
return basis is as follows:
SEAGATE TECHNOLOGY
SAN HOLDINGS
---------------------
FOR THE PERIOD FROM
NOVEMBER 23, 2000
TO DECEMBER 29, 2000
---------------------
Loss before income taxes .......................... $ (28,092)
Provision for (benefit from) income taxes ......... --
---------
Net Loss .......................................... $ (28,092)
=========
F-213
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The income tax benefits related to the exercise of certain employee stock
options increased amounts due from Seagate Technology pursuant to the Tax
Allocation Agreement and were credited to additional paid-in capital. Such
amount approximated $68,000 for the period from July 1, 2000 to November 22,
2000.
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:
SEAGATE
TECHNOLOGY
SAN HOLDINGS PREDECESSOR
------------------- --------------
(IN THOUSANDS) DECEMBER 29, 2000 JUNE 30, 2000
- -------------------------------------------------- ------------------- --------------
DEFERRED TAX ASSETS
Reserves and accrued expenses ............. $ 3,699 $ 2,787
Deferred revenue .......................... -- 300
Acquisition related items ................. 10,397 --
Net operating losses ...................... 3,394 2,556
Research and development credits .......... 58 397
--------- ---------
Total deferred tax assets ................. 17,548 6,040
Valuation allowance ....................... (17,468) --
--------- ---------
Net Deferred Tax Assets ................... 80 6,040
DEFERRED TAX LIABILITIES
Acquisition related items ................. 0 (14,645)
Depreciation .............................. (80) (56)
--------- ---------
Total deferred tax liabilities ............ (80) (14,701)
--------- ---------
Net Deferred Tax Assets/(Liabilities) ..... $ -- $ (8,661)
========= =========
In connection with the purchase of the operating assets of Seagate,
approximately $10.4 million of the net deferred tax assets at December 29, 2000
represents the excess of tax basis over the fair values of the acquired
property, plant and equipment, and liabilities assumed for which we expect to
receive tax deductions in our federal and state returns in future periods. The
realization of the Company's federal and state deferred tax assets will depend
primarily on its ability to generate sufficient taxable income in the United
States in future fiscal years, the timing and amount of which are uncertain.
Due to these uncertainties the Company recorded a valuation allowance of $17.5
million for the deferred tax assets as of December 29, 2000. The Company
anticipates that the tax benefits of $10.4 million of net deferred tax assets
if realized, will result in an increased adjustment to the amount of
unamortized negative goodwill that has been allocated on a pro rata basis to
the long-lived assets. Any excess tax benefit would then be realized as a
reduction of future income tax expense. In addition, the net operating loss and
tax credit carryforwards are subject to further limitations on utilization due
to the "change in ownership" provisions of Internal Revenue Code Section 382.
As of December 29, 2000, Seagate Technology SAN Holdings has federal tax
net operating loss carry-forwards of approximately $9.5 million that start
expiring in fiscal 2010, if not used to offset future taxable income.
F-214
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The reconciliation between the provision for (benefit from) income taxes
at the U.S. statutory rate and the effective rate are summarized as follows:
SEAGATE TECHNOLOGY
SAN HOLDINGS PREDECESSOR PRE-PREDECESSOR
---------------------- ------------------- ------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, 2000 JULY 1, 2000 TO SIX MONTHS ENDED
TO DECEMBER 29, 2000 NOVEMBER 22, 2000 DECEMBER 31, 1999
(IN THOUSANDS) ---------------------- ------------------- ------------------
Provision (benefit) at U.S. statutory rate ......... $ (9,832) $ (11,414) $ (927)
State income tax provision (benefit), net of
federal income tax benefit ....................... (346) (892) --
Research and development credits ................... (58) (181) --
Non-deductible goodwill ............................ -- 3,955 --
Compensation expense ............................... -- -- 251
Valuation allowance ................................ 9,694 -- 662
Other .............................................. 10 68 14
-------- --------- ------
Provision for (benefit from) income taxes .......... $ (532) $ (8,464) $ --
======== ========= ======
3. RELATED PARTY TRANSACTIONS
The Company conducts transactions with a number of New SAC subsidiaries.
The Predecessor conducted a number of transactions with Seagate Technology.
In the periods from November 23, 2000 to December 29, 2000 and from July
1, 2000 to November 22, 2000, the Company and its predecessor sold SAN products
to New SAC totaling approximately $118,000 and $1,752,000, respectively.
In the periods from November 23, 2000 to December 29, 2000 and from July
1, 2000 to November 22, 2000, the Company and its predecessor purchased disc
drives from New SAC totaling approximately $1,336,000 and $2,895,000,
respectively.
The Company does not settle its intercompany balances (receivables and
payables) on a current basis, and all purchases and sales are netted into the
intercompany payable to New SAC or its Predecessor.
4. SALE OF SEAGATE TECHNOLOGY
New SAC was organized solely for the purpose of entering into the Stock
Purchase Agreement with Seagate Technology and Seagate Software Holdings.
Similar to SAC, New SAC is controlled by Silver Lake Partners and Texas Pacific
Group. Silver Lake Partners L.P. is a private investment firm headquartered in
Menlo Park, California and New York, New York, the general partner of which is
Silver Lake Technology Associates, L.L.C. Silver Lake Technology Associates
L.L.C. is a Delaware limited liability company. New SAC financed the
acquisition of the Seagate operating assets as follows:
o Equity financing of $916 million from Silver Lake Partners, L.P., TPG
Partners III, L.P., August Capital, Chase Capital Partners, GS Private
Equity Partners, L.P. and other investors, including certain Seagate
management personnel.
o A senior secured credit facility of $700 million in the aggregate from
the Chase Manhattan Bank, Goldman Sachs Credit Partners L.P. and Merrill
Lynch Capital Corporation (in addition, a revolving loan facility was also
issued with amounts available up to $200 million).
F-215
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
o Senior subordinated notes of approximately $210 million issued by
Seagate Technology International at a discount to the aggregate principal
amount of $210 million, for gross proceeds of approximately $201 million.
Seagate Technology International is indirectly owned by SAC.
o Certain cash reserves of Seagate Technology of approximately $149
million, net of estimated transaction costs of $100 million.
o In lieu of receiving consideration in connection with the Merger, most
of Seagate Technology's senior management team converted a portion of
their unvested Seagate Technology options and restricted stock ("rollover
equity") with an aggregate value of $184 million into deferred
compensation and an equity interest in New SAC. Although the amount of
cash that Seagate Technology received from New SAC was reduced by the
aggregate value of this converted equity, the total merger consideration
received by Seagate Technology stockholders on a per share basis was not
reduced due to the cancellation of a number of Seagate Technology stock
options equal in value to the $184 million in rollover equity.
5. DEBT GUARANTEES AND PLEDGE OF ASSETS
SENIOR SECURED CREDIT FACILITY
On the closing of the Transaction, Seagate Technology International and
Seagate Technology (US) Holdings, Inc., both subsidiaries of New SAC entered
into senior credit facilities with a syndicate of banks and other financial
institutions led by The Chase Manhattan Bank, as administrative agent and an
issuing bank, and Goldman Sachs Credit Partners L.P., as a documentation agent,
The Bank of Nova Scotia as a documentation agent, and Merrill Lynch Capital
Corporation, as a documentation agent. The senior credit facilities provide
senior secured financing of up to $900 million, consisting of:
o a $200 million revolving credit facility for general corporate purposes,
with a sub-limit of $100 million for letters of credit, which will
terminate in five years;
o a $200 million term loan A facility with a maturity of five years; and
o a $500 million term loan B facility with a maturity of six years.
At the closing of the transaction, New SAC did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because approximately $45 million of
existing letters of credit were outstanding and reduced availability under it.
New SAC drew the full amount of the term loan A facility and the term loan B
facility on the closing of the transaction to finance the acquisition of
Seagate Technology's operating assets, including the Predecessor.
The $700 million of outstanding loans under the term loan A and B
facilities are repayable in semi-annual payments due as follows (in thousands):
Fiscal 2001 ........... $ 5,000
2002 ..... .......... 22,500
2003 ..... .......... 40,000
2004 ..... .......... 50,000
2005 ..... .......... 60,000
Thereafter ......... 522,500
--------
Total .... .......... $700,000
========
F-216
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as the consolidated financial
position of New SAC at applicable measurement dates. The average interest rates
being charged under these borrowings from the date of the New SAC Transaction
ranged from 9.1875% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC and certain of its subsidiaries, including the Company and its
subsidiaries are guarantors on a joint and several, whole and unconditional
basis, under the senior credit facilities. In addition, the majority of New
SAC's and certain of its subsidiaries' assets, including the Company's assets
and its capital stock, have been pledged against the debt under this credit
agreement. New SAC, and certain of its subsidiaries, including the Company and
its subsidiaries, have agreed to certain covenants under this agreement
including restrictions on future equity and borrowing transactions, business
acquisitions and disposals, making certain restricted payments and dividends,
making certain capital expenditures, incurring guarantee obligations and
engaging in mergers or consolidations. Further, the Company, as part of the
consolidated group, is subject to certain financial covenants which are
assessed on the consolidated operating results and financial position of New
SAC and its subsidiaries.
The credit agreement provides for the release of the Company from its
guarantee obligations, and asset pledge upon an approved transfer or sale of
the Company's common stock, or an initial public offering of at least 10%, on a
fully diluted basis, of the Company's voting common stock.
SENIOR SUBORDINATED NOTES
In connection with the closing and financing of the New SAC Transaction,
Seagate Technology International issued unsecured senior subordinated notes
under an Indenture Agreement dated November 22, 2000, at a discount to the
aggregate principal amount of $210 million, for gross proceeds of approximately
$201 million. The notes mature on November 15, 2007 and bear interest payable
semi-annually at a rate of 12.5% per annum. New SAC and certain of its
subsidiaries, including the Company and its subsidiaries, are guarantors of the
senior subordinated notes on a joint and several, whole and unconditional
basis. In addition, New SAC and certain of its subsidiaries including the
Company and its subsidiaries, have agreed to certain restrictive covenants
under the terms of these notes including restrictions on future equity and
borrowing transactions, business acquisitions and disposals, making certain
restricted payments and dividends, making certain capital expenditures,
incurring guarantee obligations and engaging in mergers or consolidations. The
Company may be released from its guarantee obligation, if there are certain
sales of its capital stock, including in an initial public offering, but would
remain subject to the restrictive covenants of the indenture until the Company
and its subsidiaries are no longer subsidiaries of New SAC or are deemed no
longer to be subject to the restrictive covenants.
New SAC will not require the Company's cash flow to be used to service the
obligations pursuant to the senior secured credit facility and the senior
subordinated notes. The Company believes that none of the guarantees or pledges
of assets under the senior credit facilities or the guarantees under the
Indenture are likely to be invoked.
6. PURCHASE ACCOUNTING
New SAC accounted for the stock purchase agreement as a purchase in
accordance with APB 16, "Business Combinations," All acquired tangible assets,
identifiable intangible assets as well as assumed liabilities were valued based
on their relative fair values and reorganized into the following businesses: 1)
the rigid disk drive business (HDD), 2) the storage area networks business
(SAN), which consists of the Company, 3) the removable storage solutions
business (RSS), 4) the software
F-217
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
business CD, and 5) an investment holding company (ST). The fair value of the
net assets exceeded the net purchase price by approximately $909 million.
Accordingly, the resultant negative goodwill was allocated on a pro rata basis
to the acquired long-lived assets and reduced the recorded amounts by
approximately 46%.
The estimated fair values of intangible assets acquired related to the
Company adjusted for the negative goodwill allocations are as follows (in
thousands):
LIFE ESTIMATED
DESCRIPTION IN YEARS FAIR VALUE
- ----------------------------------------------- ---------- -----------
Net current assets (1) ........................ $ 26,911
Long term liabilities ......................... (9,650)
Other long-lived assets ....................... --
Property, plant & equipment (2) ............... 2,412
Identified intangibles:
Trade names (3) .............................. 5 1,088
Developed technologies (3) ................... 4 5,441
Assembled workforces (3) ..................... 1 544
Other ........................................ 1 1,088
--------
Subtotal ................................... 8,161
Net assets ................................. 27,834
In-process research & development (3) ......... 25,027
--------
Net Purchase Price ......................... $ 52,861
========
- ----------
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book values
of XIOtech. Inventory values were estimated based on the current market
value of the inventories less completion costs and less a normal profit
margin based on activities remaining to be completed until the inventory
is sold.
Assumed current liabilities included accounts payable, accrued compensation
and expenses and accrued income taxes. The fair values of current
liabilities generally approximated the historic recorded book values of
XIOtech because of the monetary nature of most of the liabilities.
(2) New SAC obtained an independent valuation of the acquired property, plant
and equipment. In arriving at the determination of market value for the
assets, the appraisers considered the estimated cost to construct or
acquire comparable property. Machinery and equipment was assessed using
replacement cost estimates reduced by depreciation factors representing
the condition, functionality and operability of the assets. The sales
comparison approach was used for office and data communication equipment.
Leasehold improvements were valued based upon discussions with
knowledgeable personnel.
(3) New SAC obtained an independent valuation of acquired identified
intangibles. The significant assumptions relating to each category are
discussed in the following paragraphs. Also, these assets are being
amortized on the straight-line basis over their estimated useful life and
resultant amortization is included in amortization of goodwill and other
intangibles.
Trade Names -- The value of the trade names was based upon discounting to
their net present value the licensing income that would arise by charging the
operating businesses that use the trade names.
F-218
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Developed Technologies -- The value of this asset for each operating
business was determined by discounting the expected future cash flows
attributable to all existing technologies which had reached technological
feasibility, after considering risks relating to: 1) the characteristics and
applications of the technology, 2) existing and future markets, as well as 3)
life cycles of the technologies. Estimates of future revenues and expenses used
to determine the value of developed technology was consistent with the
historical trends in the industry and expected outlooks.
Assembled workforces -- The value of the assembled work force was
determined by estimating the recruiting, hiring and training costs to replace
each group of existing employees.
In-process research and development -- The value of in-process research
and development (IPR&D) was based on an evaluation of all developmental
projects using the guidance set forth in Interpretation No. 4 of Financial
Accounting Standards Board Statement No. 2 (FAS), Accounting for Research and
Development Costs and FAS No. 86, Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed.
The amount was determined by: 1) obtaining management estimates of future
revenues and operating profits associated with existing developmental projects
2) projecting the cash flows and costs to complete of the underlying
technologies and resultant products, and 3) discounting these cash flows to
their net present value.
Estimates of future revenues and expenses used to determine the value of
IPR&D was consistent with the historical trends in the industry and expected
outlooks. The entire amount was charged to operations because related
technologies had not reach technological feasibility and they had no
alternative future use.
At the valuation date, the Predecessor was in the process of developing
two next generation versions of existing technologies, which, based on an
effort to date, were 50% and 75% complete. Activities necessary to covert this
IPR&D into commercially viable technologies include the writing and testing of
code diagnostic software design development testing and system integration. The
Company expects resultant products will be successfully developed in fiscal
2002 at an additional estimated cost of $1,000,000.
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
acquisition of substantially all of the operating assets of the Predecessor had
occurred at July 1, 1999. The pro forma statements of operations for the six
months ended December 29, 2000, include the historical results of the Company
for the period from November 23, 2000 to December 29, 2000 and the historical
results of the Predecessor from July 1, 2000 to November 22, 2000 and are
adjusted to reflect the new accounting basis for the assets and liabilities of
the Company, and exclude acquisition related charges for recurring amortization
of goodwill and intangibles related to the Predecessor. The pro forma Statement
of Operations for the six months ended December 31, 1999 include the historical
results of the Pre-Predecessor and are adjusted to reflect the new accounting
basis for the assets and liabilities of the Company. The pro forma financial
results are as follows (in thousands):
SIX MONTHS ENDED
------------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
Revenue .......................... $ 31,771 $ 6,677
Loss before income taxes ......... $ (44,066) $ (4,478)
Net loss ......................... $ (44,066) $ (4,478)
F-219
SEAGATE TECHNOLOGY SAN HOLDINGS AND ITS PREDECESSORS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(UNAUDITED)
7. LITIGATION
LEGAL PROCEEDINGS
Storage Computer Corporation -- On March 22, 2001, Storage Computer
Corporation filed suit in the U.S. District Court for the Northern District of
Texas, Civil Action No. 3-01CV0555-M, entitled Storage Computer Corporation v.
XIOtech Corporation and Seagate Technology, Inc. The complaint alleges that
XIOtech's MAGNITUDETM product infringes U.S. Patent No. 5,893,919 and that
Seagate Technology induces infringement of the patent by promoting and
marketing XIOtech's MAGNITUDETM product, particularly through a hyperlink on
Seagate Technology's internet website to XIOtech's internet website. The
plaintiff alleges willful infringement and seeks damages and an injunction. We
have engaged outside counsel to evaluate the claims in the suit. The ultimate
outcome of this litigation is fact intensive and cannot be determined and
remains uncertain. The ultimate resolution of this matter could have a material
adverse impact on XIOtech's financial condition, results of operations, and
cash flows.
8. CAPITAL STOCK
The Company's authorized share capital is $50,000 and consists of 50,000
shares of a par value of $1.00, of which 2,000 shares were issued and
outstanding at December 29, 2000.
The Predecessor's authorized share capital consisted of 1,000 shares of
common stock with a par value of $.01, of which 1,000 shares were issued and
outstanding at June 30, 2000.
F-220
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Seagate Technology SAN Holdings
We have audited the accompanying balance sheets of XIOtech Corporation
(the "Company") as of June 30, 2000, and the related statements of operations,
changes in manditorily redeemable convertible preferred stock and stockholders'
equity (net capital deficit), and cash flows for the period from January 29,
2000 to June 30, 2000. We have also audited the accompanying balance sheet of
XIOtech Corporation (prior to being acquired by Seagate Technology, Inc.) (the
"Pre-Predecessor") at December 31, 1999, and the related statements of
operations, changes in mandatorily redeemable convertible preferred stock and
stockholders' equity (net capital deficit), and cash flows for the period from
January 1, 2000 to January 28, 2000 and for the year ended December 31, 1999.
These financial statements are the responsibility of the Company's and the
Pre-Predecessor's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at June 30,
2000, and the results of its operations and its cash flows for the period from
January 29, 2000 to June 30, 2000, and the financial position of the
Pre-Predecessor at December 31, 1999, and the results of its operations and its
cash flows for the period from January 1, 2000 to January 28, 2000 and for the
year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
March 16, 2001
F-221
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Seagate Technology SAN Holdings
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in mandatorily redeemable convertible preferred stock
and stockholders' equity (net capital deficit) and of cash flows present
fairly, in all material respects, the financial position of XIOtech Corporation
(prior to being acquired by Seagate Technology, Inc.) (the "Pre-Predecessor")
at December 31, 1998, and the results of its operations and its cash flows for
each of the two years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Pre-Predecessor's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 26, 1999
F-222
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRE-PREDECESSOR
---------------------------
JUNE 30, DECEMBER 31,
2000 1999 1998
------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 6,968 $ 9,208 $ 6,395
Accounts receivable, net of allowance for doubtful accounts of $905 in
2000, $488 in 1999, and $0 in 1998................................... 6,027 4,003 654
Inventory ............................................................ 4,893 2,584 1,208
Deferred income taxes ................................................ 5,984 -- --
Prepaid expenses and other assets .................................... 259 95 62
---------- --------- ---------
Total current assets .................................................. 24,131 15,890 8,319
Restricted cash ....................................................... 300 -- --
Property and equipment, net ........................................... 2,613 970 569
Goodwill and purchased intangibles, net ............................... 233,794 -- --
---------- --------- ---------
Total assets .......................................................... $ 260,838 $ 16,860 $ 8,888
========== ========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIT)
Current liabilities:
Accounts payable ..................................................... $ 994 $ 1,596 $ 519
Accrued expenses ..................................................... 2,517 1,684 561
Deferred revenue ..................................................... 1,706 147 31
Accrued compensation benefits ........................................ 6,763 371 119
---------- --------- ---------
Total current liabilities ............................................. 11,980 3,798 1,230
Intercompany payable to Seagate ....................................... 1,695 -- --
Deferred income taxes ................................................. 14,645 -- --
---------- --------- ---------
Total liabilities ..................................................... 28,320 3,798 1,230
Commitments and Contingencies
Mandatorily redeemable preferred stock:
Series B mandatorily redeemable convertible preferred stock, $1.00
par value; 0, 5,600 and 5,600 shares authorized and 0, 5,085 and
5,085 shares outstanding in 2000, 1999 and 1998; stated at current
redemption value .................................................... -- 8,414 7,646
Series C mandatorily redeemable convertible preferred stock, $1.00
par value; 0, 5,320 and 5,320 shares authorized and 0, 4,879 and
4,879 shares outstanding in 2000, 1999 and 1998; stated at current
redemption value .................................................... -- 11,592 10,454
Series D mandatorily redeemable convertible preferred stock, $1.00
par value; 0, 4,000 and 4,000 shares authorized and 0, 1,643 and 0
shares outstanding in 2000, 1999 and 1998; stated at current
redemption value .................................................... -- 10,100 --
---------- --------- ---------
-- 30,106 18,100
Stockholders' equity (net capital deficit):
Series A convertible preferred stock, $1.00 par value; 0, 1,900 and
1,900 shares authorized and 0, 1,337 and 1,362 shares outstanding
in 2000, 1999, and 1998 ............................................. -- 1,377 1,362
Common stock, $0.001 par value; 0, 50,000 and 50,000 shares
authorized and 0, 2,870 and 2,322 shares outstanding in 2000, 1999
and 1998 ............................................................ -- 3 2
Common Stock $0.01 par value; 1 share authorized and outstanding in
2000 ................................................................ -- -- --
Additional paid-in capital ........................................... 359,413 791 48
Accumulated deficit .................................................. (126,895) (19,215) (11,854)
---------- --------- ---------
Total stockholders' equity (net capital deficit) ...................... 232,518 (17,044) (10,442)
---------- --------- ---------
Total liabilities, mandatorily redeemable preferred stock, and
stockholders' equity (net capital deficit) ........................... $ 260,838 $ 16,860 $ 8,888
========== ========= =========
See accompanying notes.
F-223
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PRE-PREDECESSOR
---------------------------------------------------------------
PERIOD PERIOD FROM SIX MONTHS
JANUARY 29, JANUARY 1, ENDED
2000 2000 TO JUNE 30, YEARS ENDED DECEMBER 31,
TO JUNE 30, JANUARY 28, 1999
2000 2000 (Unaudited) 1999 1998 1997
-------------- ------------- ------------ ------------ ----------- -----------
Revenue ............................... $ 12,739 $ 430 $ 4,052 $ 10,727 $ 1,542 $ --
Cost of goods sold (includes
$3,462 of intangible
amortization for the period
from January 29, 2000 to
June 30, 2000) ....................... 8,672 180 2,624 6,034 1,867 461
---------- -------- -------- -------- -------- --------
Gross profit (loss) ................... 4,067 250 1,428 4,693 (325) (461)
Operating expenses:
Product development .................. 1,529 208 961 2,094 2,028 1,896
Marketing and administrative ......... 14,813 965 3,141 8,108 3,646 1,019
Amortization of goodwill and
intangible assets ................... 16,892 -- -- -- -- --
In-process research and
development ......................... 104,844 -- -- -- -- --
---------- -------- -------- -------- -------- --------
Total operating expenses .............. 138,078 1,173 4,102 10,202 5,674 2,915
---------- -------- -------- -------- -------- --------
Loss from operations .................. (134,011) (923) (2,674) (5,509) (5,999) (3,376)
Interest income ....................... 157 43 107 292 249 276
---------- -------- -------- -------- -------- --------
Loss before income taxes .............. (133,854) (880) (2,567) (5,217) (5,750) (3,100)
Benefit for income taxes .............. 6,959 -- -- -- -- --
---------- -------- -------- -------- -------- --------
Net loss .............................. (126,895) (880) (2,567) (5,217) (5,750) (3,100)
Accretion to redemption value of
mandatorily redeemable
preferred stock ...................... -- (257) (1,045) (2,144) (1,110) (635)
---------- -------- -------- -------- -------- --------
Net loss attributable to common
stockholders ......................... $ (126,895) $ (1,137) $ (3,612) $ (7,361) $ (6,860) $ (3,735)
========== ======== ======== ======== ======== ========
See accompanying notes.
F-224
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
STATEMENTS OF CHANGES
IN MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIT)
(IN THOUSANDS)
STOCKHOLDERS'
EQUITY (NET
CAPITAL DEFICIT)
----------------
SERIES A
CONVERTIBLE
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK
--------------------------------------------------------- -----------------
SERIES B SERIES C SERIES D
----------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- ---------- -------- ---------- -------- --------
PERIOD FROM JANUARY 1, 1997
TO JANUARY 28, 2000
(PRE-PREDECESSOR):
Balance at January 1,
1997 ...................... -- $ -- -- $ -- -- $ -- 1,362 $1,362
Sale of Series B
preferred stock ........... 5,085 6,312 -- -- -- -- -- --
Exercise of stock
options ................... -- -- -- -- -- -- -- --
Accretion to redemption
value of preferred
stock ..................... -- 635 -- -- -- -- -- --
Net loss ................... -- -- -- -- -- -- -- --
----- ------ -- ------- -- ------- ----- ------
Balance at December 31,
1997 ...................... 5,085 $6,947 -- -- -- -- 1,362 1,362
Sale of Series C
preferred stock ........... -- -- 4,879 10,043 -- -- -- --
Exercise of stock
options ................... -- -- -- -- -- -- -- --
Accretion to redemption
value of preferred
stock ..................... -- 699 -- 411 -- -- -- --
Net loss .................. -- -- -- -- -- -- -- --
----- ------ ----- ------- -- ------- ----- ------
Balance at December 31,
1998 ...................... 5,085 $7,646 4,879 $10,454 -- -- 1,362 $1,362
Exercise of warrants in
Series A preferred
stock ..................... -- -- -- -- -- -- 15 15
Sale of Series D
preferred stock ........... -- -- -- -- 1,643 9,862 -- --
Exercise of warrants in
common stock .............. -- -- -- -- -- -- -- --
Exercise of stock
options ................... -- -- -- -- -- -- -- --
Accretion to redemption
value of preferred
stock ..................... -- 768 -- 1,138 -- 238 -- --
Compensation expense
related to options and
warrants .................. -- -- -- -- -- -- -- --
Net loss .................. -- -- -- -- -- -- -- --
----- ------ ----- ------- ----- ------- ----- ------
Balance at December 31,
1999 ...................... 5,085 $8,414 4,879 $11,592 1,643 $10,100 1,377 $1,377
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIT)
--------------------------------------------------------------------
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON STOCK
----------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (NET CAPITAL DEFICIT)
-------- -------- ------------ ------------- ----------------------
PERIOD FROM JANUARY 1, 1997
TO JANUARY 28, 2000
(PRE-PREDECESSOR):
Balance at January 1,
1997 ...................... 2,300 $ 2 $ 114 $ (1,327) $ 151
Sale of Series B
preferred stock ........... -- -- -- -- --
Exercise of stock
options ................... 1 -- -- -- --
Accretion to redemption
value of preferred
stock ..................... -- -- (68) (567) (635)
Net loss ................... -- -- -- (3,100) (3,100)
----- --- ----- --------- ---------
Balance at December 31,
1997 ...................... 2,301 2 46 (4,994) (3,584)
Sale of Series C
preferred stock ........... -- -- --
Exercise of stock
options ................... 21 -- 2 -- 2
Accretion to redemption
value of preferred
stock ..................... -- -- -- (1,110) (1,110)
Net loss .................. -- -- -- (5,750) (5,750)
----- --- ----- --------- ---------
Balance at December 31,
1998 ...................... 2,322 $ 2 48 $ (11,854) $ (10,442)
Exercise of warrants in
Series A preferred
stock ..................... -- -- 15 -- 30
Sale of Series D
preferred stock ........... -- -- -- -- --
Exercise of warrants in
common stock .............. 400 1 8 -- 9
Exercise of stock
options ................... 148 -- 3 -- 3
Accretion to redemption
value of preferred
stock ..................... -- -- -- (2,144) (2,144)
Compensation expense
related to options and
warrants .................. -- -- 717 -- 717
Net loss .................. -- -- -- (5,217) (5,217)
----- --- ----- --------- ---------
Balance at December 31,
1999 ...................... 2,870 $ 3 791 $ (19,215) $ (17,044)
F-225
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
STATEMENTS OF CHANGES
IN MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIT) (CONTINUED)
(IN THOUSANDS)
STOCKHOLDERS'
EQUITY (NET
CAPITAL DEFICIT)
SERIES A
CONVERTIBLE
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK
--------------------------------------------------------- -----------------
SERIES B SERIES C SERIES D
----------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- ---------- -------- ---------- -------- --------
Balance at December 31,
1999 ...................... 5,085 $8,414 4,879 $11,592 1,643 $10,100 1,377 $1,377
Exercise of stock
options ................... -- -- -- -- -- -- -- --
Accretion to redemption
value of preferred
stock ..................... -- 70 -- 99 -- 88 -- --
Net loss .................. -- -- -- -- -- -- -- --
----- ------ ----- ------- ----- ------- ----- ------
Balance at January 28,
2000 ...................... 5,085 $8,484 4,879 $11,691 1,643 $10,188 1,377 $1,377
===== ====== ===== ======= ===== ======= ===== ======
PERIOD FROM JANUARY 29,
2000 TO JUNE 30, 2000:
New capitalization at
January 29, 2000 .......... -- $ -- -- $ -- -- $ -- -- $ --
Stock option deduction
available to Seagate....... -- -- -- -- -- -- -- --
Net loss .................. -- -- -- -- -- -- -- --
----- ------ ----- ------- ----- ------- ----- ------
Balance at June 30,
2000 ...................... -- $ -- -- $ -- -- $ -- -- $ --
===== ====== ===== ======= ===== ======= ===== ======
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIT)
-------------------------------------------------------------------
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON STOCK
----------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (NET CAPITAL DEFICIT)
-------- -------- ------------ ------------- ----------------------
Balance at December 31,
1999 ...................... 2,870 $ 3 $ 791 $ (19,215) $ (17,044)
Exercise of stock
options ................... 35 -- 7 -- 7
Accretion to redemption
value of preferred
stock ..................... -- -- -- (257) (257)
Net loss .................. -- -- -- (880) (880)
----- --- -------- ---------- ----------
Balance at January 28,
2000 ...................... 2,905 $ 3 $ 798 $ (20,352) $ (18,174)
===== === ======== ========== ==========
PERIOD FROM JANUARY 29,
2000 TO JUNE 30, 2000:
New capitalization at
January 29, 2000 .......... 1 $-- $359,221 $ -- $ 359,221
Stock option deduction
available to Seagate....... -- -- 192 -- 192
Net loss .................. -- -- -- (126,895) (126,895)
----- --- -------- ---------- ----------
Balance at June 30,
2000 ...................... 1 $-- $359,413 $ (126,895) $ 232,518
===== === ======== ========== ==========
See accompanying notes.
F-226
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PRE-PREDECESSOR
-------------------------------------------------------------------
PERIOD PERIOD FROM SIX MONTHS
JANUARY 29, JANUARY 1, ENDED
2000 2000 TO JUNE 30, YEARS ENDED DECEMBER 31,
TO JUNE 30, JANUARY 28, 1999
2000 2000 (Unaudited) 1999 1998 1997
-------------- ------------- -------------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net loss ............................... $ (126,895) $(880) $(2,567) $ (5,217) $ (5,750) $ (3,100)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization ......... 20,660 42 149 352 219 112
In-process research and
development .......................... 104,844 -- -- -- -- --
Deferred income taxes ................. (3,109) -- -- -- -- --
Compensation expense related
to options and warrants .............. -- -- -- 717 -- --
Changes in operating assets and
liabilities:
Accounts receivable ................... (3,097) 1,073 (2,131) (3,349) (654) --
Inventory ............................. (1,426) (883) (675) (1,376) (886) (322)
Prepaid expenses and other
assets ............................... (161) (3) (1) (33) (15) (18)
Restricted cash ....................... (300) -- -- -- -- --
Accounts payable and accrued
expenses ............................. 6,886 (235) 1,149 2,400 619 408
Deferred revenue ...................... 1,493 66 38 116 31 --
---------- ------- --------- -------- -------- --------
Net cash used in operating
activities ............................ (1,105) (820) (4,038) (6,390) (6,436) (2,920)
INVESTING ACTIVITIES
Net cash used in investing
activities for purchase of
property and equipment ................ (1,979) (10) (272) (701) (423) (328)
FINANCING ACTIVITIES
Repayment of capital lease
obligations ........................... (23) (5) -- -- -- --
Changes in intercompany payable
to Seagate ............................ 1,695 -- -- -- -- --
Proceeds from issuance of
common stock .......................... -- 7 8 12 2 --
Proceeds from issuance of Series
A preferred stock ..................... -- -- -- 30 -- --
Net proceeds from issuance of
mandatorily redeemable
convertible preferred stock ........... -- -- -- 9,862 10,043 6,312
---------- ------- --------- -------- -------- --------
Net cash provided by (used in)
financing activities .................. 1,672 2 8 9,904 10,045 6,312
---------- ------- --------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents .................. (1,412) (828) (4,302) 2,813 3,186 3,064
Cash and cash equivalents at
beginning of period ................... 8,380 9,208 6,395 6,395 3,209 145
---------- ------- --------- -------- -------- --------
Cash and cash equivalents at end
of period ............................. $ 6,968 $8,380 $ 2,093 $ 9,208 $ 6,395 $ 3,209
========== ======= ========= ======== ======== ========
See accompanying notes.
F-227
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
XIOtech Corporation ("XIOtech" or the "Company"), was a privately held
independent company prior to its acquisition by Seagate Technology, Inc.
("Seagate") on January 29, 2000. XIOtech was originally incorporated in the
state of Minnesota on October 5, 1995. On November 22, 2000, the Company became
a wholly owned subsidiary of Seagate Technology SAN Holdings, which on an
outstanding shares basis is a wholly owned subsidiary of New SAC, the successor
to Seagate Technology, Inc. (see Note 3).
XIOtech designs, manufactures, and markets a centralized data storage
system. This system is based on an exclusive set of sophisticated data
management and data movement tools. It offers storage virtualization,
multi-node server clustering, and zero backup window solutions. The main
component of the system is MAGNITUDE, a fully implemented SAN (Storage Area
Network). SANs are high-speed data storage units that attach to servers in a
network environment. SANs enable users to store their data as a network instead
of just one server. MAGNITUDE is sold in a cabinet containing software-based
architecture that allows the incorporation of all of the components of a SAN in
one centralized configuration. XIOtech also designs, develops, and produces
software, namely the REDI suite of software, which runs MAGNITUDE's
software-based architecture. The REDI software suite is application specific
and gives customers the capability of better managing their data.
BASIS OF PRESENTATION
XIOtech was acquired by Seagate on January 29, 2000, whereby all
outstanding shares, options, and warrants were exchanged for 8,032,000 shares
of common stock and options of Seagate with a combined fair value of $359
million (the "Seagate Transaction"). Prior to the Seagate Transaction, XIOtech
is referred to as the Pre-Predecessor. The Seagate Transaction was accounted
for as a purchase, and pursuant to the provisions of SEC Staff Accounting
Bulletin No. 54 and the rules of pushdown accounting, the Seagate Transaction
gave rise to a new basis of accounting (see Note 2).
On November 22, 2000, substantially all the operating assets and
liabilities of Seagate, including all the operating assets and liabilities of
the Company, were acquired by Suez Acquisition Company (Cayman) Limited ("SAC")
for approximately $1.814 billion in cash. As a result of the acquisition by
SAC, and the subsequent transfer of rights by SAC to New SAC, the Company
became a wholly owned subsidiary of Seagate Technology SAN Holdings, which on
an outstanding share basis is a wholly owned subsidiary of New SAC (see Note
3).
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 year
2000 ended on June 30. The Pre-Predecessor's fiscal year ended on December 31.
ECONOMIC DEPENDENCE ON NEW SAC
The Company has incurred net losses and negative cash flows from
operations from inception. The Company believes that to the extent future cash
flows from operations are not sufficient to fund the Company's working capital
needs and planned activities during the next twelve months, additional funding
will be available from New SAC or from Seagate Technology Holdings, an
affiliated company.
F-228
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ materially from
these estimates.
Given the volatility of the markets in which the Company and its
Pre-Predecessor participates, the Company and the Pre-Predecessor make
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,
cancelations, and rescheduling. Actual demand will inevitably differ from such
anticipated demand, and such differences may have a material effect on the
financial statements.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid financial
instruments with insignificant interest rate risk that are readily convertible
to cash and have maturities of three months or less from the date of purchase.
Cash equivalents consist of money market funds. The fair market value, based on
quoted market prices, of cash equivalents is substantially equal to their
carrying value at June 30, 2000 and December 31, 1999 and 1998.
RESTRICTED CASH
At June 30, 2000 the Company has cash which is restricted by an
irrevocable standby letter of credit to a customer in the amount of $400,000
expiring May 31, 2004. Beginning on May 31, 2001, the letter of credit will
decrease by $100,000 annually, thereby relieving the restriction of cash at the
same rate. Prepaid expenses and other assets on the balance sheets include
$100,000 of restricted cash at June 30, 2000.
CONCENTRATION OF CREDIT RISK
The Company and the Pre-Predecessor's concentration of credit risk
consists principally of cash, cash equivalents, and trade receivables. The
Company's investment policy restricts investments to high-credit quality
investments and limits the amounts invested with any one issuer. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. Reserves are maintained for potential credit
losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company and the Pre-Predecessor's financial instruments primarily
consist of cash and cash equivalents and short-term trade receivables and
payables for which current carrying amounts approximate fair market value.
INVENTORY
Inventories are valued at the lower of cost or market. Cost is computed on
a currently adjusted standard basis which approximates actual cost on a
first-in, first-out basis. Inventory consists of the following at June 30, 2000
and December 31, 1999 and 1998 (in thousands):
F-229
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PRE-PREDECESSOR
---------------------
JUNE 30, DECEMBER 31,
2000 1999 1998
--------- --------- ---------
Raw materials and components ......... $1,885 $1,037 $ 187
Work-in-process ...................... 566 359 252
Finished goods ....................... 2,442 1,188 769
------ ------ ------
$4,893 $2,584 $1,208
====== ====== ======
LONG-LIVED ASSETS
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
are generally two to seven years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the lease.
(IN THOUSANDS)
--------------------------------
PRE-PREDECESSOR
--------------------
JUNE 30, DECEMBER 31,
2000 1999 1998
--------- -------- ---------
Computer software ...................................... $ 491 $ 273 $ 252
Computer equipment ..................................... 2,149 1,196 591
Tooling ................................................ 64 77 18
Leasehold improvements ................................. 35 38 22
Office furniture and equipment ......................... 180 88 36
------ ------ ------
2,919 1,672 919
------ ------ ------
Less accumulated depreciation and amortization ......... (306) (702) (350)
------ ------ ------
$2,613 $ 970 $ 569
====== ====== ======
Depreciation expense for the Company for the period from January 29, 2000
to June 30, 2000 was $306,000. Depreciation expense for the Pre-Predecessor for
the period from January 1, 2000 to January 28, 2000, the six months ended June
30, 1999 (unaudited), and the years ended December 31, 1999, 1998, and 1997 was
$42,000, $149,000 (unaudited), $352,000, $219,000 and $112,000 respectively.
Goodwill represents the excess of the purchase price of net tangible and
intangible assets acquired by Seagate in the Seagate Transaction over their
estimated fair value. Other intangibles represent developed technology,
assembled workforce, and trademarks acquired in the Seagate Transaction.
Goodwill and purchased intangibles are being amortized on a straight-line basis
over their estimated useful lives ranging from four months to seven years (see
Note 2). Purchased research and development without alternative future use is
expensed when acquired. Accumulated amortization of goodwill and other
intangibles was approximately $20,350,000 as of June 30, 2000.
In accordance with Statement of Financial Accounting Standards No. 121,
the carrying value of property and equipment, purchase intangibles, and related
goodwill is reviewed if the facts and circumstances suggest that they may be
permanently impaired. If this review indicates that the carrying value of these
assets will not be recoverable, as determined based on undiscounted net cash
flows over the remaining life of the assets, 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).
F-230
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
The Company and the Pre-Predecessor recognize revenue when the earnings
process is complete as evidenced by an agreement with the customer, title and
risk of loss has transferred to the customer (typically at the time of shipment
to the customer), determination of probable collectibility, and fixed and
determinable pricing. If significant obligations remain after delivery, revenue
is deferred until such obligations are fulfilled. The Company and the
Pre-Predecessor derive a portion of their revenue from software, installation,
and support sold together with its SAN units. For arrangements including
software, revenue is recognized in accordance with the American Institute of
Certified Public Accountant's Statement of Position (SOP) 97-2, as amended by
SOP 98-4, "Software Revenue Recognition." Revenue from software license
agreements is primarily recognized at the time of product delivery, provided
that fees are fixed or determinable, evidence of an arrangement exists,
collectibility is probable, and the vendor-specific objective evidence of fair
value exists. Revenue from resellers is primarily recognized at the time risk
of loss passes to the end user, which is generally at time product is shipped.
Service revenue from customer maintenance fees for ongoing customer support and
product updates is recognized ratably over the maintenance term, which is
typically twelve months.
RESEARCH AND DEVELOPMENT
Research and development expenditures are generally charged to operations
as incurred. Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company and the
Pre-Predecessor's product development process, technological feasibility is
established upon the completion of a working model. The time period between
achieving technological feasibility and availability of the product for general
release to customers is typically very short. Accordingly, the costs qualifying
for capitalization have not been material to date and no costs have been
capitalized.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Pre-Predecessor adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
Company and the Pre-Predecessor's comprehensive net loss was the same as its
net loss for all periods presented.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was not
material for any period presented.
STOCK-BASED COMPENSATION
The Company and the Pre-Predecessor account for employee stock-based
compensation under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion 25"), and related interpretations. Pro
forma net income disclosures and net income per share disclosures are required
by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), and are included in Note 6.
F-231
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SUPPLIER AND CUSTOMER CONCENTRATIONS
A limited number of customers historically have accounted for a
substantial portion of the Company and its Pre-Predecessor's revenues.
Percentage revenues from customers with more than 10% of sales were as follows
(as a percentage of net sales):
PRE-PREDECESSOR
-------------------------------------------------------------
PERIOD PERIOD SIX MONTHS
FROM FROM ENDED
JANUARY 29, JANUARY 1, JUNE 30,
2000 TO 2000 TO 1999(A) YEARS ENDED DECEMBER 31,
JUNE 30, JANUARY 28,
2000 2000 (UNAUDITED) 1999(A) 1998 1997(A)
------------- ------------ ------------ --------- -------- --------
Armed Forces
Bank .................... * 18% * * * *
Times Mirror
Magazines, Inc. ......... * 11% * * * *
Winstar Broadband
Services ................ * 27% * * * *
Seagate
Technology .............. 10% * * * * *
Connect ................... * * * * 20% *
Netlan .................... * * * * 17% *
Deerfield ................. * * * * 16% *
- ----------
* Revenues from customers in these periods represent less than 10% of net
sales.
(a) There were no customers with revenues exceeding 10% of total
revenues during these periods.
Sales of the Company's products will vary as a result of fluctuations in
market demand. Further, the SAN markets in which the Company competes are
characterized by rapid technological change, evolving industry standards,
declining average selling prices, and rapid technological obsolescence.
