UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1999
Commission File Number 001-11403
SEAGATE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2612933
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
920 Disc Drive, Scotts Valley, California 95066
(Address of principal executive offices) (Zip Code)
Telephone: (831) 438-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On December 31, 1999, 215,847,927 shares of the registrant's common stock were
issued and outstanding.
INDEX
SEAGATE TECHNOLOGY, INC.
PART I FINANCIAL INFORMATION PAGE NO.
- -----------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated condensed statements of operations--
Three and six months ended December 31, 1999 and
January 1, 1999 3
Consolidated condensed balance sheets--
December 31, 1999 and July 2, 1999 4
Consolidated condensed statements of cash flows--
Three and six months ended December 31, 1999 and
January 1, 1999 5
Notes to consolidated condensed financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II OTHER INFORMATION
- ------------------------------
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 33
2
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
December 31, January 1, December 31, January 1,
1999 1999 1999 1999
----------- ------------- ----------- -----------
Revenue $1,645 $1,801 $3,327 $3,354
Cost of sales 1,334 1,373 2,738 2,605
Product development 146 156 286 297
Marketing and administrative 125 135 243 266
Amortization of goodwill and
other intangibles 8 11 17 20
Restructuring costs 23 - 135 -
Unusual items 325 - 325 78
------ ------ ------ ------
Total Operating Expenses 1,961 1,675 3,744 3,266
Income (Loss) from Operations (316) 126 (417) 88
Interest income 21 27 42 53
Interest expense (13) (12) (26) (25)
Activity related to equity interest in
VERITAS (84) - (183) -
Gain on sale of VERITAS stock 344 - 537 -
Gain on sale of SanDisk stock 62 - 62 -
Other - 4 (2) 8
------ ------ ------ ------
Other Income (Expense), net 330 19 430 36
------ ------ ------ ------
Income before income taxes 14 145 13 124
Provision for income taxes 72 41 70 50
------ ------ ------ ------
Net Income (Loss) $ (58) $ 104 $ (57) $ 74
====== ====== ====== ======
Net income (loss) per share:
Basic $(0.27) $ 0.43 $(0.26) $ 0.30
Diluted (0.27) 0.42 (0.26) 0.30
Number of shares used in
per share computations:
Basic 214.8 244.9 216.7 245.0
Diluted 214.8 250.4 216.7 249.1
See notes to consolidated condensed financial statements.
3
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
(Unaudited)
December 31, July 2,
1999 1999 (1)
------------- ---------
ASSETS
- ------
Cash and cash equivalents $ 486 $ 396
Short-term investments 1,057 1,227
Accounts receivable, net 779 872
Inventories 369 451
Deferred income taxes 254 252
Other current assets 145 114
------- -------
Total Current Assets 3,090 3,312
Property, equipment and leasehold improvements, net 1,591 1,687
Investment in VERITAS Software, net 1,265 1,745
Goodwill and other intangibles, net 146 144
Other assets 537 184
------- -------
Total Assets $ 6,629 $ 7,072
======= =======
LIABILITIES
- -----------
Accounts payable $ 630 $ 714
Accrued employee compensation 189 205
Accrued expenses 574 577
Accrued income taxes 276 43
Current portion of long-term debt 1 1
------- -------
Total Current Liabilities 1,670 1,540
Deferred income taxes 1,049 1,103
Other liabilities 168 163
Long-term debt, less current portion 704 703
------- -------
Total Liabilities 3,591 3,509
------- -------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 3 3
Additional paid-in capital 1,752 1,991
Retained earnings 2,202 2,355
Accumulated other comprehensive income (loss) 204 (7)
Deferred compensation (36) (43)
Treasury common stock at cost (1,087) (736)
------- -------
Total Stockholders' Equity 3,038 3,563
------- -------
Total Liabilities and Stockholders' Equity $ 6,629 $ 7,072
======= =======
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of July 2, 1999.
See notes to consolidated condensed financial statements.
4
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six Months Ended
-----------------
December 31, January 1,
1999 1999
------------ -----------
OPERATING ACTIVITIES:
Net income (loss) $ (57) $ 74
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 351 333
Deferred income taxes (192) 67
Non-cash portion of restructuring charge 76 -
Activity related to equity interest in VERITAS 183 -
Gain on sale of VERITAS stock (537) -
Gain on sale of SanDisk stock (62) -
Compensation expense for SSI exchange offer 284 -
Other, net 53 25
Changes in operating assets and liabilities:
Accounts receivable 85 (33)
Inventories 63 89
Accounts payable (86) (1)
Accrued income taxes (5) 5
Accrued expenses and employee compensation (135) 24
Other assets and liabilities, net 12 146
------- -------
Net cash provided by operating activities 33 729
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (279) (259)
Purchases of short-term investments (1,639) (3,676)
Maturities and sales of short-term investments 1,803 3,550
Proceeds from sale of VERITAS stock 834 -
Proceeds from sale of SanDisk stock 67 -
Other, net (19) (20)
------- -------
Net cash provided by (used in) investing activities 767 (405)
FINANCING ACTIVITIES:
Sale of common stock 65 39
Purchase of treasury stock (776) (101)
Other, net 1 (1)
------- -------
Net cash provided by (used in) financing activities (710) 63
Effect of exchange rate changes on cash and cash equivalents - (1)
------- -------
Increase in cash and cash equivalents 90 260
Cash and cash equivalents at the beginning of the period 396 666
------- -------
Cash and cash equivalents at the end of the period $ 486 $ 926
======= =======
See notes to consolidated condensed financial statements.