Certain of the raw materials and components used by the Company in the
manufacture, production, and assembly of its products are available from a
limited number of suppliers. For example, all of the Company's SAN solution
products use disk drives that are currently supplied by Seagate (see Note 8).
RECLASSIFICATIONS
Certain amounts have been reclassified in the 1998 and 1997 financial
statements in order to conform to the 2000 and 1999 presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by Statement of Financial
Accounting Standards No. 138 ("FAS 133"). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133," which deferred the effective date of FAS 133 until fiscal years beginning
after June 15, 2000. The adoption of FAS 133 did not have a significant impact
on the Company's results of operations, financial position, or cash flows.
F-232
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. SAB 101 will be effective for
the Company for the fiscal year ending June 2001. The Company's revenue
recognition policy currently complies with SAB 101, and therefore the adoption
of SAB 101 will not have any effect on the Company results of operations,
financial position, or cash flows.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No.
25 and, among other issues, clarifies the following: the definition of an
employee for purposes of applying APB Opinion No. 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequences of various modifications to the terms of the previously fixed
stock options or awards, and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000, but certain conclusions in FIN 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The application of FIN 44
did not have a material impact on the Company's results of operations,
financial position, or cash flows.
2. ACQUISITION OF THE PRE-PREDECESSOR BY SEAGATE
As discussed in Note 1, effective January 29, 2000, the Pre-Predecessor
was acquired by Seagate in exchange for 8,032,000 shares of common stock and
options with a combined value of approximately $359,000,000. The following is a
summary of the purchase price allocation (in thousands):
ESTIMATED
DESCRIPTION LIFE FAIR VALUE
- --------------------------------------------- ----------- -----------
Tangible assets and liabilities ............. $ 11,440
Developed technology ........................ 54 months 37,390
Trade names ................................. 60 months 4,836
Assembled workforce ......................... 4 months 2,183
Customer list ............................... 12 months 1,967
In-process research and development ......... 104,844
Goodwill .................................... 7 years 208,333
Deferred tax liability ...................... (11,772)
--------
$359,221
========
The value of in-process research & development ("IPR&D") was based on an
evaluation of all developmental projects using the guidance set forth in
Interpretation No. 4 of Financial Accounting Standards Board Statement (FAS)
No. 2, Accounting for Research and Development Costs and FAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.
The amount was determined by: 1) obtaining management estimates of future
revenues and operating profits associated with existing developmental projects
2) projecting the cash flows and costs to complete of the underlying
technologies and resultant products, and 3) discounting these cash flows to
their net present value.
Estimates of future revenues and expenses used to determine the value of
IPR&D was consistent with the historical trends in the industry and expected
outlooks. The entire amount was charged to operations because related
technologies had not reached technological feasibility and they had no
alternative future use.
F-233
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At the valuation date, the Company was in the process of developing two
next generation versions of existing technologies. The anticipated release date
for these next generation projects was the first half of fiscal 2001 and the
third quarter of fiscal 2001. Activities necessary to convert this IPR&D into
commercially viable technologies was expected to be $1,000,000 at the date of
the valuation.
Pro forma results of operations have not been presented for this
transaction due to the subsequent acquisition of Seagate by New SAC on November
22, 2000. See Note 3 for a discussion of that transaction.
3. PURCHASE OF SEAGATE BY SAC
On November 22, 2000, Seagate, Seagate Software Holdings, Inc. ("Seagate
Software"), a subsidiary of Seagate, and SAC completed the stock purchase
agreement, and Seagate and VERITAS Software Corporation ("VERITAS") completed
the agreement and plan of merger and reorganization (the "Merger Agreement").
SAC was a limited liability company organized under the laws of the Cayman
Islands and formed solely for the purpose of entering into the stock purchase
agreement and related acquisitions. SAC assigned all of its rights under the
stock purchase agreement to New SAC.
Under the stock purchase agreement, SAC agreed to purchase for $1.84
billion cash, including transaction costs of $25 million, all of the operating
assets of Seagate and its consolidated subsidiaries, including XIOtech. In
addition, under the stock purchase agreement, SAC agreed to assume
substantially all of the operating liabilities of Seagate and its consolidated
subsidiaries. In addition, New SAC acquired Seagate Technology Investments,
Inc. a subsidiary of Seagate, which holds strategic investments in various
companies. As part of the New SAC transaction, New SAC contributed the stock of
the Company to Seagate Technology SAN Holdings, a holding company that is a
wholly owned subsidiary of New SAC. Seagate Technology SAN Holdings is the
successor to the Company. On November 22, 2000, XIOtech also formed a wholly
owned subsidiary XIOtech Canada, Ltd., for which certain assets of XIOtech were
contributed.
Immediately following the consummation of the SAC transaction, VERITAS
acquired Seagate, and a wholly owned subsidiary of VERITAS merged with and into
Seagate with Seagate becoming a wholly owned subsidiary of VERITAS (the
"VERITAS Merger"). VERITAS did not acquire Seagate's disc drive business or any
other Seagate operating businesses, including XIOtech. In the VERITAS merger,
the Seagate stockholders received merger consideration consisting of VERITAS
stock and cash.
We refer to the transactions relating to the stock purchase agreement, the
agreement and plan of merger, and the VERITAS Merger as the New SAC
Transactions.
New SAC has accounted for the New SAC Transaction as a purchase in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations." All acquired tangible assets, identifiable intangible assets, as
well as assumed liabilities were fair valued. The fair value of the net assets
acquired in the New SAC Transaction exceeded the net purchase price.
Accordingly, the resultant negative goodwill was allocated on a pro rata basis
to the acquired long-lived assets and reduced the recorded amounts by
approximately 46%. Pursuant to the provisions of SEC Staff Accounting Bulletin
No. 54 and the rules of pushdown accounting, the New SAC Transaction gave rise
to a new basis of accounting for the Company.
The estimated fair values of intangible assets acquired related to the
Company, adjusted for the negative goodwill allocations, are as follows (in
thousands):
F-234
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LIFE ESTIMATED
DESCRIPTION IN YEARS FAIR VALUE
- ----------------------------------------------- ---------- -----------
Net current assets (1) ........................ $ 26,911
Long term liabilities ......................... (9,650)
Other long-lived assets ....................... --
Property, plant & equipment (2) ............... 2,412
Identified intangibles:
Trade names (3) .............................. 5 1,088
Developed technologies (3) ................... 4 5,441
Assembled workforces (3) ..................... 1 544
Other ........................................ 1 1,088
--------
Subtotal ................................... 8,161
--------
Net assets .................................... 27,834
In-process research & development (3) ......... 25,027
--------
$ 52,861
========
- ----------
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book values
of XIOtech. Inventory values were estimated based on the current market
value of the inventories less completion costs and less a normal profit
margin based on activities remaining to be completed until the inventory
is sold.
Assumed current liabilities included accounts payable, accrued
compensation and expenses and accrued income taxes. The fair values of
current liabilities generally approximated the historic recorded book
values of XIOtech because of the monetary nature of most of the
liabilities.
(2) New SAC obtained an independent valuation of the acquired property, plant
and equipment. In arriving at the determination of market value for the
assets, the appraisers considered the estimated cost to construct or
acquire comparable property. Machinery and equipment was assessed using
replacement cost estimates reduced by depreciation factors representing
the condition, functionality and operability of the assets. The sales
comparison approach was used for office and data communication equipment.
Leasehold improvements were valued based upon discussions with
knowledgeable personnel.
(3) New SAC obtained an independent valuation of acquired identified
intangibles. The significant assumptions relating to each category are
discussed in the following paragraphs. Also, these assets are being
amortized on the straight-line basis over their estimated useful life and
resultant amortization is included in amortization of goodwill and other
intangibles.
Trade Names -- The value of the trade names was based upon discounting to
their net present value the licensing income that would arise by charging the
operating businesses that use the trade names.
Developed Technologies -- The value of this asset for each operating
business was determined by discounting the expected future cash flows
attributable to all existing technologies which had reached technological
feasibility, after considering risks relating to: 1) the characteristics and
applications of the technology, 2) existing and future markets, as well as 3)
life cycles of the technologies. Estimates of future revenues and expenses used
to determine the value of developed technology was consistent with the
historical trends in the industry and expected outlooks.
Assembled workforces -- The value of the assembled work force was
determined by estimating the recruiting, hiring and training costs to replace
each group of existing employees.
F-235
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In-process research & development (IPR&D) -- The value of IPR&D was based
on an evaluation of all developmental projects using the guidance set forth in
Interpretation No. 4 of Financial Accounting Standards Board Statement (FAS)
No. 2, Accounting for Research and Development Costs and FAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.
The amount was determined by: 1) obtaining management estimates of future
revenues and operating profits associated with existing developmental projects
2) projecting the cash flows and costs to complete of the underlying
technologies and resultant products, and 3) discounting these cash flows to
their net present value.
Estimates of future revenues and expenses used to determine the value of
IPR&D was consistent with the historical trends in the industry and expected
outlooks. The entire amount was charged to operations because related
technologies had not reached technological feasibility and they had no
alternative future use.
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
New SAC Transaction had occurred at January 1, 1998. The pro forma information
for the six months ended June 30, 2000 combines the historical results of the
Company and are adjusted to reflect the new accounting basis for the assets and
liabilities as if the New SAC transaction had occurred on January 1, 1998. The
proforma information for the years ended December 31, 1999 and 1998 and the six
months ended June 30, 1999 include the historical results of the
Pre-Predecessor and are adjusted to reflect the new accounting basis for the
assets and liabilities as if the New SAC transaction had occurred on January 1,
1998. The pro forma information does not purport to represent the Company or
the Pre-Predecessor's actual results of operations had the New SAC transaction
occurred on January 1, 1998 and should not serve as a forecast of operating
results for any future periods. The pro forma financial results are as follows
(in thousands):
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------------------- ---------------------------
2000 1999 (UNAUDITED) 1999 1998
------------- ------------------ ------------ ------------
Revenue .......................... $ 13,169 $ 4,052 $ 10,727 $ 1,542
Loss before income taxes ......... $ (35,748) $ (3,564) $ (7,154) $ (9,479)
Net loss ......................... $ (35,748) $ (3,564) $ (7,154) $ (9,479)
F-236
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS
The Company has entered into various operating leases. The Company leases
its facility under an operating lease expiring in April 2007. The Company also
has equipment operating leases through fiscal 2007. Future minimum lease
payments under the operating leases at June 30, 2000 are as follows (in
thousands):
2001 ................................. $ 453
2002 ................................. 1,037
2003 ................................. 1,031
2004 ................................. 1,077
2005 ................................. 1,099
Thereafter ........................... 2,014
------
Total minimum lease payments ......... $6,711
======
Rental expense under operating leases was approximately $212,000, $42,000,
$222,000 (unaudited), $429,000, $423,000 and $231,000 for the periods from
January 29, 2000 to June 30, 2000, January 1, 2000 to January 28, 2000, the six
months ended June 30, 1999 (unaudited), and the years ended December 31, 1999,
1998, and 1997, respectively.
5. INCOME TAXES
Subsequent to the business combination with Seagate Technology on January
28, 2000, Xiotech Corporation is included in the consolidated federal and
certain combined and consolidated foreign and state income tax returns of
Seagate Technology. Seagate Technology and Xiotech Corporation have entered
into a tax sharing agreement (the "Tax Allocation Agreement") pursuant to which
Xiotech Corporation computes hypothetical tax returns as if Xiotech Corporation
was not joined in consolidated or combined returns with Seagate Technology.
Xiotech Corporation must pay Seagate Technology the positive amount of any such
hypothetical taxes. If the hypothetical tax returns show entitlement to
refunds, including any refunds attributable to a carryback, then Seagate
Technology will pay Xiotech Corporation the amount of such refunds. At the end
of fiscal 2000, there were approximately $4.0 million of inter-company tax
related balances due to Xiotech Corporation from Seagate Technology that were
offset against amounts due to Seagate Technology under the Revolving Loan
Agreement.
F-237
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The provision for (benefit from) income taxes consisted of the following
(in thousands):
PREDECESSOR PRE-PREDECESSOR
------------- --------------------------------------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
JANUARY 29, JANUARY 1, ENDED
2000 TO 2000 TO JUNE 30, YEARS ENDED DECEMBER 31,
JUNE 30, JANUARY 28, 1999 -------------------------------
2000 2000 (UNAUDITED) 1999 1998 1997
(IN THOUSANDS) ------------- ------------- ------------ --------- --------- ---------
Current Tax Expense:
Federal ............ $ (550) $ -- $ -- $ -- $ -- $ --
State .............. (109) -- -- -- -- --
-------- ------ ------ ------ ------ ------
Total ............... (659) -- -- -- -- --
Deferred Tax Expense:
Federal ............ (5,265) -- -- -- -- --
State .............. (1,035) -- -- -- -- --
-------- ------ ------ ------ ------ ------
Total ............... (6,300) -- -- -- -- --
-------- ------ ------ ------ ------ ------
Benefit from Income
Taxes .............. $ (6,959) $ -- $ -- $ -- $ -- $ --
======== ====== ====== ====== ====== ======
The pro forma information assuming a tax benefit based on a separate
return basis is as follows:
PERIOD FROM
JANUARY 29,
2000
TO JUNE 30, 2000
-----------------
(IN THOUSANDS)
Loss before income taxes .......................... $133,854
Provision for (benefit from) income taxes ......... --
--------
Net loss .......................................... $133,854
========
The income tax benefits related to the exercise of certain employee stock
options increased amounts due from Seagate Technology pursuant to the Tax
Allocation Agreement and were credited to additional paid-in capital. Such
amount approximated $192,000 in fiscal 2000.
F-238
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities were as
follows:
PRE-PREDECESSOR
---------------------------
JUNE 30, DECEMBER 31,
2000 1999 1998
(IN THOUSANDS) ------------ ----------- -------------
DEFERRED TAX ASSETS
Reserves and accrued expenses ...................... $ 2,787 $ 290 $ 17
Deferred revenue ................................... 300 -- --
Net operating losses ............................... 2,556 5,458 3,976
Research and development credits/other ............. 397 334 228
--------- -------- -------
Total deferred tax assets .......................... 6,040 6,082 4,221
Valuation allowance ................................ -- (6,071) (4,216)
--------- -------- -------
Net deferred tax assets ............................ 6,040 11 5
--------- -------- -------
DEFERRED TAX LIABILITIES
Acquisition-related deferred tax liability ......... (14,645) -- --
Other .............................................. (56) (11) (5)
--------- -------- ----------
Total deferred tax liabilities ..................... (14,701) (11) (5)
--------- -------- ----------
Net deferred tax liabilities ....................... $ (8,661) $ -- $ --
========= ======== =========
A valuation allowance has been provided for the deferred tax assets as of
the end of fiscal 1999 and fiscal 1998. Realization of the deferred tax assets
was dependent on future earnings, the timing and amount of which were
uncertain. In addition, the net operating loss and tax credit carryforwards are
subject to further limitations on utilization due to the "change in ownership"
provisions of Internal Revenue Code Section 382. The valuation allowance
decreased by $6,071,000 in 2000 and increased by $1,855,000 and $2,450,000 in
1999 and 1998, respectively.
Approximately $1.9 million of the deferred tax assets at June 30, 2000
represent acquired tax attributes that reduced the purchase price recorded in
the business combination through a reduction of goodwill.
As of June 30, 2000, Xiotech Corporation has federal and state tax net
operating loss carry-forwards of approximately $6.5 million that start expiring
in fiscal 2015, if not used to offset future taxable income.
F-239
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reconciliation between the benefit from income taxes at the U.S.
federal statutory rate and the effective rate are summarized as follows :
PREDECESSOR PRE-PREDECESSOR
------------- ----------------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 29, JANUARY 1, SIX MONTHS
2000 TO 2000 TO ENDED YEARS ENDED DECEMBER 31,
JUNE 30, JANUARY 28, JUNE 30, --------------------------------------
2000 2000 1999 1999 1998 1997
------------- ------------- ----------- ------------ ------------ ------------
(IN THOUSANDS)
Benefit at U.S. statutory rate ............. $ (46,849) $ (308) $ (898) $ (1,826) $ (2,012) $ (1,085)
State income tax provision (benefit),
net of federal income tax benefit ......... (744) -- -- -- -- --
Nondeductible charge for purchased
research and development .................. 36,696 -- -- -- -- --
Nondeductible goodwill ..................... 3,955 -- -- -- -- --
Valuation allowance ........................ -- 308 898 1,560 2,012 1,085
Compensation expense ....................... -- -- -- 251 -- --
Other ...................................... (17) -- -- 15 -- --
--------- ------ ------ -------- -------- --------
Benefit from income taxes .................. $ (6,959) $ -- $ -- $ -- $ -- $ --
========= ====== ====== ======== ======== ========
6. STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIT)
COMMON STOCK, PREFERRED STOCK, AND MANDATORILY REDEEMABLE PREFERRED STOCK
In 1999, the Pre-Predecessor sold 1,643,000 shares of Series D mandatorily
redeemable convertible preferred stock for $9,862,000. The Series D mandatorily
redeemable convertible preferred stock was convertible at the holder's option
into one share of common stock, subject to adjustment of the conversion price,
as defined. The Series D preferred stock had voting rights identical to shares
of the Pre-Predecessor's common stock.
In 1998, the Pre-Predecessor sold 4,879,000 shares of Series C mandatorily
redeemable convertible preferred stock for $10,099,000. The Series C
mandatorily redeemable convertible preferred stock was convertible at the
holder's option into one share of common stock, subject to adjustment of the
conversion price, as defined. The Series C preferred stock had voting rights
identical to shares of the Pre-Predecessor's common stock.
During 1997, the Pre-Predecessor sold 5,085,000 shares of Series B
mandatorily redeemable convertible preferred stock for $6,358,000. The Series B
mandatorily redeemable convertible preferred stock was convertible at the
holder's option into one share of common stock, subject to adjustment of the
conversion price, as defined. The Series B preferred stock had voting rights
identical to shares of the Pre-Predecessor's common stock.
The Series A preferred stock was convertible at the holder's option into
one share of common stock, subject to adjustment of the conversion price, as
defined. The Series A preferred stock had voting rights identical to shares of
the Company's common stock.
All preferred stock was liquidated and exchanged by the holders for
Seagate stock at the date of the Seagate Transaction. Prior to the Seagate
Transaction, the Pre-Predecessor had authorized 75,000,000 shares of stock, of
which 25,000,000 shares were designated preferred stock and 50,000,000 were
designated common stock. Of the 25,000,000 shares of designated preferred
stock, 1,900,000 shares had been designated Series A, 5,600,000 had been
designated Series B, 5,320,000 had been designated Series C, and 4,000,000 had
been designated Series D. The remaining 8,180,000 shares of preferred stock
were undesignated.
F-240
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
In connection with the Series A sale of preferred stock in 1997, the
Pre-Predecessor issued warrants to the respective stockholders to purchase
456,000 shares of Series A preferred stock at a per share exercise price of
$2.00.
In June 1996, the Pre-Predecessor redeemed 400,000 founders shares in
exchange for 400,000 ten-year warrants to purchase common stock at an exercise
price of $0.15. There were 267,000 shares vested through December 1998. The
remaining 133,000 warrants became fully vested by board approval in August
1999. All 400,000 warrants were exercised during the year ended December 31,
1999.
In March 1996, the Pre-Predecessor granted 10,000 warrants to a director
to purchase Series A preferred stock at an exercise price of $1.00, which
vested through January 1, 2000.
OPTIONS ISSUED TO EMPLOYEES
In March 1996, the Pre-Predecessor established the 1996 Stock Option Plan
(the Plan). Under the Plan, the Pre-Predecessor could grant options to
employees for up to 1,000,000 shares of common stock, subject to adjustments
for changes in the Pre-Predecessor's stock such as stock splits and stock
dividends. The exercise price of each option equals the fair market value of
the Pre-Predecessor's stock, as determined by its Board of Directors, on the
date of grant. Options generally vested over a four-year period with a maximum
option term of ten years.
A summary of stock option activity of the Pre-Predecessor is presented
below (shares in thousands):
WEIGHTED
TOTAL SHARES AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE
GRANT SHARES PRICE
--------------- ----------- ---------
Balance at December 31, 1996 ......... 918 82 $ 0.10
Grants .............................. (193) 193 $ 0.13
Exercised ........................... -- (1) $ 0.10
Canceled ............................ 4 (4) $ 0.10
---- ------
Balance at December 31, 1997 ......... 729 270 $ 0.12
Granted ............................. (218) 218 $ 0.17
Exercised ........................... -- (21) $ 0.12
Canceled ............................ 34 (34) $ 0.12
---- -----
Balance at December 31, 1998 ......... 545 433 $ 0.14
Granted ............................. (635) 635 $ 0.54
Exercised ........................... -- (148) $ 0.11
Canceled ............................ 109 (109) $ 0.16
---- ------
Balance at December 31, 1999 ......... 19 811 $ 0.44
Exercised ........................... -- (35) $ 0.21
---- ------ ------
Balance at January 28, 2000 .......... 19 776 $ 0.45
==== ======
F-241
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Pre-Predecessor Plan was terminated at the acquisition date of the
Company by Seagate. All outstanding XIOtech options were converted to options
to purchase Seagate stock. Beginning January 29, 2000, the Company's employees
participated in the Seagate employee stock option and stock purchase plans.
Options granted under Seagate Technology'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.
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
----------- ---------------
(IN THOUSANDS)
XIOtech options exchanged for Seagate options at January 29, 2000 ....... 352 $ 1.17
Grants ................................................................ 135 $ 40.25
Exercised ............................................................. (1) $ 1.33
Canceled .............................................................. (96) $ 0.54
----- -------
Balance at June 30, 2000 of options held by XIOtech employees ........... 390 $ 13.45
===== =======
At June 30, 2000, the Company's employees held 390,000 options at a weighted
average exercise price of $13.45. All options outstanding at the date of the
New SAC transaction, November 22, 2000, became fully vested and were exchanged
for cash.
SEAGATE STOCK PURCHASE PLAN
Seagate also maintains an Employee Stock Purchase Plan in which employees
of the Company are eligible to participate. 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.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company and the Pre-Predecessor have elected to follow APB Opinion No.
25 and related interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under FAS 123 requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB Opinion No. 25, because
the exercise price of the Company's or the Pre-Predecessor's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income is required by FAS 123, which
also requires that the information be determined as if the Company or the
Pre-Predecessor had accounted for their employee stock options granted under
the fair value method of this statement.
The fair value of Seagate's and the Pre-Predecessor's 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 Seagate's
and the Pre-Predecessor'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.
F-242
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of stock options granted under Seagate's
or the Pre-Predecessor's stock option plans was $16.66, $0.54, $0.54
(unaudited), $0.54, $0.17, and $0.13 for the period from January 29, 2000 to
June 30, 2000, January 1, 2000 to January 28, 2000, the six months ended June
30, 1999 (unaudited), and the years ended December 31, 1999, 1998, and 1997,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the option's vesting period (for stock options) and
the six-month purchase period for stock purchases under the Stock Purchase
Plan. Had compensation expense for the Company's stock based compensation plans
been determined based on the fair value at the grant dates for awards under
these plans, consistent with the method of FAS 123, the impact on a proforma
basis to the net loss would have been immaterial for all periods presented.
7. RETIREMENT PLANS
TAX DEFERRED SAVINGS PLANS
Seagate has a tax-deferred savings plan, the Seagate Technology, Inc.
Savings and Investment Plan (the "401(k) plan"), for the benefit of qualified
employees (including employees of the Company subsequent to January 29, 2000).
The 401(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. Seagate may make annual contributions to the
401(k) plan at the discretion of its Board of Directors. During the period from
January 29, 2000 to June 30, 2000, Seagate's contributions to the 401(K) plan
made on behalf of the Company's employees was not material.
In September 1996, the Pre-Predecessor adopted a 401(k) employee
retirement plan under which eligible employees could contribute up to 18% of
their annual compensation, subject to certain limitations. Employees vested
immediately in their contributions and earnings thereon. The plan allowed for,
but did not require, the Pre-Predecessor to make matching contributions. No
contributions were made by the Pre-Predecessor for the period from January 1,
2000 to January 28, 2000, the six months ended June 30, 1999 (unaudited), and
the years ended December 31, 1999, 1998, and 1997. The plan was terminated at
the date of the Seagate Transaction.
8. RELATED PARTY TRANSACTIONS
The Company and the Pre-Predecessor conduct transactions with a number of
Seagate entities.
The Company or the Pre-Predecessor sold SAN products to Seagate totaling
approximately $1,325,000, $5,000, $0 (unaudited), $221,000, $0, and $0 for the
periods from January 29, 2000 to June 30, 2000, January 1, 2000 to January 28,
2000, the six months ended June 30, 1999 (unaudited), and the years ended
December 31, 1999, 1998, and 1997, respectively. The amount receivable from
Seagate for product sales was $978,000, and $105,000 at June 30, 2000 and
December 31, 1999 respectively. The $978,000 receivable at June 30, 2000 is
included in payable to Seagate, net on the balance sheet. Amounts receivable
from Seagate at December 31, 1999 and 1998 are included in accounts receivable
in the balance sheet.
The Company or the Pre-Predecessor purchased disc drives from Seagate
totaling approximately $2,723,000, $0, $0 (unaudited), $0, $0, and $0 for the
periods from January 29, 2000 to June 30, 2000, January 1, 2000 to January 28,
2000, the six months ended June 30, 1999 (unaudited), and the years ended
December 31, 1999, 1998, and 1997, respectively. The amount
F-243
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
payable to Seagate for disc drive purchases was $2,723,000 at June 30, 2000.
The $2,723,000 payable at June 30, 2000 is included in payable to Seagate, net
on the balance sheet. Amounts payable to Seagate at December 31, 1999 and 1998
are included in accounts payable on the balance sheet.
9. DEBT GUARANTEES AND PLEDGE OF ASSETS
SENIOR SECURED CREDIT FACILITY
On the closing of the New SAC Transactions, Seagate Technology
International and Seagate Technology (US) Holdings, Inc., both subsidiaries of
New SAC entered into senior credit facilities with a syndicate of banks and
other financial institutions led by The Chase Manhattan Bank, as administrative
agent and an issuing bank, and Goldman Sachs Credit Partners L.P., as a
documentation agent, The Bank of Nova Scotia as a documentation agent, and
Merrill Lynch Capital Corporation, as a documentation agent. The senior credit
facilities provide senior secured financing of up to $900 million, consisting
of:
o a $200 million revolving credit facility for general corporate purposes,
with a sub-limit of $100 million for letters of credit, which will
terminate in five years;
o a $200 million term loan A facility with a maturity of five years; and
o a $500 million term loan B facility with a maturity of six years.
At the closing of the transaction, New SAC did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because approximately $46 million of
existing letters of credit were outstanding and reduced availability under it.
New SAC drew the full amount of the term loan A facility and the term loan B
facility on the closing of the transaction to finance the acquisition of old
Seagate's operating assets, including the Company.
F-244
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The $700 million of outstanding loans under the term loan A and B
facilities are repayable in semi-annual payments due as follows (in thousands):
Fiscal 2001 ........... $ 5,000
2002 ..... .......... 22,500
2003 ..... .......... 40,000
2004 ..... .......... 50,000
2005 ..... .......... 60,000
Thereafter ......... 522,500
--------
Total .... .......... $700,000
========
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as the consolidated financial
position of New SAC at applicable measurement dates. The average interest rates
being charged under these borrowings from the date of the New SAC Transactions
ranged from 9.1875% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC and certain of its subsidiaries, including the Company's successor
and its subsidiaries are guarantors under the senior credit facilities. In
addition, the majority of New SAC's and certain of its subsidiaries' assets,
including the Company's successor's assets and its capital stock, have been
pledged against the debt under this credit agreement. New SAC, and certain of
its subsidiaries, including the Company's successor and its subsidiaries, have
agreed to certain covenants under this agreement including restrictions on
future equity and borrowing transactions, business acquisitions and disposals,
making certain restricted payments and dividends, making certain capital
expenditures, incurring guarantee obligations and engaging in mergers or
consolidations. Further, the Company's successor, as part of the consolidated
group, is subject to certain financial covenants which are assessed on the
consolidated operating results and financial position of New SAC and its
subsidiaries.
The credit agreement provides for the release of the Company's successor
from its guarantee obligations, and asset pledge upon an approved transfer or
sale of the Company's successor's common stock, or an initial public offering
of at least 10%, on a fully diluted basis, of the Company's successor's voting
common stock.
SENIOR SUBORDINATED NOTES
In connection with the closing and financing of the New SAC Transaction,
Seagate Technology International issued unsecured senior subordinated notes
under an Indenture Agreement dated November 22, 2000 at a discount to the
aggregate principal amount of $210 million, for gross proceeds of approximately
$201 million. The notes mature on November 15, 2007 and bear interest payable
semi-annually at a rate of 12.5% per annum. New SAC and certain of its
subsidiaries, including the Company's successor and its subsidiaries, are
guarantors of the notes. In addition, New SAC and certain of its subsidiaries
including the Company's successor and its subsidiaries, have agreed to certain
restrictive covenants under the terms of these notes including restrictions on
future equity and borrowing transactions, business acquisitions and disposals,
making certain restricted payments and dividends, making certain capital
expenditures, incurring guarantee obligations and engaging in mergers or
consolidations. The Company's successor may be released from its guarantee
obligation, if there are certain sales of its capital stock, including in an
initial public offering, but would remain subject to the restrictive covenants
of the indenture until the Company's successor and its subsidiaries are no
longer subsidiaries of New SAC or are deemed no longer to be subject to the
restrictive covenants.
F-245
XIOTECH CORPORATION
PREDECESSOR TO SEAGATE TECHNOLOGY SAN HOLDINGS
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
New SAC will not require the Company's successor's cash flow to be used to
service the obligations pursuant to the senior secured credit facility and the
senior subordinated notes. The Company's successor believes that none of the
guarantees or pledges of assets under the senior credit facilities or the
guarantees under the Indenture are likely to be invoked.
10. LITIGATION
LEGAL PROCEEDINGS
Storage Computer Corporation -- On March 22, 2001, Storage Computer
Corporation filed suit in the U.S. District Court for the Northern District of
Texas, Civil Action No. 3-01CV0555-M, entitled Storage Computer Corporation v.
XIOtech Corporation and Seagate Technology, Inc. The complaint alleges that
XIOtech's MAGNITUDETM product infringes U.S. Patent No. 5,893,919 and that
Seagate Technology induces infringement of the patent by promoting and
marketing XIOtech's MAGNITUDETM product, particularly through a hyperlink on
Seagate Technology's internet website to XIOtech's internet website. The
Plaintiff alleges willful infringment and seeks unspecified damages and an
injunction. We have engaged outside counsel to evaluate the claims in the suit.
The ultimate outcome of this litigation is uncertain. The ultimate resolution
of this matter could have a material adverse impact on XIOtech's financial
condition, results of operations, and cash flows.
11. SEGMENT INFORMATION
The Company applied Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or group, in deciding how to allocate resources
and in assessing performance.
The Company operates in one segment, storage area network products. The
Company markets its products primarily in the United States through its sales
personnel, dealers, and resellers. The Chief Executive Officer has been
identified as the Chief Operating Decision Maker ("CODM") because he has final
authority over resources allocation decisions and performance assessment. The
CODM does not receive discrete financial information about individual
components of the market.
12. SUPPLEMENTAL BALANCE SHEET INFORMATION
BALANCE CHARGED
AT TO BALANCE AT
BEGINNING COST AND END OF
OF YEAR EXPENSES OTHER DEDUCTIONS YEAR
----------- ---------- ------- ------------ -----------
Accounts receivable allowance (In thousands):
Period from January 29, 2000 to June 30,
2000 ........................................ $583 $334 $-- $ (12) $905
Period from January 1, 2000 to January 28,
2000 ........................................ $488 $ 95 $-- $ -- $583
Six months ended June 30, 1999 (unaudited)..... $ -- $150 $-- $ -- $150
Year ended December 31, 1999 .................. $ -- $488 $-- $ -- $488
Year ended December 31, 1998 .................. $ -- $ -- $-- $ -- $ --
F-246
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATED AND CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------ ------------
DECEMBER 29, JUNE 30,
2000 2000 (1)
------------------ ------------
(UNAUDITED)
ASSETS (See Note 7)
Cash and cash equivalents .................................... $ 10,797 $ 2,502
Accounts receivable, net ..................................... 21,296 19,217
Accounts receivable from affiliates .......................... 5,594 --
Inventories .................................................. 23,931 16,866
Other current assets ......................................... 670 1,776
Deferred tax asset ........................................... -- 7,675
-------- -------
Total Current Assets ........................................ 62,288 48,036
-------- -------
Property, equipment and leasehold improvements, net .......... 10,709 14,432
Goodwill and other intangibles, net .......................... 14,282 3,170
Other assets ................................................. 249 --
-------- -------
Total Assets (See Note 7) ................................... $ 87,528 $65,638
======== =======
LIABILITIES
Accounts payable ............................................. $ 19,819 $17,978
Accrued employee compensation ................................ 4,627 6,733
Accrued expenses ............................................. 8,751 7,277
Accrued warranty ............................................. 4,425 5,276
Current portion of long-term debt ............................ 666 666
-------- -------
Total Current Liabilities ................................... 38,288 37,930
-------- -------
Accrued warranty ............................................. 1,888 2,506
Long-term debt less current portion .......................... 667 333
-------- -------
Total Liabilities ........................................... 40,843 40,769
-------- -------
SHAREHOLDER'S/BUSINESS EQUITY
Common stock ................................................. 2 --
Contributed Capital .......................................... 52,221 --
Accumulated deficit .......................................... (5,538) --
-------- -------
Total stockholder's/Business Equity ......................... 46,685 24,869
-------- -------
Total Liabilities and Shareholder's/Business Equity ......... $ 87,528 $65,638
======== =======
- ----------
(1) The information in this column was derived from Seagate Removable Storage
Solutions Business, an Operating Business of Seagate Technology, Inc.'s
audited combined balance sheet as of June 30, 2000.
See notes to condensed consolidated and condensed combined financial
statements.
F-247
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------ ------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
NOVEMBER 23, TO JULY 1, TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
------------------ -------------- -------------
Revenue ................................................ $ 28,371 $ 89,987 $152,071
Cost of sales .......................................... 29,225 76,520 107,521
Product development .................................... 2,372 22,578 17,799
Marketing and administration ........................... 2,556 13,231 11,755
Amortization of goodwill and intangible assets ......... 91 323 438
Restructuring .......................................... -- 776 369
-------- --------- --------
Total operations expenses ............................. 34,244 113,428 137,882
-------- --------- --------
Income (loss) from operations .......................... (5,873) (23,441) 14,189
Interest income ........................................ 31 28 35
Other income (expense) net ............................. (62) 806 3
-------- --------- --------
Income (loss) before income taxes ...................... (5,904) (22,607) 14,227
Benefit (provision) for income taxes 366 9,132 (4,892)
-------- --------- --------
Net income (loss) ...................................... $ (5,538) $ (13,475) $ 9,335
======== ========= ========
See notes to condensed consolidated and condensed combined financial
statements.
F-248
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
CONDENSED CONSOLIDATED AND CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------ ------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
NOVEMBER 23, TO JULY 1, TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
------------------ -------------- -------------
OPERATING ACTIVITIES:
Net income (loss) ...................................... $ (5,538) $(13,475) $ 9,335
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and Amortization ......................... 694 2,570 2,841
Profit on disposal of property, equipment and
leasehold improvements .............................. -- (3) (6)
Deferred income taxes ................................. (6,637) 2,615
Changes in operating assets and liabilities:
Accounts receivable ................................... (9,806) 2,133 5,889
Inventories ........................................... 6,912 (6,098) (2,207)
Other assets .......................................... 636 470 (571)
Accounts payable ...................................... 2,675 (834) (4,893)
Accrued expenses, employee compensation and
warranty ............................................ 913 (3,167) 105
Other liabilities ..................................... -- -- 666
Long-term debt ........................................ -- -- 666
Other non-current liabilities ......................... 385 (665) (484)
--------- ---------- ---------
Net cash provided by (used in) operating activities (3,129) (25,706) 13,956
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements .......................................... (1,255) (4,987) (5,248)
Proceeds from sale of property, equipment and
leasehold improvements ................................ 334 402 40
Other, net ............................................. 2 (251) --
--------- ---------- ---------
Net cash provided by (used in) investing activities..... (919) (4,836) (5,208)
FINANCING ACTIVITIES:
Net cash change in investment by Seagate
Technology, Inc. ...................................... -- 42,885 (6,597)
--------- ---------- ---------
Net cash provided by (used in) financing activities -- 42,885 (6,597)
Increase (decrease) in cash and cash equivalents (4,048) 12,343 2,151
Cash and cash equivalents at the beginning of the
period ................................................ 14,845 2,502 2,411
--------- ---------- ---------
Cash and cash equivalents at the end of the
period ................................................ $ 10,797 $ 14,845 $ 4,562
========= ========== =========
See notes to condensed consolidated and condensed combined financial
statements.
F-249
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Seagate Removable Storage Solutions Holdings ("the Company") was formed in
August 2000, for the purpose of acquiring the Removable Storage Solutions
operating business of Seagate Technology, Inc. The Company is wholly owned on
an outstanding shares basis, by New SAC, the successor to Seagate Technology,
Inc. Prior to November 22, 2000, the Company did not have significant
operations. As a result, Seagate Removable Storage Solutions Business, an
Operating Business of Seagate Technology ("RSS" or "Predecessor") is considered
to be the Company's Predecessor for accounting purposes.
The Company and its Predecessor design, market and support a product line
of tape drives that use removable tape cartridges that store and protect large
volumes of data inexpensively and reliably. Tape drives are used in both
enterprise and desktop computer systems needing dedicated backup storage that
combines high capacity, portability, low cost and reliability. Typically tape
drives are used less frequently and data is often migrated from rigid disc
drives to tape drives because tape drives are less expensive. However, tape
drives take longer to retrieve data. The Company also manufactures tape heads
for use in it's own products and for sale to other OEM companies that
manufacture and sell tape drives.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company,
without audit. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. For comparative purposes,
the financial statements presentation includes the combined operations of the
predecessor through November 22, 2000, and the Company's consolidated
operations from November 23, 2000 to December 29, 2000. The Company believes
the disclosures included in these condensed consolidated and condensed combined
financial statements, when read in conjunction with the combined financial
statements of the predecessor as of June 30, 2000, and related notes thereto,
are adequate to make the information presented herein not misleading.
The accompanying financial statements include the historical assets,
liabilities, revenues and expenses that are directly related to the Company's
and its Predecessor's operations. For certain assets and liabilities that are
not specifically identifiable with the Company and its Predecessor, estimates
have been used to allocate such assets and liabilities to the Company and its
Predecessor, by applying methodologies management believes are appropriate.
The statements of income include all revenues and expenses attributable to
the Company and its Predecessor including allocations of certain corporate
administration, finance and management costs. Such costs were proportionately
allocated to the Company and its Predecessor based on detailed inquiries and
estimates of time incurred by Seagate Technology, Inc.'s corporate marketing
and general administrative departmental managers. In addition, certain of
Seagate Technology, Inc.'s operations are shared locations involving activities
that pertain to the Company and its Predecessor as well as to other businesses
of Seagate Technology, Inc. Costs incurred in shared locations are allocated
based on specific identification, or where specific identification is not
possible, such costs are allocated between the Company and its Predecessor and
other businesses of Seagate Technology, Inc. based on the volume of activity,
head count, square footage, and other methodologies that management believes
are reasonable. Transactions and balances between entities and locations within
the Company's and its Predecessor's business have been eliminated. Management
believes that the foregoing allocations were made on a reasonable basis.
F-250
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
The accompanying financial statements reflect, in the opinion of
management, all material adjustments necessary to summarize fairly the
consolidated or combined financial position, results of operations and cash
flows for such periods. Such adjustments are of a normal recurring nature.
The consolidated results of operations of the Company and its Predecessor
for the six-month period ended December 29, 2000 are not necessarily indicative
of the results that may be expected for the entire fiscal year ending June 29,
2001.
The Predecessor operated and reported financial results on a fiscal year
of 52 or 53 weeks ending on the Friday closest to June 30. The Company will
operate and report financial results on the same basis. Fiscal 2001 will be 52
weeks for the combined Company and its Predecessor and will end on June 29,
2001.
The financial information included herein may not necessarily reflect the
results of operations, financial position, change in business equity and cash
flows of the Company in the future or what they would have been had it been a
separate, stand-alone entity during the periods presented.
ECONOMIC DEPENDENCE ON AFFILIATE -- SEAGATE TECHNOLOGY HOLDINGS
The Company has incurred net losses and negative cash flows from
operations for the period from July 1, 2000 to November 22, 2000, and for the
period from November 23, 2000 to December 29, 2000. To the extent future cash
flows from operations are insufficient to fund the Company's working capital
needs and planned activities, the Company believes that additional funding will
be available from Seagate Technology Holdings, a subsidiary of New SAC. Seagate
Technology Holdings operates the former rigid disc drive and storage area
networks business of Seagate Technology, Inc. Seagate Technology, Inc. is the
predecessor of the Company's parent New SAC.
2. BALANCE SHEET AND OTHER INFORMATION
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------ ------------
DECEMBER 29, JUNE 30,
2000 2000
------------------ ------------
(IN THOUSANDS)
Accounts Receivable:
Accounts receivable ....................... $ 23,888 $ 21,635
Less allowance for non-collection ......... (2,592) (2,418)
-------- --------
$ 21,296 $ 19,217
======== ========
F-251
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
2. BALANCE SHEET AND OTHER INFORMATION (CONTINUED)
Activity in the allowance for doubtful accounts is as follows:
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES PERIOD
-------------- ------------ -----------
(IN THOUSANDS)
Six Months Ended
December 29, 2000 ......... $2,418 $174 $2,592
====== ==== ======
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------ ------------
DECEMBER 29, JUNE 30,
2000 2000
------------------ ------------
(IN THOUSANDS)
Inventories:
Components ............................................. $ 9,055 $ 3,488
Work-in-process ........................................ 1,216 2,801
Finished goods ......................................... 13,660 10,577
------- ---------
$23,931 $ 16,866
======= =========
Property, equipment and leasehold improvements ......... $10,992 $ 45,013
Less accumulated depreciation and amortization ......... (283) (30,581)
------- ---------
$10,709 $ 14,432
======= =========
Included within Property, equipment and leasehold improvements at December
29, 2000 is a property held for sale of $2,273,000.
The Company purchases certain backup and retrieval software that are
included with its tape drives when sold. This software is purchased from
VERITAS Software Corporation which is an equity method investment held by
Seagate Technology, Inc. prior to its merger with and into VERITAS (See Note
7). Purchases from VERITAS were $2,175,200 and $932,615 in the periods from
July 1, 2000 to November 22, 2000 and November 23, 2000 to December 29, 2000,
respectively and $3,384,145 for the six months ended December 31, 1999.
3. INCOME TAXES
The federal Tax Allocation Agreement ("Tax Allocation Agreement") between
the Company and Seagate Technology was terminated on November 22, 2000, and the
Company will no longer file federal income tax returns on a consolidated basis
with Seagate Technology. The Company will enter into a state tax allocation
agreement with affiliates of New SAC, as applicable. Therefore, Seagate
Technology will not benefit from nor will it reimburse the Company pursuant to
the Tax Allocation Agreement for federal tax losses the Company sustains
subsequent to consummation of the SAC Transaction. In prior periods, the
Company has recorded substantial intercompany receivables for its tax losses
utilized by Seagate Technology, which have been netted against the Seagate
Technology business equity interest in the Company. As a result of the
termination of the Tax Allocation Agreement, the Company may not be able to
convert any future tax losses into cash.
F-252
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
3. INCOME TAXES (CONTINUED)
The provision for (benefit from) income taxes consisted of the following:
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------- --------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, 2000 JULY 1, 2000 SIX MONTHS
THROUGH THROUGH ENDED
DECEMBER 29, 2000 NOVEMBER 23, 2000 DECEMBER 31, 1999
------------------- ------------------- ------------------
(IN THOUSANDS)
Current Tax Expense (Benefit):
Federal ................................. $ -- $ (2,225) $1,367
State ................................... (370) (286) 368
Foreign ................................. 4 17 543
------ -------- ------
(366) (2,494) 2,278
Deferred Tax Expense (Benefit):
Federal ................................. -- (5,532) 2,181
State ................................... -- (1,106) 433
Foreign ................................. -- -- --
------ -------- ------
-- (6,638) 2,614
Provision for (Benefit from) Income Taxes $ (366) $ (9,132) $4,892
====== ======== ======
Income (loss) before income taxes consisted of the following:
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------- --------------------------------------
PERIOD FROM
NOVEMBER 23, 2000 JULY 1, 2000 SIX MONTHS
THROUGH THROUGH ENDED
DECEMBER 29, 2000 NOVEMBER 23, 2000 DECEMBER 31, 1999
------------------- ------------------- ------------------
(IN THOUSANDS)
Domestic ......... $ (5,376) $ (23,073) $ 9,611
Foreign .......... (528) 466 4,616
-------- --------- -------
$ (5,904) $ (22,607) $14,227
======== ========= =======
The proforma information assuming a tax provision/(benefit) based on a
separate return basis is as follows:
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS
------------------
PERIOD FROM
NOVEMBER 23,
2000 TO
DECEMBER 29,
Income (loss) before income taxes ............ $ (5,904)
Provision (benefit) for income taxes ......... (366)
--------
Net Income (loss) ............................ $ (5,538)
========
F-253
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
3. INCOME TAXES (CONTINUED)
The income tax benefit related to the exercise of certain employee stock
options increased amounts due from Seagate Technology pursuant to the Tax
Allocation Agreement and were credited to Business Equity. Such amounts
approximated $2.5 million in the period from July 1, 2000 to November 22, 2000.
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:
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------------
DECEMBER 29, JUNE 30,
2000 2000
-------------- ---------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Accrued warranty .................................. $ 3,176 $ 343
Inventory valuation accounts ...................... 1,352 1,874
Receivable reserves ............................... 1,776 3,830
Accrued compensation and benefits ................. 1,279 570
Acquisition-related Items ......................... 2,158 --
Deferred revenue .................................. 135 151
Other reserves and accruals ....................... 5,410 1,753
Research and development credits .................. 142 --
--------- ------
Total Deferred Tax Assets ......................... 15,428 8,521
Valuation allowance ............................... (12,256) --
--------- ------
Net Deferred Tax Assets ........................... 3,172 8,521
--------- ------
DEFERRED TAX LIABILITIES
Depreciation ...................................... (311) (330)
Unremitted income of foreign subsidiaries ......... -- (516)
Acquisition-related items ......................... (2,861) --
--------- ------
Total Deferred Tax Liabilities .................... (3,172) (846)
--------- ------
Net Deferred Tax Assets/(Liabilities) .......... $ 0 $7,675
========= ======
In connection with the purchase of the operating assets of Seagate
Technology, Inc., approximately $2.9 million of deferred tax liabilities at
December 29, 2000 represent the excess of book basis over the tax basis of the
acquired property, plant and equipment, and liabilities assumed for which we do
not expect to receive tax deductions in our federal and state returns in future
periods. The realization of the Company's federal and state deferred tax assets
will depend primarily on its ability to generate sufficient taxable income in
the United States in future fiscal years, the timing and amount of which are
uncertain. Due to these uncertainties the Company recorded a valuation
allowance of $12.3 million for the deferred tax assets as of December 29, 2000.
The Company anticipates that the tax benefits of $10.4 million of net deferred
tax assets if realized, will result in an increased adjustment to the amount of
unamortized negative goodwill that has been allocated on a pro rata basis to
the long-lived assets. Any excess tax benefit would then be realized as a
reduction of future income tax expense.
F-254
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
3. INCOME TAXES (CONTINUED)
The reconciliation between the provision for (benefit from) income taxes
at the U.S. federal statutory rate and the effective rate are summarized as
follows:
SEAGATE
REMOVABLE STORAGE PREDECESSOR
SOLUTIONS HOLDINGS ------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, JULY 1, SIX MONTHS
2000 TO 2000 TO ENDED
DECEMBER 29, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
-------------------- -------------- -------------
(IN THOUSANDS)
Provision (benefit) at U.S. statutory rate ......... $ (2,066) $ (7,913) $4,980
State income tax provision (benefit), net of federal
income tax benefit ................................ (240) (906) 521
Research and development credits ................... (142) (784) (485)
Benefit from net earnings of foreign subsidiaries
considered to be permanently reinvested in
non-U.S. operations ............................... (121) (174) --
Valuation allowance ................................ 1,877 -- --
Foreign losses not benefited ....................... 295 509 --
Other .............................................. 31 136 (124)
-------- -------- ------
Provision for (benefit from) income taxes .......... $ (366) $ (9,132) $4,892
-------- -------- ------
A substantial portion of the Company's Asia Pacific manufacturing
operations in Singapore and Malaysia operate under various tax holidays which
expire in whole or in part during fiscal years 2001 through 2010. Certain tax
holidays may be extended if specific conditions are met. As of November 22,
2000, the Company's foreign manufacturing subsidiaries had approximately $3.5
million of undistributed foreign earnings considered permanently reinvested
offshore. As a result of the sale of the operating assets of Seagate Technology
and the ensuing corporate structure, the Company now has a foreign parent
holding company with various foreign and U.S. subsidiaries. The unremitted
earnings of the Company's foreign subsidiairies will no longer be subject to
U.S. tax if remitted to the Company's foreign parent holding company.
4. RESTRUCTURING
The Company has recorded expense for all restructuring activities as
incurred. This amounted to nil, $776,000 and $369,000 for the period from
November 23, 2000 through December 29, 2000, the period from July 1, 2000
through November 22, 2000 and six months ended December 31, 1999, respectively.
These expenses consisted primarily of workforce reductions related to the
closure of facilities or portions of facilities.
5. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company develops, manufactures and markets a product line of tape
drives. These products include tape drives, tape media and components such as
read and write heads and storage and retrieval software. The Company operates
one operating segment under the criteria of Statement of Financial Accounting
Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and
Related Information," with activities in three geographical areas. The
President has been identified as the Chief Operating Decision maker as defined
by SFAS No. 131. The President evaluates performance and allocates resources
based on revenue and gross profit from operations. Gross profit from operations
is defined as revenue less cost of sales.
F-255
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
6. SUPPLIER AND CUSTOMER CONCENTRATIONS
A limited number of customers historically have accounted for a
substantial portion of the Company's revenues. Percentage revenues from
customers with more than 10% of sales were as follows (as a percentage of net
sales):
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS PREDECESSOR
------------------ ------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 23, JULY 1 SIX MONTHS
2000 TO 2000 TO ENDED
DECEMBER 28, NOVEMBER 22, DECEMBER 31,
2000 2000 1999
------------------ -------------- -------------
International Business Machines Corp. ......... 32% 29% 22%
Dell Computer Corp. ........................... 20% 24% 19%
Ingram Micro Inc. ............................. -- -- 14%
Sales of the Company's products will vary as a result of fluctuations in
market demand. Further, the markets in which the Company competes are
characterized by rapid technological obsolescence.
Certain of the raw materials and components used by the Company in the
manufacture of its products are available from a limited number of suppliers.
For example, all of the Company's basic DAT tape drives are currently purchased
from Matsushita Kotobuki Electronics, (MKE), under an exclusive manufacturing
agreement. All of the Company's LTO heads are manufactured by the Company and
the main component of the head, the wafer, is purchased exclusively from a
Seagate Technology plant in Springtown, Ireland.
7. PURCHASE ACCOUNTING
On November 22, 2000, under the stock purchase agreement, the Company's
Parent, New SAC, completed the purchase of all of the operating assets and
assumption of the operating liabilities of Seagate Technology and its
consolidated subsidiaries. The net purchase price was $1.840 billion in cash,
including transaction costs of approximately $25 million. Seagate Technology
designed, developed and manufactured rigid disk drives, enterprise management
software, storage area networks, and removable tape storage solutions.
Immediately thereafter, in a separate and independent transaction, Seagate
Technology and VERITAS completed their merger under the Merger Agreement. The
stock purchase agreement and the Merger Agreement are referred to as the New
SAC transactions. At the time of the merger with VERITAS, Seagate Technology
assets included a specified amount of cash, an equity method investment in
VERITAS, and certain specified investments and liabilities. In connection with
the Merger Agreement, Seagate Technology, VERITAS, and New SAC entered into an
Indemnification Agreement, pursuant to which these entities and certain other
subsidiaries of Seagate Technology agreed to certain indemnification provisions
regarding tax and other matters that may arise in connection with the New SAC
transactions.
New SAC accounted for the acquisition of all the operations of Seagate
Technology as a purchase in accordance with Accounting Principles Board Opinion
No. 16 "Business Combinations." All acquired tangible assets, identifiable
intangible assets as well as assumed liabilities were valued based on their
fair values and reorganized into the following businesses: 1) the rigid disk
drive business (HDD), 2) the storage area networks business (SAN), 3) the
removable storage solutions business (RSS), 4) the software business (CD), and
5) an investment holding company (ST). The fair value of the net assets
acquired by New SAC exceeded the net purchase price by approximately $909
million. Accordingly, the resultant negative goodwill was allocated on a pro
rata basis to certain acquired long-lived assets and reduced the recorded fair
value amounts by approximately 46%.
F-256
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
7. PURCHASE ACCOUNTING (CONTINUED)
The purchase price allocation presented below is preliminary because New
SAC has not received the final reports from the independent appraiser that are
required to complete the allocation. New SAC believes that the independent
appraiser has substantially completed and concluded its work, except for
certain information that is continuing to be assessed at the Company for
in-process research and development. New SAC expects the independent appraiser
to complete and issue its final report prior to July 2001.
The table below summarizes the preliminary allocation of net purchase
price as it relates to the RSS business (in thousands).
ESTIMATED
DESCRIPTION LIFE FAIR VALUE
- ----------------------------------------- ------ -----------
Net current assets (1) .................. $ 32,237
Other long-lived assets ................. 250
Property, plant & equipment (2) ......... 10,079
Identified intangibles:
Developed technologies (4) .............. 3 11,426
Assembled workforces (4) ................ 3 3,264
--------
Subtotal ................................ 14,690
Long-term deferred taxes (3) ............ (2,861)
Long term liabilities ................... (2,174)
--------
Net assets .............................. $ 52,221
========
- ----------
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book values
of the Company. Inventory values were estimated based on the current
market value of the inventories less completion costs and less a normal
profit margin based on activities remaining to be completed until the
inventory is sold. Valuation allowances were established for current
deferred tax assets in excess of long-term deferred tax liabilities.
Assumed current liabilities included accounts payable, accrued
compensation and expenses and accrued income taxes. The fair values of
current liabilities generally approximated the historic recorded book
values of the Company because of the monetary nature of most of the
liabilities.
(2) The Company has obtained a preliminary indication of the fair value of
the acquired property, plant and equipment. This valuation is subject to
the engagement of a valuation expert to complete a valuation and the
Company anticipates it will receive a final report by July 2001.
(3) Long-term deferred tax liabilities arose as a result of the excess of the
fair values of inventory, and acquired intangible assets over their
related tax basis. The Company has $10.4 million federal and state
deferred tax assets for which a full valuation allowance has been
established. (See Note 3, Income Taxes.)
(4) The Company obtained an independent valuation of acquired identified
intangible assets. The significant assumptions relating to each category
are discussed in the following paragraphs. Also, these assets are being
amortized on the straight-line basis over their estimated useful life and
resultant amortization is included in amortization of goodwill and other
intangible assets.
DEVELOPED TECHNOLOGIES -- The value of this asset for the Company was
determined by discounting the expected future cash flows attributable to all
existing technologies which had reached technological feasibility, after
considering risks relating to: 1) the characteristics and applications of
F-257
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
7. PURCHASE ACCOUNTING (CONTINUED)
the technology, 2) existing and future markets, as well as 3) life cycles of
the technologies. Estimates of future revenues and expenses used to determine
the value of developed technology was consistent with the historical trends in
the industry and expected outlooks.
ASSEMBLED WORKFORCES -- The value of the assembled work force was
determined by estimating the recruiting, hiring and training costs to replace
each group of existing employees.
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
acquisition of substantially all of the operating assets of RSS had occurred at
the beginning of fiscal 2000. The pro forma statements of operations for the
six months ended December 29, 2000 and December 31, 1999, include the
historical results of the Company in addition to the historical results of the
predecessor and are adjusted to reflect the new accounting basis for the assets
and liabilities of the Company, and exclude acquisition related charges for
recurring amortization of goodwill and intangibles related to the Company's
prior acquisitions, as well as compensation expense related to option
accelerations associated with the New SAC transactions. The pro forma financial
results are as follows:
SIX MONTHS ENDED
----------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
(IN THOUSANDS)
Revenue .................................... $ 118,358 $152,071
Income (loss) before income taxes ......... (26,992) 12,815
Net income (loss) ......................... (26,587) 7,923
CAPITAL STOCK
The Company's authorized share capital is $50,000 and consists of 50,000
ordinary shares, par value $1.00, of which 2,000 shares were outstanding as of
December 29, 2000.
LONG-TERM DEBT AND CREDIT FACILITIES
Upon the closing of the transactions, New SAC entered into senior credit
facilities with a syndicate of banks and other financial institutions. The
senior credit facilities provide senior secured financing of up to $900
million, consisting of:
o a $200 million revolving credit facility for general corporate purposes,
with a sublimit of $100 million for letters of credit, which will
terminate in five years;
o a $200 million term loan A facility with a maturity of five years; and
o a $500 million term loan B facility with a maturity of six years.
At the closing of the transactions, New SAC did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because approximately $45 million of
existing letters of credit were outstanding and reduced availability under it.
New SAC drew the full amount of the term loan A facility and the term loan B
facility on the closing of the transactions to finance the acquisition of
Seagate Technology's operating assets.
F-258
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
7. PURCHASE ACCOUNTING (CONTINUED)
The $700 million of outstanding loans under the term loan A and B
facilities are repayable in semi-annual payments due as follows:
(IN THOUSANDS)
---------------
Fiscal 2001 ................ $ 5,000
2002 ................ 22,500
2003 ................ 40,000
2004 ................ 50,000
2005 ................ 60,000
Thereafter .......... 522,500
--------
Total ............... $700,000
========
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as New SAC's consolidated
financial position at applicable measurement dates. The average interest rates
being charged under these borrowings from the date of the transactions ranged
from 9.1875% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC, and certain of its subsidiaries, including Seagate Removable
Storage Solutions Holdings, are guarantors under the senior credit facilities.
In addition, the majority of New SAC's, and certain of its subsidiaries, assets
have been pledged against the debt under this credit agreement (see Note 8,
Condensed Consolidating Financial Information). The Company, and certain of its
subsidiaries have agreed to certain covenants under this agreement including
restrictions on future equity and borrowing transactions, business acquisitions
and disposals, making certain restricted payments and dividends, making certain
capital expenditures, incurring guarantee obligations and engaging in mergers
or consolidations.
In connection with the closing and financing of the transactions, Seagate
Technology International, a subsidiary of New SAC, issued unsecured senior
subordinated notes under an Indenture Agreement dated November 22, 2000 at a
discount to the aggregate principal amount of $210 million, for gross proceeds
of approximately $201 million. The notes mature on November 15, 2007 and bear
interest payable semi-annually at a rate of 12.5% per annum. New SAC and
certain of its subsidiaries, including Seagate Removable Storage Solutions
Holdings, are guarantors of the notes. In addition, New SAC, and certain of its
subsidiaries have agreed to certain restrictive covenants under the terms of
these notes including restrictions on future equity and borrowing transactions,
business acquisitions and disposals, making certain restricted payments and
dividends, making certain capital expenditures, incurring guarantee obligations
and engaging in mergers or consolidations.
The Company may be released from its guarantee obligation, if there are
certain sales of its capital stock, including in an initial public offering,
but would remain subject to the restrictive covenants of the indenture until
the Company and its subsidiaries are no longer subsidiaries of New SAC or are
deemed no longer to be subject to the restrictive covenants.
New SAC will not require the Companys' cash flow to be used to service the
obligations pursuant to the senior secured credit facility and the senior
subordinated notes. The Company believes that none of the guarantees or pledges
of assets under the senior credit facilities or the guarantees under the
Indenture are likely to be invoked.
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company is a wholly owned subsidiary of New SAC. The senior
subordinated notes are guaranteed by certain, but not all of the subsidiaries
of New SAC. The guarantees of the senior subordinated notes are full and
unconditional, and are made on a joint and several basis by the guaranteeing
subsidiaries.
F-259
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
The following tables present guarantor and non-guarantor condensed
consolidating financial information for RSS' subsidiaries, at December 29, 2000
condensed consolidating results of its operations and its cash flows for the
one month ended December 29, 2000, the five months ended November 22, 2000 and
six months ended December 31, 1999. The information is based on the guarantor
and non-guarantor classification of RSS's subsidiaries under the current
provisions of the senior subordinated notes.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 29, 2000
(IN THOUSANDS)
(UNAUDITED)
GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------- -------------
ASSETS
Cash and cash equivalents .................. $10,150 $ 647 $ -- $10,797
Accounts receivable, net ................... 17,587 5,838 (2,129) 21,296
Affiliate accounts receivable .............. 5,131 463 -- 5,594
Inventories ................................ 21,611 2,320 -- 23,931
Other current assets ....................... 649 21 -- 670
------- -------- -------- -------
Total Current Assets ...................... 59,192 9,289 (2,129) 62,288
Property, equipment, leasehold
improvements, net ......................... 7,625 3,084 -- 10,709
Other assets ............................... 14,173 358 -- 14,531
------- -------- -------- -------
Total Assets .............................. $76,926 $ 12,731 $ (2,129) $87,528
======= ======== ======== =======
LIABILITIES
Accounts payable ........................... $17,359 $ 4,589 $ (2,129) $19,819
Accrued employee compensation .............. 4,238 389 -- 4,627
Accrued expenses ........................... 8,467 284 -- 8,751
Accrued Warranty ........................... 4,425 -- -- 4,425
Current portions of long-term debt ......... 666 -- -- 666
------- -------- -------- -------
Total Current Liabilities ................. 35,155 (5,262) (2,129) 38,288
Other liabilities .......................... 2,555 -- -- 2,555
------- -------- -------- -------
Shareholders' Equity ...................... 39,216 7,469 -- 46,685
------- -------- -------- -------
Total Liabilities and Shareholders'
Equity .................................. $76,926 $ 12,731 $ (2,129) $87,528
======= ======== ======== =======
F-260
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN THOUSANDS)
(UNAUDITED)
GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------- -------------
Revenue ....................................... $ 30,749 $3,955 $ (6,333) $ 28,371
Costs of revenue .............................. 31,625 3,933 (6,333) 29,225
Product development ........................... 2,372 -- -- 2,372
Marketing and administrative .................. 2,420 136 -- 2,556
Amortization of goodwill and other intangibles 91 -- -- 91
Restructuring ................................. -- -- -- --
-------- ------ --------- --------
Total operating expenses ................... 36,508 4,069 (6,333) 34,244
-------- ------ --------- --------
Income (loss) from operations .............. (5,759) (114) -- (5,873)
Other income (expense), net ................... (31) -- -- (31)
-------- ------ --------- --------
Income (loss) before income taxes ............. (5,790) (114) -- (5,904)
-------- ------ --------- --------
Benefit (provision) for income taxes .......... 366 -- -- 366
-------- ------ --------- --------
Net Income (loss) .......................... $ (5,424) $ (114) $ -- $ (5,538)
======== ====== ========= ========
F-261
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED COMBINING STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN THOUSANDS)
(UNAUDITED)
GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------- -------------
Revenues ...................................... $ 97,606 $ 13,551 $ (21,170) $ 89,987
Costs of sales ................................ 83,457 14,233 (21,170) 76,520
Product development ........................... 22,578 -- 22,578
Marketing and administrative .................. 12,507 724 13,231
Amortization of goodwill and other
intangibles .................................. 323 -- 323
Restructuring ................................. 755 21 776
--------- -------- ---------
Total operating expense .................... 119,620 14,978 (21,170) 113,428
Income (loss) from operations .............. (22,014) (1,427) -- (23,441)
Other income (expense), net ................... 830 4 -- 834
--------- -------- --------- ---------
Income (loss) before income taxes ............. (21,184) (1,423) -- (22,607)
Benefit (provision) for income taxes .......... 9,132 -- -- 9,132
--------- -------- --------- ---------
Net income (loss) .......................... $ (12,052) $ (1,423) $ -- $ (13,475)
========= ======== ========= =========
F-262
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED COMBINING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN THOUSANDS)
(UNAUDITED)
GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................... $ (3,788) $ 659 $ -- $ (3,129)
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements, net ............ (995) (260) -- (1,255)
Proceeds from sale of property, equipment
and leasehold improvements ............. 334 -- -- 334
Other, net .............................. 2 -- -- 2
-------- ------ ----- --------
Net cash provided by (used in) investing
activities ........................... (659) (260) -- (919)
FINANCING ACTIVITIES
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ................. -- -- -- --
Increase (decrease) in cash and cash
equivalents ............................ (4,447) 399 -- (4,048)
Cash and cash equivalents at the
beginning of the year .................. 14,597 248 -- 14,845
-------- ------ ----- --------
Cash and cash equivalents at the end of
the year ............................... $ 10,150 $ 647 $ -- $ 10,797
======== ====== ===== ========
F-263
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED COMBINING STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN THOUSANDS)
(UNAUDITED)
GUARANTORS NON-GUARANTORS ELIMINATIONS COMBINED
--------------- ---------------- -------------- ---------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................... $ (25,085) $ (621) $ -- $ (25,706)
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements, net ............ (3,507) (1,480) -- (4,987)
Profit on disposal of property, equipment
and leasehold improvements ............. 402 -- -- 402
Other, net .............................. (251) -- -- (251)
----------- -------- ----- -----------
Net cash provided by (used in) investing
activities ........................... (3,356) (1,480) -- (4,836)
FINANCING ACTIVITIES
Other, net .............................. 40,563 2,322 -- 42,885
----------- -------- ----- -----------
Net cash provided by (used in) financing
activities ........................... 40,563 2,322 -- 42,885
Effect of exchange rate changes on cash
and cash equivalents ................... -- -- -- --
Increase (decrease) in cash and cash
equivalents ............................ 12,122 221 -- 12,343
Cash and cash equivalents at the
beginning of the year .................. 2,475 27 -- 2,502
----------- -------- ----- -----------
Cash and cash equivalents at the end of
the year ............................... $ 14,597 $ 248 $ -- $ 14,845
=========== ======== ===== ===========
F-264
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED COMBINING STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
(UNAUDITED)
TOTAL SEAGATE
REMOVABLE
STORAGE SOLUTIONS
HOLDINGS
AND ITS
GUARANTORS NON-GUARANTORS ELIMINATIONS PREDECESSOR
------------ ---------------- -------------- ------------------
Revenue .................................. $137,234 $26,430 $ (11,593) 152,071
Costs of revenue ......................... 94,775 24,344 (11,598) 107,521
Product development ...................... 17,799 -- -- 17,799
Marketing and administrative ............. 11,230 525 -- 11,755
Amortization of goodwill and other
intangibles ............................. 438 -- -- 438
Restructuring ............................ 128 241 -- 369
-------- ------- --------- -------
Total operating expense ............... 124,370 25,110 (11,598) 137,882
Income (loss) from operations ......... 12,864 1,320 5 14,189
Other income (expense), net .............. 33 5 38
-------- ------- -------
Income (loss) before income taxes ........ 12,897 1,325 5 14,227
Benefit (provision) for income taxes ..... (4,674) (218) -- (4,892)
-------- ------- --------- -------
Net income (loss) ..................... $ 8,223 $ 1,107 $ 5 9,335
======== ======= ========= =======
F-265
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED COMBINING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
(UNAUDITED)
GUARANTORS NON-GUARANTORS ELIMINATIONS COMBINED
------------ ---------------- -------------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................... $ (7,462) $6,494 $-- $ 13,956
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements ................. (5,248) -- -- (5,248)
Proceeds from sale of property, equipment
and leasehold improvements ............. 40 -- -- 40
Other, net .............................. 3 -- -- 3
-------- ------ --- --------
Net cash provided by (used in) investing
activities ........................... (5,245) 1,349 -- (5,208)
FINANCING ACTIVITIES
Net cash change in investment by
Seagate Technology Inc., ............... (6,597) -- -- (6,597)
Net cash provided by (used in) financing
activities ........................... 6,597 -- -- 6,597
Increase (decrease) in cash and cash
equivalents ............................ 2,173 (22) -- 2,151
Cash and cash equivalents at the
beginning of the year .................. 2,389 22 -- 2,411
-------- ------ --- --------
Cash and cash equivalents at the end of
the year ............................... $ 4,562 $ -- $-- $ 4,562
======== ====== === ========
F-266
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
10. SUBSEQUENT EVENTS
In February 2001, the Board of Directors of the Company, approved an
amendment to the Articles of Association of Seagate Removable Storage Solutions
Holdings. This amendment is subject to approval by the senior subordinated
noteholders under the terms of a Share Mortgage Agreement entered into between
the Company and the senior subordinated noteholders. Under the terms of the
amendment, the Company's authorized share capital will consist of 30 million
common shares, par value $0.0001, and 22.5 million preferred shares, par value
$0.0001, of which 20 million shares will be designated Series A preferred
shares.
Common Shares -- Holders of common shares will be entitled to receive
dividends and distributions when and as declared by the Company's Board of
Directors, on a basis equal to the preferred shares. Upon any liquidation,
dissolution, or winding up of the Company, after required payments are made to
holders of preferred shares, any remaining assets of the Company will be
distributed ratably to holders of the common shares. Holders of common shares
are entitled to one vote per share on all matters presented to the Company's
shareholders.
Preferred Shares -- The Board approved amendment allows the Company's
Board of Directors to issue one or more series of preferred shares, at the time
and for the consideration determined by the Board of Directors. Holders of
preferred shares will be entitled to receive dividends and distributions when
and as declared by the Company's Board of Directors on a basis equal to the
Company's common shares. Upon any liquidation, dissolution, or winding up of
the Company, the holders of preferred shares shall receive, out of any
remaining, legally available assets of the Company, a liquidation preference of
$1.60 per preferred share, less the aggregate amount of any distributions or
dividends already made per preferred share. To the extent there are not
sufficient remaining assets of the Company to pay the liquidation preference,
holders of preferred shares shall share ratably in the distribution of the
Company's remaining assets. Upon payment of the liquidation preference on each
preferred share, the preferred shares shall be redeemed in full and cancelled.
Holders of preferred shares will have one vote per share and all such shares
are convertible on a one-to-one basis into common stock.
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS 2001 STOCK OPTION PLAN
On December 18, 2000, the Company's Board of Directors approved, subject
to the approval by the Senior Subordinated note holders in accordance with the
terms of the share mortgage agreement, the Seagate Removable Storage Solutions
Holdings 2001 Stock Option Plan (the 2001 Stock Option Plan). A total of
5,000,000 options to purchase ordinary shares may be issued under the 2001
Stock Option Plan. Key management and other employees, directors and
consultants of the Company and its affiliates, are eligible to be granted
awards under the 2001 Stock Option Plan. The Board of Directors has committed
to issuing 1,037,000 options to purchase shares of common stock at a weighted
average exercise price of $1.60 per share under the 2001 Stock Option Plan.
Such options will be issued after completion of the previously mentioned
amendment to the Articles of Association and approval by the Senior
Subordinated noteholders.
NEW SAC 2001 RESTRICTED SHARE PLAN
On December 18, 2000, New SAC's Board of Directors approved, the New SAC
2001 Restricted Share Plan (the 2001 Restricted Share Plan). A total of 500,000
shares of common stock have been reserved for issuance under the New SAC 2001
Restricted Share Plan. Key management and other employees, directors and
consultants of New SAC and its subsidiaries, including Seagate Removable
Storage Solutions Holdings, are eligible to be granted awards under the Plan.
The Board of Directors has committed to issuing up to 3,400 shares at a fair
value to certain employees of Seagate
F-267
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS AND ITS PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND CONDENSED COMBINED FINANCIAL STATEMENTS
(CONCLUDED)
(UNAUDITED)
10. SUBSEQUENT EVENTS (CONTINUED)
Removal Storage Solutions Holdings. Such shares will vest over 4 years on a pro
rata basis. These shares will be issued after completion of the previously
mentioned amendment to the Articles of Association.
F-268
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Seagate Removable Storage Solutions Holdings
We have audited the accompanying combined balance sheets of the Seagate
Removable Storage Solutions Business, an Operating Business of Seagate
Technology, Inc., the predecessor to Seagate Removable Storage Solutions
Holdings, as of June 30, 2000 and July 2, 1999 and the related combined
statements of operations, business equity, and cash flows for each of the three
years in the period ended June 30, 2000. These combined 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 auditing standards generally
accepted in the United States. 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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
the Seagate Removable Storage Solutions Business, an Operating Business of
Seagate Technology, Inc. at June 30, 2000 and July 2, 1999 and the combined
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
April 18, 2001
F-269
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, JULY 2,
2000 1999
---------- ----------
ASSETS (see Note 8)
Cash and cash equivalents ................................... $ 2,502 $ 2,411
Accounts receivable, net .................................... 19,217 35,686
Inventories ................................................. 16,866 11,122
Other current assets ........................................ 1,776 958
Deferred tax asset .......................................... 7,675 12,373
------- -------
Total Current Assets ....................................... 48,036 62,550
------- -------
Property, equipment and leasehold improvements, net ......... 14,432 12,172
Goodwill and other intangible assets, net ................... 3,170 3,612
------- -------
Total Assets (see Note 8) .................................. $65,638 $78,334
======= =======
LIABILITIES
Accounts payable ............................................ $17,978 $24,694
Accrued employee compensation ............................... 6,733 7,293
Accrued expenses ............................................ 7,277 13,417
Accrued warranty ............................................ 5,276 5,951
Current portion of long-term debt ........................... 666 --
------- -------
Total Current Liabilities .................................. 37,930 51,355
Accrued warranty ............................................ 2,506 2,267
Long-term debt less current portion ......................... 333 --
------- -------
Total Liabilities .......................................... 40,769 53,622
BUSINESS EQUITY ............................................. 24,869 24,712
------- -------
Total Liabilities and Business Equity ...................... $65,638 $78,334
======= =======
See notes to combined financial statements.
F-270
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED
----------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
------------ ----------- -----------
Revenue ...................................................... $262,814 $314,006 $286,086
Cost of revenue .............................................. 193,193 225,151 228,901
Product development .......................................... 37,444 36,081 24,981
Marketing and administration ................................. 18,578 22,924 27,175
Amortization of goodwill and other intangible assets ......... 877 3,207 2,181
Restructuring ................................................ 627 711 686
-------- -------- --------
Total operating expenses .................................... 250,719 288,074 283,924
Income from operations ....................................... 12,095 25,932 2,162
Interest income .............................................. 87 94 51
Other income (expense) net ................................... 1,489 (92) 836
-------- -------- --------
Income before income taxes ................................... 13,671 25,934 3,049
Benefit (provision) for income taxes ......................... (4,432) (9,556) (1,571)
-------- -------- --------
Net income .................................................. $ 9,239 $16,378 $ 1,478
======== ======== ========
See notes to combined financial statements.
F-271
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
---------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- ----------- ------------
OPERATING ACTIVITIES
Net income .................................................. $ 9,239 $ 16,378 $ 1,478
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and Amortization .............................. 6,606 8,904 7,609
Profit on disposal of property, equipment and
leasehold improvements .................................... (10) (119) (58)
Deferred income taxes ...................................... 4,698 88 (1,271)
Changes in operating assets and liabilities:
Accounts receivable ........................................ 16,469 (4,183) 7,757
Inventories ................................................ (5,744) 10,165 13,022
Other assets................................................ (819) 19 (25)
Accounts payable ........................................... (6,716) 3,624 668
Accrued expenses, employee compensation and
warranty ................................................. (7,375) 3,144 (4,040)
Other assets and liabilities ............................... 666 -- --
Other non-current liabilities .............................. 572 671 (610)
-------- --------- ---------
Net cash provided by (used in) operating activities ......... 17,586 38,691 24,530
INVESTING ACTIVITIES
Acquisition of property, equipment and leasehold
improvements ............................................... (9,083) (6,573) (7,223)
Proceeds from sale of property, equipment and
leasehold improvements ..................................... 670 958 1,949
-------- --------- ---------
Net cash provided by (used in) investing activities ......... (8,413) (5,615) (5,274)
FINANCING ACTIVITIES
Net cash change in investment by Seagate
Technology, Inc. ........................................... (9,082) (29,061) (21,828)
-------- --------- ---------
Net cash provided by (used in) financing activities ......... (9,082) (29,061) (21,828)
Increase (Decrease) in cash and cash equivalents ............ 91 4,015 (2,572)
Cash and cash equivalents at the beginning of the
year ....................................................... 2,411 (1,604) 968
-------- --------- ---------
Cash and cash equivalents at the end of the year ............ $ 2,502 $ 2,411 $ (1,604)
======== ========= =========
See notes to combined financial statements.
F-272
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
COMBINED STATEMENT OF BUSINESS EQUITY
(IN THOUSANDS)
Balance at June 27, 1997 ...................................... $ 57,745
Net income ................................................... 1,478
Net change in investment by Seagate Technology, Inc. ......... (21,828)
---------
Balance at July 3, 1998 ....................................... 37,395
Net income ................................................... 16,378
Net change in investment by Seagate Technology, Inc. ......... (29,061)
---------
Balance at July 2, 1999 ....................................... 24,712
Net income ................................................... 9,239
Net change in investment by Seagate Technology, Inc. ......... (9,082)
---------
Balance at June 30, 2000 ...................................... $ 24,869
=========
See notes to combined financial statements.
F-273
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Nature of Operations -- Seagate Removable Storage Solutions Holdings
("RSS" or the "Company") operated as an operating business of Seagate
Technology, Inc. ("Seagate Technology") during the three years ended June 30,
2000. On November 22, 2000, all the operating assets and liabilities of Seagate
Technology, including all the operating assets and liabilities of the Company,
were acquired by New SAC. New SAC is the parent company of Seagate Removable
Storage Solutions Holdings and the operating assets and liabilities of the
Company are now organized in to various subsidiaries of Seagate Removable
Storage Solutions Holdings. Seagate Removable Storage Solutions Holdings had no
operations prior to November 22, 2000, and Seagate Removable Storage Solutions,
an operating business of Seagate Technology is considered the predecessor to
Seagate Removable Storage Solutions Holdings. See Note 8, Subsequent Events,
for a further description of the current organizational structure of the
Company.
The Company designs, markets and supports a product line of tape drives
that use removable tape cartridges that store and protect large volumes of data
inexpensively and reliably. Tape drives are used in both enterprise and desktop
computer systems needing dedicated backup storage that combines high capacity,
portability, low cost and reliability. Typically tape drives are used less
frequently and data is often migrated from rigid disc drives to tape drives
because tape drives are less expensive. However, tape drives take longer to
retrieve data.
The Company also manufactures tape heads for use in its own products and
for sale to other OEM companies that manufacture and sell tape drives.
Basis of Presentation -- These financial statements have been prepared
using the historical basis of accounting and are presented as if the Company
existed as an entity separate from Seagate Technology during the periods
presented. These financial statements include the historical assets,
liabilities, revenues and expenses that are directly related to the Company's
operations. For certain assets and liabilities that are not specifically
identifiable with the Company, estimates have been used to allocate such assets
and liabilities to the Company, by applying methodologies management believes
are appropriate.
The statements of income include all revenues and expenses attributable to
the Company, including allocations of certain corporate administration, finance
and management costs. Such costs were proportionately allocated to the Company
based on detailed inquiries and estimates of time incurred by Seagate
Technology's corporate marketing and general administrative departmental
managers. In addition, certain of Seagate Technology's operations are shared
locations involving activities that pertain to the Company as well as to other
businesses of Seagate Technology. Costs incurred in shared locations are
allocated based on specific identification, or where specific identification is
not possible, such costs are allocated between the Company and other businesses
of Seagate Technology based on the volume of activity, head count, square
footage, and other methodologies that management believes are reasonable.
Transactions and balances between entities and locations within the Company's
business have been eliminated. Management believes that the foregoing
allocations were made on a reasonable basis.
Domestic treasury and cash management for the Company was performed by
Seagate Technology on a centralized basis. Accordingly, the majority of the
Company's cash and cash equivalents were held by foreign subsidiaries.
The financial information included herein may not necessarily reflect the
results of operations, financial position, change in business equity and cash
flows of the Company in the future or what they would have been had it been a
separate, stand-alone entity during the periods presented.
F-274
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Year --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 2000 was 52 weeks and ended on June 30, 2000, fiscal 1999 was 52 weeks
and ended on July 2, 1999, and fiscal 1998 was 53 weeks and ended on July 3,
1998. All references to years in these notes represent fiscal years unless
otherwise noted.
Accounting Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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.
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.
Cash Equivalents -- Cash equivalents consist of short-term, highly liquid
financial instruments with insignificant interest rate risk that are readily
convertible to cash and have maturities of three months or less from the date
of purchase. The Company had no cash equivalents for any period presented.
Foreign Currency Translation -- The U.S. dollar is the functional currency for
most of the Company's foreign operations. Gains and losses on the remeasurement
into U.S. dollars of amounts denominated in foreign currencies are included in
net income for those operations whose functional currency is the U.S. dollar.
Revenue Recognition and Product Warranty -- Revenue from sales of products is
recognized when persuasive evidence of an arrangement exists including a fixed
price to the buyer, title and risk of loss has transferred to the buyer
(typically upon shipment) and collectibility is reasonably assured. Product
returns are reserved for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 48. The Company warrants its products against defects in
design, materials and workmanship generally for two to four years depending
upon the capacity category of the tape drive or tape component (head), 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.
Inventory -- Inventories are valued at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market.
Market value is based upon forecast estimated average selling price reduced by
estimated completion costs.
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.
Depreciation is computed using the straight-line method over the useful
economic lives of the assets which are, one to four years for equipment and the
shorter of the lease period or 30 years for building and leasehold
improvements.
F-275
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Goodwill and Other Intangible Assets -- Goodwill represents the excess of the
purchase price of net tangible and intangible assets acquired by the Company
over their estimated fair value. Other intangible assets represent developed
technology, assembled workforce and trademarks acquired in business
combinations. Goodwill and other intangible assets are being amortized on a
straight-line basis over their estimated useful lives of three to eight years.
Accumulated amortization of goodwill and other intangible assets was $8,898,000
and $8,021,000 as of June 30, 2000 and July 2, 1999, respectively.
In accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lives Assets and for Long-Lives Assets to be Disposed of" the carrying
value of property and equipment, other intangible assets, 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 undiscounted net cash flows over the
assets' remaining life, 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 intangible assets (fair value is generally based on
an estimate of discounted future net cash flows).
Advertising Expense -- The cost of advertising is expensed as incurred.
Advertising costs were $1,330,000, $2,898,000 and $3,985,000 in 2000, 1999, and
1998, 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" ("APB Opinion No. 25") and related interpretations.
Pro forma net income and net income per share are disclosures required by SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and are
included in note 4 below under "Stock-Based Benefit Plans -- Pro Forma
Information".
Impact of Recently Issued Accounting Standards -- In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS 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, 2000 and will
be adopted by Seagate Removable Storage Solutions Holdings, the successor to
the Company for its fiscal year 2001 and is not anticipated to have a material
impact on Seagate Removable Storage Solutions Holdings, the successor to the
Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. Seagate Removable Storage
Solutions Holdings, the successor to the Company does not expect the adoption
of SAB 101 will have a material effect on its combined results of operations,
financial position and cash flows. Seagate Removable Storage Solutions
Holdings, the successor to the Company is required to adopt SAB 101 in the
fourth quarter of fiscal 2001, retroactive to the beginning of the year.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25." FIN 44 clarifies the application of APB
Opinion No. 25 and, among other issues, clarifies the following: the definition
of an employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the accounting
consequence of various modifications to the terms of the previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000,
F-276
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not
have a material impact on the Company's consolidated results of operations,
financial position, and cash flows.
Concentration of Credit Risk -- The Company's customer base for tape drive
products and tape components 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.
2. BALANCE SHEET INFORMATION
ACCOUNTS RECEIVABLE
Accounts receivable are summarized below:
JUNE 30, JULY 2,
2000 1999
---------- ----------
(IN THOUSANDS)
Accounts receivable .......................... $ 21,635 $ 37,232
Less allowance for doubtful accounts ......... (2,418) (1,546)
-------- --------
$ 19,217 $ 35,686
======== ========
Activity in the allowance for doubtful accounts is as follows:
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS-- END OF
PERIOD EXPENSES DESCRIBE(1) PERIOD
-------------- ------------ -------------- -----------
(IN THOUSANDS)
Year Ended June 30, 2000: ......... $1,546 $915 $ 43 $2,418
Year Ended July 2, 1999: .......... $1,576 $ -- $ 30 $1,546
Year Ended July 3, 1998: .......... $2,365 $ -- $789 $1,576
- ----------
(1) Uncollectible accounts written off, net of recoveries.
F-277
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are summarized below:
JUNE 30, JULY 2,
2000 1999
---------- ----------
(IN THOUSANDS)
Components .............. $ 3,488 $ 1,042
Work-in-process ......... 2,801 330
Finished goods .......... 10,577 9,750
------- -------
$16,866 $11,122
======= =======
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost and
consist of the following:
JUNE 30, JULY 2,
ESTIMATED USEFUL LIFE 2000 1999
------------------------------------ ------------ ------------
(IN THOUSANDS)
Land ................................................... $ 890 $ 890
Equipment .............................................. 3 to 4 years 37,348 30,734
Building and leasehold improvements .................... Shorter of life of Lease or 30 yrs 5,098 4,995
Construction in progress ............................... 1,677 3,084
--------- ---------
45,013 39,703
Less accumulated depreciation and amortization ......... (30,581) (27,531)
--------- ---------
Property, equipment and leasehold improvements
(net) ................................................. $ 14,432 $ 12,172
========= =========
There are no capitalized leases. Depreciation expense is recorded on a
straight-line basis over the shorter of the useful life of the asset or the
life of the lease. Depreciation expense was $5,729,000, $5,682,000 and
$5,428,000 in 2000, 1999 and 1998, respectively.
LONG-TERM DEBT AND LINES OF CREDIT:
At June 30, 2000, future minimum principal payments on long-term debt
consists of and are $666,000 in 2001, $333,000 in 2002 and none there after.
As of June 30, 2000, Seagate Technology has committed lines of credit of
$71 million that can be used for standby letters of credit or bankers'
guarantees. At June 30, 2000, the Company utilized $15 million of these lines
of credit.
3. COMPENSATION
TAX-DEFERRED SAVINGS PLAN
The Company participated in the Seagate Technology Savings and Investment
Plan ("the 401(k) plan"), for the benefit of qualified employees. The 401(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. Seagate Technology may make annual contributions to
the 401(k) plan at the discretion of the Board of Directors. During the fiscal
years ended June 30, 2000, July 2, 1999, and July 3, 1998 Seagate Technology
made contributions for employees of the Company totaling approximately
$612,640, $612,640 and $397,808 respectively to the 401(k) plan in each year.