5
SEAGATE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The Company
believes the disclosures included in the unaudited consolidated condensed
financial statements, when read in conjunction with the consolidated
financial statements of the Company as of July 2, 1999 and notes thereto,
are adequate to make the information presented not misleading.
The consolidated condensed financial statements reflect, in the opinion of
management, all material adjustments necessary to summarize fairly the
consolidated financial position, results of operations and cash flows for
such periods. Such adjustments are of a normal recurring nature.
The results of operations for the three and six month periods ended
December 31, 1999 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 2000.
The Company operates and reports financial results on a fiscal year of 52
or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal
1999 was 52 weeks and ended on July 2, 1999 and fiscal 2000 will be 52
weeks and will end on June 30, 2000.
2. Net Income (Loss) Per Share
---------------------------
The following table sets forth the computation of basic and diluted net
income (loss) per share:
(In Millions, Except Three Months Ended Six Months Ended
-------------------------- --------------------------
Per Share Data) December 31, January 1, December 31, January 1,
1999 1999 1999 1999
------------- ---------- ------------- ----------
Numerator:
Net income (loss) $ (58) $ 104 $ (57) $ 74
------ ------ ------ ----------
Denominator:
Denominator for basic net
income (loss) per share - weighted
average shares outstanding 214.8 244.9 216.7 245.0
6
Incremental common shares
attributable to exercise of
outstanding options (assuming
proceeds would be used to
purchase treasury stock) - 5.5 - 4.1
------ ------ ------ ------
Denominator for diluted net
income (loss) per share - adjusted
weighted average shares 214.8 250.4 216.7 249.1
====== ====== ====== ======
Basic net income (loss)
per share $(0.27) $ 0.43 $(0.26) $ 0.30
====== ====== ====== ======
Diluted net income (loss)
per share $(0.27) $ 0.42 $(0.26) $ 0.30
====== ====== ====== ======
For the quarter and six months ended December 31, 1999, all options to
purchase shares of common stock, including 8.3 million shares and 6.9
million shares, respectively, were excluded from the computation of diluted
net loss per share because the effect would be anti-dilutive. Options to
purchase 3.1 million shares and 10.1 million shares of common stock were
outstanding during the quarter and six months ended January 1, 1999,
respectively, but were not included in the computation of diluted net
income per share because the options' exercise price was greater than the
average market price of the common stock and, therefore, the effect would
be antidilutive.
3. Balance Sheet Information
-------------------------
(In millions)
December 31, July 2,
1999 1999
----------- --------
Receivable:
Accounts receivable $ 851 $ 925
Allowance for non-collection (72) (53)
------- -------
$ 779 $ 872
======== =======
Inventories:
Components $ 95 $ 143
Work-in-process 68 54
Finished goods 206 254
------- -------
$ 369 $ 451
======= =======
Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements $ 3,549 $ 3,533
Allowance for depreciation and amortization (1,958) (1,846)
------- -------
$ 1,591 $ 1,687
======= =======
7
4. Income Taxes
------------
The effective tax rate used to record the provision for income taxes for
the six months ended December 31, 1999 was 534% compared with a 40%
effective tax rate used to record the provision for income taxes for the
six months ended January 1, 1999. The higher effective tax rate used to
record the provision for income taxes for the six months ended December 31,
1999 resulted primarily from the effects of net non-deductible charges
associated with the acquisition of the minority interest in Seagate
Software, the net gain from the sales of VERITAS Software Corporation
("VERITAS") and SanDisk Corporation ("SanDisk") common stock and activity
related to the Company's equity interest in VERITAS. Excluding these
items, the Company's settlement of litigation with Rodime PLC (the "Rodime
Settlement") and certain non-recurring restructuring costs, the pro forma
effective tax rate used to record the provision for income taxes for the
six months ended December 31, 1999 would have been 28%. The pro forma
effective tax rate of 28% is less than the statutory rate because a portion
of the Company's anticipated foreign operating income is not subject to
foreign income taxes and is considered to be permanently reinvested in non-
U.S. operations.