EMPLOYEE PROFIT SHARING AND EXECUTIVE BONUS PLANS
The Company participated in Seagate Technology's Employee Profit Sharing
and Executive Bonus Plan. The Company allocates a certain percentage of
adjusted quarterly pretax profits to
F-278
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Seagate Technology's Employee Profit Sharing Plan, which is currently
distributed to employees employed for the full quarter. The Company also
allocates a certain percentage of adjusted quarterly pretax profits to Seagate
Technology's Executive Bonus Plan. Charges to operations for distributions to
employees of the Company under these plans during 2000, 1999, and 1998 were
$3,220,000, $3,027,000, and $3,157,000, respectively.
STOCK-BASED BENEFIT PLANS
Stock Option Plans -- Employees of the Company are eligible to participate
in Seagate Technology's stock option plans. Options granted under Seagate
Technology'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. As of June 30,
2000, 778,000 options were outstanding to employees of the Company.
STOCK PURCHASE PLAN
The Company also participates in Seagate Technology's Employee Stock
Purchase Plan. The purchase plan permits eligible employees, including
employees of the Company, 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 1,515,000, 1,604,000 and 1,348,000 shares of common stock were issued
to the employees of the Company in 2000, 1999 and 1998, respectively.
PRO FORMA INFORMATION
Seagate Technology has elected to follow APB Opinion No. 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 APB Opinion No. 25, the Company generally
recognized no compensation expense with respect to such options.
As a result of the consummation of the transactions, all stock options
other than stock options included in the management rollover, were accelerated
and exercised. The full fair value of these stock options amounting to $16.9
million was recorded as compensation in the period ended November 22, 2000. In
these circumstances and because of the significant change in the Company's
ownership and equity structure, the Company believes the pro forma net income
(loss) information as required by SFAS 123, Accounting for Stock Based Stock
Compensation, is not meaningful and such information has not been provided.
POST RETIREMENT HEALTH CARE PLAN
In fiscal 2000, Seagate Technology adopted a post-retirement health care
plan which offers medical coverage to eligible U.S. retirees and their eligible
dependents including eligible employees of the Company. Substantially all U.S.
employees become eligible for these benefits after 15 years of service and
attaining age 60 or older.
The following table provides a reconciliation of the changes in the
post-retirement health care plan's benefit obligation and a statement of the
funded status for the Company's eligible participant's.
F-279
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year ................................... $ --
Service cost .............................................................. 122
Amortization of unrecognized prior service cost ........................... 52
----
Benefit obligation at end of year ......................................... $174
====
FUNDED STATUS OF THE PLAN
Fair value of plan assets at end of year .................................. $ --
Unrecognized prior service cost ........................................... 512
Accrued benefit liability recognized in the balance sheet at June 30, 2000 174
----
Accrued benefit cost ...................................................... $686
====
Net periodic benefit cost allocated to the Company for the year ended June
30, 2000 was as follows:
(IN THOUSANDS)
Service cost ................................ $ 72
Interest cost ............................... 50
Amortization of prior service cost .......... 52
----
Net periodic benefit cost ................... $174
====
WEIGHTED AVERAGE ACTURIAL ASSUMPTIONS
A discount rate of 7.0% was used in the determination of the accumulated
benefit obligation.
Seagate Technology's future medical benefit costs were estimated to
increase at an annual rate of 10% during 2000, decreasing to an annual growth
rate of 5% in 2010, and thereafter. Seagate Technology's cost is capped at 200%
of its fiscal year 1999 employer cost and, therefore, will not be subject to
medical and dental trends after the capped cost is attained. A 1% change in
these annual trend rates would not have a significant impact on the accumulated
post-retirement benefit obligation at June 30, 2000, or benefit expense for the
period from January 29, 2000 to June 30, 2000. Claims are paid as incurred.
4. INCOME TAXES
RSS is included in the consolidated federal and certain combined and
consolidated foreign and state income tax returns of Seagate Technology.
Seagate Technology and RSS have entered into a tax sharing agreement (the "Tax
Allocation Agreement") pursuant to which RSS computes hypothetical tax returns
as if RSS was not joined in consolidated or combined returns with Seagate
Technology. RSS must pay Seagate Technology the positive amount of any such
hypothetical taxes. If the hypothetical tax returns show entitlement to
refunds, including any refunds attributable to a carryback, then Seagate
Technology will pay RSS the amount of such refunds. At June 30, 2000, there
were no inter-company tax related balances between RSS and Seagate Technology.
F-280
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The provision for (benefit from) income taxes consisted of the following:
2000 1999 1998
------------ --------- -----------
(IN THOUSANDS)
Current Tax Expense (Benefit):
Federal .......................... $ (1,130) $7,530 $ 2,126
State ............................ (32) 1,630 488
Foreign .......................... 896 308 227
-------- ------ --------
(266) 9,468 2,841
-------- ------ --------
Deferred Tax Expense (Benefit):
Federal .......................... 3,960 98 (1,040)
State ............................ 738 (10) (230)
Foreign .......................... -- -- --
-------- ------ --------
4,698 88 (1,270)
-------- ------ --------
Provision for Income Taxes ......... $ 4,432 $9,556 $ 1,571
======== ====== ========
Income (loss) before income taxes consisted of the following:
2000 1999 1998
--------- ---------- ------------
Domestic .......... $ 5,983 $18,448 $ (2,888)
Foreign ........... 7,688 7,486 5,937
------- ------- --------
$13,671 $25,934 $ 3,049
======= ======= ========
The pro forma information assuming a tax provision (benefit) based on a
separate return basis is as follows:
FOR THE
YEAR ENDED
JUNE 30, 2000
--------------
Income before income taxes ................... $13,671
Provision (benefit) for income taxes ......... 4,432
-------
Net Income ................................... $ 9,239
=======
The income tax benefit related to the exercise of certain employee stock
options increased amounts due from/(decreased amounts due to) Seagate
Technology pursuant to the Tax Allocation Agreement and were credited to
business equity. Such amounts approximated $2,277,000, ($328,000) and ($81,000)
for fiscal 2000, 1999 and 1998, respectively.
F-281
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities were as
follows:
JUNE 30, JULY 2,
2000 1999
---------- ----------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Accrued warranty .................................. $ 343 $ 166
Inventory valuation accounts ...................... 1,874 2,429
Receivable reserves ............................... 3,830 4,215
Accrued compensation and benefits ................. 570 1,266
Deferred revenue .................................. 151 191
Other reserves and accruals ....................... 1,753 4,417
------ -------
Total deferred tax assets ........................ 8,521 12,684
------ -------
DEFERRED TAX LIABILITIES
Depreciation ...................................... (330) (40)
Unremitted income of foreign subsidiaries ......... (516) (271)
------ -------
Total deferred tax liabilities ................... (846) (311)
------ -------
Net deferred tax assets (liabilities) ............ $7,675 $12,373
====== =======
The reconciliation between the provision for (benefit from) income taxes
at the U.S. federal statutory rate and the effective rate are summarized as
follows:
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- --------- ----------
(IN THOUSANDS)
Provision (benefit) at U.S. statutory rate ......... $4,785 $9,077 $1,067
State income tax provision (benefit), net of federal
income tax benefit ................................ 459 1,053 168
Research and development credits ................... (969) (677) (332)
Non-deductible goodwill ............................ -- 711 404
Benefit from net earnings of foreign subsidiaries
considered to be permanently reinvested in
non-U.S. operations ............................... -- (705) --
Other .............................................. 157 97 264
------ ------ ------
Provision for (benefit from) income taxes .......... $4,432 $9,556 $1,571
====== ====== ======
A substantial portion of the Company's Asia Pacific manufacturing
operations in Singapore and Malaysia operate under various tax holidays which
expire in whole or in part during fiscal years 2001 through 2010. Certain tax
holidays may be extended if specific conditions are met. The tax holidays had
no impact on net income in 2000. The net impact of these tax holidays was to
increase net income approximately $700,000 in 1999. The tax holidays had no
impact on net income in 1998. Cumulative undistributed earnings of the
Company's Asia Pacific subsidiaries for which no income taxes have been
provided aggregated $2.7 million at June 30, 2000. These earnings are
considered to be permanently invested in non-U.S. operations. Additional
federal and state taxes of approximately $1.1 million would have to be provided
if these earnings were repatriated to the U.S. at June 30, 2000.
F-282
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. RESTRUCTURING
The Company has recorded expense for all restructuring activities as
incurred. This amounted to $627,000, $711,000 and $686,000 for the years ended
June 30, 2000, July 2, 1999 and July 3, 1998, respectively. These expenses
consisted primarily of workforce reductions related to the reorganization of
our sales force in fiscal 2000 resulting in the termination of 40 sales
persons, reduction of head count in the Costa Mesa tape drive operation and
Santa Maria tape head operation resulting in the termination of personnel and
closure of facilities, or portions of facilities.
6. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company designs, manufactures and markets a product line of tape
drives. These products include tape drives, tape media and components such as
read and write heads and storage and retrieval software. The Company operates
one operating segment under the criteria of SFAS No. 131, with activities in
three geographical areas. The President evaluates performance and allocates
resources based on revenue and gross profit from operations. Gross profit from
operations is defined as revenue less cost of sales. The President has been
identified as the Chief Operating Decision maker as defined by SFAS No. 131.
Long-lived assets consist of property, equipment and leasehold
improvements, capital leases, equity investments, goodwill and other
intangibles, and other non-current assets as recorded by RSS's operations in
each area.
The following table summarizes RSS's operations by geographic area:
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS)
Revenue from external customers: (1)
United States ..................... $163,640 $201,923 $205,997
Scotland .......................... 71,625 88,385 71,679
Rest of Europe .................... 3,078 2,348 --
Asia, primarily Singapore ......... 24,471 21,350 8,410
-------- -------- --------
Total ............................. $262,814 $314,006 $286,086
======== ======== ========
Long-lived assets:
United States ..................... $ 15,475 $ 12,651 $ 19,711
Europe ............................ 23 137 84
Asia, primarily Malaysia .......... 2,104 2,996 4,283
-------- -------- --------
Total ............................. $ 17,602 $ 15,784 $ 24,078
======== ======== ========
- ----------
(1) Revenue is attributed to countries based on the shipping location.
F-283
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLIER AND CUSTOMER CONCENTRATIONS
A limited number of customers historically have accounted for a
substantial portion of the Company's revenues. Percentage revenues from
customers with more than 10% of sales were as follows (as a percentage of net
sales):
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- --------- --------
International Business Machines Corp. ......... 25% 24% 16%
Dell Computer Corp. ........................... 19% 19% 14%
Ingram Micro Inc. ............................. 13% 12% --
Sales of the Company's products will vary as a result of fluctuations in
market demand. Further, the RSS markets in which the Company competes are
characterized by rapid technological change, evolving industry standards,
declining average selling prices, and rapid technological obsolescence.
Certain of the raw materials and components used by the Company in the
manufacture of its products are available from a limited number of suppliers.
For example, all of the Company's basic DAT Tape drives are currently purchased
from Matsushita Kotobuki Electronics (MKE), under an exclusive manufacturing
agreement. All of the Company's LTO heads are manufactured by the Company and
the main component of the head, the wafer, is purchased exclusively from a
Seagate Technology plant in Springtown, Ireland.
8. SUBSEQUENT EVENTS
PURCHASE OF SEAGATE TECHNOLOGY BY NEW SAC
On November 22, 2000, under the stock purchase agreement New SAC,
successor to Seagate Technology, completed the purchase of all of the operating
assets and the assumption of operating liabilities of Seagate Technology and
its consolidated subsidiaries. The net purchase price was $1.840 billion in
cash, including transaction costs of approximately $25 million. Seagate
Technology designed, developed and manufactured rigid disk drives, enterprise
management software, storage area networks, and removable tape storage
solutions. Immediately thereafter, in a separate and independent transaction,
Seagate Technology and VERITAS completed their merger under the merger
agreement (the "Merger Agreement"). The stock purchase agreement and the Merger
Agreement are referred to as the New SAC transactions. At the time of the
merger, Seagate Technology assets included a specified amount of cash, an
investment in VERITAS, and certain specified investments and liabilities. In
connection with the Merger Agreement, Seagate Technology, VERITAS and New SAC
entered into an Indemnification Agreement, pursuant to which these entities and
certain other subsidiaries of Seagate Technology agreed to certain
indemnification provisions regarding tax and other matters that may arise in
connection with the New SAC transactions.
New SAC accounted for this transaction as a purchase in accordance with
Accounting Principles Board (APB) Opinion No. 16 "Business Combinations". All
acquired tangible assets, identifiable intangible assets as well as assumed
liabilities were valued based on their relative fair values and reorganized
into the following businesses: 1) the rigid disk drive business (HDD), 2) the
storage area networks business (SAN), 3) the removable storage solutions
business (RSS), 4) the software business (CD), and 5) an investment holding
company (ST). The fair value of the net assets exceeded the net purchase price
by approximately $909 million. Accordingly, the resultant negative goodwill was
allocated on a pro rata basis to the acquired long-lived assets and reduced the
recorded amounts by approximately 46%.
F-284
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The purchase price allocation presented below is preliminary because New
SAC has not received the final reports from the independent appraiser that are
required to complete the allocation. New SAC believes that the independent
appraiser has substantially completed and concluded its work, except for
certain information that is continuing to be assessed for property, plant and
equipment. New SAC expects the independent appraiser to complete and issue its
final report prior to July 2001.
The table below summarizes the preliminary allocation of net purchase
price as it relates to the RSS (in thousands):
LIFE ESTIMATED
DESCRIPTION (IN YEARS) FAIR VALUE
- ----------------------------------------- ------------ ---------------
(IN THOUSANDS)
Net current assets (1) .................. $ 32,237
Other long-lived assets ................. 250
Property, plant & equipment (2) ......... 10,079
Identified intangibles:
Developed technologies (4) .............. 3 11,426
Assembled workforces (4) ................ 3 3,264
--------
Subtotal ............................... 14,690
Long-term deferred taxes (3) ............ (2,861)
Long term liabilities ................... (2,174)
--------
Net assets ............................. $ 52,221
--------
- ----------
(1) Acquired current assets included cash and cash equivalents, accounts
receivable, inventories and other current assets. The fair values of
current assets generally approximated the recorded historic book values.
Inventory values were estimated based on the current market value of the
inventories less completion costs and less a normal profit margin based
on activities remaining to be completed until the inventory is sold.
Valuation allowances were established for current deferred tax assets in
excess of long-term deferred tax liabilities.
Assumed current liabilities included accounts payable, accrued compensation
and expenses and accrued income taxes. The fair values of current
liabilities generally approximated the historic recorded book values
because of the monetary nature of most of the liabilities.
(2) New SAC has obtained a preliminary indication of the fair value of the
acquired property, plant and equipment. This valuation is subject to
additional work to completion and New SAC anticipates the appraiser will
issue a final report by July 2001. In arriving at the determination of
estimated market value for the assets, the appraisers considered the
estimated cost to construct or acquire comparable property. Machinery and
equipment was assessed using replacement cost estimates reduced by
depreciation factors representing the condition, functionality and
operability of the assets. The sales comparison approach was used for
office and data communication equipment. Land, land improvements,
buildings, and building and leasehold improvements were valued based upon
discussions with knowledgeable personnel.
(3) Long-term deferred tax liabilities arose as a result of the excess of the
fair values of inventory, and acquired intangible assets over their
related tax basis. The Company has $10.4 million of federal and state
deferred tax assets for which a full valuation allowance has been
established.
(4) New SAC obtained an independent valuation of acquired identified
intangibles. The significant assumptions relating to each category are
discussed in the following paragraphs. Also, these assets are being
amortized on the straight-line basis over their estimated useful life and
resultant amortization is included in amortization of goodwill and other
intangibles.
F-285
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Developed technologies -- The value of this asset for RSS was determined
by discounting the expected future cash flows attributable to all existing
technologies which had reached technological feasibility, after considering
risks relating to: 1) the characteristics and applications of the technology,
2) existing and future markets, as well as 3) life cycles of the technologies.
Estimates of future revenues and expenses used to determine the value of
developed technology was consistent with the historical trends in the industry
and expected outlooks.
Assembled workforces -- The value of the assembled work force was
determined by estimating the recruiting, hiring and training costs to replace
each group of existing employees.
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
acquisition of substantially all of the operating assets of RSS had occurred at
the beginning of fiscal 1999. The pro forma statements of operations for the
fiscal years ended June 30, 2000 and July 2, 1999 are adjusted to reflect the
new accounting basis for the assets and liabilities of Seagate Removable
Storage Solutions Holdings, and exclude acquisition related charges for
recurring amortization of goodwill and intangibles related to RSS's prior
acquisitions, as well as charges recorded by Seagate Technology to reflect the
loss on sale to New SAC and compensation expense related to option
accelerations associated with the transactions. The pro forma financial results
are as follows:
FISCAL YEAR
------------------------
JUNE 30, JULY 2,
2000 1999
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE
AND
PER SHARE DATA)
Revenue ................................... $262,814 $314,006
Income (loss) before income taxes ......... 12,858 26,614
Net income (loss) ......................... 8,754 18,119
NEW CAPITAL STRUCTURE
The Company operated as an operating business of Seagate Technology and
had no formal capital structure prior to the stock purchase agreement by New
SAC, see Note 8. From November 23, 2000, the Company operated as Seagate
Technology Removable Storage Solutions Holdings, a stand alone company, with a
new capital structure. In February 2001, the Board of Directors of the Company,
approved an amendment to the Articles of Association of Seagate Removable
Storage Solutions Holdings. This amendment is subject to approval by the senior
subordinated noteholders under the terms of a Share Mortgage Agreement entered
into between the Company and the senior subordinated noteholders. Under the
terms of the amendment, the Company's authorized share capital will consist of
30 million common shares, par value $0.0001, and 22.5 million preferred shares,
par value $0.0001, of which 20 million shares will be designated Series A
preferred shares.
Common Shares -- Holders of common shares will be entitled to receive
dividends and distributions when and as declared by the Company's Board of
Directors on a basis equal to the preferred shares. Upon any liquidation,
dissolution, or winding up of the Company, after required payments are made to
holders of preferred shares, any remaining assets of the Company will be
distributed ratably to holders of the common shares. Holders of common shares
are entitled to one vote per share on all matters presented to the Company's
shareholders.
Preferred Shares -- The Board approved amendment allows the Company's
Board of Directors to issue one or more series of preferred shares, at the time
and for the consideration determined by the Board of Directors. Holders of
preferred shares will be entitled to receive dividends and
F-286
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
distributions when and as declared by the Company's Board of Directors on a
basis equal to the Company's common shares. Upon any liquidation, dissolution,
or winding up of the Company, the holders of preferred shares shall receive,
out of any remaining, legally available assets of the Company, a liquidation
preference of $1.60 per preferred share, less the aggregate amount of any
distributions or dividends already made per preferred share. To the extent
there are not sufficient remaining assets of the Company to pay the liquidation
preference, holders of preferred shares shall share ratably in the distribution
of the Company's remaining assets. Upon payment of the liquidation preference
on each preferred share, the preferred shares shall be redeemed in full and
cancelled. Holders of preferred shares will have one vote per share and all
such shares are convertible on a one-to-one basis into common stock.
SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS 2001 STOCK OPTION PLAN
On December 18, 2000, the Company's Board of Directors approved, subject
to the approval by the Senior Subordinated note holders in accordance with the
terms of the share mortgage agreement, the Seagate Removable Storage Solutions
Holdings 2001 Stock Option Plan (the 2001 Stock Option Plan). A total of
5,000,000 options to purchase shares of common stock may be issued under the
2001 Stock Option Plan. Key management and other employees, directors and
consultants of the Company and its affiliates, are eligible to be granted
awards under the 2001 Stock Option Plan. The Board of Directors has committed
to issuing 1,037,000 options to purchase shares of common stock at a weighted
average exercise price of $1.60 per share under the 2001 Stock Option Plan.
NEW SAC 2001 RESTRICTED SHARE PLAN
On December 18, 2000, New SAC's Board of Directors approved, subject to
the approval by the senior subordinated note holders, the New SAC 2001
Restricted Share Plan (the 2001 Restricted Share Plan). A total of 500,000
shares of common stock have been reserved for issuance under the New SAC 2001
Restricted Share Plan. Key management and other employees, directors and
consultants of New SAC and its subsidiaries, including Seagate Removable
Storage Solutions Holdings, are eligible to be granted awards under the Plan.
The Board of Directors has committed to issuing 3,400 shares under the 2001
Restricted Share Plan to certain employees of Seagate Removal Storage Solutions
Holdings. Such shares will vest over 4 years on a pro rata basis.
9. DEBT GUARANTEES AND PLEDGE OF ASSETS
SENIOR SECURED CREDIT FACILITY
On the closing of the New SAC Transaction, Seagate Technology
International and Seagate Technology (US) Holdings, Inc., both subsidiaries of
New SAC entered into senior credit facilities with a syndicate of banks and
other financial institutions led by The Chase Manhattan Bank, as administrative
agent and an issuing bank, and Goldman Sachs Credit Partners L.P., as a
documentation agent, The Bank of Nova Scotia as a documentation agent, and
Merrill Lynch Capital Corporation, as a documentation agent. The senior credit
facilities provide senior secured financing of up to $900 million, consisting
of:
o a $200 million revolving credit facility for general corporate purposes,
with a sub-limit of $100 million for letters of credit, which will
terminate in five years;
o a $200 million term loan A facility with a maturity of five years; and
o a $500 million term loan B facility with a maturity of six years.
F-287
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
At the closing of the transaction, New SAC did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because approximately $45 million of
existing letters of credit were outstanding and reduced availability under it.
New SAC drew the full amount of the term loan A facility and the term loan B
facility on the closing of the transaction to finance the acquisition of
Seagate Technology's operating assets, including RSS.
The $700 million of outstanding loans under the term loan A and B
facilities are repayable in semi-annual payments due as follows:
(IN THOUSANDS)
---------------
Fiscal 2001 ............ $ 5,000
2002 ..... ........... 22,500
2003 ..... ........... 40,000
2004 ..... ........... 50,000
2005 ..... ........... 60,000
Thereafter .......... 522,500
--------
Total .... ........... $700,000
========
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as the consolidated financial
position of New SAC at applicable measurement dates. The average interest rates
being charged under these borrowings from the date of the New SAC Transaction
ranged from 9.1875% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC and certain of its subsidiaries, including RSS and certain of its
subsidiaries are guarantors under the senior credit facilities. In addition,
the majority of New SAC's and certain of its subsidiaries' assets, including
RSS' assets and its capital stock, have been pledged for the debt under this
credit agreement. New SAC and certain of its subsidiaries, including RSS and
certain of its subsidiaries, have agreed to certain covenants under this
agreement including restrictions on future equity and borrowing transactions,
business acquisitions and disposals, making certain restricted payments and
dividends, making certain capital expenditures, incurring guarantee obligations
and engaging in mergers or consolidations. Further, RSS, as part of the
consolidated group, is subject to certain financial covenants which are
assessed on the consolidated operating results and financial position of New
SAC and its subsidiaries.
The credit agreement provides for the release of RSS from its guarantee
obligations, and asset pledge upon an approved transfer or sale of RSS' common
stock, or an initial public offering of at least 10%, on a fully diluted basis,
of RSS' voting common stock.
SENIOR SUBORDINATED NOTES
In connection with the closing and financing of the New SAC Transaction,
Seagate Technology International issued unsecured senior subordinated notes
under an Indenture Agreement dated November 22, 2000 at a discount to the
aggregate principal amount of $210 million, for gross proceeds of approximately
$201 million. The notes mature on November 15, 2007 and bear interest payable
semi-annually at a rate of 12.5% per annum. New SAC and certain of its
subsidiaries, including RSS and certain of its subsidiaries, are guarantors of
the notes, see Note 13. In addition, New SAC and certain of its subsidiaries
including RSS and certain of its subsidiaries, have agreed to certain
restrictive covenants under the terms of these notes including restrictions on
future equity and borrowing transactions, business acquisitions and disposals,
making certain restricted payments and dividends, making certain capital
expenditures, incurring guarantee obligations and engaging in mergers or
consolidations. RSS may be released from its guarantee obligation, if there are
certain
F-288
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
sales of its capital stock, including in an initial public offering, but would
remain subject to the restrictive covenants of the indenture until RSS and its
subsidiaries are no longer subsidiaries of New SAC or are deemed no longer to
be subject to the restrictive covenants.
New SAC will not require RSS' cash flow to be used to service the
obligations pursuant to the senior secured credit facility and the senior
subordinated notes. The Company believes that none of the guarantees or pledges
of assets under the senior credit facilities or the guarantees under the
Indenture are likely to be invoked.
10. COMMITMENTS
LEASES
The Company, leases certain property, facilities and equipment under
non-cancelable lease agreements. Land and facility leases expire at various
dates through 2015 and contain various provisions for rental adjustments
including, in certain cases, a provision based on increases in the Consumer
Price Index. All of the leases require the Company, to pay property taxes,
insurance and normal maintenance costs.
Future minimum lease payments for operating leases with initial or
remaining terms of one year or more at June 30, 2000 were as follows:
OPERATING
LEASES
---------------
(IN THOUSANDS)
2001 ................................. $2,057
2002 ................................. 1,800
2003 ................................. 1,413
2004 ................................. 1,295
2005 ................................. --
Thereafter ........................... --
------
Total minimum lease payments ......... $6,565
======
Total rental expense for all land, facility and equipment operating leases
was approximately $2,292,000, $2,195,000 and $2,282,000 for 2000, 1999 and
1998, respectively.
CAPITAL EXPENDITURES
The Company's commitments for construction of manufacturing facilities and
equipment approximated $2,300,000 at June 30, 2000.
F-289
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION
The components of depreciation and amortization are as follows:
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Depreciation ..................................... $5,729 $5,682 $5,428
Amortization of goodwill and intangibles ......... 877 3,222 2,181
12. RELATED PARTY TRANSACTIONS
Historically, Seagate Technology has provided substantial services to the
Company. Upon the closing of the stock purchase agreement by New SAC, these
services continue to be provided by New SAC. The services provided generally
include general management, treasury, tax, financial reporting, benefits
administration, insurance, information technology, legal accounts payable and
receivable and credit functions, among others. Seagate Technology charges the
Company for these services through corporate expense allocations. The amount of
corporate expense allocations depends upon the total amount of allocable costs
incurred by Seagate Technology on behalf of the Company less amounts charged as
specific cost or expense rather than by allocation. Such costs have been
proportionately allocated to the Company based on detailed inquiries and
estimates of time incurred by Seagate Technology's corporate marketing and
general administrative departmental managers. Management believes that the
allocations charged to the Company is reasonable. Allocations charged to the
Company's marketing and administrative expenses for the years ended June 30,
2000, July 2, 1999 and July 3, 1998 were $3,476,000, $3,476,000 and $3,476,000,
respectively.
The Company conducts transactions with a number of New SAC subsidiaries.
The Predecessor conducted a number of transactions with Seagate Technology.
These transactions generally include warranty repair and customer service
administration, Wafer Manufacturing in Springtown, Ireland, and product
distribution in the Far East and Eastern Europe, among others.
For the years ended June 30, 2000, July 2, 1999 and July 3, 1998 the
Company sold products to Seagate Technology totaling approximately $864,000,
$608,000 and $1,949,000, respectively.
For the years ended June 30, 2000, July 2, 1999 and July 3, 1998 the
Company purchased products from Seagate Technology totaling approximately
$8,113,000, $7,869,000 and $4,609,000, respectively.
13. CONDENSED FINANCIAL INFORMATION
Seagate Removable Storage Solutions Holdings, ("RSS"), is a subsidiary of
New SAC. The Senior Subordinated Debt, see Note 9, is guaranteed by certain,
but not all of the subsidiaries of New SAC, including certain of RSS's
world-wide subsidiaries. The guarantees of the subordinated debt are full and
unconditional, and are made on a joint and several basis by the guaranteeing
subsidiaries.
The following tables present guarantor and non-guarantor condensed
financial information for RSS's subsidiaries, at June 30, 2000 and June 29,
1999, and the condensed results of its operations and its cash flows for the
years ended June 30, 2000, June 29, 1999 and June 27, 1998. The information is
based on the guarantor and non-guarantor classification of RSS's subsidiaries
under the current provisions of the senior subordinated debentures.
F-290
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED COMBINING BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS COMBINED
------------ ---------------- -------------- -----------
ASSETS
Cash and cash equivalents ........................ $ 2,475 $ 27 $ -- $ 2,502
Accounts receivable, net ......................... 20,554 6,719 (8,056) 19,217
Inventories ...................................... 14,833 2,033 -- 16,866
Deferred income taxes ............................ 7,675 -- -- 7,675
Other current assets ............................. 1,590 186 -- 1,776
-------- -------- --------- --------
Total Current Assets .......................... 47,127 8,965 (8,056) 48,036
Property, equipment, leasehold improvements,
net ............................................. 12,328 2,104 -- 14,432
Goodwill and other intangibles ................... 3,170 -- -- 3,170
-------- -------- --------- --------
Total Assets .................................. $ 62,625 $ 11,069 $ (8,056) $ 65,638
======== ======== ========= ========
LIABILITIES
Accounts payable ................................. $ 23,577 $ 2,457 $ (8,056) $ 17,978
Accrued employee compensation .................... 6,270 463 -- 6,733
Accrued expenses ................................. 6,646 631 -- 7,277
Accrued warranty ................................. 5,276 -- -- 5,276
Current portions of long-term debt ............... 666 -- -- 666
-------- -------- --------- --------
Total Current Liabilities ..................... 42,435 3,551 (8,056) 37,930
Other liabilities ................................ 2,839 -- -- 2,839
-------- -------- --------- --------
BUSINESS EQUITY .................................. 17,351 7,518 -- 24,869
-------- -------- --------- --------
Total Liabilities and Business Equity ......... $ 62,625 $ 11,069 $ (8,056) $ 65,638
======== ======== ========= ========
F-291
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED COMBINING STATEMENT OF OPERATIONS
JUNE 30, 2000
(IN THOUSANDS)
TOTAL REMOVABLE
STORAGE SOLUTIONS
HOLDINGS AND
GUARANTORS NON-GUARANTORS ELIMINATIONS ITS PREDECESSOR
------------ ---------------- -------------- ------------------
Revenue ................................................ $ 227,847 $ 57,387 $ (22,420) $ 262,814
Cost of revenue ........................................ 162,184 53,427 (22,420) 193,193
Product development .................................... 37,444 -- -- 37,444
Marketing and administrative ........................... 17,338 1,240 -- 18,578
Amortization of goodwill and other intangibles ......... 877 -- -- 877
Restructuring .......................................... 627 -- -- 627
--------- -------- ---------- ---------
Total operating expense ............................. 218,470 54,669 (22,420) 250,719
Income (loss) from operations ....................... 9,377 2,718 -- 12,095
Other, net ............................................. 1,576 -- -- 1,576
--------- -------- ---------- ---------
Income (loss) before income taxes ...................... 10,953 2,718 -- 13,671
Benefit (provision) for income taxes ................... (3,762) (670) -- (4,432)
--------- -------- ---------- ---------
Net income (loss) ................................... $ 7,191 $ 2,048 $ -- $ 9,239
========= ======== ========== =========
F-292
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS COMBINED
------------ ---------------- -------------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................. $ 10,320 $ 7,266 $ -- $ 17,586
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements, net ................ (6,086) (2,997) -- (9,083)
Proceeds from sale of property, equipment and
leasehold improvements ..................... 670 -- -- 670
Net cash provided by (used in) investing
activities .............................. (5,416) (2,997) -- (8,413)
FINANCING ACTIVITIES
Net cash change in investments by Seagate
Technology, Inc. ........................... (6,358) (2,724) -- (9,082)
-------- -------- ---- --------
Net cash provided by (used in) financing
activities ................................. (6,358) (2,724) -- (9,082)
Increase (decrease) in cash and cash
equivalents ................................ (1,454) 1,545 -- 91
Cash and cash equivalents at the beginning of
the year ................................... 2,389 22 -- 2,411
-------- -------- ---- --------
Cash and cash equivalents at the end of the
year ....................................... $ 935 $ 1,567 $ -- $ 2,502
======== ======== ==== ========
F-293
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED COMBINING BALANCE SHEET JULY 2, 1999
(IN THOUSANDS)
TOTAL
GUARANTORS NON-GUARANTORS ELIMINATIONS COMBINED
------------ ---------------- -------------- -----------
ASSETS
Cash and cash equivalents ........................ $ 2,389 $ 22 $ -- $ 2,411
Accounts receivable, net ......................... 88,297 12,419 (65,030) 35,686
Inventories ...................................... 10,124 998 -- 11,122
Other current assets ............................. 823 135 -- 958
Deferred income taxes ............................ 12,373 -- -- 12,373
-------- ------- ---------- --------
Total Current Assets .......................... 114,006 13,574 (65,030) 62,550
Property, equipment, leasehold improvements,
net ............................................. 9,176 2,996 -- 12,172
Other assets ..................................... 3,612 -- -- 3,612
-------- ------- ---------- --------
Total Assets .................................. $126,794 $16,570 $ (65,030) $ 78,334
======== ======= ========== ========
LIABILITIES
Accounts payable ................................. $ 84,264 $ 5,460 $ (65,030) $ 24,694
Accrued employee compensation .................... 6,711 582 -- 7,293
Accrued expenses ................................. 12,994 423 -- 13,417
Accrued warranty ................................. 5,951 -- -- 5,951
-------- ------- ---------- --------
Total Current Liabilities ..................... 109,920 6,465 (65,030) 51,355
Other liabilities ................................ 2,267 -- -- 2,267
-------- ------- ---------- --------
BUSINESS EQUITY .................................. 11,883 12,829 -- 24,712
-------- ------- ---------- --------
Total Liabilities and Business Equity ......... $124,070 $19,294 $ (65,030) $ 78,334
======== ======= ========== ========
F-294
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED COMBINING STATEMENT OF OPERATIONS
JULY 2, 1999
(IN THOUSANDS)
TOTAL
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS AND
GUARANTORS NON-GUARANTORS ELIMINATIONS ITS PREDECESSOR
------------ ---------------- -------------- ------------------
Revenue ................................................ $311,101 $63,307 $ (60,402) $ 314,006
Cost of revenue ........................................ 228,008 57,545 (60,402) 225,151
Product development .................................... 36,081 -- -- 36,081
Marketing and administrative ........................... 22,651 273 -- 22,924
Amortization of goodwill and other intangibles ......... 3,207 -- -- 3,207
Restructuring .......................................... 711 -- -- 711
-------- ------- ---------- ---------
Total operating expense ............................. 290,658 57,818 (60,402) 288,074
Income (loss) from operations ....................... 20,443 5,489 -- 25,932
Other, net ............................................. 2 -- -- 2
-------- ------- ---------- ---------
Income (loss) before income taxes ...................... 20,445 5,489 -- 25,934
Benefit (provision) for income taxes ................... (9,307) (249) -- (9,556)
-------- ------- ---------- ---------
Net income (loss) ................................... $ 11,138 $ 5,240 $ -- $ 16,378
======== ======= ========== =========
F-295
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 2, 1999
(IN THOUSANDS)
GUARANTORS NON-GUARANTORS ELIMINATIONS COMBINED
------------ ---------------- -------------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................. $ 31,222 $ 7,469 $ -- $ 38,691
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements ..................... (5,377) (1,196) -- (6,573)
Proceeds from sale of property, equipment and
leasehold improvements ..................... 935 23 -- 958
--------- -------- ---- ---------
Net cash provided by (used in) investing
activities .............................. (4,442) (1,173) -- (5,615)
FINANCING ACTIVITIES
Net change in investments by Seagate
Technology ................................. (22,725) (6,336) -- (29,061)
--------- -------- ---- ---------
Net cash provided by (used in) financing
activities .............................. (22,725) (6,336) -- (29,061)
Increase (decrease) in cash and cash
equivalents ................................ 4,055 (40) -- 4,015
Cash and cash equivalents at the beginning
of the year ................................ (1,666) 62 -- (1,604)
--------- -------- ---- ---------
Cash and cash equivalents at the end
of the year ................................ $ 2,389 $ 22 $ -- $ 2,411
========= ======== ==== =========
F-296
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED COMBINING STATEMENT OF OPERATIONS
JULY 3, 1998
(IN THOUSANDS)
TOTAL
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS AND
GUARANTORS NON-GUARANTORS ELIMINATIONS ITS PREDECESSOR
------------ ---------------- -------------- ------------------
Revenue ................................................ $ 232,589 $98,046 $ (44,549) $ 286,086
Cost of revenue ........................................ 180,010 93,440 (44,549) 228,901
Product development .................................... 24,981 -- -- 24,981
Marketing and administrative ........................... 26,757 418 -- 27,175
Amortization of goodwill and other intangibles ......... 2,181 -- -- 2,181
Restructuring .......................................... 686 -- -- 686
--------- ------- --------- ---------
Total operating expense ............................. 234,615 93,858 (44,549) 283,924
Income (loss) from operations ....................... (2,026) 4,188 -- 2,162
Other, net ............................................. 887 -- -- 887
--------- ------- --------- ---------
Income (loss) before income taxes ...................... (1,139) 4,188 -- 3,049
Benefit (provision) for income taxes ................... (1,571) -- -- (1,571)
--------- ------- --------- ---------
Net income (loss) ................................... $ (2,710) $ 4,188 $ -- $ 1,478
========= ======= ========= =========
F-297
SEAGATE REMOVABLE STORAGE SOLUTIONS, AN OPERATING BUSINESS OF SEAGATE
TECHNOLOGY, INC.,
THE PREDECESSOR TO SEAGATE REMOVABLE STORAGE SOLUTIONS HOLDINGS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONCLUDED)
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED JULY 3, 1998
(IN THOUSANDS)
TOTAL
SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS AND
GUARANTORS NON-GUARANTORS ELIMINATIONS ITS PREDECESSOR
------------ ---------------- -------------- ------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ................................. $ 22,902 $ 1,628 $ -- $ 24,530
INVESTING ACTIVITIES
Acquisition of property, equipment, and
leasehold improvements, net ................ (6,232) (991) -- (7,223)
Proceeds from sale of property, equipment and
leasehold improvements ..................... 667 1,282 -- 1,949
--------- -------- ---- ---------
Net cash provided by (used in) investing
activities .............................. (5,565) 291 -- (5,274)
FINANCING ACTIVITIES
Net change in investments by Seagate
Technology ................................. (19,625) (2,203) (21,828)
--------- -------- ---------
Net cash provided by (used in) financing
activities .............................. (19,625) (2,203) (21,828)
Increase (decrease) in cash and cash
equivalents ................................ (2,288) 284 -- (2,572)
Cash and cash equivalents at the beginning of
the year ................................... 622 346 -- 968
--------- -------- ---- ---------
Cash and cash equivalents at the end of the
year ....................................... $ (1,666) $ 62 $ -- $ (1,604)
========= ======== ==== =========
F-298
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE
INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
DECEMBER 29,
2000 JUNE 30,
(SEE NOTE 2) 2000
-------------- -------------
ASSETS (See Note 10)
Cash ......................................................... $ 6,544 $ 3,621
Loan receivable from Seagate Technology (See Note 3) ......... 31,331 25,681
Accounts receivable, net ..................................... 21,083 16,578
Income taxes receivable ...................................... 1,599 6,071
Inventories .................................................. 357 674
Prepaid and other current assets ............................. 4,181 4,021
------- ----------
Total Current Assets ........................................ 65,095 56,646
Capital assets, net .......................................... 5,955 9,348
Goodwill and other intangibles, net .......................... 21,687 5,286
------- ----------
Total Assets ................................................ $92,737 $ 71,280
======= ==========
LIABILITIES
Current liabilities:
Accounts payable ............................................. 10,064 10,190
Accrued employee compensation ................................ 8,449 6,004
Accrued expenses ............................................. 11,003 12,097
Deferred revenue ............................................. 24,971 19,495
------- ----------
Total Current Liabilities ................................... 54,487 47,786
Deferred income taxes ........................................ 2,087 381
------- ----------
Total Liabilities ........................................... 56,574 48,167
Commitments and contingencies (See Notes 2, 3, and 10)
STOCKHOLDERS' EQUITY
Common stock -- 150,000,000 shares authorized; shares
issued and outstanding -- 75,283,820 and 75,002,050 at
$0.001 par value per share as of December 29, 2000 and
June 30, 2000 ............................................... 75 75
Additional paid-in capital ................................... 41,625 407,893
Accumulated deficit .......................................... (5,535) (384,688)
Accumulated other comprehensive loss ......................... (2) (167)
---------- ----------
Total Stockholders' Equity .................................. 36,163 23,113
--------- ----------
Total Liabilities and Stockholders' Equity .................. $92,737 $ 71,280
========= ==========
See notes to consolidated and combined condensed financial statements.
F-299
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE
INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
--------------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- ---------------
Revenues:
Licensing (See note 7) ............................................ $ 48,536 $ 31,391
Maintenance, support and services (See note 7) .................... 28,512 26,784
----------- -----------
Total Revenues ................................................... 77,048 58,175
Cost of revenues:
Licensing ......................................................... 2,182 1,603
Maintenance, support and services ................................. 20,028 20,815
Amortization of developed technologies ............................ 511 93
----------- -----------
Total Cost of Revenues ........................................... 22,721 22,511
----------- -----------
Gross profit ...................................................... 54,327 35,664
Operating expenses:
Sales and marketing ............................................... 34,823 32,427
Research and development .......................................... 13,785 12,841
General and administrative (See note 7) ........................... 9,491 10,008
Amortization of goodwill and other intangibles .................... 844 2,002
Write-off of in-process research and development (See note 2) ..... 7,073 --
Unusual items (See note 5) ........................................ 1,851 242,569
Restructuring costs (See note 6) .................................. 573 1,301
----------- -----------
Total Operating Expenses ......................................... 68,440 301,148
----------- -----------
Loss from Operations .............................................. (14,113) (265,484)
Interest and Other Income (Expense), net (See note 3) ............. 1,120 (1,283)
----------- -----------
Loss before income taxes .......................................... (12,993) (266,767)
Benefit from (provision for) income taxes (See note 8) ............ 2,506 48,881
----------- -----------
Net Loss ......................................................... $ (10,487) $ (217,886)
=========== ===========
Net loss per share:
Basic and diluted (See note 9) .................................... $ (0.14) $ (2.90)
=========== ===========
Weighted average number of shares used in basic and diluted
net loss per share: .............................................. 75,155,894 75,001,000
See notes to consolidated and combined condensed financial statements.
F-300
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE
INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
(SEE NOTE 2)
FOR THE SIX MONTHS ENDED
------------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
OPERATING ACTIVITIES:
Net loss ....................................................... $ (10,487) $ (217,886)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization ................................. 3,635 4,112
Bad debt expense .............................................. 588 2,674
Deferred income taxes ......................................... 162 (27)
Stock based compensation expense on Seagate Technology
Exchange of Shares .......................................... 1,851 239,574
Write-off of in-process research and development .............. 7,073 --
--------- ----------
2,822 28,447
--------- ----------
Changes in operating assets and liabilities:
Accounts receivable ........................................... (5,059) 15,916
Income taxes receivable ....................................... 4,472 (51,280)
Income taxes receivable from Seagate Technology ............... (3,978) (4,118)
Inventories ................................................... 317 366
Prepaid and other current assets .............................. (129) (3,397)
Accounts payable .............................................. (75) (2,668)
Accrued employee compensation ................................. 2,527 (4,422)
Accrued expenses .............................................. (1,094) 4,575
Deferred revenue .............................................. 6,821 (568)
Other liabilities ............................................. -- (225)
--------- ----------
Net cash provided by (used in) operating activities ............ 6,624 (17,374)
--------- ----------
INVESTING ACTIVITIES:
Acquisition of capital assets, net ............................. (2,966) (1,454)
--------- ----------
Net cash (used in) investing activities ........................ (2,966) (1,454)
--------- ----------
FINANCING ACTIVITIES:
Issuance of common stock and common stock subject to
repurchase .................................................... 1,127 1
Borrowings from Seagate Technology ............................. 76,712 94,895
Payment to Seagate Technology .................................. (78,384) (77,075)
--------- ----------
Net cash provided by (used in) financing activities ......... (545) 17,821
Effect of exchange rate changes on cash ........................ (190) 614
--------- ----------
Increase (decrease) in cash ................................. 2,923 (393)
Cash at the beginning of the period ............................ 3,621 7,419
--------- ----------
Cash at the end of the period .................................. $ 6,544 $ 7,026
========= ==========
See notes to consolidated and combined condensed financial statements.
F-301
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Crystal Decisions, Inc. -- ("Crystal Decisions" or the "Company") develops
and markets software products and provides related services enabling business
users and information technology professionals to manage enterprise
information. Crystal Decisions operates in a single industry segment and its
products, commonly referred to as business intelligence software, permit the
analysis and interpretation of data in order to make business decisions.
Crystal Decisions was incorporated in Delaware in August 1999. Crystal
Decision's headquarters are located in Palo Alto, California.
Crystal Decisions is a majority-owned subsidiary of Seagate Software
(Cayman) Holdings, Inc., a Cayman Islands limited corporation ("Suez
Software"), which is a wholly owned subsidiary of New SAC, a Cayman Islands
limited corporation ("New SAC"), whose predecessor was Seagate Technology, Inc.
("Seagate Technology"). On November 22, 2000, through Suez Software, Crystal
Decisions became a majority owned subsidiary of Suez Software. Prior to
November 22, 2000, the Company was a majority owned subsidiary of Seagate
Software Holdings, Inc. ("Seagate Software Holdings", formerly known as Seagate
Software, Inc.), a Delaware corporation and wholly owned subsidiary of Seagate
Technology. Seagate Technology was a data technology company that provided
products for storing, managing and accessing digital information on computer
systems. The outstanding minority interests in the Company's capital stock
amounted to approximately 12.8% and 10.5% on a fully diluted basis as of
December 29, 2000 and June 30, 2000, respectively. The minority interests
consisted of the Company's common stock and options to purchase its common
stock issued pursuant to the 1999 and 2000 Stock Option Plans.
In March 2001, the Company changed its name from Seagate Software
Information Management Group Holdings, Inc. to Crystal Decisions, Inc.
BASIS OF PRESENTATION
The consolidated and combined condensed financial statements of the
Company have been prepared by the Company, without audit, in accordance with
generally accepted accounting principles for interim financial information and
in accordance with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations. These unaudited interim financial statements, should be
read in conjunction with the consolidated and combined financial statements and
related notes of the Company as of June 30, 2000, July 2, 1999 and July 3, 1998
included herein.
The consolidated and combined condensed financial statements reflect, in
the opinion of management, all material adjustments (consisting of normal
recurring items) necessary for the fair presentation of the consolidated
financial position, results of operations and cash flows for such periods. The
results of operations for the six months ended December 29, 2000 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ending June 29, 2001.
On November 22, 2000, 99% of the outstanding common stock of Crystal
Decisions was purchased by New SAC, through Suez Software and resulted in a
"Change in Control of Crystal Decisions" as described in note 2. Under the
Securities and Exchange Commission's, or SEC's, rules and regulations, because
more than 95% of the Company was acquired and a change of ownership
F-302
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
occurred, the Company has restated all its assets and liabilities as of
November 22, 2000 on a push down accounting basis. Accordingly, results of
operations prior to November 22, 2000 and the comparative information presented
do not reflect these adjustments. Refer to further discussion of the push down
accounting basis in note 2.
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 2000
ended on June 30, 2000, fiscal 1999 ended on July 2, 1999 and fiscal 1998 ended
on July 3, 1998. Fiscal 2000 and 1999 were comprised of 52 weeks. Fiscal 1998
was comprised of 53 weeks. Fiscal 2001 will be a 52-week year and will end on
June 29, 2001. The quarters ended October 1, 1999, December 31, 1999, September
29, 2000 and December 29, 2000 each comprised 13 weeks of activity.
2. CHANGE IN CONTROL OF CRYSTAL DECISIONS
On November 22, 2000, Suez Software, a wholly owned subsidiary of New SAC,
acquired 75,001,000 shares of Crystal Decisions common stock under the terms of
a stock purchase agreement (the "Stock Purchase Agreement"). As a result of
this transaction, New SAC held 99.6% of the outstanding capital stock of
Crystal Decisions at December 29, 2000. New SAC did not purchase shares of
Crystal Decisions common stock that are outstanding as a result of the exercise
of options to purchase these shares under Crystal Decisions' 1999 and 2000
Stock Option Plans. Crystal Decisions' minority stockholders continue to hold
their interests in common stock. In addition, the outstanding unexercised
options granted under the 1999 and 2000 Stock Option Plans continue to remain
outstanding.
SALE OF SEAGATE TECHNOLOGY
On March 29, 2000, Seagate Software Holdings, Seagate Technology and Suez
Acquisition Company (Cayman) Limited ("SAC"), an entity affiliated with, among
others, Silver Lake Partners and Texas Pacific Group, entered into the stock
purchase agreement, and Seagate Technology, VERITAS Software Corporation
("VERITAS") and a wholly owned subsidiary of VERITAS entered into an agreement
and plan of Merger and Reorganization (the "Merger Agreement"). At the closing
of the transaction contemplated by the stock purchase agreement, SAC assigned
all of its rights under such agreements to New SAC.
SAC was organized solely for the purpose of entering into the Stock
Purchase Agreement with Seagate Technology and Seagate Software Holdings.
Similar to SAC, New SAC is controlled by Silver Lake Partners and Texas Pacific
Group. Silver Lake Partners L.P. is a private investment firm headquartered in
Menlo Park, California and New York, New York, the general partner of which is
Silver Lake Technology Associates, L.L.C. Silver Lake Technology Associates
L.L.C. is a Delaware limited liability company.
TRANSACTION FINANCING AND CONSIDERATION PAID
New SAC financed the acquisition of the Seagate Technology operating
assets, including 75,001,000 shares of Crystal Decisions' common stock through:
o Equity financing of $916 million from Silver Lake Partners, L.P., TPG
Partners III, L.P., August Capital, Chase Capital Partners, GS Private
Equity Partners, L.P. and other investors, including certain of the
directors of Crystal Decisions.
F-303
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
o A senior secured credit facility of $700 million in the aggregate from
the Chase Manhattan Bank, Goldman Sachs Credit Partners L.P. and Merrill
Lynch Capital Corporation. In addition, a revolver facility was entered
into with amounts available up to $200 million.
o Senior subordinated notes of approximately $210 million issued by
Seagate Technology International (which is an indirect subsidiary of New
SAC) at a discount to the aggregate principal amount of $210 million, for
gross proceeds of approximately $201 million.
o Certain cash reserves of Seagate Technology of approximately $149
million, net of estimated transaction costs of $100 million.
o In lieu of receiving consideration in connection with the merger, most
of Seagate Technology's senior management team converted a portion of
their unvested Seagate Technology options and restricted stock ("rollover
equity") with an aggregate value of $184 million into deferred
compensation and an equity interest in New SAC. Although the amount of
cash that Seagate Technology received from New SAC was reduced by the
aggregate value of this converted equity, the total merger consideration
received by Seagate Technology stockholders on a per share basis was not
reduced due to the cancellation of a number of Seagate Technology stock
options equal in value to the $184 million in rollover equity. As a
result, while the cash component of the merger consideration to be
received by Seagate Technology shareholders was reduced on a per share
basis, the VERITAS shares component of the merger consideration was
increased on a per share basis by an offsetting amount because of the
antidilutive impact of the Seagate Technology stock options that were
cancelled.
Under the Stock Purchase Agreement, New SAC purchased for $2.05 billion of
cash (less the value of Seagate Technology equity rolled over by former Seagate
Technology officers and less $50 million paid to VERITAS and to be released to
the former Seagate Technology shareholders upon settlement of outstanding
lawsuits), all of the operating assets of Seagate Technology and its
consolidated subsidiaries, including Seagate Technology's rigid disc drive,
storage area network, removable tape storage solutions, enterprise management
software businesses and operations, including shares of Crystal Decisions
common stock, and certain cash balances, but excluding the approximately 128
million shares of VERITAS common stock then held by Seagate Software Holdings
and Seagate Technology's equity investments in Gadzoox Networks, Inc. and
Lernout & Hauspie Speech Products N.V. In addition, under the Stock Purchase
Agreement, wholly owned subsidiaries of New SAC assumed substantially all of
the operating liabilities of Seagate Technology, Seagate Software Holdings and
their consolidated subsidiaries. This transaction is referred to hereafter as
the New SAC Transaction.
Immediately following the New SAC Transaction, VERITAS acquired Seagate
Technology pursuant to the Merger Agreement and a wholly owned subsidiary of
VERITAS merged with and into Seagate Technology, and Seagate Technology
survived the merger and became a wholly owned subsidiary of VERITAS. This
wholly owned subsidiary was renamed VERITAS Software Technology Corporation. We
refer to this transaction as the Merger. In the Merger, Seagate Technology
stockholders received consideration consisting of 0.4465 shares of VERITAS
common stock and $8.55 of cash per share of Seagate Technology common stock.
The Merger is intended to qualify as a tax-free reorganization.
In addition, Seagate Technology stockholders were entitled to receive
their proportionate amounts of a tax refund trust account, a class action
litigation settlement of $50 million and the shares of Lernout & Hauspie Speech
Products N.V. held by Seagate Technology at closing.
F-304
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
VERITAS did not acquire Seagate Technology's disc drive business or any
other Seagate Technology operating business, including Crystal Decisions. All
of Seagate Technology's operating assets, including Crystal Decisions, were
sold to wholly owned subsidiaries of New SAC in connection with the leveraged
buyout.
The New SAC Transaction and the Merger are referred to collectively herein
as the transactions.
Crystal Decisions' directors and officers had interests in the
transactions that may have differed from those of Seagate Technology's, or
VERITAS' stockholders. For example, certain directors and officers of Crystal
Decisions are members of the board of directors of VERITAS.
As part of the New SAC Transaction, New SAC, Seagate Technology and
Crystal Decisions agreed to assume and indemnify VERITAS for substantially all
liabilities arising in connection with the Company's operating assets. On March
29, 2000, Seagate Technology, VERITAS and SAC entered into an Indemnification
Agreement, pursuant to which these entities and certain other subsidiaries of
Seagate Technology, including Crystal Decisions, have agreed to certain
indemnification provisions regarding tax and other matters that may arise in
connection with the transactions.
A majority of Crystal Decisions' assets, along with certain other assets
of Seagate Technology, are now pledged as a guarantee for debt issued to
finance the New SAC Transaction. (Refer to further discussion in note 10).
The federal tax allocation agreement ("Tax Allocation Agreement") Crystal
Decisions had with Seagate Technology was terminated on November 22, 2000, and
Crystal Decisions will no longer file federal income tax returns on a
consolidated basis with Seagate Technology. (Refer to further discussion in
note 8).
Crystal Decisions relies on a revolving loan, pursuant to a revolving loan
agreement (the "Revolving Loan Agreement"), with Seagate Technology LLC, which
is a wholly owned subsidiary of New SAC, to fund a portion of its operating
cash needs. The Revolving Loan Agreement continues in effect subsequent to the
closing of the New SAC Transaction on November 22, 2000 and expires on July 4,
2001. (Refer to further discussion in note 3).
ALLOCATION OF PURCHASE PRICE TO CRYSTAL DECISIONS PURSUANT TO THE APPLICATION
OF PUSH DOWN ACCOUNTING
The New SAC Transaction constituted a purchase business transaction of
Seagate Technology and resulted in a change in control of Crystal Decisions.
Under purchase accounting rules, the net purchase price under this transaction
has been allocated to the assets and liabilities of Seagate Technology and its
subsidiaries, including Crystal Decisions based on their estimated fair values
at the date of the transaction. However, the estimated fair values of
identifiable tangible and intangible assets and liabilities of Seagate
Technology and its subsidiaries at the date of the transaction were greater
than the amount paid, resulting in negative goodwill. The negative goodwill has
been allocated to the long-lived tangible and intangible assets, including
those of Crystal Decisions, on the basis of relative fair values. The estimated
fair values of tangible and intangible assets, including in-process research
and development, have been determined based upon independent appraisals.
The consolidated and combined condensed interim financial statements as of
December 29, 2000 reflect the historical results of operations and financial
position up to the date of the transactions, November 22, 2000, the restatement
of assets and liabilities at that date to reflect the push down purchase
accounting adjustments, followed by the results of operations and financial
F-305
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
position for the period from November 22, 2000 to December 29, 2000 reflecting
the effects of restated balances from the date of the New SAC Transaction. As a
result of the New SAC Transaction and the push down accounting, the Company's
results of operations following the New SAC Transaction, particularly the
depreciation and amortization charges, are not necessarily comparable to the
results of operations prior to the New SAC Transaction.
In connection with the finalization of the purchase price allocation of
the transactions, New SAC and Crystal Decisions are currently evaluating the
fair value of the consideration given and the fair value of the assets acquired
and liabilities assumed. Using this information, New SAC and Crystal Decisions
will make a final allocation of the purchase price including the allocation to
in-process research and development and other intangibles. Accordingly, the
purchase price allocation is preliminary, and subject to adjustment.
The table below lists the estimated net purchase price allocation of the
tangible and intangible assets acquired. The fair value of the intangible
assets acquired and long-lived assets acquired have been reduced by
approximately 46% as a result of negative goodwill allocated to these assets to
arrive at the net purchase price allocation.
NET PURCHASE PRICE
PURCHASE PRICE ALLOCATION ALLOCATION
- ------------------------------------------------- -------------------
(IN THOUSANDS)
Net current assets acquired ..................... $ 9,138
Tangible long-lived assets acquired (1) ......... 5,130
--------
14,268
--------
Intangible assets acquired:
Developed technology (2) ........................ 15,234
Assembled work force (3) ........................ 7,073
In-process research and development (4) ......... 7,073
Deferred tax liability (5) ...................... (2,126)
--------
$ 27,254
--------
Total ........................................ $ 41,522
========
- ----------
(1) Tangible long-lived assets acquired consists of leasehold improvements
and equipment, and are amortized over their remaining useful lives of
approximately 2 years.
(2) The value of the developed technology has been estimated by discounting
the expected future cash flows attributable to all existing technology,
taking into account risks related to the characteristics and applications
of the technology, existing and future markets and assessments of the
life cycle stage of the technology. The analysis resulted in a valuation
for developed technology, which had reached technological feasibility and
therefore was capable of being capitalized. The developed technology is
being amortized on the straight-line basis over its estimated useful life
(3 years) and the amortization is included in cost of revenues.
(3) The estimated value of the assembled work force has been determined by
estimating the costs to replace the existing employees, including the
recruiting, hiring and training costs for each category of employee. The
assembled workforce is being amortized on the straight-line basis over
its estimated useful life (3 years) and the amortization is included in
amortization of goodwill and other intangibles.
F-306
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
(4) As the basis for identifying the in-process research and development
("IPR&D"), Crystal Decisions' developmental projects were evaluated in
the context of Financial Accounting Standards Board Interpretation 4 and
paragraph 11 of Financial Accounting Standards Board ("FAS") Statement
No. 2 and FAS Statement No. 86. Crystal Decisions has charged the value
allocated to projects identified as IPR&D to expense in the period the
transactions close. This write-off is necessary because the acquired
technologies have not yet reached technological feasibility and have no
future alternative uses.
At the valuation date, Crystal Decisions was in the process of
developing three next generation versions of existing technologies
which were estimated to be about 85%, 70%, and 75% complete based on
total man-hours and absolute time. Crystal Decisions expects these
three projects to be completed in fiscal 2002, at an estimated cost of
$20 million. The nature of the efforts required to develop the
purchased IPR&D into commercially viable products principally relate
to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish
that the product can be produced to meet its design specifications,
including functions, features and technical performance requirements.
Crystal Decisions expects that the acquired IPR&D will be successfully
developed, but it cannot ensure that commercial viability of these
products will be achieved.
The value of the purchased IPR&D for Crystal Decisions has been
calculated by estimating the projected net cash flows related to such
products, including costs to complete the development of the
technology and the future revenues to be earned on commercialization
of the products. These cash flows were then discounted back to their
net present value. The projected net cash flows from such projects
were based on management's estimates of revenues and operating profits
related to these projects.
(5) Deferred taxes arose because of the difference between the book and tax
basis of tangible long-lived and intangible assets acquired and located
in jurisdictions other than the United States (U.S.). Deferred taxes do
not arise for those intangible and tangible long-lived assets acquired
and located in the U.S., because the transaction is subject to a special
tax election in the U.S., whereby no difference in the book and tax basis
of the net assets exists.
PRO FORMA INFORMATION. The following table presents the unaudited pro
forma results of operations for informational purposes, assuming the change of
control of Crystal Decisions occurred at the beginning of fiscal 1999:
FOR THE SIX MONTHS ENDED
------------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Total revenue ............................................. $ 77,048 $ 58,175
Net loss .................................................. $ (6,847) $ (23,237)
-------- ---------
Pro forma basic and diluted net loss per share ......... $ (0.09) $ (0.31)
======== =========
The pro forma results of operations give effect to certain adjustments
including amendment of amortization and depreciation of revalued intangible and
tangible assets. The pro forma net loss for the six months ended December 29,
2000 and December 31, 1999 does not include the following push down and
purchase price adjustments, as they represent one time charges which are not
necessarily reflective of ongoing operating results:
o unusual items of approximately $1.9 million and $242.6 million for the
six months ended December 29, 2000 and December 31, 1999, respectively as
described in note 5;
F-307
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
o the effects of fair value adjustments to deferred revenue, reducing
revenue by $1.3 million on a declining basis during the twelve months
following the date of the transaction; and
o the write off of IPR&D charges of approximately $7.1 million during the
six months ended December 29, 2000, in connection with the SAC
Transaction.
3. ECONOMIC DEPENDENCE ON SEAGATE TECHNOLOGY
On July 4, 2000, Crystal Decisions and Seagate Technology LLC, then a
wholly owned subsidiary of Seagate Technology, now an indirect subsidiary of
New SAC, renewed the Revolving Loan Agreement dated June 28, 1996. Under the
Revolving Loan Agreement, Seagate Technology LLC finances certain of Crystal
Decisions' working capital needs and operating activities. The Revolving Loan
Agreement provides for maximum outstanding borrowings of up to $60.0 million
and expires on July 4, 2001. The Revolving Loan Agreement continued in effect
subsequent to the closing of the New SAC Transaction on November 22, 2000. The
loan is payable or receivable upon termination of the agreement. As of December
29, 2000 and June 30, 2000, the revolving loan balance was a net receivable
from Seagate Technology LLC and its affiliates of $31.3 million and $25.7
million, respectively. The net receivable arose largely as a result of
offsetting amounts due from Seagate Technology under a Tax Allocation Agreement
for income tax loss benefits utilized by Seagate Technology relative to Crystal
Decisions' tax loss position (refer to note 8 for further discussion). The loan
balance is presented on the balance sheet as a net receivable or net payable in
accordance with the terms of the loan agreement.
During the six months ended December 29, 2000, Crystal Decisions earned
interest income on a monthly basis on the net receivable revolving loan balance
outstanding at a rate calculated to be Seagate Technology LLC's in-house
portfolio yield (average of 7.67% for the six months ended December 29, 2000).
During the six months ended December 31, 1999, interest was charged or
earned on the net revolving loan balance receivable or payable outstanding on a
monthly basis at LIBOR plus 2% per annum, (7.53% for the six months ended
December 31, 1999). Interest income and expense as presented in the statement
of operations primarily relates to interest on the revolving loan.
Crystal Decisions has incurred net losses during the three year period
ended June 30, 2000 and the six months ended December 29, 2000. Crystal
Decisions relies on the revolving loan with Seagate Technology LLC to fund a
portion of its operating needs. Crystal Decisions believes that the amounts due
from Seagate Technology LLC under the Revolving Loan Agreement, in addition to
the amounts available to Crystal Decisions under the Revolving Loan Agreement
are sufficient to fund Crystal Decisions' operating and planned activities
during the next six months.
Crystal Decisions may require additional financing through the end of
fiscal 2002. Crystal Decisions is in the process of negotiating additional
financing with Seagate Technology LLC through the end of fiscal 2002. Should
additional financing not be available from Seagate Technology LLC at terms that
are satisfactory to Crystal Decisions and Seagate Technology LLC, Crystal
Decisions may seek additional equity and financing from other sources, subject
to concurrence by the lenders which financed the New SAC Transaction, as well
as Crystal Decisions' parent company. As a result of the New SAC Transaction,
Crystal Decisions guaranteed the debt used to finance the New SAC Transaction
and pledged a majority of its assets. As a result of restrictive covenants
under the debt agreement, the ability of Crystal Decisions to raise additional
debt or equity from other sources may be limited. (Refer to note 10 for further
discussion.)
F-308
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
4. REVENUE RECOGNITION
Typically, Crystal Decisions can establish vendor specific objective
evidence ("VSOE") for all elements of its multi-element arrangements, and
accordingly, revenues are allocated to the individual elements on the basis of
VSOE. During the second quarter of fiscal year 2001, Crystal Decisions adopted
a new sales model that limits the sale of certain software license products
sold on an individual basis and, as a result, is not able to establish
sufficient VSOE for these license products. As a result of this change in
circumstance, when these products are included in bundled arrangements with
technical support and maintenance services, Crystal Decisions applies the
residual method of accounting as specified in SOP 98-9 such that the total fair
value of the undelivered elements as indicated by vendor-specific objective
evidence, is deferred and subsequently recognized in accordance with SOP 97-2
and the difference between the total arrangement fee and the amount deferred
for the undelivered elements is accounted for as revenue related to the
delivered elements. The impact on revenues of applying the residual method of
accounting in the six months ended December 29, 2000 was not material. Although
not typical, some OEM arrangements contain end-user maintenance elements for
which VSOE has not been established, as sufficient evidence of consistent
pricing and renewal rates has not been present. In such arrangements, Crystal
Decisions has recognized the arrangement fee ratably over the maintenance
period in accordance with the provisions set forth in SOP 97-2.
5. UNUSUAL TRANSACTIONS
SALE OF SEAGATE TECHNOLOGY
On November 22, 2000, the date of the closing of the New SAC Transaction,
vesting of Seagate Technology options were accelerated and net exercised for
merger consideration of 0.4465 shares of VERITAS and $8.55 cash per share of
Seagate Technology. The accelerated vesting and net exercise of these options
resulted in compensation expense to Seagate Technology. At November 22, 2000,
options to purchase 51,500 shares of Seagate Technology common stock were held
by certain Crystal Decisions employees. As a result, the Company recorded
approximately $1.9 million of compensation expense attributable to its
employees as a capital contribution from Seagate. The compensation expense is
recorded as an unusual item in the income statement for the six months ended
December 29, 2000.
THE OCTOBER 1999 SEAGATE TECHNOLOGY EXCHANGE OF SHARES
On October 20, 1999, the stockholders of Seagate Software Holdings
approved the merger of Seagate Daylight Merger Corp., a wholly owned subsidiary
of Seagate Technology, with and into Seagate Software Holdings. The merger was
effected on October 20, 1999. Seagate Software Holdings assets consisted of the
assets of the business and its investment in the common stock of VERITAS. Upon
the closing of the merger, Seagate Software Holdings became a wholly owned
subsidiary of Seagate Technology. All outstanding options to purchase Seagate
Software Holdings common stock were accelerated immediately prior to the
merger. In connection with the merger, Seagate Software Holdings minority
stockholders and optionees received payment in the form of 3.23 shares of
Seagate's common stock per share of Seagate Software Holdings common stock less
any amounts due for the payment of the exercise price of unexercised options.
Seagate Technology issued 9,124,046 shares of its common stock from treasury
shares to optionees and minority stockholders of Seagate Software Holdings in
connection with the merger.
Seagate Technology accounted for the exchange of shares of its common
stock as the acquisition of a minority interest for Seagate Software Holdings
common stock outstanding and
F-309
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
vested more than six months held by employees and all stock held by former
employees and consultants. The fair value of the shares of Seagate Technology
issued was $19.4 million and was recorded as the purchase price and allocated
to all the identifiable tangible and intangible assets and liabilities of
Seagate Software Holdings. Seagate Technology accounted for the exchange of
shares of its common stock for stock options in Seagate Software Holdings held
by employees and stock held and vested by employees less than six months as the
settlement of an earlier stock award. Seagate Technology recorded compensation
expense of $283.6 million, plus $2.1 million of employer portion of payroll
taxes, related to the purchase of minority interest in Seagate Software
Holdings.
The consolidated and combined condensed statement of operations for the
six months ended December 31, 1999 includes an allocation of compensation
expense arising from the October 1999 Seagate Technology exchange offer.
Compensation expense was allocated to Crystal Decisions on the basis of
employees specifically identified with the business and for those employees
that performed services for the business, on the basis of time estimates.
Accordingly, Crystal Decisions recorded $239.6 million of the $283.6 million
compensation expense related to the October 1999 Seagate Exchange of Shares and
an offsetting $239.6 million was recorded as a capital contribution from
Seagate Technology. In addition, the $2.1 million of employer portion of
payroll taxes paid related to Crystal Decisions employees and therefore the
amount was recorded as an expense for the six months ended December 31, 1999.
In addition, $877,000 of legal and accounting costs were incurred by
Crystal Decisions in connection with the recapitalization and reorganization of
Crystal Decisions, of which $523,000 was recorded in the six months ended
December 31, 1999.
The following table summarizes the components of the unusual items expense
for the six months ended December 31, 1999 reported by Seagate that are
attributable to the employees of Crystal Decisions:
AS REPORTED BY ALLOCATED TO
SEAGATE TECHNOLOGY CRYSTAL DECISIONS
-------------------- ------------------
(IN THOUSANDS)
Compensation expense associated with the exchange of Seagate
Software Holdings common stock for Seagate Technology common
stock ...................................................... $283,619 $239,574
Employer portion of payroll taxes ........................... 2,118 2,118
Transaction costs ........................................... 877 877
-------- --------
Total unusual items ...................................... $286,614 $242,569
======== ========
F-310
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
6. RESTRUCTURING COSTS
During the six months ended December 29, 2000, Crystal Decisions incurred
$573,000 of restructuring charges. The charges relate to the closure of eight
offices in Europe and are part of a restructuring plan announced in September
2000 to consolidate the European sales organization into fewer office
locations. The charges primarily consisted of costs related to the termination
of office leases and other related closure costs, as well as severance and
benefits due to nine sales and marketing employees who were terminated in
September 2000. At December 29, 2000, $375,000 was included in accrued expenses
and is expected to be paid by the quarter ending March 30, 2001.
During the six months ended December 31, 1999, Crystal Decisions incurred
$1.3 million of restructuring charges for termination of excess personnel as
Crystal Decisions realigned its resources to better manage and control its
business. The charges resulted from a company-wide restructuring plan announced
in October 1999 and were comprised of charges of severance and benefits paid to
approximately 125 employees from various locations and departments, including
direct sales force personnel, who were terminated on October 23, 1999. The
restructuring charges were paid during fiscal 2000.
The restructuring events described above were independent of each other.
7. RELATED PARTY TRANSACTIONS
During the six months ended December 29, 2000, Crystal Decisions signed a
software license agreement (the "License Agreement") with Seagate Technology.
Under the terms of the License Agreement, Crystal Decisions granted Seagate
Technology a non-exclusive, non-transferable, perpetual license to use its
business intelligence software and maintenance and support services. The total
value of the License Agreement is $1.6 million. The License Agreement was
priced at an approximate 50% discount to Crystal Decisions' established list
price. During the six months ended December 29, 2000, Crystal Decisions
recognized a total of $1.3 million from the License Agreement. The balance of
$347,000 is included in deferred revenue. As of December 29, 2000, there were
no outstanding amounts owed by Seagate included in accounts receivable.
Historically, Seagate Technology has provided substantial services to
Crystal Decisions under a General Services Agreement dated June 28, 1997. Upon
the closing of the New SAC Transaction, this agreement was assumed by New SAC.
The services generally include general management, treasury, tax, financial
reporting, benefits administration, insurance, information technology, legal,
accounts payable and receivable and credit functions, among others. Seagate
Technology charges Crystal Decisions for these services through corporate
expense allocations. The amount of corporate expense allocations depends upon
the total amount of allocable costs incurred by Seagate on behalf of Crystal
Decisions' less amounts charged as a specific cost or expense rather than by
allocation. Such costs have been proportionately allocated to Crystal Decisions
based on detailed inquiries and estimates of time incurred by Seagate
Technology's corporate marketing and general and administrative departmental
managers. Management believes that the allocation method applied to the costs
provided under the General Services Agreement is reasonable. Allocations
charged to Crystal Decisions general and administrative expenses were $422,000
and $328,874 for the six months ended December 29, 2000 and December 31, 1999,
respectively. Management estimates that additional costs for the services
covered under this agreement would have been $688,000 for fiscal 2000 had the
Company operated on a stand-alone basis from Seagate Technology.
F-311
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
8. INCOME TAXES
Prior to the sale of the operating assets of Seagate Technology, Crystal
Decisions was included in the consolidated federal and certain combined and
consolidated foreign and state income tax returns of Seagate Technology.
Seagate Technology and Crystal Decisions had entered into a tax sharing
agreement (the "Tax Allocation Agreement") pursuant to which Crystal Decisions
computes hypothetical tax returns as if Crystal Decisions was not joined in
consolidated or combined returns with Seagate Technology. Crystal Decisions
paid Seagate Technology the positive amount of any such hypothetical taxes. If
the hypothetical tax returns show entitlement to refunds, including any refunds
attributable to a carryback, then Seagate would pay Crystal Decisions the
amount of such refunds. At the end of fiscal 2000 and fiscal 1999 there were
$67.0 million and $762,000, respectively, of intercompany tax related balances
due to Crystal Decisions from Seagate Technology that were offset against
amounts due to Seagate Technology under the Revolving Loan Agreement (note 2).
On November 22, 2000, the Tax Allocation Agreement was terminated.
The provision for (benefit from) income taxes consisted of the following:
PRE-PREDECESSOR
------------------
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 29, 2000 DECEMBER 31, 1999
(IN THOUSANDS) ------------------- ------------------
Current Tax Expense (Benefit):
Federal ........................................... $ (1,936) $ (30,137)
State ............................................. (846) (8,069)
Foreign ........................................... 276 (10,282)
-------- ---------
(2,506) (48,488)
-------- ---------
Deferred Tax Expense (Benefit):
Federal ........................................... -- (351)
State ............................................. -- (42)
Foreign ........................................... -- --
-------- ---------
-- (393)
-------- ---------
Provision for (Benefit from) Income Taxes ......... $ (2,506) $ (48,881)
======== =========
For purposes of the historical financial statements, the benefit from
income taxes has been computed on a separate return basis, except that the tax
benefits of certain of Crystal Decisions' tax losses and credits were
recognized by Crystal Decisions on a current basis if such losses could be
utilized by Seagate Technology in its tax returns.
Income (loss) before income taxes consisted of the following:
PRE-PREDECESSOR
------------------
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 29, 2000 DECEMBER 31, 1999
------------------- ------------------
Domestic ......... $ (8,445) $ (262,693)
Foreign .......... (4,548) (4,074)
--------- ----------
$ (12,993) $ (266,767)
========= ==========
F-312
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
The proforma information assuming a tax provision/(benefit) based on a
separate return basis is as follows:
SIX MONTHS
ENDED
DECEMBER 29, 2000
------------------
Income (loss) before income taxes ............ $ (12,993)
Provision (benefit) for income taxes ......... (2,506)
---------
Net Income (loss) ............................ $ (10,487)
=========
The income tax benefits related to the exercise of certain employee stock
options increased amounts due from Seagate Technology pursuant to the Tax
Allocation Agreement and were credited to additional paid-in capital. Such
amounts approximated $34,000 as of November 22, 2000.
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 Crystal Decisions' deferred tax assets and liabilities were as
follows:
DECEMBER 29, JUNE 30,
2000 2000
-------------- ------------
DEFERRED TAX ASSETS
Inventory valuation accounts ..................... $ 164 $ 141
Receivable reserves .............................. 1,173 1,953
Accrued compensation and benefits ................ 283 802
Depreciation ..................................... 53 75
Acquisition-related items ........................ 8,255 31,754
Other reserves and accruals ...................... 2,228 2,721
Net operating loss and tax carryforwards ......... 590 855
--------- ---------
Total Deferred Tax Assets ........................ 12,746 38,301
Valuation allowance .............................. (12,746) (38,301)
--------- ---------
Net Deferred Tax Assets .......................... -- --
DEFERRED TAX LIABILITIES
Acquisition-related items ........................ (2,087) (381)
--------- ---------
Total Deferred Tax Liabilities ................... (2,087) (381)
--------- ---------
Net Deferred Tax Assets/(Liabilities) ............ $ (2,087) $ (381)
--------- ---------
In connection with the purchase of the operating assets of Seagate
Technology, we recorded a $10.5 million valuation allowance for deferred tax
assets. The $10.5 million of deferred tax assets subject to the valuation
allowance arose primarily as a result of the excess of tax basis over the fair
values of acquired property, plant and equipment, and liabilities assumed for
which we expect to receive tax deductions in our federal and state returns in
future periods. We also recorded $2 million of foreign deferred tax liabilities
as a result of the excess of the fair market value of inventory, long-term
investments, and acquired intangible assets over their related tax bases. Our
realization of
F-313
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
the tax benefits for the federal and state deferred tax assets subject to the
valuation allowance will depend primarily on our ability to generate sufficient
taxable income in the United States in future periods, the timing and amount of
which are uncertain. We anticipate that the tax benefits of the deferred tax
assets when realized, will first result in an increased adjustment to the
amount of unamortized negative goodwill that has been allocated on a pro rata
basis to the long-lived assets. Any excess tax benefit would then be realized
as a reduction of future income tax expense.
The reconciliation between the provision for (benefit from) income taxes
at the U.S. federal statutory rate and the effective rate are summarized as
follows:
PRE-PREDECESSOR
(IN THOUSANDS) ------------------
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 29, 2000 DECEMBER 31, 1999
------------------- ------------------
Provision (benefit) at U.S. statutory rate ............................ $ (4,548) $ (93,368)
State income tax provision (benefit), net of federal income tax benefit (550) (5,272)
Write-off of in-process research and development ...................... 778 --
Compensation expense related to SSI exchange offer .................... -- 49,585
Valuation allowance ................................................... 2,244 --
Other ................................................................. (430) 174
-------- ---------
Provision for (benefit from) income taxes ............................. $ (2,506) $ (48,881)
======== =========
9. NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share", requires the disclosure of basic and diluted earnings
(losses) per share. Prior to August 24, 1999, Crystal Decisions had no
outstanding share capital. Crystal Decisions issued 1,000 shares of common
stock to Seagate Technology for aggregate proceeds of $1,000 on August 24,
1999. On November 16, 1999, Seagate Software Holdings contributed the
information management group business' legal entities to Crystal Decisions in
exchange for 75,000,000 shares of Crystal Decisions common stock. On November
22, 2000, and as part of the New SAC Transaction, New SAC, through Suez
Software, acquired the 75,001,000 common shares of Crystal Decisions owned by
Seagate Technology. Basic loss per common share has been computed using the
weighted average number of shares of common stock outstanding during each of
the periods presented, with the initial 1,000 and 75,000,000 shares being
treated as outstanding for all reporting periods. Diluted loss per share is
computed using the pro forma weighted average number of shares of common stock
outstanding during each of the periods presented assuming exercise of options
to purchase common stock, with the initial 1,000 and 75,000,000 shares being
treated as outstanding for all reporting periods. Options to purchase common
stock were excluded from the computation of diluted net loss per share, as
their effect is antidilutive.
F-314
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
Below is a reconciliation of the numerator and denominator used to
calculate net loss per share.
FOR THE SIX MONTHS ENDED
----------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
(IN THOUSANDS, EXPECT SHARE
AND PER SHARE DATA)
(UNAUDITED)
Basic net loss per share
Numerator:
Net loss ............................... $ (10,487) $ (217,886)
Denominator:
Weighted average number of common shares
outstanding .......................... 75,155,894 75,001,000
Net loss per share -- basic ............. $ (0.14) $ (2.90)
Diluted net loss per share computation:
Numerator:
Net loss ............................... $ (10,487) $ (217,886)
Denominator:
Weighted average number of common shares
outstanding .......................... 75,155,894 75,001,000
----------- -----------
Net loss per share -- diluted ........... $ (0.14) $ (2.90)
=========== ===========
10. DEBT GUARANTEES AND PLEDGE OF ASSETS
SENIOR SECURED CREDIT FACILITY
On the closing of the New SAC Transaction, Seagate Technology
International and Seagate Technology (US) Holdings, Inc., both subsidiaries of
New SAC entered into senior credit facilities with a syndicate of banks and
other financial institutions led by The Chase Manhattan Bank, as administrative
agent and an issuing bank, and Goldman Sachs Credit Partners L.P., as a
documentation agent, The Bank of Nova Scotia as a documentation agent, and
Merrill Lynch Capital Corporation, as a documentation agent. The senior credit
facilities provide senior secured financing of up to $900 million, consisting
of:
o a $200 million revolving credit facility for general corporate purposes,
with a sub-limit of $100 million for letters of credit, which will
terminate in five years;
o a $200 million term loan A facility with a maturity of five years; and
o a $500 million term loan B facility with a maturity of six years.
At the closing of the transaction, New SAC did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because approximately $45 million of
existing letters of credit were outstanding and reduced availability under it.
New SAC drew the full amount of the term loan A facility and the term loan B
facility on the closing of the transaction to finance the acquisition of
Seagate Technology's operating assets, including Crystal Decisions.
F-315
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
The $700 million of outstanding loans under the term loan A and B
facilities are repayable in semi-annual payments due as follows:
(IN THOUSANDS)
---------------
Fiscal 2001 ............ $ 5,000
2002 ..... ........... 22,500
2003 ..... ........... 40,000
2004 ..... ........... 50,000
2005 ..... ........... 60,000
thereafter .......... 522,500
--------
Total .... ........... $700,000
========
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as the consolidated financial
position of New SAC at applicable measurement dates. The average interest rates
being charged under these borrowings from the date of the New SAC Transaction
ranged from 9.1875% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC and certain of its subsidiaries, including Crystal Decisions and
certain of its subsidiaries are guarantors under the senior credit facilities.
In addition, the majority of New SAC's and certain of its subsidiaries' assets,
including Crystal Decisions' assets and its capital stock, have been pledged
against the debt under this credit agreement. New SAC, and certain of its
subsidiaries, including Crystal Decisions and certain of its subsidiaries, have
agreed to certain covenants under this agreement including restrictions on
future equity and borrowing transactions, business acquisitions and disposals,
making certain restricted payments and dividends, making certain capital
expenditures, incurring guarantee obligations and engaging in mergers or
consolidations. Further, Crystal Decisions, as part of the consolidated group,
is subject to certain financial covenants which are assessed on the
consolidated operating results and financial position of New SAC and its
subsidiaries.
The credit agreement provides for the release of Crystal Decisions from
its guarantee obligations, and asset pledge upon an approved transfer or sale
of Crystal Decisions' common stock, or an initial public offering of at least
10%, on a fully diluted basis, of Crystal Decisions' voting common stock.
SENIOR SUBORDINATED NOTES
In connection with the closing and financing of the New SAC Transaction,
Seagate Technology International issued unsecured senior subordinated notes
under an Indenture Agreement dated November 22, 2000 at a discount to the
aggregate principal amount of $210 million, for gross proceeds of approximately
$201 million. The notes mature on November 15, 2007 and bear interest payable
semi-annually at a rate of 12.5% per annum. New SAC and certain of its
subsidiaries, including Crystal Decisions and certain of its subsidiaries, are
guarantors of the notes. In addition, New SAC and certain of its subsidiaries
including Crystal Decisions and certain of its subsidiaries, have agreed to
certain restrictive covenants under the terms of these notes including
restrictions on future equity and borrowing transactions, business acquisitions
and disposals, making certain restricted payments and dividends, making certain
capital expenditures, incurring guarantee obligations and engaging in mergers
or consolidations. Crystal Decisions may be released from its
F-316
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
guarantee obligation, if there are certain sales of its capital stock,
including in an initial public offering, but would remain subject to the
restrictive covenants of the indenture until Crystal Decisions and its
subsidiaries are no longer subsidiaries of New SAC or are deemed no longer to
be subject to the restrictive covenants.
New SAC will not require Crystal Decisions' cash flow to be used to
service the obligations pursuant to the senior secured credit facility and the
senior subordinated notes. The Company believes that none of the guarantees or
pledges of assets under the senior credit facilities or the guarantees under
the Indenture are likely to be invoked.
11. COMMON STOCK ELIGIBLE FOR REPURCHASE
As of December 29, 2000, employees and directors of Crystal Decisions
exercised a combined total of 282,820 options to purchase common stock under
the 1999 Stock Option Plan. At December 29, 2000, 152,611 shares were vested
and 130,209 shares were unvested. At the option of Crystal Decisions and within
30 days of termination, the unvested shares held by directors may be
repurchased at the directors original purchase price. As of December 29, 2000,
there were 168,750 shares eligible for repurchase with a balance and a
repurchase price of $675,000.
12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Crystal Decisions adopted Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information", in fiscal 1999. SFAS 131 establishes standards for reporting
information about operating segments.
Crystal Decisions operates in a single industry segment, enterprise
information management. Crystal Decisions' products and services are sold
worldwide, through direct, OEM and distributor channels. Within the segment,
the chief operating decision maker, Crystal Decisions' chief executive officer,
evaluates the performance of the business based upon revenues from product and
services, revenues by geographic regions and revenues by product channels. The
chief executive officer does not receive discrete financial information about
asset allocation, expense allocation or profitability from the business
products or maintenance, support and services.
Product and services revenues:
FOR THE SIX MONTHS ENDED
----------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
(IN THOUSANDS)
Licensing revenues ..................... $48,536 $31,391
Maintenance, support and other ......... 28,512 26,784
------- -------
Total revenues ...................... $77,048 $58,175
======= =======
F-317
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
Geographic revenues (1), (2):
FOR THE SIX MONTHS ENDED
----------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
(IN THOUSANDS)
United States ............. $53,959 $37,262
Europe .................... 14,170 14,065
Other ..................... 8,919 6,848
------- -------
Total revenues ......... $77,048 $58,175
======= =======
Channel revenues:
FOR THE SIX MONTHS ENDED
----------------------------
DECEMBER 29, DECEMBER 31,
2000 1999
-------------- -------------
(IN THOUSANDS)
Direct .................... $47,255 $37,316
Distribution .............. 24,696 16,133
OEM ....................... 5,097 4,726
------- -------
Total revenues ......... $77,048 $58,175
======= =======
F-318
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
Long-lived assets (3):
DECEMBER 29, JUNE 30,
2000 2000
-------------- ---------
(IN THOUSANDS)
United States ...................... $14,486 $ 6,154
Canada ............................. 10,467 7,254
Other .............................. 2,689 1,226
------- -------
Total long-lived assets ......... $27,642 $14,634
======= =======
DECEMBER 29, JUNE 30,
2000 2000
-------------- ---------
Total long-lived assets ................. $27,642 $14,634
Other assets, including current ......... 65,095 56,646
------- -------
Total assets ......................... $92,737 $71,280
======= =======
- ----------
(1) Revenues are attributed to geographic regions based on the location of
the customer.
(2) Europe includes South Africa and the Middle East.
(3) Reconciliation to total assets reported (in thousands).
Overall, Crystal Decisions' customer base is diverse however, a
third-party customer, Ingram Micro Inc. ("Ingram"), represented 21% and 19% of
revenues for the six months ended December 29, 2000 and December 31, 1999,
respectively. The revenues from Ingram accounted for more than 10% of
consolidated revenues for a total of $16.5 million for the six months ended
December 29, 2000.
13. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
basis of presentation adopted in fiscal 2001.
14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company is a non-wholly owned subsidiary of New SAC. The senior
subordinated notes, see Note 10, are guaranteed by certain, but not all of the
subsidiaries of New SAC, including certain of Crystal Decisions' world-wide
subsidiaries. The guarantees of the senior subordinated notes are full and
unconditional, and are made on a joint and several basis by the guaranteeing
subsidiaries.
The following tables present guarantor and non-guarantor condensed
consolidating financial information for Crystal Decisions' subsidiaries, at
December 29, 2000, and the condensed consolidating results of its operations
and its cash flows for the period from November 23, 2000 to December 29, 2000,
period from July 1, 2000 to November 22, 2000, and six months ended December
31, 1999. The information is based on the guarantor and non-guarantor
classification of Crystal Decisions' subsidiaries under the current provisions
of the senior subordinating notes. This information is audited.
F-319
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 29, 2000
(IN THOUSANDS)
(UNAUDITED)
TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ELIMINATIONS CRYSTAL DECISIONS
------------ ---------------- -------------- -------------------
ASSETS
Cash ................................................ $ 4,133 $ 2,231 $ 180 $ 6,544
Loan receivable from Seagate Technology ............. 31,331 -- -- 31,331
Accounts receivable, net ............................ 24,795 9,754 (13,466) 21,083
Inventories ......................................... 357 -- -- 357
Deferred income taxes ............................... -- 17 (17) --
Income tax receivable ............................... 1,599 -- -- 1,599
Other current assets ................................ 3,667 514 -- 4,181
------- ------- --------- -------
Current assets ..................................... 65,882 12,516 (13,303) 65,095
Capital assets, net ................................. 5,684 271 -- 5,955
Investments ......................................... 1,781 -- (1,781) --
Intangibles ......................................... 21,687 -- -- 21,687
------- ------- --------- -------
Total assets ....................................... 95,034 12,787 (15,084) 92,737
------- ------- --------- -------
LIABILITIES
Accounts payable .................................... 17,834 5,516 (13,286) 10,064
Accrued employee compensation ....................... 7,536 913 -- 8,449
Accrued expenses .................................... 8,967 2,036 -- 11,003
Deferred revenue .................................... 23,122 1,849 -- 24,971
Deferred income taxes ............................... 17 -- (17) --
Accrued income taxes ................................ (665) 665 -- --
------- ------- --------- -------
Current liabilities ................................ 56,811 10,979 (13,303) 54,487
Deferred income taxes ............................... 2,060 27 -- 2,087
------- ------- --------- -------
Total liabilities .................................. 58,871 11,006 (13,303) 56,574
STOCKHOLDERS' EQUITY ............................... 36,163 1,781 (1,781) 36,163
------- ------- --------- -------
Total liabilities and stockholders' equity ......... $95,034 $12,787 $ (15,084) $92,737
======= ======= ========= =======
F-320
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN THOUSANDS)
(UNAUDITED)
TOTAL CONSOLIDATED
GUARANTOR NON-GUARANTOR ELIMINATIONS CRYSTAL DECISIONS
------------- --------------- -------------- -------------------
Revenues ..................................... $ 18,673 $ 1,201 $ -- $ 19,874
Costs of revenues ............................ 4,404 233 -- 4,637
Research and development ..................... 2,754 31 -- 2,785
Sales, marketing and administrative .......... 8,653 881 -- 9,534
Amortization of goodwill and other
intangibles ................................. 196 -- -- 196
Restructuring costs .......................... -- 14 -- 14
Unusual items ................................ 7,073 -- -- 7,073
--------- ------- ------- ---------
Total operating expenses .................... 23,080 1,159 -- 24,239
--------- ------- ------- ---------
Income (loss) from operations ............... (4,407) 42 -- (4,365)
Interest income (expense) .................... 251 (22) -- 229
Intercompany charges, net .................... (342) 342 -- --
Equity investment income (loss) .............. 320 -- (320) --
--------- ------- ------- ---------
Other income (expense), net ................. 229 320 (320) 229
--------- ------- ------- ---------
Income (loss) before income taxes ............ (4,178) 362 (320) (4,136)
Benefit (provision) for income taxes ......... (1,357) (42) -- (1,399)
--------- ------- ------- ---------
Net income (loss) ........................... $ (5,535) $ 320 $ (320) $ (5,535)
========= ======= ======= =========
F-321
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM NOVEMBER 23, 2000 TO DECEMBER 29, 2000
(IN THOUSANDS)
(UNAUDITED)
TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ELIMINATIONS CRYSTAL DECISIONS
------------ ---------------- -------------- -------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ..................................... $ 4,244 $ (620) $180 $ 3,804
INVESTING ACTIVITIES
Acquisition of capital assets, net .............. (1,024) (41) -- (1,065)
--------- ------ ---- ---------
Net cash provided by (used in) investing
activities ................................... (1,024) (41) -- (1,065)
FINANCING ACTIVITIES
Issuance of common stock ........................ 178 -- -- 178
Borrowings from Seagate Technology .............. 22,433 -- -- 22,433
Payments to Seagate Technology .................. (23,925) -- -- (23,925)
--------- ------ ---- ---------
Net cash provided by (used in) financing
activities ................................... (1,314) -- -- (1,314)
Effect of exchange rate changes on cash ......... (32) 236 -- 204
--------- ------ ---- ---------
Increase (decrease) in cash ..................... 1,874 (425) 180 1,629
Cash at the beginning of the period ............. 2,259 2,656 -- 4,915
--------- ------ ---- ---------
Cash at the end of the period ................... $ 4,133 $2,231 $180 $ 6,544
========= ====== ==== =========
F-322
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN THOUSANDS)
(UNAUDITED)
TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ELIMINATIONS CRYSTAL DECISIONS
------------ ---------------- -------------- -------------------
Revenues ............................................... $ 52,914 $ 4,260 $ -- $ 57,174
Costs of revenues ...................................... 16,831 1,253 -- 18,084
Research and development ............................... 10,887 113 -- 11,000
Sales, marketing and administrative .................... 30,319 4,478 (17) 34,780
Amortization of goodwill and other intangibles ......... 648 -- -- 648
Restructuring costs .................................... (45) 604 -- 559
Unusual items .......................................... 1,851 -- -- 1,851
--------- -------- ------- ---------
Total Operating Expenses .............................. 60,491 6,448 (17) 66,922
--------- -------- ------- ---------
Income (Loss) from Operations ......................... (7,577) (2,188) 17 (9,748)
Interest income (expense) .............................. 540 368 (17) 891
Intercompany charges, net .............................. (2,451) 2,451 -- --
Equity investment income (loss) ........................ 354 -- (354) --
--------- -------- ------- ---------
Other Income (Expense), net ........................... (1,557) 2,819 (371) 891
--------- -------- ------- ---------
Income (loss) before income taxes ...................... (9,134) 631 (354) (8,857)
Benefit (provision) for income taxes ................... 4,182 (277) -- 3,905
--------- -------- ------- ---------
Net Income (Loss) ..................................... $ (4,952) $ 354 $ (354) $ (4,952)
========= ======== ======= =========
F-323
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 2000 TO NOVEMBER 22, 2000
(IN THOUSANDS)
(UNAUDITED)
TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ELIMINATIONS CRYSTAL DECISIONS
------------ ---------------- -------------- -------------------
Net cash provided by (used in) operating
activities ..................................... $ 2,641 $ 179 $ -- $ 2,820
INVESTING ACTIVITIES
Acquisition of capital assets, net .............. (1,916) 15 -- (1,901)
--------- ------ ------ ---------
Net cash provided by (used in) investing
activities ................................... (1,916) 15 -- (1,901)
FINANCING ACTIVITIES
Issuance of common stock ........................ 949 -- -- 949
Borrowings from Seagate Technology .............. 54,279 -- -- 54,279
Payments to Seagate Technology .................. (54,459) -- -- (54,459)
--------- ------ ------ ---------
Net cash provided by (used in) financing
activities ................................... 769 -- -- 769
Effect of exchange rate changes on cash ......... (79) (315) -- (394)
--------- ------ ------ ---------
Increase (decrease) in cash ..................... 1,415 (121) -- 1,294
Cash at the beginning of the period ............. 844 2,777 -- 3,621
--------- ------ ------ ---------
Cash at the end of the period ................... $ 2,259 $2,656 $ -- $ 4,915
========= ====== ====== =========
F-324
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT
OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
(UNAUDITED)
TOTAL
GUARANTOR NON-GUARANTOR ELIMINATIONS CRYSTAL DECISIONS
--------------- --------------- -------------- ------------------
Revenues ..................................... $ 50,541 $ 7,634 $ -- $ 58,175
Costs of revenues ............................ 20,384 2,127 -- 22,511
Research and development ..................... 12,841 -- -- 12,841
Sales, marketing and administrative .......... 35,274 7,161 -- 42,435
Amortization of goodwill and other
intangibles ................................. 2,002 -- -- 2,002
Restructuring costs .......................... 838 463 -- 1,301
Unusual items ................................ 221,601 20,968 -- 242,569
----------- ---------- -------- -----------
Total operating expenses .................... 292,940 30,719 -- 323,659
----------- ---------- -------- -----------
Income (loss) from operations ............... (242,399) (23,085) -- (265,484)
Interest income (expense) .................... (1,311) 28 -- (1,283)
Intercompany Charges, net .................... (2,692) 2,692 -- --
Equity investment income (loss) .............. (20,542) -- 20,542 --
----------- ---------- -------- -----------
Other income (expense), net ................. (24,545) 2,720 20,542 (1,283)
----------- ---------- -------- -----------
Income (loss) before income taxes ............ (266,944) (20,365) 20,542 (266,767)
Benefit (provision) for income taxes ......... 49,058 (177) 48,881
----------- ---------- -----------
Net income (loss) ........................... $ (217,886) $ (20,542) $ 20,542 $ (217,886)
=========== ========== ======== ===========
F-325
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 29, 2000 AND FOR THE SIX MONTHS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999 IS UNAUDITED) (CONCLUDED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
(UNAUDITED)
TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ELIMINATIONS CRYSTAL DECISIONS
------------ ---------------- -------------- -------------------
Net cash provided by (used in) operating
activities ..................................... $ (18,719) $1,345 $ -- $ (17,374)
INVESTING ACTIVITIES
Acquisition of capital assets, net .............. (1,359) (95) -- (1,454)
--------- ------ ------ ---------
Net cash provided by (used in) investing
activities ................................... (1,359) (95) -- (1,454)
FINANCING ACTIVITIES
Issuance of common stock ........................ 1 -- -- 1
Borrowings from Seagate Technology .............. 94,895 -- -- 94,895
Payments to Seagate Technology .................. (77,075) -- -- (77,075)
--------- ------ ------ ---------
Net cash provided by (used in) financing
activities ................................... 17,821 -- -- 17,821
Effect of exchange rate changes on cash ......... 596 18 -- 614
--------- ------ ------ ---------
Increase (decrease) in cash ..................... (1,661) 1,268 -- (393)
Cash at the beginning of the period ............. 4,895 2,524 -- 7,419
--------- ------ ------ ---------
Cash at the end of the period ................... $ 3,234 $3,792 $ -- $ 7,026
========= ====== ====== =========
F-326
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE
INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, JULY 2,
2000 1999
------------- -------------
ASSETS (SEE NOTE 20)
Current assets:
Cash ......................................................... $ 3,621 $ 7,419
Loan receivable from Seagate Technology (See note 2) ......... 25,681 --
Accounts receivable, net (See note 4) ........................ 16,578 42,727
Income taxes receivable ...................................... 6,071 11,655
Inventories (See note 5) ..................................... 674 981
Prepaid and other current assets ............................. 4,021 2,533
---------- ----------
Total Current Assets ........................................ 56,646 65,315
Capital assets, net (See Note 6) ............................. 9,348 7,293
Goodwill and other intangibles, net (See Note 7) ............. 5,286 7,212
---------- ----------
Total Assets ................................................ $ 71,280 $ 79,820
========== ==========
LIABILITIES
Current liabilities:
Loan payable to Seagate Technology (See Note 2) .............. $ -- $ 16,517
Accounts payable ............................................. 10,190 12,231
Accrued employee compensation ................................ 6,004 19,299
Accrued expenses ............................................. 12,097 10,879
Deferred revenue ............................................. 19,495 17,552
---------- ----------
Total Current Liabilities ................................... 47,786 76,478
Deferred income taxes (See Note 11) .......................... 381 234
Other liabilities ............................................ -- 225
---------- ----------
Total Liabilities ........................................... 48,167 76,937
Commitments and contingencies (Notes 17 and 18)
STOCKHOLDERS' EQUITY
Common stock, -- 150,000,000 shares authorized; shares
issued and outstanding -- 75,002,050 at $0.001 par value
per share as of June 30, 2000; no shares authorized or
issued and outstanding as of July 2, 1999 (See notes 13 and
14) ......................................................... 75 --
Additional paid-in capital (See Notes 13 and 14) ............. 407,893 167,038
Accumulated deficit .......................................... (384,688) (163,526)
Accumulated other comprehensive loss ......................... (167) (629)
---------- ----------
Total Stockholders' Equity .................................. 23,113 2,883
---------- ----------
Total Liabilities and Stockholders' Equity .................. $ 71,280 $ 79,820
========== ==========
See notes to consolidated and combined financial statements.
F-327
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE
INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED
-------------------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
--------------- -------------- --------------
Revenues:
Licensing ................................................ $ 74,182 $ 92,013 $ 81,246
Maintenance, support and services ........................ 52,336 49,744 34,706
Total Revenues .......................................... 126,518 141,757 115,952
Cost of revenues:
Licensing ................................................ 4,096 4,243 3,249
Maintenance, support and services ........................ 39,681 35,213 26,379
Amortization of developed technologies ................... 198 4,545 6,128
Write-off of developed technologies (See Note 7) ......... -- 4,700 --
----------- ----------- -----------
Total Cost of Revenues .................................. 43,975 48,701 35,756
----------- ----------- -----------
Gross profit ............................................. 82,543 93,056 80,196
Operating expenses:
Sales and marketing (See Notes 8 and 9) .................. 66,076 65,473 50,725
Research and development ................................. 24,874 21,224 16,237
General and administrative (See Note 9) .................. 20,922 13,830 15,062
Amortization of goodwill and other intangibles ........... 3,038 4,772 3,165
Unusual items (See Note 9) ............................... 242,569 86,714 --
Restructuring costs (See Note 10) ........................ 1,301 -- --
----------- ----------- -----------
Total Operating Expenses ................................ 358,780 192,013 85,189
----------- ----------- -----------
Loss from Operations .................................... (276,237) (98,957) (4,993)
Interest income (See Note 2) ............................. 982 145 297
Interest expense (See Note 2) ............................ (1,481) (128) (253)
Net foreign currency exchange gain (loss) ................ 519 39 490
----------- ----------- -----------
Interest and Other, net ................................. 20 56 534
----------- ----------- -----------
Loss before income taxes ................................. (276,217) (98,901) (4,459)
Benefit from (provision for) income taxes (See Note 11) 55,055 2,526 (8,800)
----------- ----------- -----------
Net Loss ................................................ $ (221,162) $ (96,375) $ (13,259)
=========== =========== ===========
Net loss per share:
Basic and diluted (See Note 12) .......................... $ (2.95) $ (1.28) $ (0.18)
=========== =========== ===========
Number of shares used in basic and diluted net loss
per share ............................................... 75,001,391 75,001,000 75,001,000
See notes to consolidated and combined financial statements.
F-328
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE
INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
------------------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
-------------- -------------- --------------
OPERATING ACTIVITIES
Net loss .............................................. $ (221,162) $ (96,375) $ (13,259)
Adjustments to reconcile net loss to net cash from
operating activities: ................................
Depreciation and amortization (See Note 6) ........... 7,538 12,775 12,087
Bad debt expense (recovery) .......................... 2,288 1,049 807
Deferred income taxes (See Note 11) .................. 147 234 --
Stock based compensation expense on Seagate
Technology exchange of shares (See Note 9) ......... 239,574 77,519 --
Write-off of developed technologies (See Note 7) ..... -- 4,700 --
Write-off of in process research and development
(See Note 9) ....................................... 25 109 --
---------- ---------- ----------
28,410 11 (365)
---------- ---------- ----------
Changes in operating assets and liabilities:
Accounts receivable .................................. 24,236 (14,278) (16,054)
Income taxes receivable .............................. 5,599 (15,593) 1,526
Income taxes receivable from Seagate Technology
(See Note 11) ...................................... (66,245) 4,954 (2,765)
Inventories .......................................... 307 (575) (107)
Prepaid and other current assets ..................... (1,585) (154) (184)
Accounts payable ..................................... (2,133) 4,696 3,433
Accrued employee compensation ........................ (13,295) 13,132 3,921
Accrued expenses ..................................... 1,297 2,077 2,039
Deferred revenue ..................................... 1,985 4,596 6,093
Other liabilities .................................... (225) 225 --
---------- ---------- ----------
Net cash provided by (used in) operating
activities ........................................ (21,649) (909) (2,463)
---------- ---------- ----------
INVESTING ACTIVITIES
Acquisition of capital assets, net .................... (6,356) (4,856) (4,765)
Acquisition of intangible assets ...................... -- -- (1,950)
---------- ---------- ----------
Net cash (used in) investing activities .............. (6,356) (4,856) (6,715)
---------- ---------- ----------
FINANCING ACTIVITIES
Issuance of common stock and common stock
eligible for repurchase (See Note 14) ................ 5 -- --
Borrowings from Seagate Technology .................... 176,714 131,194 108,469
Payment to Seagate Technology ......................... (152,667) (128,233) (100,243)
---------- ---------- ----------
Net cash provided by financing activities ............ 24,052 2,961 8,226
Effect of exchange rate changes on cash ............... 155 -- 11
---------- ---------- ----------
Increase (decrease) in cash .......................... (3,798) (2,804) (941)
Cash at the beginning of the year ..................... 7,419 10,223 11,164
---------- ---------- ----------
Cash at the end of the year ........................... $ 3,621 $ 7,419 $ 10,223
========== ========== ==========
See notes to consolidated and combined financial statements.
F-329
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE
INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, JULY 2, 1999 AND JULY 3, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------------ PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT TOTAL
------------- -------- ----------- --------------- -------------- -------------
Balance at June 27,
1997 ............................ -- $ $ 84,046 $ 157 $ (53,892) $ 30,311
--
Components of
comprehensive loss
Foreign currency
translation .................... (414) (414)
Net loss ........................ (13,259) (13,259)
----------
Comprehensive loss .............. (13,673)
Income tax benefit from
Seagate Technology
stock option exercises
(See note 11) .................. 3 3
-------- ----------
Balance at July 3, 1998 .......... -- -- 84,049 (257) (67,151) 16,641
Components of
comprehensive loss
Foreign currency
translation .................... (372) (372)
Net loss ........................ (96,375) (96,375)
----------
Comprehensive loss .............. (96,747)
Equity contribution by
Seagate Technology related
to the acquisition of the
minority interest of Seagate
Software Holdings, Inc .......... 5,448 5,448
Compensation expense for
Seagate Technology stock
exchange offer .................. 77,519 77,519
Income tax benefit from
Seagate Technology stock
option exercises (See
note 11) ........................ 22 22
-------- ----------
Balance at July 2, 1999 .......... -- -- 167,038 (629) (163,526) 2,883
Components of
comprehensive loss
Foreign currency
translation .................... 462 462
Net loss ........................ (221,162) (221,162)
----------
Comprehensive loss .............. (220,700)
Incorporation of Crystal
Decisions ....................... 1,000 1 1
Contribution of IMG business
to Crystal Decisions ............ 75,000,000 75 (75)
Issuance of common stock
upon exercise of employee
stock options ................... 1,050 4 4
Equity contribution by
Seagate Technology related
to the acquisition of the
minority interest of Seagate
Software Holdings, Inc .......... 1,242 1,242
Compensation expense for
Seagate Technology
exchange of shares .............. 239,574 239,574
Income tax benefit from
Seagate Technology stock
option exercises (See
note 11) ........................ 109 109
-------- ----------
Balance at June 30, 2000 ......... 75,002,050 $75 $407,893 $ (167) $ (384,688) $ 23,113
========== ====== ======== ====== ========== ==========
See notes to consolidated and combined financial statements
F-330
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Crystal Decisions, Inc. ("Crystal Decisions" or "the Company") develops
and markets software products and provides related services enabling business
users and information technology professionals to manage enterprise
information. Crystal Decisions operates in a single industry segment and its
products, commonly referred to as business intelligence software, permit the
analysis and interpretation of data in order to make business decisions.
Crystal Decisions has over 25 offices and operations in 14 countries worldwide,
including significant operations and certain administrative functions in
Vancouver, Canada. Crystal Decisions' primary market is North America where
Crystal Decisions products are sold through a direct sales force and certain
indirect sales channels, such as distributors and original equipment
manufacturer ("OEM") relationships. Outside North America, Crystal Decisions
products are sold through a direct sales force, distributors and OEMs.
Crystal Decisions was incorporated in Delaware in August 1999. Crystal
Decisions is a majority-owned subsidiary of Seagate Software (Cayman) Holdings,
Inc., a Cayman Islands limited corporation ("Suez Software"), which is a wholly
owned subsidiary of New SAC, a Cayman Islands limited corporation ("New SAC"),
whose predecessor was Seagate Technology, Inc. ("Seagate Technology"). On
November 22, 2000, through Suez Software, Crystal Decisions became a majority
owned subsidiary of Suez Software. Prior to November 22, 2000, the Company was
a majority owned subsidiary of Seagate Software Holdings, Inc. ("Seagate
Software Holdings", formerly known as Seagate Software, Inc.), a Delaware
corporation and wholly owned subsidiary of Seagate Technology. Seagate
Technology was a data technology company that provided products for storing,
managing and accessing digital information on computer systems. The outstanding
minority interests in our capital stock amounted to approximately 10.5% on a
fully diluted basis as of June 30, 2000. The minority interests consisted of
the Company's common stock and options to purchase Crystal Decisions common
stock issued pursuant to the 1999 and 2000 Stock Option Plans (see Note 19,
Sale of Seagate Technology).
In March 2001, the Company changed its name from Seagate Software
Information Management Group Holdings, Inc. to Crystal Decisions, Inc.
BASIS OF PRESENTATION
Seagate Software Holdings commenced operations in May 1994 pursuant to
Seagate Technology's acquisition of Crystal Computer Services, Inc., a company
engaged in developing and marketing report writing software. This acquisition
was accounted for as a pooling of interests.
Prior to May 28, 1999, Seagate Software Holdings comprised two business
units, the Information Management Group ("IMG") business and the Network
Storage Management Group ("NSMG") business. The NSMG business developed and
marketed software products and provided related services enabling information
technology professionals to manage distributed network resources and to secure
and protect enterprise data. On May 28, 1999, Seagate Software Holdings
contributed its NSMG business to VERITAS Software Corporation ("VERITAS") in
exchange for VERITAS common stock.
On October 20, 1999, the stockholders of Seagate Software Holdings
approved the merger of Seagate Daylight Merger Corp., a wholly owned subsidiary
of Seagate Technology, with and into Seagate Software Holdings. Seagate
Software Holdings' assets consisted of the assets of the IMG business and its
investment in the common stock of VERITAS. Upon the closing of the merger,
Seagate Software Holdings became a wholly owned subsidiary of Seagate
Technology.
F-331
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
On November 16, 1999 Seagate Software Holdings contributed the IMG
business to Crystal Decisions, including the operating assets, liabilities and
interests in subsidiaries, as a contribution of capital. As consideration for
the IMG business, Crystal Decisions issued 75,000,000 shares of its common
stock to Seagate Software Holdings. Seagate Software Holdings retained the
shares of VERITAS common stock and other non-operating assets.
The accompanying consolidated and combined financial statements present
the consolidated financial position of Crystal Decisions and its consolidated
subsidiaries as of June 30, 2000. These financial statements have been prepared
using the historical basis of accounting and are presented as if Crystal
Decisions had existed as an entity separate from Seagate Software Holdings
during each of the periods presented. The financial statements include the
historical assets, liabilities, revenues and expenses that are directly related
to Crystal Decisions' operations. For all periods prior to November 16, 1999,
the consolidated and combined financial statements present the combined
historical financial position, results of operations, equity and cash flows of
the ongoing IMG business of Seagate Software Holdings and are not necessarily
indicative of what the financial position, results of operations, equity or
cash flows would have been had Crystal Decisions been an independent legal
entity during the periods presented.
For certain assets and liabilities of Seagate Software Holdings that were
not specifically identifiable with the IMG business, estimates were used to
allocate assets and liabilities to Crystal Decisions by applying methodologies
management believed to be appropriate.
The statements of operations include all revenues and costs attributable
to Crystal Decisions, including allocations of certain corporate
administration, finance and management costs. Such costs were proportionately
allocated to the IMG business based on detailed inquiries and estimates of time
incurred by Seagate Software Holdings corporate marketing and general and
administrative departmental managers. In addition, certain of Seagate Software
Holdings operations were previously shared locations involving activities that
pertained to the IMG business as well as to the NSMG business of Seagate
Software Holdings. Costs incurred in shared locations were allocated based on
specific identification, or where specific identification was not possible,
costs were proportionately allocated between the IMG business and the NSMG
business based on either headcount, square footage or a percentage of revenues
as management believed was reasonable. Such costs consisted primarily of
administration and marketing and sales costs related to shared finance and
marketing functions.
Crystal Decisions operated on a stand-alone basis for fiscal 2000.
Management estimates that additional costs in the form of professional fees and
public reporting costs of $378,000 (unaudited) and $744,000 (unaudited)
respectively, would have been incurred in fiscal 1999 and fiscal 1998 had we
been reporting as a stand-alone entity from Seagate Software Holdings.
Crystal Decisions operates and reports financial results on a fiscal year
of 52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal
2000 ended on June 30, 2000, fiscal 1999 ended on July 2, 1999 and fiscal 1998
ended on July 3, 1998. Fiscal 2000 and 1999 were comprised of 52 weeks and
fiscal 1998 was comprised of 53 weeks. Fiscal 2001 will be a 52-week year and
will end on June 29, 2001.
2. ECONOMIC DEPENDENCE ON SEAGATE TECHNOLOGY
On July 4, 2000, Crystal Decisions, Seagate Software Holdings and Seagate
Technology LLC, then a wholly owned subsidiary of Seagate Technology, the
predecessor to New SAC, renewed the Revolving Loan Agreement dated June 28,
1996. Under the Revolving Loan Agreement, Seagate Technology finances certain
of Crystal Decisions' working capital needs and operating activities. The
Revolving Loan Agreement provides for maximum outstanding borrowings of up to
$60.0 million and
F-332
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
expires on July 4, 2001. The Revolving Loan Agreement continues in effect
subsequent to the closing of the New SAC Transaction on November 22, 2000 (see
note 19). The loan is payable or receivable upon termination of the agreement.
As of June 30, 2000, the Revolving Loan balance was a net receivable from
Seagate Technology and its affiliates of $25.7 million. The net receivable
arose largely as a result of offsetting amounts due from Seagate Technology
under a Tax Allocation Agreement for income tax loss benefits utilized by
Seagate Technology relative to Crystal Decisions' tax loss position (see Note
11). The loan balance is presented on the balance sheet as a net receivable or
net payable in accordance with the terms of the loan agreement. As of July 2,
1999, borrowings from Seagate Technology and its affiliates were $16.5 million.
Beginning fiscal 2001, Crystal Decisions earned interest income on a
monthly basis on net receivable balances outstanding at a rate calculated to be
Seagate Technology's in-house portfolio yield and were charged interest expense
on a monthly basis on net amounts payable at LIBOR plus 2%.
During fiscal 2000 and fiscal 1999, interest was charged on a monthly
basis at the LIBOR plus 2% per annum (7.85% for fiscal 2000) on balances
outstanding. Prior to fiscal 1999, Crystal Decisions paid interest at 6%.
Interest income and expense as presented in the statement of operations
primarily relates to interest on the revolving loan.
Crystal Decisions may require additional financing through the end of
fiscal 2002. Crystal Decisions is in the process of negotiating additional
financing with Seagate Technology LLC through the end of fiscal 2002. Should
additional financing not be available from Seagate Technology LLC at terms that
are satisfactory to Crystal Decisions and Seagate Technology LLC, Crystal
Decisions may seek additional equity and financing from other sources, subject
to concurrence by the lenders which financed the SAC Transaction, as well as
Crystal Decision's parent company. As a result of the SAC Transaction, Crystal
Decisions guaranteed the debt used to finance the SAC Transaction and pledge a
majority of its assets. As a result of restrictive covenants under the debt
agreement, the ability of Crystal Decisions to raise additional debt or equity
from other sources may be limited. (Refer to note 20 for further discussion.)
3. SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates -- The preparation of financial statements, in
conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ materially from those estimates.
Foreign Currency Translation -- The functional currency for most of
Crystal Decisions' foreign operations is the local currency. In such cases,
assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting from
this process are charged or credited to other comprehensive income. Revenues
and expenses are translated at average rates of exchange prevailing during the
year. Gains and losses on foreign currency transactions are included in other
expenses. For those foreign operations whose functional currency is the U.S.
dollar, financial results are translated using a combination of current and
historical exchange rates and any translation adjustments are included in net
earnings, along with all transaction gains and losses for the period.
Revenue Recognition -- Licensing revenues are derived from sales of
software licenses. Maintenance, support and services revenues consist of
technical support, training, consulting and maintenance.
F-333
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Crystal Decisions recognizes revenues in accordance with Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4
"Deferral of the Effective Date of a Provision of SOP 97-2" and by SOP 98-9"
Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions." These amendments deferred and then clarified, respectively, the
specification of what was considered vendor specific objective evidence of fair
value for the various elements in a multiple element arrangement. Crystal
Decisions adopted the provisions of SOP 97-2 and SOP 98-4 as of the beginning
of fiscal year 1999 and adopted SOP 98-9 as of the beginning of fiscal year
2000.
SOP 97-2 requires that the total arrangement fee from software
arrangements that include rights to multiple software products, post contract
customer support and/or other services be allocated to each element of the
arrangement based on their relative fair values. Under SOP 97-2, the
determination of fair value is based on vendor specific objective evidence
("VSOE"). Fair value is established for each element based on its individual
sales prices consistent with Crystal Decisions' pricing strategy. The pricing
strategy is established by the pricing group, consisting of representatives
from our marketing, sales, finance and product development departments.
Typically, Crystal Decisions can establish VSOE for all elements of its
multi-element arrangements, and accordingly, revenues are allocated to the
individual elements on the basis of VSOE. Although not typical, some OEM
arrangements contain end-user maintenance elements for which VSOE has not been
established, as sufficient evidence of consistent pricing and renewal rates has
not been present. In such arrangements, Crystal Decisions has recognized the
arrangement fee ratably over the maintenance period in accordance with the
provisions set forth in SOP 97-2.
Crystal Decisions generally recognizes licensing revenues, whether sold
direct or through resellers, upon product delivery, provided persuasive
evidence of an arrangement exists, fees are fixed or determinable and the
resulting receivable is deemed collectible by management. In instances where
payments are subject to extended payment terms, revenues are not recognized
until the date payments become due. When an acceptance period is specified in
an arrangement, revenues are recognized upon the earlier of customer acceptance
or the expiration of the acceptance period.
Crystal Decisions' policy is not to recognize revenues on sales to
distributors or resellers, if resale contingencies exist. Some of the factors
that are considered to determine the existence of such contingencies include
payment terms, collectibility and history with the distributor or reseller.
Revenues are recognized when such contingencies are resolved and the criteria
for revenue recognition in SOP 97-2 are met.
Crystal Decisions recognizes revenues for sales to distributors and
resellers with rights of return when the criteria for recognizing revenues, as
outlined in SFAS 48, are met. However, we make estimates of future returns and
reduce the revenues and related receivables accordingly by the amount of such
estimates.
Where rights of return exist and the criteria of SFAS 48 are not met,
revenues are not recognized until such time that all of the criteria are met.
We consider factors including historical experience, nature of the product,
fixed or determinable fees, arms length contract terms, the level of inventory
in the distribution channels and the ability to reasonably estimate returns.
Revenues from technical support and maintenance are recognized ratably
over the term of the arrangement, generally one year. Revenues from training
and consulting are recognized as the services are performed.
Deferred revenue represents amounts from customers under certain license,
maintenance and service arrangements for which the revenue earnings process has
not been completed. These amounts relate primarily to provision of technical
support and maintenance, arrangements with future deliverables and arrangements
where specified customer acceptance has not occurred.
F-334
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Where software arrangements require Crystal Decisions to provide
consulting services for significant production, modification, or customization
of software, or where these services are essential to the functionality of the
software, Crystal Decisions recognizes revenues in accordance with the
provisions of SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts". In these arrangements, both the licensing
revenues and consulting services revenues are recognized on the percentage of
completion method based on cost inputs.
Cash Management -- Seagate Technology uses a centralized cash management
function for all of its domestic operations, including certain domestic
operations of Crystal Decisions. A substantial majority of Crystal Decisions'
cash is from balances maintained by its foreign subsidiaries.
Cash and Cash Equivalents -- Crystal Decisions considers all highly liquid
investments with an original maturity of 90 days or less at the time of
purchase to be cash equivalents. Crystal Decisions typically uses available
cash in excess of amounts required for operating activities to pay amounts due
under the Revolving Loan Agreement. Accordingly, historically Crystal Decisions
has not had significant cash equivalents.
Fair Value Disclosures -- Crystal Decisions maintains its cash held by its
foreign subsidiaries principally with major banks in interest and
non-interest-bearing bank accounts. There are no realized or unrealized gains
or losses and fair value approximates carrying value for all cash balances as
of the periods presented herein. The fair values of accounts receivable
balances approximate carrying values.
Concentration of Credit and Foreign Currency Risk -- Financial instruments
that potentially subject Crystal Decisions to significant concentrations of
credit risk consist primarily of cash and accounts receivable. Crystal
Decisions places its cash in high credit quality financial institutions.
Year-end cash balances represent both US Dollar and foreign currency deposits,
primarily denominated in Canadian Dollar, British Pounds Sterling, Japanese Yen
and currencies tied to the Euro. Accounts receivable are derived from revenues
earned from customers primarily located in North America and Europe. Crystal
Decisions performs ongoing credit evaluations of its customers and generally
does not require collateral. Crystal Decisions maintains reserves for potential
credit losses.
Overall, Crystal Decisions' customer base is diverse however, a
third-party customer, Ingram Micro, Inc. ("Ingram") represented 20%, 13% and
14% of Crystal Decisions' total revenues in fiscal 2000, fiscal 1999 and fiscal
1998, respectively. As a percentage of receivables, amounts outstanding from
Ingram Micro represent 22% and 18% of the total receivable balance in fiscal
2000 and fiscal 1999, respectively. Crystal Decisions' agreements with Ingram
may be terminated upon the expiration of a required notice period.
Inventories -- Inventories are stated at the lower of cost (first in,
first out method) or market and consist primarily of materials used in software
products, related supplies and packaging materials.
Capital Assets. Property and equipment, including leasehold improvements,
are stated at cost. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets up to ten years. Leasehold
improvements are depreciated using the straight-line method over the shorter of
the estimated useful lives of the leasehold improvement or the remaining
leasehold life.
Goodwill and Other Intangibles -- Goodwill represents the excess of the
purchase price of acquired companies over estimated fair values of tangible and
intangible net assets acquired. Goodwill is amortized on a straight-line basis
over four years. Under SFAS No. 121, the carrying values of long-term assets
and intangibles other than developed technology (included in other intangibles)
are reviewed if facts and circumstances suggest that they may be impaired. If
this review
F-335
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
indicates that carrying values of long-term assets and other intangibles and
associated goodwill will not be recoverable based on projected undiscounted
future cash flows, carrying values are reduced to estimated fair values by
first reducing goodwill and second by reducing long-term assets and other
intangibles.
Other intangible assets consist of trademarks, assembled work forces,
distribution networks and developed technology and customer bases. Amortization
of purchased intangibles is provided on the straight-line basis over the
respective useful lives of the assets ranging from 36 to 60 months. In-process
research and development without alternative future use is expensed when
acquired.
In addition, Crystal Decisions assesses the impairment of goodwill not
included in the scope of SFAS 121 under Accounting Principles Board Opinion No.
17 ("APB 17"), "Intangible Assets". Write-offs and write-downs to net
realizable value of goodwill not included in the scope of SFAS 121 are
typically made only when Crystal Decisions has effectively abandoned and
stopped selling virtually all of the products acquired in an acquisition.
Developed Technology -- Crystal Decisions 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
for Crystal Decisions 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.
Comprehensive Income (Loss) -- Accumulated other comprehensive income
(loss) comprises foreign currency translation gains and losses. Crystal
Decisions has reported the components of comprehensive loss on its consolidated
and combined statements of stockholders' equity.
Stock-Based Compensation -- Crystal Decisions accounts for employee
stock-based compensation under Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees" and related interpretations.
Pro forma net income and net income per share are disclosures required by
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" and are included in the Stock Based Benefits
Plans -- Pro Forma Information note to the consolidated and combined financial
statements.
Income Taxes -- The liability method is used in accounting for income
taxes. Under this method deferred tax assets and liabilities are determined
based on differences between financial reporting and income tax bases of assets
and liabilities and are measured using the enacted tax rates and laws.
F-336
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable are summarized below:
JUNE 30, JULY 2,
2000 1999
---------- ----------
(IN THOUSANDS)
Accounts receivable .................. $ 19,272 $ 45,574
Less allowance for bad debts ......... (1,679) (1,635)
Less allowance for returns ........... (1,015) (1,212)
-------- --------
$ 16,578 $ 42,727
======== ========
Return reserves are summarized below:
BALANCE AT ADDITIONS REDUCTIONS BALANCE
BEGINNING OF CHARGED TO FROM RETURN AT
DESCRIPTION PERIOD PERIOD RESERVES END OF PERIOD
- ------------------------- -------------- ------------ ------------- --------------
(IN THOUSANDS)
Return Reserves:
Fiscal Year Ended
June 30, 2000: ......... $1,212 $1,130 $1,327 $1,015
------ ------ ------ ------
Fiscal Year Ended
July 2, 1999: .......... $ 647 $2,067 $1,502 $1,212
------ ------ ------ ------
Fiscal Year Ended
July 3, 1998: .......... $ 208 $2,250 $1,811 $ 647
====== ====== ====== ======
Allowance for bad debts are summarized below:
BALANCE AT ADDITIONS REDUCTIONS BALANCE
BEGINNING OF CHARGED TO FROM RETURN AT
DESCRIPTION PERIOD PERIOD RESERVES END OF PERIOD
- ------------------------- -------------- ------------ ------------- --------------
(IN THOUSANDS)
Allowance for Bad
Debts:
Fiscal Year Ended
June 30, 2000: ......... $1,635 $3,191 $3,147 $1,679
------ ------ ------ ------
Fiscal Year Ended
July 2, 1999: .......... $ 926 $1,049 $ 340 $1,635
------ ------ ------ ------
Fiscal Year Ended
July 3, 1998: .......... $ 317 $ 807 $ 198 $ 926
====== ====== ====== ======
5. INVENTORIES
During fiscal 2000, product support materials in the amount of $350,000
were written off as obsolete. There were no other revaluations of inventory to
the lower of cost or market during fiscal 2000, fiscal 1999, or fiscal 1998.
F-337
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL ASSETS
Capital assets consisted of the following:
ESTIMATED JUNE 30, JULY 2,
USEFUL LIFE 2000 1999
--------------- ------------ ----------
(IN THOUSANDS)
Equipment ............................. 2 to 5 years $ 19,686 $ 14,219
Leasehold improvements ................ Life of lease 3,359 2,665
--------- --------
23,045 16,884
Less accumulated depreciation ......... (13,697) (9,591)
--------- --------
$ 9,348 $ 7,293
========= ========
Depreciation expense was $4.3 million, $3.4 million and $2.6 million in
fiscal 2000, fiscal 1999 and fiscal 1998, respectively.
7. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consisted of the following, in thousands:
JUNE 30, JULY 2,
2000 1999
------------ ------------
(IN THOUSANDS)
Goodwill ....................................... $ 5,771 $ 4,700
Other intangibles:
Developed technologies ......................... 18,492 18,336
Trademark ...................................... 2,284 2,237
Assembled work force ........................... 4,025 4,025
Customer base .................................. 6,506 6,469
--------- ---------
Total other intangibles ....................... 31,307 31,067
--------- ---------
37,078 35,767
Accumulated amortization and write-off ......... (31,792) (28,555)
--------- ---------
Goodwill and other intangibles ................. $ 5,286 $ 7,212
========= =========
Amortization of developed technologies is included in costs of revenues.
Cost of revenues includes write-offs to net realizable value of $4.7 million in
fiscal 1999 due to Crystal Decisions' decision not to use previously acquired
technology in future periods and to reflect the impairment of certain developed
technologies. Crystal Decisions periodically reviews the net realizable value
of developed technologies under the guidance of SFAS 86. Crystal Decisions
compares the estimated undiscounted future cash flows on a product-by-product
basis to the unamortized cost of developed technologies and unamortized costs
in excess of the estimated undiscounted cash flows are written off.
Crystal Decisions also reviews the carrying value of its intangibles to
ascertain if there has been any impairment. Amortization of goodwill and other
intangibles includes a write-off of $1.5 million in fiscal 1999 due to asset
values that have become impaired.
Crystal Decisions has capitalized the assembled work force in most of its
acquisitions and amortizes this asset over an expected useful life of 48
months. As more fully described in Note 3, Crystal Decisions reviews the
carrying value of its long-term assets and intangibles other than developed
technology using the guidance of SFAS 121. To date, there have been no
write-offs or write-downs for impairment of acquired assembled work force
recorded in the financial statements.
F-338
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. ADVERTISING EXPENSE
Advertising expense included in sales and marketing expense, totaled $10.9
million, $10.7 million and $6.8 million in fiscal 2000, fiscal 1999 and fiscal
1998, respectively. The cost of advertising is expensed as incurred. Crystal
Decisions does not incur any direct response advertising costs.
9. RELATED PARTY TRANSACTIONS
Seagate Technology has provided substantial services to Crystal Decisions
under a General Services Agreement dated June 28, 1997. The services generally
include general management, treasury, tax, financial reporting, benefits
administration, insurance, information technology, legal, accounts payable and
receivable and credit functions, among others. Seagate Technology charges
Crystal Decisions for these services through corporate expense allocations. The
amount of corporate expense allocations depends upon the total amount of
allocable costs incurred by Seagate Technology on behalf of Crystal Decisions
less amounts charged as a specific cost or expense rather than by allocation.
Such costs have been proportionately allocated to Crystal Decisions based on
detailed inquiries and estimates of time incurred by Seagate Technology's
corporate marketing and general and administrative departmental managers.
Management believes that the allocation method applied to the costs provided
under the General Services Agreement is reasonable. Allocations charged to
Crystal Decisions' general and administrative expenses were $657,749, $279,848
and $273,870 in fiscal 2000, fiscal 1999 and fiscal 1998, respectively.
Allocations charged to Crystal Decisions' sales and marketing expenses were
corporate allocation charges of zero, $288,000 and $307,792 in fiscal 2000,
fiscal 1999 and fiscal 1998, respectively. Management estimates that additional
costs for the services covered under this agreement would have been $688,000
for fiscal 2000 (unaudited), $755,000 for fiscal 1999 (unaudited) and $719,000
for fiscal 1998 (unaudited), had we operated on a stand-alone basis from
Seagate Technology.
The employees of Crystal Decisions also participate in the Seagate
Technology Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase
Plan permits eligible employees who have completed thirty days of employment
prior to the inception of the offering period to purchase common stock of
Seagate through payroll deductions at the lower of 85% of the fair market value
of the common stock at the beginning or at the end of each six-month offering
period. Under the Purchase Plan, Crystal Decisions employees purchased 57,245,
35,113 and 39,361 shares of Seagate common stock in fiscal 2000, fiscal 1999
and fiscal 1998, respectively.
The U.S. employees of Crystal Decisions also participate in the Seagate
Technology tax-deferred savings plan, the Seagate Technology, Inc. Savings and
Investment Plan ("the 401(k) plan"). The 401(k) plan is designed to provide
qualified employees with an accumulation of funds at retirement. Qualified
employees may elect to contribute to the 401(k) plan on a monthly basis.
Crystal Decisions may make annual contributions to the 401(k) plan at the
discretion of the Board of Directors. Crystal Decisions made no material
contributions in fiscal 2000, fiscal 1999 or fiscal 1998.
THE JUNE 1999 SEAGATE TECHNOLOGY EXCHANGE OFFER
On May 28, 1999, Seagate Software Holdings contributed its NSMG business
and related assets and liabilities to VERITAS in exchange for shares of VERITAS
common stock. In a separate but related transaction on June 9, 1999, Seagate
exchanged 5,275,772 shares of Seagate Technology common stock for 3,267,255
shares of Seagate Software Holdings common stock owned by employees, directors
and consultants of Seagate Software Holdings and its parent and subsidiaries.
The exchange ratio was determined based on the estimated value of Seagate
Software Holdings common stock divided by the fair market value of Seagate
common stock.
F-339
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
The estimated value of Seagate Software Holdings common stock exchanged
into Seagate common stock was determined based upon the sum of the fair value
of the NSMG business, as measured by the fair value of the shares received from
VERITAS, plus the estimated fair value of the IMG business of Seagate Software
Holdings as determined by the Seagate Software Holding's Board of Directors,
plus the assumed proceeds from the exercise of all outstanding Seagate Software
Holdings stock options, divided by the number of fully converted shares of
Crystal Decisions. The Board of Directors of Seagate Software Holdings
considered a number of factors in determining the estimated fair value of the
IMG business, including historical and projected revenues,
earnings and cash flows, as well as other factors and consultations with
financial advisors.
Seagate Software Holdings recorded the acquisition of its common stock by
Seagate Technology as an acquisition of the minority interest by Seagate
Technology. Seagate Software Holdings accounted for the exchange of shares of
its common stock outstanding and vested more than six months as the purchase of
a minority interest and, accordingly, the fair value of the shares exchanged of
$51.8 million was allocated to all the identifiable tangible and intangible
assets and liabilities of Seagate Software Holdings. For those shares
outstanding and vested less than six months, the fair value of the
sharespurchased less the original purchase price paid by the employees was
recorded as compensation expense as this constitutes an early settlement of an
award of stock or grant of an option. Compensation expense associated with the
issuance of Seagate shares amounted to approximately $102.5 million, plus
$630,000 of employer portion of payroll taxes.
Related to the June 1999 Seagate Technology Exchange Offer, Seagate
Software Holdings recorded additional compensation expense of $8.6 million for
the issuance of notes payable for the purchase of unvested stock options held
by certain continuing employees. This amount was not considered a capital
contribution from Seagate Technology because the notes payable were issued by
Crystal Decisions, Inc. In addition, Seagate Software Holdings recorded
compensation expense amounting to $12.7 million for accelerated vesting on
certain stock options for its former Chief Executive Officer and several other
employees, each of whom became employees of VERITAS.
The consolidated and combined statement of operations for fiscal 1999
included an allocation of compensation expense arising from the June 1999
Seagate Technology Exchange Offer attributable to Crystal Decisions.
Compensation expense was allocated to Crystal Decisions on the basis of
employees specifically identified with the IMG business who participated in the
exchange and for those employees of Seagate Software Holdings and Seagate
Technology who performed services for the IMG business on the basis of time
estimates. Accordingly, Crystal Decisions recorded $77.5 million of
compensation expense out of the total compensation expense of $102.5 million
related to the June 1999 Seagate Technology Exchange Offer as a capital
contribution from Seagate. In addition, both the $630,000 and an offsetting
entry of $77.5 million was recorded relating to the employer portion of payroll
taxes and the $8.6 million aforementioned compensation expense for the purchase
of unvested stock options relate to certain continuing employees of Crystal
Decisions, and therefore both amounts have been reflected as expenses for
fiscal 1999. None of the aforementioned $12.7 million of compensation expense
that arose from the accelerated vesting on certain stock options for employees
who became employees of VERITAS was allocated to Crystal Decisions because the
compensation expense was not attributable to employees of Crystal Decisions.
The following table summarizes the components of the unusual items expense
for fiscal 1999 reported by Seagate, that are attributable to the employees of
Crystal Decisions:
F-340
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
AS REPORTED BY ALLOCATED TO
SEAGATE TECHNOLOGY CRYSTAL DECISIONS
-------------------- ------------------
(IN THOUSANDS)
Compensation expense related to the issuance of Seagate
Technology common stock ........................................... $102,549 $77,519
Compensation expense for accelerating vesting on stock options
held by certain employees who became employees of VERITAS 12,719 --
Compensation expense for the purchase of unvested stock options
held by certain continuing employees of Crystal Decisions ......... 8,565 8,565
Employer portion of payroll taxes .................................. 630 630
-------- -------
Total unusual items ............................................... $124,463 $86,714
======== =======
The consolidated and combined financial statements of Crystal Decisions at
July 2, 1999 also include an allocation of $5.4 million of the $51.8 million
purchase price allocation described above. The allocation to Crystal Decisions
was based on the fair value of the IMG business relative to Seagate Software
Holdings. A number of factors were considered in determining the estimated fair
value of the IMG business, including historical and projected revenues,
earnings and cash flows, as well as other factors and consultations with
financial advisors.
The allocation of the purchase price to the intangible assets of Crystal
Decisions as at June 9, 1999 was as follows:
Developed technologies ...................... $ 686,000
Trademark ................................... 158,000
Assembled work force ........................ 207,000
In-process research and development ......... 109,000
Goodwill .................................... 4,700,000
Deferred tax liability ...................... (412,000)
----------
Total purchase price allocated ........... $5,448,000
==========
THE OCTOBER 1999 SEAGATE TECHNOLOGY EXCHANGE OF SHARES
On October 20, 1999, the stockholders of Seagate Software Holdings
approved the merger of Seagate Daylight Merger Corp., a wholly owned subsidiary
of Seagate Technology, predecessor of New SAC, with and into Seagate Software
Holdings. The merger was effected on October 20, 1999. Seagate Software
Holding's assets consisted of the assets of the IMG business and its investment
in the common stock of VERITAS. Upon the closing of the merger, Seagate
Software Holdings became a wholly owned subsidiary of Seagate Technology. All
outstanding options to purchase Seagate Software Holdings common stock were
accelerated immediately prior to the merger. In connection with the merger,
Seagate Software Holdings minority stockholders and optionees received payment
in the form of 3.23 shares of Seagate common stock per share of Seagate
Software Holdings common stock less any amounts due for the payment of the
exercise price of unexercised options. Seagate issued 9,124,046 shares of its
common stock from treasury shares to optionees and minority stockholders of
Seagate Software Holdings in connection with the merger.
Seagate Technology accounted for the exchange of shares of its common
stock as the acquisition of a minority interest for Seagate Software Holdings
common stock outstanding and vested more than six months held by employees and
all stock held by former employees and consultants. The fair value of the
shares of Seagate Technology issued was $19.4 million and was recorded as
purchase price and allocated to all the identifiable tangible and intangible
assets and liabilities of Seagate Software Holdings. Seagate Technology
accounted for the exchange of shares
F-341
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
of its common stock for stock options in Seagate Software Holdings held by
employees and stock held and vested by employees less than six months as the
settlement of an earlier stock award. Seagate Technology recorded compensation
expense of $283.6 million, plus $2.1 million of employer portion of payroll
taxes, related to the purchase of minority interest in Seagate Software
Holdings.
The consolidated and combined statement of operations for fiscal 2000
includes an allocation of compensation expense arising from the October 1999
Seagate Technology exchange offer. Compensation expense was allocated to
Crystal Decisions on the basis of employees specifically identified with the
IMG business and for those employees that performed services for the IMG
business, on the basis of time estimates. Accordingly, Crystal Decisions
recorded $239.6 million of the $283.6 million compensation expense related to
the October 1999 Seagate Technology exchange of total of shares and offsetting
$239.6 million was recorded as a capital contribution from Seagate Technology.
In addition, the $2.1 million of employer portion of payroll taxes paid relate
to Crystal Decisions employees and therefore the amount is recorded as an
expense for fiscal 2000.
In addition, $877,000 of legal and accounting costs were incurred by
Crystal Decisions in connection with the recapitalization and reorganization of
Crystal Decisions.
The following table summarizes the components of the unusual items expense
for fiscal 2000 reported by Seagate that are attributable to the employees of
Crystal Decisions:
AS REPORTED BY ALLOCATED TO
SEAGATE CRYSTAL DECISIONS
---------------- ------------------
(IN THOUSANDS)
Compensation expense associated with the exchange of Seagate
Software Holdings common stock for Seagate Technology
common stock .............................................. $283,619 $239,574
Employer portion of payroll taxes .......................... 2,118 2,118
Transaction costs .......................................... 877 877
-------- --------
Total unusual items ....................................... $286,614 $242,569
======== ========
The consolidated and combined financial statements of Crystal Decisions at
June 30, 2000 also include an allocation of $1.2 million of the $19.4 million
purchase price allocation described above. The allocation to Crystal Decisions
was based on the fair value of the IMG business relative to the fair value of
Seagate Software Holdings. A number of factors were considered in determining
the estimated fair value of the IMG business, including historical and
projected revenues, earnings and cash flows, as well as other factors and
consultations with financial advisors.
The allocation of the purchase price to the intangible assets of Crystal
Decisions as at October 20, 1999 was as follows:
Developed technologies ...................... $ 156,000
Trademark ................................... 36,000
Assembled work force ........................ 47,000
In-process research and development ......... 25,000
Goodwill .................................... 1,071,000
Deferred tax liability ...................... (94,000)
----------
Total purchase price allocated ........... $1,241,000
==========
10. RESTRUCTURING COSTS
During fiscal 2000 Crystal Decisions incurred $1.3 million of
restructuring charges for termination of excess personnel as Crystal Decisions
realigned its resources to better manage and control its
F-342
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
business. The charges resulted from a company-wide restructuring plan announced
in October 1999 and were comprised of charges for excess personnel related to
severance and benefits paid to approximately 125 employees from various
locations and departments, including direct sales force personnel, who were
terminated on October 23, 1999. The decline in the direct sales force as part
of this restructuring contributed to the decline in revenues during fiscal 2000
as compared to fiscal 1999. The restructuring charges were paid during fiscal
2000 and no amounts were outstanding as of June 30, 2000.
11. INCOME TAXES
Crystal Decisions is included in the consolidated federal and certain
combined and consolidated foreign and state income tax returns of Seagate
Technology. Seagate Technology and Crystal Decisions have entered into a tax
sharing agreement (the "Tax Allocation Agreement") pursuant to which Crystal
Decisions computes hypothetical tax returns as if Crystal Decisions was not
joined in consolidated or combined returns with Seagate Technology. Crystal
Decisions must pay Seagate Technology the positive amount of any such
hypothetical taxes. If the hypothetical tax returns show entitlement to
refunds, including any refunds attributable to a carryback, then Seagate
Technology will pay Crystal Decisions the amount of such refunds. At the end of
fiscal 2000 and fiscal 1999 there were $67.0 million and $762,000 of
inter-company tax related balances due to Crystal Decisions from Seagate
Technology that were offset against amounts due to Seagate Technology under the
Revolving Loan Agreement. On November 22, 2000 the Tax Allocation Agreement was
terminated (see note 19).
The provision for (benefit from) income taxes consisted of the following:
FOR THE YEARS ENDED
-------------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
--------------- ------------ ----------
(IN THOUSANDS)
Current Tax Expense (Benefit):
Federal ......................................... $(46,977) $ (3,646) $1,915
State ........................................... (7,440) (1,694) (195)
Foreign ......................................... $ (491) $ 2,814 $7,080
-------- -------- ------
Total Current Tax Expense (Benefit) .......... $(54,908) $ (2,526) $8,800
-------- -------- ------
Deferred Tax Expense (Benefit):
Federal ......................................... (139) -- --
State ........................................... (8) -- --
Foreign ......................................... -- -- --
---------- -------- ------
Total Deferred Tax Expense (Benefit) ......... (147) -- --
---------- -------- ------
Provision for (benefit from) Income Taxes .......... $(55,055) $ (2,526) $8,800
========== ======== ======
For purposes of the historical financial statements, the benefit from
income taxes has been computed on a separate return basis, except that the tax
benefits of certain of Crystal Decisions's tax losses and credits were
recognized by Crystal Decisions on a current basis if such losses could be
utilized by Seagate Technology in its tax returns.
F-343
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Loss before income taxes consisted of the following:
FOR THE YEARS ENDED
-----------------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
-------------- -------------- -------------
(IN THOUSANDS)
United States ......... $ (271,991) $ (109,095) $ (20,005)
Foreign:
Canada ............... (4,042) 9,668 14,944
Europe ............... 116 750 (459)
Other ................ (300) (224) 1,061
---------- ---------- ---------
$ (276,217) $ (98,901) $ (4,459)
========== ========== =========
The pro forma information assuming a tax benefit based on a separate
return basis is as follows:
FOR THE
YEAR ENDED
JUNE 30,
2000
--------------
Loss before income taxes .......................... $ (276,217)
Provision for (benefit from) income taxes ......... (491)
----------
Net loss .......................................... $ (275,726)
==========
The income tax benefits related to the exercise of certain employee stock
options increased amounts due from Seagate Technology pursuant to the Tax
Allocation Agreement and were credited to additional paid-in capital. Such
amounts approximated $109,000, $22,000 and $3,000 in fiscal 2000, fiscal 1999
and fiscal 1998, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of Crystal Decisions's deferred tax assets and liabilities were as
follows:
FOR THE YEARS ENDED
---------------------------
JUNE 30, JULY 2,
2000 1999
------------ ------------
(IN THOUSANDS)
Deferred Tax Assets:
Receivable reserves ............................... 1,953 1,158
Inventory valuation accounts ...................... 141 68
Accrued compensation and benefits ................. 802 523
Depreciation ...................................... 75 (24)
Accrued expenses not currently deductible ......... 1,300 (28)
Goodwill and other intangibles .................... 31,754 37,322
Foreign net operating loss carryforwards .......... 855 3,579
Tax credit carryforwards .......................... -- 7,602
Other ............................................. 1,421 1,014
------ ------
Total Deferred Tax Assets ...................... 38,301 51,214
Valuation allowance ............................... (38,301) (51,214)
------- -------
Net Deferred Tax Assets ........................ -- --
------- -------
Deferred Tax Liabilities:
Goodwill and other intangibles .................... 381 234
------- -------
Net Deferred Tax Liabilities ................... $ 381 $ 234
========= =========
F-344
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
A valuation allowance has been provided for the deferred tax assets as of
the end of fiscal 2000 and fiscal 1999. Realization of the deferred tax assets
is dependent on future earnings, the timing and amount of which are uncertain.
In addition, the net operating loss and tax credit carryforwards of acquired
subsidiaries are subject to further limitations on utilization due to the
"change in ownership" provisions of Internal Revenue Code Section 382 and the
"separate return limitation year" rules of the federal consolidated return
regulations. The valuation allowance decreased by $12.9 million in fiscal 2000
and increased by $13.6 million in fiscal 1999 and $9.0 million in fiscal 1998.
As of June 30, 2000, Crystal Decisions had foreign net operating loss
carryforwards of approximately $2.8 million that start expiring in fiscal 2004
if not used to offset future taxable income.
The reconciliation between the provision for (benefit from) income taxes
at the U.S. statutory rate and the effective rate are summarized as follows:
FOR THE YEARS ENDED
--------------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
------------- ------------- ------------
(IN THOUSANDS)
Provision (benefit) at U.S. statutory rate ........................ $ (95,765) $ (34,615) $ (1,562)
State income taxes (benefit), net ................................. (4,191) (2,371) (557)
Foreign income taxes (benefit) in excess of the U.S. statutory rate 1,229 109 1,816
Non-deductible compensation expense ............................... 56,734 18,019 --
Valuation allowance ............................................... (12,913) 13,631 9,075
Other individually immaterial items ............................... (149) 2,701 28
--------- --------- --------
$ (55,055) $ (2,526) $ 8,800
========= ========= ========
12. NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share", requires the disclosure of basic and diluted earnings
(losses) per share. Prior to August 24, 1999, Crystal Decisions had no
outstanding share capital. Crystal Decisions issued 1,000 shares of common
stock to Seagate Technology for aggregate proceeds of $1,000 on August 24,
1999. On November 16, 1999, Seagate Software Holdings contributed the IMG
business to Crystal Decisions in exchange for 75,000,000 shares of Crystal
Decisions common stock. Basic loss per common share has been computed using the
weighted average number of common stock outstanding during each of the periods
presented, with the initial 1,000 and 75,000,000 shares being treated as
outstanding for all reporting periods. Diluted loss per share is computed using
the weighted average number of shares of common stock outstanding during each
of the periods presented assuming exercise of options to purchase common stock,
with the initial 1,000 and 75,000,000 shares being treated as outstanding for
all reporting periods. Options to purchase common stock were excluded from the
computation of diluted net loss per share, as their effect is antidilutive.
F-345
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Below is a reconciliation of the numerator and denominator used to
calculate net loss per share :
FOR THE YEARS ENDED
-----------------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
-------------- -------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Basic net loss per share
Numerator:
Net loss ........................................... $ (221,162) $ (96,375) $ (13,259)
Denominator:
Weighted average number of common shares
outstanding ....................................... 75,001,391 75,001,000 75,001,000
----------- ----------- -----------
Net loss per share -- basic ........................... $ (2.95) $ (1.28) $ (0.18)
=========== =========== ===========
Diluted net loss per share computation
Numerator:
Net loss ........................................... $ (221,162) $ (96,375) $ (13,259)
Denominator:
Weighted average number of common shares
outstanding ....................................... 75,001,391 75,001,000 75,001,000
Incremental common shares attributable to
exercise of outstanding options and shares
subject to repurchase (assuming proceeds
would be used to purchase treasury stock) ......... -- -- --
----------- ----------- -----------
75,001,391 75,001,000 75,001,000
----------- ----------- -----------
Net loss per share -- diluted ......................... $ (2.95) $ (1.28) $ (0.18)
=========== =========== ===========
13. STOCKHOLDERS' EQUITY
Crystal Decisions' authorized capital stock consists of 150,000,000 shares
of common stock, $0.001 par value per share. No dividends have been declared or
paid to date by Crystal Decisions.
1999 and 2000 Stock Option Plans -- The Crystal Decisions' 1999 and 2000
Stock Option Plans ("Crystal Decisions Plans") provides for the issuance of
incentive and nonstatutory stock options to employees, directors and
consultants of Crystal Decisions, its parent and subsidiaries.
1999 Stock Option Plan -- As of June 30, 2000, Crystal Decisions had
reserved 22,500,000 shares under the 1999 Stock Option Plan. Options granted
under this Plan are granted at fair market value, expire ten years from the
date of the grant and vest over 48 months, with 25% vesting on the first
anniversary of the date of grant. As of June 30, 2000, 8,626,879 options were
outstanding under the 1999 stock option plan.
2000 Stock Option Plan -- As of June 30, 2000, Crystal Decisions had
reserved 200,000 shares under the 2000 Stock Option Plan. Options granted under
this Plan are granted at fair market value, expire ten years from the date of
grant and become fully vested and exercisable immediately prior to a merger or
asset sale, other than the Sale of Seagate Technology described in note 19, or
on the date upon an initial public offering of Crystal Decisions common stock
is declared effective by the United States Securities and Exchange Commission.
Compensation expense will have to be recognized upon vesting of these options
as all of the options under this plan have been granted to employees of our
parent or another subsidiary within the consolidated group. As of June 30,
2000, 161,450 options were outstanding under the 2000 stock option plan.
F-346
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Options under the 1999 and 2000 Stock Option Plans were granted at an
exercise price equal to the fair market value of Crystal Decisions' common
stock on the grant date, as determined by our Board of Directors.
Prior to fiscal 2000, employees, directors and consultants of Crystal
Decisions participated in Seagate Software Holdings' 1996 Stock Option Plan
(the "Holdings Plan"). Under the Holdings Plan, incentive or nonstatutory stock
options were issued to employees, directors and consultants of Seagate Software
Holdings, its parent and subsidiaries. Seagate Software Holdings had reserved a
total of 16,600,000 shares under the plan. Options granted under the Holdings
Plan were granted at fair market value, expired 10 years from the date of the
grant and vested equally over 48 months. During fiscal 1999, certain of these
options were exchanged for Seagate Technology common stock, (see note 9), and
in October 1999, the remaining options outstanding were accelerated, vested in
full and exercised. In connection with the merger of Seagate Software Holdings
and Seagate Daylight Merger Corp., the Holdings Plan was terminated. The SFAS
123 pro forma information disclosed below for fiscal 1999 and fiscal 1998 were
based on the Holdings Plan.
Following is a summary of stock option activity from the inception of the
Crystal Decisions stock option plans through fiscal 2000:
OPTIONS OUTSTANDING
-----------------------------------
NUMBER OF
COMMON SHARES WEIGHTED AVERAGE
ISSUABLE EXERCISE PRICE
--------------- -----------------
Balance at July 2, 1999 .......... 0 0.00
Granted ......................... 9,501,899 4.00
Exercised ....................... (1,050) 4.00
Canceled ........................ (712,520) 4.00
---------
Balance at June 30, 2000 ......... 8,788,329 4.00
=========
Options available for grant were 13,910,621 as of the end of fiscal 2000.
The following tables summarize information about options outstanding at June
30, 2000.
EXERCISABLE
OPTIONS OUTSTANDING OPTIONS
---------------------------------------------------------- -----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL LIFE EXERCISE NUMBER OF EXERCISE
PRICE SHARES (IN YEARS) PRICE SHARES PRICE
---------- ----------- ------------------ ---------- ----------- ---------
$ 4.00 8,788,329 9.54 $ 4.00 40,600 $ 4.00
--------- ------
Total ......... $ 4.00 8,788,329 9.54 $ 4.00 40,600 $ 4.00
========= ======
Pro Forma Information -- In October 1995, the Financial Accounting
Standards Board issued SFAS 123. SFAS 123 provides an alternative to APB 25 and
requires additional disclosures. Crystal Decisions has elected to follow APB 25
in accounting for stock options granted. Under APB 25, Crystal Decisions
generally recognized no compensation expense with respect to such options.
F-347
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
SFAS 123 requires Crystal Decisions to present pro forma information
regarding net income and earnings per share for stock options granted after
June 30, 1995 as if Crystal Decisions had accounted for its stock options under
the fair value method of SFAS 123. The fair value of Crystal Decisions' stock
options was estimated using a Black-Scholes option valuation model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions, including the expected stock price volatility. Because
Crystal Decisions' stock options granted to employees have characteristics
significantly different from those of exchange-traded options (and are not
fully transferable) and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable single measure of
the fair value of its stock options granted to employees.
The fair value of Crystal Decisions' stock options granted to employees
was estimated assuming no expected dividends and the following weighted average
assumptions:
CRYSTAL DECISIONS INCENTIVE SEAGATE EMPLOYEE
STOCK OPTION PLAN SHARES STOCK PURCHASE PLAN SHARES
----------------------------------------- ----------------------------------------
FISCAL 2000 FISCAL 1999 FISCAL 1998 FISCAL 2000 FISCAL 1999 FISCAL 1998
------------- ------------- ------------- ------------- ------------- ------------
Expected life (in years) ......... 1.97 3.31 3.67 .50 .50 .56
Risk-free interest rate .......... 6.2% 5.2% 5.7% 5.7% 4.6% 5.5%
Volatility ....................... .95 .68 .55 .78 .80 .63
The weighted average fair value of stock options granted under Crystal
Decisions' 1999 Stock Option Plan was $2.83 per share. The weighted average
fair value of shares granted under the Purchase Plan were $11.47, $10.18 and
$12.03 per share in fiscal 2000, fiscal 1999 and fiscal 1998, respectively. The
weighted average purchase price of shares granted under the Purchase Plan was
$23.38, $22.72 and $26.99 per share in fiscal 2000, fiscal 1999 and fiscal
1998, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options was amortized over the options' vesting period (for stock options) and
over the six-month purchase period for stock purchases under the Purchase Plan.
Crystal Decisions' pro forma information follows:
FOR THE YEARS ENDED
----------------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
-------------- ------------- -------------
(IN THOUSANDS)
Pro forma net loss .......................... $ (225,973) $ (96,956) $ (14,319)
Pro forma net loss per common share ......... $ (3.01) $ (1.29) $ (0.19)
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 as
no shares were issued under the IMG Plan prior to November 1999.
14. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Crystal Decisions adopted Statement of Financial Accounting Standards No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information", in fiscal 1999. SFAS 131 establishes standards for reporting
information about operating segments.
Crystal Decisions operates in a single industry segment, enterprise
information management. Crystal Decisions' products and services are sold
worldwide, through direct, OEM and distributor channels. Within the segment,
the chief operating decision maker, Crystal Decisions' chief executive
F-348
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
officer, evaluates the performance of the business based upon revenues from
product and services, revenues by geographic regions and revenues by product
channels. The chief executive officer does not receive discrete financial
information about asset allocation, expense allocation or profitability from
the business products or maintenance, support and services.
Product and services revenues:
FOR THE YEARS ENDED
-------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- ----------- ----------
(IN THOUSANDS)
Licensing revenues ..................... $ 74,182 $ 92,013 $ 81,246
Maintenance, support and other ......... 52,336 49,744 34,706
-------- -------- --------
Total revenues ...................... $126,518 $141,757 $115,952
======== ======== ========
Geographic revenues (1),(2):
FOR THE YEARS ENDED
-------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- ----------- ----------
(IN THOUSANDS)
United States ............. $ 83,080 $ 86,945 $ 78,932
Europe .................... 28,570 38,625 25,760
Other ..................... 14,868 16,187 11,260
-------- -------- --------
Total revenues ......... $126,518 $141,757 $115,952
======== ======== ========
Channel revenues:
FOR THE YEARS ENDED
-------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- ----------- ----------
(IN THOUSANDS)
Direct .................... $ 74,760 $ 85,773 $ 69,908
Distribution .............. 40,985 44,299 38,953
OEM ....................... 10,773 11,685 7,091
-------- -------- --------
Total revenues ......... $126,518 $141,757 $115,952
======== ======== ========
Long-lived assets (3) as of:
JUNE 30, JULY 2,
2000 1999
---------- ----------
(IN THOUSANDS)
United States ...................... $ 6,154 $ 8,347
Canada ............................. 7,254 4,904
Other .............................. 1,226 1,254
------- -------
Total long-lived assets ......... $14,634 $14,505
======= =======
F-349
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, JULY 2,
2000 1999
---------- ----------
Total long-lived assets ................. $14,634 $14,505
Other assets, including current ......... 56,646 65,315
------- -------
Total assets ......................... $71,280 $79,820
======= =======
- ----------
(1) Revenues are attributed to geographic regions based on the location of
the customer.
(2) Europe includes the United Kingdom, South Africa and the Middle East.
(3) Reconciliation to total assets reported (in thousands).
In fiscal 2000, fiscal 1999 and fiscal 1998, revenues from one third-party
customer, Ingram, accounted for more than 10% of consolidated revenues for a
total of $25.3 million, $18.3 million and $16.8 million, respectively.
15. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 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. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB No. 133" to defer the effective date of SFAS 133 until fiscal
years beginning after June 15, 2000. Crystal Decisions is still assessing the
impact of SFAS 133 on its consolidated results of operations, financial
position and cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. All
registrants are expected to apply the accounting and disclosures described in
SAB 101. Crystal Decisions is required to adopt SAB 101 in the fourth quarter
of fiscal 2001, retroactive to the beginning of the year. Crystal Decisions is
still assessing the impact of SAB 101 on its consolidated results of
operations, financial position and cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB No. 25". FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
was effective fiscal years commencing July 1, 2000. The impact of FIN 44 is not
anticipated to be material when adopted.
16. COMMITMENTS
Leases. Crystal Decisions leases its property, facilities and equipment
under non-cancelable lease agreements. Facility leases expire at various dates
through 2007 and contain various provisions for rental adjustments. The leases
require Crystal Decisions to pay property taxes, insurance and normal
maintenance costs. Crystal Decisions also occupies certain facilities owned by
Seagate. Future minimum payments for operating leases were as follows at June
30, 2000:
F-350
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
OPERATING
LEASES
---------------
(IN THOUSANDS)
2001 ............... $ 5,506
2002 ............... 4,812
2003 ............... 4,080
2004 ............... 3,423
2005 ............... 2,365
After 2005 ......... 2,418
-------
$22,604
=======
Total rent expense for all facility equipment operating leases was
approximately $5.7 million, $5.7 million and $3.2 million for fiscal 2000,
fiscal 1999 and fiscal 1998, respectively.
Non-cancelable Capital Obligations. As of June 30, 2000 there were no
outstanding non-cancelable capital obligations.
Canadian Registered Retirement Savings Program. In January 1999, Crystal
Decisions began sponsoring a tax deferred registered retirement savings program
for its Canadian employees. Employees voluntarily contribute to registered
retirement savings accounts and Crystal Decisions contributes 50% of the
amounts contributed by the employees, up to a maximum of $1,667 (CAD $2,500)
per employee or 6% of the individual employee's salary, whichever is less.
Expenses related this program were $530,000 in fiscal 2000 and $215,000 in
fiscal 1999.
17. CONTINGENCIES
On November 10, 1997, Vedatech commenced an action in the High Court of
Justice Chancery Division in the United Kingdom against Seagate Software
Information Management Group Ltd., a wholly owned subsidiary of Crystal
Decisions, claiming breach of an oral agreement and infringement of a Vedatech
U.K. copyright in the Japanese translation of one of Crystal Decisions'
products and is seeking monetary and injunctive relief. No specific damage
amount has yet been claimed with the exception of $240,000 ((Yen)26.0 million)
for unpaid invoices in connection with the quantum meruit claim. Vedatech seeks
to enjoin Crystal Decisions from infringing the U.K. copyright and seeks
forfeiture to Vedatech of all infringing software copies. Crystal Decisions has
hired local counsel in the U.K., reviewed documents, conducted interviews and
participated in the discovery process. On August 22, 2000, Vedatech requested
and obtained permission from the court to amend its action to include claims
for unjust enrichment, unlawful interference and quantum merit. Crystal
Decisions has deposited with the court an amount equal to $200,000 in relation
to the quantum meruit claim. Crystal Decisions has filed an amended response.
Discovery is ongoing, and the court has expressed its intent to set the matter
for trial on June 5, 2001. With the exception of the quantum meruit claim,
Crystal Decisions believes the complaint has no merit, and intends vigorously
to defend the action. However, if an unfavorable outcome were to arise, there
can be no assurance that such outcome would not have a material adverse affect
on Crystal Decisions' liquidity, financial position or results of operations.
The outcome of this matter and amount of related claims are not determinable at
this time.
In addition to the foregoing, Crystal Decisions is subject to other
litigation in the ordinary course of our business. While Crystal Decisions
believes that the ultimate outcome of these matters will not have a material
adverse effect on Crystal Decisions, the outcome of these matters is not
determinable and negative outcomes may adversely affect Crystal Decisions'
financial position, liquidity, or results of operations.
F-351
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CASH FLOW INFORMATION
FOR THE YEARS ENDED
---------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- --------- --------
(IN THOUSANDS)
Cash Transactions:
Cash paid for interest ............................. $1,481 $ 128 $ 253
Cash paid for income taxes, net of refunds ......... $1,045 $12,951 $6,756
19. SALE OF SEAGATE TECHNOLOGY
On March 29, 2000, Seagate Technology, Seagate Software Holdings and Suez
Acquisition Company (Cayman) Limited ("SAC"), an entity affiliated with, among
others, Silver Lake Partners and Texas Pacific Group, entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") and Seagate Technology,
VERITAS and a wholly owned subsidiary of VERITAS entered into an Agreement and
Plan of Merger and Reorganization (the "Merger Agreement"). The transaction is
referred to as the "New SAC Transaction." The stockholders of each of VERITAS
and Seagate approved the Merger and the New SAC Transaction, as the case may
be, on November 21, 2000. The New SAC Transaction contemplated by the Stock
Purchase Agreement and Merger Agreement were completed on November 22, 2000.
SAC assigned all of its rights under the Stock Purchase Agreement to New SAC, a
Cayman Islands limited corporation ("New SAC"), in connection with the closing
of the New SAC Transaction.
Under the Stock Purchase Agreement, New SAC has purchased for cash, all of
the operating assets of Seagate Technology and its consolidated subsidiaries,
including Seagate Technology's rigid disc drive, storage area network,
removable tape storage solutions, and enterprise management software businesses
and operations, including Crystal Decisions and certain cash reserves. Upon
completion of the New SAC Transaction, the 75,001,000 common shares of Crystal
Decisions formerly held by Seagate Software Holdings were assigned to Seagate
Software (Cayman) Holdings, a wholly owned subsidiary of New SAC organized as a
Cayman Islands limited corporation.
The New SAC transaction resulted in a change of control which will require
pushdown accounting. Crystal Decisions will be required to reflect the fair
value of its tangible and intangible assets and liabilities as at the close of
the transaction.
The Tax Allocation Agreement between Seagate Technology and Crystal
Decisions was terminated on November 22, 2000, and Seagate and Crystal
Decisions will no longer file federal income tax returns on a consolidated
basis. Therefore, Seagate Technology will not benefit from nor will it
reimburse Crystal Decisions pursuant to the Tax Allocation Agreement for tax
losses sustained by Crystal Decisions subsequent to consummation of the
transaction. In prior periods, Crystal Decisions has generated substantial cash
payments from its tax losses utilized by Seagate Technology, which have been
used to reduce its obligations to Seagate Technology under the Revolving Loan
Agreement. As a result of the termination of the Tax Allocation Agreement,
Crystal Decisions may not be able to convert any future tax losses into cash.
Crystal Decisions relies on a revolving loan with Seagate Technology LLC,
which is now a wholly-owned subsidiary of New SAC, to fund a portion of its
operating cash needs. The Revolving Loan Agreement continues in effect
subsequent to the closing of the New SAC Transaction on November 22, 2000.
Crystal Decisions may require additional financing through the end of fiscal
2002. Crystal Decisions is in the process of negotiating additional financing
with Seagate Technology LLC through the end of fiscal 2002. Should additional
financing not be available from Seagate Technology LLC at terms that are
satisfactory to Crystal Decisions and Seagate Technology LLC,
F-352
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
Crystal Decisions may seek additional equity and financing from other sources.
However, as a result of the New SAC Transaction, Crystal Decisions pledged a
majority of its assets to guarantee the debt used to finance the New SAC
Transaction. As a result, Crystal Decisions' ability to raise additional
secured debt from other sources may be limited.
NOTE 20. DEBT GUARANTEES AND PLEDGE OF ASSETS
SENIOR SECURED CREDIT FACILITY
On the closing of the New SAC Transaction, Seagate Technology
International and Seagate Technology (US) Holdings, Inc., both subsidiaries of
New SAC entered into senior credit facilities with a syndicate of banks and
other financial institutions led by The Chase Manhattan Bank, as administrative
agent and an issuing bank, and Goldman Sachs Credit Partners L.P., as a
documentation agent, The Bank of Nova Scotia as a documentation agent, and
Merrill Lynch Capital Corporation, as a documentation agent. The senior credit
facilities provide senior secured financing of up to $900 million, consisting
of:
o a $200 million revolving credit facility for general corporate purposes,
with a sub-limit of $100 million for letters of credit, which will
terminate in five years;
o a $200 million term loan A facility with a maturity of five years; and
o a $500 million term loan B facility with a maturity of six years.
At the closing of the transaction, New SAC did not borrow under the
revolving credit facility. At that time approximately $155 million of the
revolving credit facility was available because approximately $45 million of
existing letters of credit were outstanding and reduced availability under it.
New SAC drew the full amount of the term loan A facility and the term loan B
facility on the closing of the transaction to finance the acquisition of
Seagate's operating assets, including Crystal Decisions.
The $700 million of outstanding loans under the term loan A and B
facilities are repayable in semi-annual payments due as follows:
(IN THOUSANDS)
---------------
Fiscal 2001 ............ $ 5,000
2002 ................... 22,500
2003 ................... 40,000
2004 ................... 50,000
2005 ................... 60,000
Thereafter.............. 522,500
--------
Total .................. $700,000
========
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as the consolidated financial
position of New SAC at applicable measurement dates. The average interest rates
being charged under these borrowings from the date of the New SAC Transaction
ranged from 9.1875% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC and certain of its subsidiaries, including Crystal Decisions and
certain of its subsidiaries are guarantors under the senior credit facilities.
In addition, the majority of New SAC's and certain of its subsidiaries' assets,
including Crystal Decisions' assets and its capital stock, have been pledged
against the debt under this credit agreement. New SAC, and certain of its
subsidiaries,
F-353
CRYSTAL DECISIONS, INC.
(FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
including Crystal Decisions and certain of its subsidiaries, have agreed to
certain covenants under this agreement including restrictions on future equity
and borrowing transactions, business acquisitions and disposals, making certain
restricted payments and dividends, making certain capital expenditures,
incurring guarantee obligations and engaging in mergers or consolidations.
Further, Crystal Decisions, as part of the consolidated group, is subject to
certain financial covenants which are assessed on the consolidated operating
results and financial position of New SAC and its subsidiaries.
The credit agreement provides for the release of Crystal Decisions from
its guarantee obligations, and asset pledge upon an approved transfer or sale
of Crystal Decisions' common stock, or an initial public offering of at least
10%, on a fully diluted basis, of Crystal Decisions' voting common stock.
SENIOR SUBORDINATED NOTES
In connection with the closing and financing of the New SAC Transaction,
Seagate Technology International issued unsecured senior subordinated notes
under an Indenture Agreement dated November 22, 2000 at a discount to the
aggregate principal amount of $210 million, for gross proceeds of approximately
$201 million. The notes mature on November 15, 2007 and bear interest payable
semi-annually at a rate of 12.5% per annum. New SAC and certain of its
subsidiaries, including Crystal Decisions and certain of its subsidiaries, are
guarantors of the notes. In addition, New SAC and certain of its subsidiaries
including Crystal Decisions and certain of its subsidiaries, have agreed to
certain restrictive covenants under the terms of these notes including
restrictions on future equity and borrowing transactions, business acquisitions
and disposals, making certain restricted payments and dividends, making certain
capital expenditures, incurring guarantee obligations and engaging in mergers
or consolidations. Crystal Decisions may be released from its guarantee
obligation, if there are certain sales of its capital stock, including in an
initial public offering, but would remain subject to the restrictive covenants
of the indenture until Crystal Decisions and its subsidiaries are no longer
subsidiaries of New SAC or are deemed no longer to be subject to the
restrictive covenants.
New SAC will not require Crystal Decisions' cash flow to be used to
service the obligations pursuant to the senior secured credit facility and the
senior subordinated notes. The Company believes that none of the guarantees or
pledges of assets under the senior credit facilities or the guarantees under
the Indenture are likely to be invoked.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Crystal Decisions is a non-wholly owned subsidiary of New SAC. The senior
subordinated notes are guaranteed by certain, but not all of the subsidiaries
of New SAC, including certain of Crystal Decisions' world-wide subsidiaries.
The guarantees of the senior subordinated notes are full and unconditional, and
are made on a joint and several basis by the guaranteeing subsidiaries.
F-354
The following tables present guarantor and non-guarantor condensed
consolidating financial information for Crystal Decisions' subsidiaries, at
June 30, 2000 and July 2, 1999, and the condensed consolidating results of its
operations and its cash flows for the years ended June 30, 2000, July 2, 1999,
and July 3, 1998. The information is based on the guarantor and non-guarantor
classification of Crystal Decisions' subsidiaries under the current provisions
of the senior subordinated notes.
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
ELIMINATION TOTAL CONSOLIDATED
GUARANTOR NON-GUARANTOR ENTRIES CRYSTAL DECISIONS
----------- --------------- ------------- -------------------
ASSETS:
Cash ........................................... $ 844 $ 2,777 $ -- $ 3,621
Loan receivable from Seagate Technology......... 25,681 -- -- 25,681
Accounts Receivable, net ....................... 24,141 12,638 (20,201) 16,578
Inventories .................................... 674 -- -- 674
Income Tax Receivable .......................... 6,134 -- (63) 6,071
Other Current Assets ........................... 1,832 2,189 -- 4,021
-------- -------- ---------- --------
Current Assets ................................ 59,306 17,604 (20,264) 56,646
Capital Assets, net ............................ 9,095 253 -- 9,348
Investments .................................... 1,436 -- (1,436) --
Goodwill and Other Intangible Assets ........... 5,286 -- -- 5,286
-------- -------- ---------- --------
TOTAL ASSETS ................................... $ 75,123 $ 17,857 $ (21,700) $ 71,280
======== ======== ========== ========
LIABILITIES:
Accounts Payable ............................... $ 20,677 $ 9,714 $ (20,201) $ 10,190
Accrued Employee Compensation .................. 5,239 765 -- 6,004
Accrued Expenses ............................... 8,279 3,818 -- 12,097
Deferred Revenue ............................... 18,038 1,457 -- 19,495
Deferred income taxes .......................... -- 63 (63) --
Accrued Income Taxes ........................... (573) 573 -- --
-------- -------- ---------- --------
Current Liabilities ........................... 51,660 16,390 (20,264) 47,786
Deferred income taxes .......................... 350 31 -- 381
-------- -------- ---------- --------
TOTAL LIABILITIES .............................. 52,010 16,421 (20,264) 48,167
STOCKHOLDERS' EQUITY ........................... 23,113 1,436 (1,436) 23,113
-------- -------- ---------- --------
Total Liabilities and Stockholders' Equity ..... $ 75,123 $ 17,857 $ (21,700) $ 71,280
======== ======== ========== ========
F-355
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
ELIMINATION TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ENTRIES CRYSTAL DECISIONS
--------------- ---------------- ------------- -------------------
Revenues ................................. $ 113,094 $ 13,424 $ -- $ 126,518
Costs of revenues ........................ 40,417 3,558 43,975
Research and development ................. 24,874 -- 24,874
Sales, marketing and administrative ...... 72,205 14,793 86,998
Amortization of goodwill and other
intangibles ............................. 3,038 -- 3,038
Restructuring costs ...................... 855 446 1,301
Unusual items ............................ 221,601 20,968 242,569
----------- ---------- -----------
Total operating expenses .............. 362,990 39,765 -- 402,755
----------- ---------- -------- -----------
Loss from Operations .................. (249,896) (26,341) -- (276,237)
Equity Investment income (loss) .......... (21,128) -- 21,128 --
Other income (expense) ................... (5,561) 5,581 -- 20
----------- ---------- -------- -----------
Other Income (Expense), net ........... (26,689) 5,581 21,128 20
----------- ---------- -------- -----------
Income (loss) before income taxes ........ (276,585) (20,760) 21,128 (276,217)
Benefit (provision) for income taxes ..... 55,423 (368) 55,055
----------- ---------- -----------
Net Income (Loss) ..................... $ (221,162) $ (21,128) $ 21,128 $ (221,162)
=========== ========== ======== ===========
F-356
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000
(IN THOUSANDS)
ELIMINATION TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ENTRIES CRYSTAL DECISIONS
------------ ---------------- ------------- -------------------
Net cash provided by (used in) operating
activities ................................... $ (21,717) $ 68 $ -- $ (21,649)
INVESTING ACTIVITIES
Acquisition of capital assets, net ............ (6,272) (84) -- (6,356)
---------- ------ ----------- ----------
Net cash (used in) investing activities..... (6,272) (84) -- (6,356)
FINANCING ACTIVITIES
Issuance of common stock ...................... 5 -- -- 5
Borrowings from Seagate Technology ............ 176,714 -- -- 176,714
Payments to Seagate Technology ................ (152,667) -- -- (152,667)
---------- ------ ----------- ----------
Net cash provided by (used in)
financing activities ...................... 24,052 -- -- 24,052
Effect of exchange rate changes on cash ....... (114) 269 -- 155
---------- ------ ----------- ----------
Increase (decrease) in cash ................... (4,051) 253 -- (3,798)
Cash at the beginning of the year ............. 4,895 2,524 -- 7,419
---------- ------ ----------- ----------
Cash at the end of the year ................... $ 844 $2,777 $ -- $ 3,621
========== ====== =========== ==========
F-357
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED BALANCE SHEET
JULY 2, 1999
(IN THOUSANDS)
ELIMINATION TOTAL CONSOLIDATED
GUARANTOR NON-GUARANTOR ENTRIES CRYSTAL DECISIONS
----------- --------------- ------------- -------------------
ASSETS:
Cash ............................................... $ 4,895 $ 2,524 $ -- $ 7,419
Accounts Receivable, net ........................... 46,910 8,343 (12,526) 42,727
Inventories ........................................ 981 -- 981
Income Tax Receivable .............................. 11,655 -- -- 11,655
Other Current Assets ............................... (1,747) 4,280 2,533
-------- ------- -------
Current Assets .................................... 62,694 15,147 (12,526) 65,315
Capital Assets, net ................................ 6,933 360 -- 7,293
Investments ........................................ 1,320 -- (1,320) --
Goodwill and Other Intangible Assets ............... 7,212 -- -- 7,212
Other Assets ....................................... -- -- -- --
-------- ------- --------- -------
TOTAL ASSETS ....................................... $ 78,159 $15,507 $ (13,846) $79,820
======== ======= ========= =======
LIABILITIES:
Accounts Payable ................................... 15,752 9,005 (12,526) 12,231
Accrued Employee Compensation ...................... 18,393 906 -- 19,299
Accrued Expenses ................................... 24,673 4,089 (331) 28,431
Loan Payable to Seagate Technology ................. 16,517 -- -- 16,517
Accrued Income Taxes ............................... (293) (38) 331 --
-------- ------- --------- -------
Current Liabilities ............................... 75,042 13,962 (12,526) 76,478
-------- ------- --------- -------
Deferred income taxes .............................. 234 -- -- 234
Other Liabilities .................................. -- 225 -- 225
-------- ------- --------- -------
TOTAL LIABILITIES .................................. 75,276 14,187 (12,526) 76,937
STOCKHOLDERS' EQUITY ............................... 2,883 1,320 (1,320) 2,883
-------- ------- --------- -------
Total Liabilities and Stockholders' Equity ......... $ 78,159 $15,507 $ (13,846) $79,820
======== ======= ========= =======
F-358
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 2, 1999
(IN THOUSANDS)
ELIMINATION TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ENTRIES CRYSTAL DECISIONS
-------------- ---------------- ------------- -------------------
Revenues ..................................... $ 126,265 $ 15,492 $ -- $ 141,757
Costs of revenues ............................ 45,407 3,294 -- 48,701
Research and development ..................... 21,224 -- -- 21,224
Sales, marketing and administrative .......... 66,305 12,998 -- 79,303
Amortization of goodwill and other
intangibles ................................. 4,772 -- -- 4,772
Restructuring costs .......................... -- -- -- --
Unusual items ................................ 79,157 7,557 86,714
---------- -------- ----------
Total operating expenses .................. 216,865 23,849 -- 240,714
---------- -------- ------ ----------
Income (Loss) from Operations ............. (90,600) (8,357) -- (98,957)
Interest income (expense) .................... 816 (760) -- 56
Equity Investment income (loss) .............. (9,274) -- 9,274 --
---------- -------- ------ ----------
Other Income (Expense), net ............... (8,458) (760) 9,274 56
---------- -------- ------ ----------
Income (loss) before income taxes ............ (99,058) (9,117) 9,274 (98,901)
Benefit (provision) for income taxes ......... 2,683 (157) -- 2,526
---------- -------- ------ ----------
Net Income (Loss) ......................... $ (96,375) $ (9,274) $9,274 $ (96,375)
========== ======== ====== ==========
F-359
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 2, 1999
(IN THOUSANDS)
ELIMINATION TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ENTRIES CRYSTAL DECISIONS
------------ ---------------- ------------- -------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ....................... $ (2,322) $1,413 $ -- $ (909)
INVESTING ACTIVITIES
Acquisition of capital assets, net .......... (4,731) (125) -- (4,856)
---------- ------ ----- ----------
Net cash provided by (used in)
investing activities .................... (4,731) (125) -- (4,856)
FINANCING ACTIVITIES
Borrowings from Seagate Technology .......... 131,194 -- -- 131,194
Payments to Seagate Technology .............. (128,233) -- -- (128,233)
---------- ------ ----- ----------
Net cash provided by (used in)
financing activities .................... 2,961 -- -- 2,961
Effect of exchange rate changes on cash ..... -- -- -- --
---------- ------ ----- ----------
Increase (decrease) in cash ................. (4,092) 1,288 -- (2,804)
Cash at the beginning of the year ........... 8,987 1,236 10,223
---------- ------ ----------
Cash at the end of the year ................. $ 4,895 $2,524 $ -- $ 7,419
========== ====== ===== ==========
F-360
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 3, 1998
(IN THOUSANDS)
ELIMINATION
GUARANTORS NON-GUARANTORS ENTRIES CRYSTAL DECISIONS
-------------- ---------------- ------------ ------------------
Revenues ..................................... $ 103,955 $ 11,997 $ -- $ 115,952
Costs of revenues ............................ 35,067 689 35,756
Research and development ..................... 16,237 -- 16,237
Sales, marketing and administrative .......... 55,222 10,565 65,787
Amortization of goodwill and other
intangibles ................................. 3,165 -- 3,165
Restructuring costs .......................... -- -- --
Unusual items ................................ -- -- --
---------- -------- ----------
Total operating expenses .................. 109,691 11,254 -- 120,945
---------- -------- ------- ----------
Income (loss) from operations ............. (5,736) 743 -- (4,993)
Interest income (expense) .................... 742 (208) 534
Equity investment income (loss) .............. 188 -- (188) --
---------- -------- ------- ----------
Other income (expense), net ............... 930 (208) (188) 534
---------- -------- ------- ----------
Income (loss) before income taxes ............ (4,806) 535 (188) (4,459)
Benefit (provision) for income taxes ......... (8,453) (347) (8,800)
---------- -------- ----------
Net income (loss) ......................... $ (13,259) $ 188 $ (188) $ (13,259)
========== ======== ======= ==========
F-361
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 3, 1998
(IN THOUSANDS)
ELIMINATION TOTAL CONSOLIDATED
GUARANTORS NON-GUARANTORS ENTRIES CRYSTAL DECISIONS
------------ ---------------- ------------- -------------------
Net cash provided by (used in) operating
activities ................................. $ (4,235) $1,772 $ -- $ (2,463)
INVESTING ACTIVITIES
Acquisition of capital assets, net .......... (4,122) (643) -- (4,765)
Acquisition of intangible assets ............ (1,950) -- -- (1,950)
---------- ------ ----- ----------
Net cash provided by (used in)
investing activities .................... (6,072) (643) -- (6,715)
FINANCING ACTIVITIES
Borrowings from Seagate Technology .......... 108,469 -- -- 108,469
Payments to Seagate Technology .............. (100,243) -- -- (100,243)
---------- ------ ----- ----------
Net cash provided by (used in)
financing activities .................... 8,226 -- -- 8,226
Effect of exchange rate changes on cash ..... -- 11 -- 11
---------- ------ ----- ----------
Increase (decrease) in cash ................. (2,081) 1,140 -- (941)
Cash at the beginning of the year ........... 11,068 96 11,164
---------- ------ ----------
Cash at the end of the year ................. $ 8,987 $1,236 $ -- $ 10,223
========== ====== ===== ==========
NOTE 21. QUARTERLY INFORMATION (UNAUDITED)
The table below shows the Company's unaudited quarterly statements of
operations data for each of the eight quarters ended June 30, 2000. This
information has been derived from the Company's unaudited consolidated and
combined financial statements, which, in management's opinion, have been
prepared on the same basis as the audited consolidated and combined financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the information for the
quarters presented. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
For the 13 Weeks Ended:
JUNE 30, MAR. 31, DEC. 31,
2000 2000 1999
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATE)
Net Revenues .......... $ 33,956 $ 34,387 $ 30,298
Gross Profit .......... 23,012 23,867 19,353
Net Loss .............. $ (2,173) $ (1,103) $ (213,234)
Net Loss per share--
basic and diluted .... $ (0.03) $ (0.01) $ (2.84)
Weighted average
number of shares ..... 73,002,050 75,001,357 75,001,000
OCT. 1, JULY 2, APRIL 2, JAN. 1, OCT. 2,
1999 1999 1999 1999 1998
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
Net Revenues .......... $ 27,877 $ 41,779 $ 38,869 $ 33,517 $ 27,592
Gross Profit .......... 16,311 26,623 26,363 22,870 17,200
Net Loss .............. $ (4,652) $ (87,541) $ (2,296) $ (354) $ (6,184)
Net Loss per share--
basic and diluted .... $ (0.06) $ (1.17) $ (0.03) $ (0.00) $ (0.08)
Weighted average
number of shares ..... 75,001,000 75,001,000 75,001,000 75,001,000 75,001,000
F-362
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Crystal Decisions, Inc.
We have audited the accompanying consolidated and combined balance sheets of
Crystal Decisions, Inc. as of June 30, 2000 and July 2, 1999 and the related
consolidated and combined statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended June 30, 2000.
These financial statements are the responsibility of Crystal Decisions, Inc.'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 in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the consolidated and combined financial position of Crystal
Decisions, Inc. at June 30, 2000 and July 2, 1999 and the consolidated combined
results of its operations and its cash flows for each of the years in the three
year period ended June 30, 2000, in conformity with generally accepted
accounting principles in the United States.
Chartered Accountants
/s/ Ernst & Young LLP
July 7, 2000, except for
Notes 1, 2, 11, 19, and 20
as to which the date is
March 26, 2001
Vancouver, Canada
F-363
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
INDEMNIFICATION OF THE DIRECTORS AND OFFICERS OF THE ISSUER, NEW SAC, SEAGATE
TECHNOLOGY HOLDINGS, SEAGATE TECHNOLOGY SAN HOLDINGS AND SEAGATE REMOVABLE
STORAGE SOLUTIONS
HOLDINGS
The articles of association of the Issuer, New SAC, Seagate Technology
Holdings, Seagate Technology SAN Holdings and Seagate Removable Storage
Solutions Holdings provide for the indemnification of their respective
directors and officers. Specifically, under the indemnification provisions,
these companies will indemnify their respective directors and officers against
liabilities that are incurred by the directors or officers while carrying out
the affairs of the company or discharging the duties of their respective
offices. The directors and officers, however, will not be entitled to the
indemnification if they incurred the liabilities through their own willful
neglect or default.
In addition, the board resolutions of the Issuer, New SAC, Seagate
Technology Holdings, Seagate Technology SAN Holdings and Seagate Removable
Storage Solutions Holdings provide for the indemnification of their respective
directors and officers against any claims arising out of or relating to (a) the
preparation, filing and distribution of this registration statement or the
prospectus contained in this registration statement, (b) the issue and exchange
of the exchange guarantee or the exchange notes, (c) the exchange offer and (d)
any activities that the directors and officers deem necessary or advisable to
carry out the intent and purposes of the resolutions. The resolutions also
expressly authorize these companies to indemnify their directors and officers
to the fullest extent permitted by law.
Each of these companies is a Cayman Islands company and, as such, is
governed by the laws of the Cayman Islands with respect to the indemnification
provisions. Although The Companies Law (2000 Revision) of the Cayman Islands
does not specifically restrict a Cayman Islands company's ability to indemnify
its directors or officers, it does not expressly provide for such
indemnification either. Certain Commonwealth case law (which is likely to be
persuasive in the Cayman Islands), however, indicate that the indemnification
is generally permissible, unless there had been fraud, willful default or
reckless disregard on the part of the director or officer in question.
INDEMNIFICATION OF THE DIRECTORS AND OFFICERS OF CRYSTAL DECISIONS, INC.
Crystal Decisions, Inc. is a Delaware corporation and is subject to the
Delaware General Corporation Law or DGCL. Section 145 of the DGCL permits the
company to indemnify its officers and directors against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any threatened, pending or
completed action (except settlements or judgments in derivative suits), suit or
proceeding in which such person is made a party by reason of his or her being
or having been a director, officer, employee or agent of the company, in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities, including reimbursement for expenses incurred, arising under
the Securities Act of 1933, as amended. The statute provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any by-law, agreement,
vote of stockholders of disinterested directors, or otherwise.
Article 6 of Crystal Decisions' by-laws provides for the mandatory
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the DGCL. As permitted by sections 102 and 145 of
the DGCL, the company's certificate of incorporation eliminates a director's
personal liability for monetary damages to the company and its stockholders
arising from a breach of a director's fiduciary duty, except as otherwise
provided under the DGCL.
LIABILITY INSURANCE COVERING DIRECTORS AND OFFICERS
In addition to the indemnification provisions set forth above, each of the
Issuer, New SAC, Crystal Decisions, Inc., Seagate Technology Holdings, Seagate
Technology SAN Holdings and
II-1
Seagate Removable Storage Solutions Holdings maintains insurance policies that
indemnify its directors and officers against various liabilities arising under
the Securities Act of 1933 and the Securities Exchange Act of 1934 that might
be incurred by any director or officer in his capacity as such.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are being filed with this Registration Statement
pursuant to Item 601 of Regulation S-K.
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ---------------- ----------------------------------------------------------------------------------------
1.1* Purchase Agreement, dated as of November 17, 2000, by and among Suez Acquisition
Company (Cayman) Limited, Chase Securities Inc., Goldman, Sachs & Co. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1.2* Joinder to the Purchase Agreement, dated as of November 22, 2000, by and among
among Seagate Technology International, the Note Guarantors listed therein, Chase
Securities Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated
2.1* Stock Purchase Agreement, dated as of March 29, 2000, by and among Suez
Acquisition Company (Cayman) Limited, Seagate Technology, Inc. and Seagate
Software Holdings, Inc.
2.2* Agreement and Plan of Merger and Reorganization, dated as of March 29, 2000, by
and among VERITAS Software Corporation, Victory Merger Sub, Inc. and Seagate
Technology, Inc.
2.3* Indemnification Agreement, dated as of March 29, 2000, by and among VERITAS
Software Corporation, Seagate Techology, Inc. and Suez Acquisition Company
(Cayman) Limited
2.4* Joinder Agreement to the Indemnification Agreement, dated as of November 22, 2000,
by and among VERITAS Software Corporation, Seagate Technology, Inc. and the SAC
Indemnitors listed therein
2.5* Consolidated Amendment to Stock Purchase Agreement, Agreement and Plan of
Merger and Reorganization, and Indemnification Agreement, and Consent, dated as of
August 29, 2000, by and among Suez Acquisition Company (Cayman) Limited, Seagate
Technology, Inc., Seagate Software Holdings, Inc., VERITAS Software Corporation and
Victory Merger Sub, Inc.
2.6* Consolidated Amendment No. 2 to Stock Purchase Agreement, Agreement and Plan of
Merger and Reorganization, and Indemnification Agreement, and Consent, dated as of
October 18, 2000, by and among Suez Acquisition Company (Cayman) Limited,
Seagate Technology, Inc., Seagate Software Holdings, Inc., VERITAS Software
Corporation and Victory Merger Sub, Inc.
2.7* Letter Agreement, dated as of March 29, 2000, by and between VERITAS Software
Corporation and Suez Acquisition Company (Cayman) Limited
2.8* Agreement and Plan of Reorganization, dated as of December 3, 1999, by and among
Seagate Technology, Inc., Trout Acquisition Corp., XIOtech Corporation and the
Securityholders Agents listed therein
3.1 (a)* Memorandum of Association of Seagate Technology International
3.1 (b)* Articles of Association of Seagate Technology International
3.2 (a)* Memorandum of Association of New SAC
3.2 (b)* Articles of Association of New SAC
3.3 (a)* Certificate of Incorporation of Seagate Software Information Management Group
Holdings, Inc.
3.3 (b)* Amendment to Certificate of Incorporation of Crystal Decisions, Inc., formerly known as
Seagate Software Information Management Group Holdings, Inc.
II-2
EXHIBIT
NUMBER DESCRIPTION
- ----------------- --------------------------------------------------------------------------------------
3.3 (c)* By-laws of Crystal Decisions, Inc.
3.4 (a)* Amended and Restated Memorandum of Association of Seagate Technology Holdings
3.4 (b)* Amended and Restated Articles of Association of Seagate Technology Holdings
3.5 (a)+ Amended and Restated Memorandum of Association of Seagate Technology SAN
Holdings
3.5 (b)+ Amended and Restated Articles of Association of Seagate Technology SAN Holdings
3.6 (a)* Amended and Restated Memorandum of Association of Seagate Removable Storage
Solutions Holdings
3.6 (b)* Amended and Restated Articles of Association of Seagate Removable Storage
Solutions Holdings
4.1* Form of 12 1/2% Senior Subordinated Note due 2007 (included in Exhibit 4.2(a))
4.2 (a)* Indenture, dated as of November 22, 2000, by and among among New SAC, Seagate
Technology International, the Note Guarantors listed therein and The Bank of New York
4.2 (b)* Supplemental Indenture, dated as of February 16, 2001, among Seagate Technology
(Malaysia) Holding Company, New SAC, Seagate Technology International, the Existing
Guarantors listed therein and The Bank of New York
4.3* Exchange and Registration Rights Agreement, dated as of November 22, 2000, by and
among Seagate Technology International, the Note Guarantors listed therein, Chase
Securities Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated
5.1* Opinion of Simpson Thacher & Bartlett
10.1* Credit Agreement, dated as of November 22, 2000, by and among New SAC, Seagate
Technology International, Seagate Technology (US) Holdings, Inc., the Lenders party
thereto and The Chase Manhattan Bank
10.2 + First Amendment, dated as of April 11, 2001, to the Credit Agreement dated as of
November 22, 2000, by and among New SAC, Seagate Technology (US) Holdings, Inc.,
the Lenders party hereto and The Chase Manhattan Bank
10.3 (a)* Form of Employment Agreement by and between Seagate Technology (US) Holdings,
Inc. and the Executive listed therein
10.3 (b)* Employment Agreement, dated as of February 2, 2001, by and between Seagate
Technology (US) Holdings, Inc. and Stephen J. Luczo
10.3 (c)+ Employment Agreement, dated as of February 2, 2001, by and between Seagate
Technology (US) Holdings, Inc. and William D. Watkins
10.4* Separation Agreement and Release, dated as of July 29, 1998, by and between
Seagate Technology, Inc. and Al Shugart
10.5 (a)* Form of Management Retention Agreement by and between the Employee listed therein
and Seagate Technology, Inc.
10.5 (b)* Management Retention Agreement, dated November 1998, by and between Seagate
Technology, Inc. and Stephen J. Luczo
10.6* Form of Rollover Agreement, dated as of November 13, 2000, by and among New
SAC, Seagate Technology HDD Holdings and the Senior Manager listed therein
10.7* Form of Rollover Agreement, dated as of November 13, 2000, by and among New
SAC, Seagate Technology SAN Holdings and the Senior Manager listed therein
10.8* Seagate Technology HDD Holdings Deferred Compensation Plan
10.9* Seagate Technology SAN Holdings Deferred Compensation Plan
10.10 (a)* New SAC 2000 Restricted Share Plan
10.10 (b)* Form of New SAC 2000 Restricted Share Agreement
10.11 (a)* New SAC 2001 Restricted Share Plan
10.11 (b)* Form of New SAC 2001 Restricted Share Agreement (Tier I Senior Managers)
10.11 (c)* Form of New SAC 2001 Restricted Share Agreement (Other Employees)
10.12* Crystal Decisions, Inc. 1999 Stock Option Plan and Form of Stock Option Agreement as
amended and restated
II-3
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------
10.13* Crystal Decisions, Inc. 2000 Stock Option Plan and Form of Stock Option Agreement as
amended and restated
10.14 + Seagate Technology Holdings 2001 Stock Option Plan
10.15 + Seagate Removable Storage Solutions Holdings 2001 Stock Option Plan
10.16* Shareholders Agreement, dated as of November 22, 2000, by and among New SAC,
Silver Lake Technology Investors Cayman, L.P., Silver Lake Investors Cayman, L.P.,
Silver Lake Partners Cayman, L.P., SAC Investments, L.P., August Capital III, L.P.,
Chase Equity Associates, L.P., GS Capital Partners III, L.P., GS Capital Partners III
Offshore, L.P., Goldman, Sachs & Co. Verwaltungs GmbH, Stone Street Fund 2000
L.P., Bridge Street Special Opportunities Fund 2000, L.P., Staenberg Venture Partners
II, L.P., Staenberg Seagate Partners, LLC, Integral Capital Partners V, L.P., Integral
Capital Partners V Side Fund, L.P. and the individuals listed therin
10.17* Management Shareholders Agreement, dated as of November 22, 2000, by and among
New SAC and the Management Shareholders listed therein
12.1* Statement of Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors of New SAC and its predecessor
Seagate Technology, Inc.
23.2 Consent of Ernst & Young LLP, Independent Auditors of Seagate Technology Hard Disc
Drive Business, an operating business of Seagate Technology, Inc.
23.3 Consent of Ernst & Young LLP, Independent Auditors of XIOtech Corporation
23.4 Consent of Ernst & Young LLP, Independent Auditors of Seagate Removable Storage
Solutions Business, an operting business of Seagate Technology, Inc.
23.5 Consent of Ernst & Young LLP, Independent Auditors of Crystal Decisions, Inc.
23.6 Consent of PricewaterhouseCoopers LLP, Independent Accountants of XIOtech
Corporation
23.7* Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1)
24.1* Powers of Attorney
25.1* Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of
New York
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
- ----------
* Previously filed.
+ To be filed by amendment.
II-4
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) that, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" Table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of the
offering.
(b) (1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus that is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
Issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-5
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY INTERNATIONAL
By:/s/ William L. Hudson
----------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27th, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Director
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
/s/ William L. Hudson Director
-------------------------------
William L. Hudson
* Director
-------------------------------
Donald L. Waite
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By:/s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
NEW SAC
By:/s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- -------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Chairman of the Board
-------------------------------
David J. Roux
* Director
-------------------------------
David Bonderman
* Director
-------------------------------
James G. Coulter
* Director
-------------------------------
James A. Davidson
* Director
-------------------------------
Glenn H. Hutchins
* Director
-------------------------------
David F. Marquardt
* Director
-------------------------------
John W. Thompson
* Director
-------------------------------
William D. Watkins
II-8
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
QUINTA CORPORATION
By: /s/ William L. Hudson
------------------------------------
Name : William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- -------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Director
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
/s/ William L. Hudson Director
-------------------------------
William L. Hudson
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY (US) HOLDINGS, INC.
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- -------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Donald L. Waite
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY LLC
By: SEAGATE TECHNOLOGY (US) HOLDINGS,
INC., its Managing Member
By: /s/ William L. Hudson
-----------------------------------------
William L. Hudson, on behalf of Seagate
Technology (US) Holdings, Inc.
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Managing Member)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE REMOVABLE STORAGE SOLUTIONS
(US) HOLDINGS, INC.
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- -------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
Chief Financial Officer
*
-------------------------------
Charles C. Pope (Principal Financial Officer)
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Donald L. Waite
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE REMOVABLE STORAGE SOLUTIONS LLC
By: SEAGATE REMOVABLE STORAGE SOLUTIONS
(US) HOLDINGS, INC., its Sole Member
By: /s/ William L. Hudson
----------------------------------------
William L. Hudson, on behalf of Seagate
Removable Storage Solutions (US)
Holdings, Inc.
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- -----------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Seagate Removable Storage Solutions (US)
------------------------------- Holdings, Inc.
Stephen J. Luczo, on behalf (Sole Member)
of Seagate Removable
Storage Solutions (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE RSS LLC
By: SEAGATE REMOVABLE STORAGE SOLUTIONS
LLC, as Sole Member
By: /s/ William L. Hudson
----------------------------------------
William L. Hudson, on behalf of Seagate
Removable Storage Solutions LLC
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ----------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Seagate Removable Storage Solutions LLC
------------------------------- (Sole Member)
Stephen J. Luczo, on behalf
of Seagate Removable
Storage Solutions LLC
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE US LLC
By: SEAGATE TECHNOLOGY LLC,
as Sole Member
By: /s/ William L. Hudson
------------------------------------
William L. Hudson, on behalf of
Seagate
Technology LLC
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- -------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Seagate Technology LLC
------------------------------- (Sole Member)
Stephen J. Luczo, as
Chief Executive Officer of
Seagate Technology LLC
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
REDWOOD ACQUISITION CORPORATION
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- -------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Director
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Palo Alto, state of California, on the 27th day of April, 2001.
CRYSTAL DECISIONS, INC.
By: /s/ Gregory B. Kerfoot
------------------------------------
Name: Gregory B. Kerfoot
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------------
* President and Chief Executive Officer
------------------------------- (Principal Executive Officer)
Gregory B. Kerfoot
* Chief Financial Officer
------------------------------- (Principal Financial and Accounting Officer)
Eric Patel
* Chairman of the Board
-------------------------------
Stephen J. Luczo
* Director
-------------------------------
Justin Chang
* Director
-------------------------------
David F. Marquardt
* Director
-------------------------------
David J. Roux
* Director
-------------------------------
John W. Thompson
* Director
-------------------------------
Donald L. Waite
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
XIOTECH CORPORATION
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ------------------------------------------------
* President, Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Philip E. Soran
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Sue Hogue
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Justin Chang
* Director
-------------------------------
John P. Guider
* Director
-------------------------------
Kenneth Y. Hao
* Director
-------------------------------
Jeremy Tennenbaum
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
XIOTECH (CANADA) LTD.
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Philip E. Soran
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
CRYSTAL DECISIONS, CORP
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial and Accounting Officer)
Eric Patel
* Director
-------------------------------
Gregory B. Kerfoot
* Director
-------------------------------
Susan J. Wolfe
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY HOLDINGS
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Chairman of the Board
-------------------------------
David J. Roux
* Director
-------------------------------
David Bonderman
* Director
-------------------------------
James G. Coulter
* Director
-------------------------------
James A. Davidson
* Director
-------------------------------
Glenn H. Hutchins
* Director
-------------------------------
David F. Marquardt
* Director
-------------------------------
John W. Thompson
* Director
-------------------------------
William D. Watkins
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY HDD HOLDINGS
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Donald L. Waite
* Director
-------------------------------
William D. Watkins
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY CHINA HOLDING
COMPANY
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Director
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-24
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY ASIA HOLDINGS
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Director
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-25
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY (IRELAND)
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Director
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Kenneth D. Allen
* Director
-------------------------------
James M. Chirico, Jr.
/s/ William L. Hudson Director
-------------------------------
William L. Hudson
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-26
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY MEDIA (IRELAND)
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Director
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Patrick J. O'Malley
* Director
-------------------------------
William D. Watkins
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-27
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY FAR EAST HOLDINGS
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Director
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
Director
-------------------------------
William L. Hudson
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-28
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY (PHILIPPINES)
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- --------------------------------------------
Chief Executive Officer and Chief
* Financial Officer
-------------------------------
Charles C. Pope (Principal Executive and Financial Officer)
* Chief Accounting Officer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
James M. Chirico, Jr.
/s/ William L. Hudson Director
-------------------------------
William L. Hudson
* Director
-------------------------------
Pornchai Piemsomboon
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-29
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY SAN HOLDINGS
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Donald L. Waite
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-30
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE REMOVABLE STORAGE SOLUTIONS
HOLDINGS
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Chairman of the Board
-------------------------------
David J. Roux
* Director
-------------------------------
David Bonderman
* Director
-------------------------------
James G. Coulter
* Director
-------------------------------
James A. Davidson
* Director
-------------------------------
Glenn H. Hutchins
* Director
-------------------------------
David F. Marquardt
* Director
-------------------------------
John W. Thompson
* Director
-------------------------------
William D. Watkins
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-31
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE REMOVABLE STORAGE SOLUTIONS
INTERNATIONAL
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Donald L. Waite
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-32
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE SOFTWARE (CAYMAN) HOLDINGS
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Chairman of the Board
-------------------------------
David J. Roux
* Director
-------------------------------
David Bonderman
* Director
-------------------------------
James G. Coulter
* Director
-------------------------------
James A. Davidson
* Director
-------------------------------
Glenn H. Hutchins
* Director
-------------------------------
David F. Marquardt
* Director
-------------------------------
John W. Thompson
* Director
-------------------------------
William D. Watkins
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-33
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY (MALAYSIA) HOLDING
COMPANY
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
Donald L. Waite
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-34
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
NIPPON SEAGATE INC.
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- --------------------------------------------------
* President and Representative Director
------------------------------- (Principal Executive Officer)
Tsuyoshi Kobayashi
* Statutory Auditor
------------------------------- (Principal Financial and Accounting Officer)
Stephen P. Sedler
* Chairman of the Board and Representative Director
-------------------------------
Stephen J. Luczo
* Director
-------------------------------
Charles C. Pope
/s/ William L. Hudson Director
-------------------------------
William L. Hudson
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-35
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Palo Alto, state of California, on the 27th day of April, 2001.
NIPPON SEAGATE SOFTWARE KK
By: /s/ Stephen J. Luczo
------------------------------------
Name: Stephen J. Luczo
Title: Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Gregory B. Kerfoot
* Chief Financial Officer
------------------------------- (Principal Financial and Accounting Officer)
Eric Patel
* Representative Director
-------------------------------
Shun Goto
* Director
-------------------------------
Stephen J. Luczo
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-36
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY -- REYNOSA, S. DE
R.L. DE C.V.
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary, Senior Vice
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- --------------------------------------------------
* Chief Executive Officer
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer and Chairman of the Board
------------------------------- (Principal Financial Officer)
Charles C. Pope
* Treasurer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
William D. Watkins
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-37
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE DISTRIBUTION (UK) LIMITED
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- --------------------------------------------------
Chief Executive Officer, Chief Financial Officer,
* Chairman of the Board and Managing Director
-------------------------------
Charles C. Pope (Principal Executive and Financial Officer)
* Chief Accounting Officer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
/s/ William L. Hudson Director
-------------------------------
William L. Hudson
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-38
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE SINGAPORE DISTRIBUTION PTE.
LTD.
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- --------------------------------------------
Chief Executive Officer, Chief Financial
* Officer and Director
-------------------------------
Charles C. Pope (Principal Executive and Financial Officer)
* Chief Accounting Officer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
/s/ William L. Hudson Director
-------------------------------
William L. Hudson
* Director
-------------------------------
Ronald Roughton
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Palo Alto, state of California, on the 27th day of April, 2001.
CRYSTAL DECISIONS (SINGAPORE) PTE LTD
By: /s/ Gregory B. Kerfoot
------------------------------------
Name: Gregory B. Kerfoot
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Gregory B. Kerfoot
* Chief Financial Officer
------------------------------- (Principal Financial and Accounting Officer)
Eric Patel
* Director
-------------------------------
Stephen J. Luczo
* Director
-------------------------------
Geraldine Norrie
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-40
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY (THAILAND) LIMITED
By: /s/ Charles C. Pope
------------------------------------
Name: Charles C. Pope
Title: Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- -----------------------------------------------------
* Chief Executive Officer, Chief Financial Officer and
------------------------------- Director
Charles C. Pope
* Chief Accounting Officer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
* Director
-------------------------------
James M. Chirico, Jr.
* Director
-------------------------------
Terry M. Dauenhauer
* Director
-------------------------------
Patrick J. O'Malley
* Director
-------------------------------
Pornchai Piemsomboon
* Director
-------------------------------
Jirapannee Supratya
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
SEAGATE TECHNOLOGY (MARLOW) LIMITED
By: /s/ William L. Hudson
------------------------------------
Name: William L. Hudson
Title: Joint Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- --------------------------------------------
Chief Executive Officer, Chief Financial
* Officer and Director
-------------------------------
Charles C. Pope (Principal Executive and Financial Officer)
* Chief Accounting Officer
------------------------------- (Principal Accounting Officer)
Glen A. Peterson
/s/ William L. Hudson Director
-------------------------------
William L. Hudson
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-42
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the following
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the city
of Scotts Valley, state of California, on the 27th day of April, 2001.
CRYSTAL DECISIONS (UK) LIMITED
By: /s/ Stephen J. Luczo
------------------------------------
Name: Stephen J. Luczo
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities indicated on April 27, 2001.
SIGNATURE TITLE
- ---------------------------------- ---------------------------------------------
* Chief Executive Officer and Director
------------------------------- (Principal Executive Officer)
Stephen J. Luczo
* Chief Financial Officer
------------------------------- (Principal Financial and Accounting Officer)
Eric Patel
* Director
-------------------------------
Brian Cannon
* Director
-------------------------------
Gregory B. Kerfoot
* Seagate Technology (US) Holdings, Inc.
------------------------------- (Authorized U.S. Representative)
Stephen J. Luczo, on behalf
of Seagate Technology (US)
Holdings, Inc.
* By: /s/ William L. Hudson
-----------------------------
William L. Hudson
Attorney-in-Fact
II-43
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ---------------- -------------------------------------------------------------------------------- -----
1.1* Purchase Agreement, dated as of November 17, 2000, by and among Suez
Acquisition Company (Cayman) Limited, Chase Securities Inc., Goldman, Sachs
& Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
1.2* Joinder to the Purchase Agreement, dated as of November 22, 2000, by and
among among Seagate Technology International, the Note Guarantors listed
therein, Chase Securities Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
2.1* Stock Purchase Agreement, dated as of March 29, 2000, by and among Suez
Acquisition Company (Cayman) Limited, Seagate Technology, Inc. and Seagate
Software Holdings, Inc.
2.2* Agreement and Plan of Merger and Reorganization, dated as of March 29,
2000, by and among VERITAS Software Corporation, Victory Merger Sub, Inc.
and Seagate Technology, Inc.
2.3* Indemnification Agreement, dated as of March 29, 2000, by and among
VERITAS Software Corporation, Seagate Techology, Inc. and Suez Acquisition
Company (Cayman) Limited
2.4* Joinder Agreement to the Indemnification Agreement, dated as of November 22,
2000, by and among VERITAS Software Corporation, Seagate Technology, Inc.
and the SAC Indemnitors listed therein
2.5* Consolidated Amendment to Stock Purchase Agreement, Agreement and Plan
of Merger and Reorganization, and Indemnification Agreement, and Consent,
dated as of August 29, 2000, by and among Suez Acquisition Company
(Cayman) Limited, Seagate Technology, Inc., Seagate Software Holdings, Inc.,
VERITAS Software Corporation and Victory Merger Sub, Inc.
2.6* Consolidated Amendment No. 2 to Stock Purchase Agreement, Agreement and
Plan of Merger and Reorganization, and Indemnification Agreement, and
Consent, dated as of October 18, 2000, by and among Suez Acquisition
Company (Cayman) Limited, Seagate Technology, Inc., Seagate Software
Holdings, Inc., VERITAS Software Corporation and Victory Merger Sub, Inc.
2.7* Letter Agreement, dated as of March 29, 2000, by and between VERITAS
Software Corporation and Suez Acquisition Company (Cayman) Limited
2.8* Agreement and Plan of Reorganization, dated as of December 3, 1999, by and
among Seagate Technology, Inc., Trout Acquisition Corp., XIOtech Corporation
and the Securityholders Agents listed therein
3.1 (a)* Memorandum of Association of Seagate Technology International
3.1 (b)* Articles of Association of Seagate Technology International
3.2 (a)* Memorandum of Association of New SAC
3.2 (b)* Articles of Association of New SAC
3.3 (a)* Certificate of Incorporation of Seagate Software Information Management Group
Holdings, Inc.
3.3 (b)* Amendment to Certificate of Incorporation of Crystal Decisions, Inc., formerly
known as Seagate Software Information Management Group Holdings, Inc.
3.3 (c)* By-laws of Crystal Decisions, Inc.
3.4 (a)* Amended and Restated Memorandum of Association of Seagate Technology
Holdings
3.4 (b)* Amended and Restated Articles of Association of Seagate Technology Holdings
3.5 (a)+ Amended and Restated Memorandum of Association of Seagate Technology
SAN Holdings
3.5 (b)+ Amended and Restated Articles of Association of Seagate Technology SAN
Holdings
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------------- -------------------------------------------------------------------------------- -----
3.6 (a)* Amended and Restated Memorandum of Association of Seagate Removable
Storage Solutions Holdings
3.6 (b)* Amended and Restated Articles of Association of Seagate Removable Storage
Solutions Holdings
4.1* Form of 12 1/2% Senior Subordinated Note due 2007 (included in Exhibit 4.2(a))
4.2 (a)* Indenture, dated as of November 22, 2000, by and among among New SAC,
Seagate Technology International, the Note Guarantors listed therein and The
Bank of New York
4.2 (b)* Supplemental Indenture, dated as of February 16, 2001, among Seagate
Technology (Malaysia) Holding Company, New SAC, Seagate Technology
International, the Existing Guarantors listed therein and The Bank of New York
4.3* Exchange and Registration Rights Agreement, dated as of November 22, 2000,
by and among Seagate Technology International, the Note Guarantors listed
therein, Chase Securities Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
5.1* Opinion of Simpson Thacher & Bartlett
10.1* Credit Agreement, dated as of November 22, 2000, by and among New SAC,
Seagate Technology International, Seagate Technology (US) Holdings, Inc., the
Lenders party thereto and The Chase Manhattan Bank
10.2 + First Amendment, dated as of April 11, 2001, to the Credit Agreement dated as
of November 22, 2000, by and among New SAC, Seagate Technology (US)
Holdings, Inc., the Lenders party hereto and The Chase Manhattan Bank
10.3 (a)* Form of Employment Agreement by and between Seagate Technology (US)
Holdings, Inc. and the Executive listed therein
10.3 (b)* Employment Agreement, dated as of February 2, 2001, by and between
Seagate Technology (US) Holdings, Inc. and Stephen J. Luczo
10.3 (c)+ Employment Agreement, dated as of February 2, 2001, by and between
Seagate Technology (US) Holdings, Inc. and William D. Watkins
10.4* Separation Agreement and Release, dated as of July 29, 1998, by and between
Seagate Technology, Inc. and Al Shugart
10.5 (a)* Form of Management Retention Agreement by and between the Employee
listed therein and Seagate Technology, Inc.
10.5 (b)* Management Retention Agreement, dated November 1998, by and between
Seagate Technology, Inc. and Stephen J. Luczo
10.6* Form of Rollover Agreement, dated as of November 13, 2000, by and among
New SAC, Seagate Technology HDD Holdings and the Senior Manager listed
therein
10.7* Form of Rollover Agreement, dated as of November 13, 2000, by and among
New SAC, Seagate Technology SAN Holdings and the Senior Manager listed
therein
10.8* Seagate Technology HDD Holdings Deferred Compensation Plan
10.9* Seagate Technology SAN Holdings Deferred Compensation Plan
10.10 (a)* New SAC 2000 Restricted Share Plan
10.10 (b)* Form of New SAC 2000 Restricted Share Agreement
10.11 (a)* New SAC 2001 Restricted Share Plan
10.11 (b)* Form of New SAC 2001 Restricted Share Agreement (Tier I Senior Managers)
10.11 (c)* Form of New SAC 2001 Restricted Share Agreement (Other Employees)
10.12* Crystal Decisions, Inc. 1999 Stock Option Plan and Form of Stock Option
Agreement as amended and restated
10.13* Crystal Decisions, Inc. 2000 Stock Option Plan and Form of Stock Option
Agreement as amended and restated
10.14 + Seagate Technology Holdings 2001 Stock Option Plan
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------------- -----
10.15 + Seagate Removable Storage Solutions Holdings 2001 Stock Option Plan
10.16* Shareholders Agreement, dated as of November 22, 2000, by and among New
SAC, Silver Lake Technology Investors Cayman, L.P., Silver Lake Investors
Cayman, L.P., Silver Lake Partners Cayman, L.P., SAC Investments, L.P.,
August Capital III, L.P., Chase Equity Associates, L.P., GS Capital Partners III,
L.P., GS Capital Partners III Offshore, L.P., Goldman, Sachs & Co. Verwaltungs
GmbH, Stone Street Fund 2000 L.P., Bridge Street Special Opportunities Fund
2000, L.P., Staenberg Venture Partners II, L.P., Staenberg Seagate Partners,
LLC, Integral Capital Partners V, L.P., Integral Capital Partners V Side Fund,
L.P. and the individuals listed therin
10.17* Management Shareholders Agreement, dated as of November 22, 2000, by and
among New SAC and the Management Shareholders listed therein
12.1* Statement of Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors of New SAC and its
predecessor Seagate Technology, Inc.
23.2 Consent of Ernst & Young LLP, Independent Auditors of Seagate Technology
Hard Disc Drive Business, an operating business of Seagate Technology, Inc.
23.3 Consent of Ernst & Young LLP, Independent Auditors of XIOtech Corporation
23.4 Consent of Ernst & Young LLP, Independent Auditors of Seagate Removable
Storage Solutions Business, an operating business of Seagate Technology, Inc.
23.5 Consent of Ernst & Young LLP, Independent Auditors of Crystal Decisions, Inc.
23.6 Consent of PricewaterhouseCoopers LLP, Independent Accountants of XIOtech
Corporation
23.7* Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1)
24.1* Powers of Attorney
25.1* Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The
Bank of New York
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
- ----------
* Previously filed.
+ To be filed by amendment.