5. Supplemental Cash Flow Information
----------------------------------
(In millions)
Six Months Ended
----------------
December 31, January 1,
1999 1999
------------ ----------
Cash Transactions:
Cash paid for interest $ 26 $ 26
Cash paid for income taxes, net of refunds 261 (123)
Non-Cash Transactions:
Acquisition of minority interest 19 -
6. Restructuring Costs
-------------------
In the quarters ended October 1, 1999 and December 31, 1999, the Company
recorded restructuring charges of $112 million and $23 million,
respectively, for a total of $135 million. These charges were a result of a
restructuring plan established to align the Company's global workforce and
manufacturing capacity with existing and anticipated future market
requirements and necessitated by the Company's improved productivity and
operating efficiencies (the "fiscal 2000 restructuring plan"). These
actions include workforce reductions, capacity reductions including closure
of facilities or portions of facilities, write-off of excess equipment and
consolidation of operations in the Company's recording media operations,
disc drive assembly and test facilities, printed circuit board assembly
manufacturing, recording head operations, software operations, customer
service operations, sales and marketing activities, and research and
development activities. The restructuring charges were comprised of $48
million for the write-off of excess manufacturing, assembly and test
equipment formerly utilized in Singapore, Thailand and Northern California;
$46 million for employee termination costs; $29 million for the write-off
of owned facilities located in Singapore; $5 million in lease termination
and holding costs; $5 million in renovation costs to restore facilities in
Singapore and Northern
8
California to their pre-lease condition; and $2 million in contract
cancellations associated with one of the Singapore facilities. Prior to
this period, there was no indication of permanent impairment of the assets
associated with the closure and consolidation of facilities.
In connection with the restructuring activities taken to date, the
Company plans to reduce its workforce by approximately 11,300 employees.
Approximately 8,800 of the 11,300 employees had been terminated as of
December 31, 1999. As a result of employee terminations and the write-off
of equipment and facilities in connection with the restructuring charges
recorded in the quarters ended October 1, 1999 and December 31, 1999
related to 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 $82 million and $73
million, respectively. As the Company implements additional actions
pursuant to the fiscal 2000 restructuring plan, the Company anticipates
that additional charges will be taken related to these actions and that
the implementation of the fiscal 2000 restructuring plan will be
substantially complete by September 30, 2000.
In connection with the restructuring plan implemented in fiscal 1999,
approximately 800 of the planned workforce reduction of 1,250 employees had
been terminated as of December 31, 1999. As a result of employee
terminations and the write-off or write-down of equipment and facilities in
connection with the fiscal 1999 restructuring plan, the Company estimates
that after completion of these restructuring activities, annual salary
and depreciation expense will be reduced by approximately $27 million and
$16 million, respectively. The Company anticipates that the
implementation of the fiscal 1999 restructuring plan will be
substantially complete by the end of March 2000.
The following table summarizes the Company's restructuring
activities for the six months ended December 31, 1999:
Severance
and Excess Contract
In millions Benefits Facilities Equipment Cancellations Other Total
Reserve balances,
July 2, 1999 $ 4 $ 18 $ - $3 $11 $ 36
Q1FY00 restructuring charge 27 33 48 2 2 112
Q2FY00 restructuring charge 19 1 - - 3 23
Cash charges (26) (5) - - (1) (32)
Non-cash charges - (28) (48) - - (76)
-----------------------------------------------------------------
Reserve balances,
December 31, 1999 $ 24 $ 19 $ - $5 $15 $ 63
-----------------------------------------------------------------
7. Business Segments
-----------------
The Company has three operating segments, disc drives, software and tape
drives, however, only the disc drive business is a reportable segment under
the criteria of SFAS 131. The "other" category in the following tables
consists of tape drives, software, and out-of-warranty repair. The Chief
Executive Officer (the "CEO") has been identified as the Chief Operating
Decision Maker as defined by SFAS 131. The CEO evaluates
9
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 following tables summarize the Company's operations by business
segment:
In millions
Three Months Ended Six Months Ended
------------------ ----------------
December 31, January 1, December 31, January 1,
1999 1999 1999 1999
------------- ----------- ------------ ----------
Revenue:
Disc Drives $ 1,534 $ 1,622 $3,100 $3,013
Other 111 179 227 341
-------- -------- ------ ------
Consolidated $ 1,645 $ 1,801 $3,327 $3,354
======== ======== ====== ======
Gross Profit:
Disc Drives $ 258 $ 325 $ 489 $ 563
Other 53 103 100 186
-------- -------- ------ ------
Consolidated $ 311 $ 428 $ 589 $ 749
======== ======== ====== ======
December 31, July 2,
1999 1999
-------- --------
Total Assets:
Disc Drives $ 17,761 $ 16,553
Other 210 586
-------- --------
Operating Segments 17,971 17,139
Investment in VERITAS 1,265 1,745
Eliminations (12,607) (11,812)
-------- --------
Consolidated $ 6,629 $ 7,072
======== ========
8. Comprehensive Income
--------------------
During the quarter ended October 1, 1999, Gadzoox Networks Inc.
("Gadzoox"), a company in which Seagate Technology holds a 19.89% interest,
completed an initial public offering of its common stock. The Company is
required to account for its investment under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). The Company has identified this
investment as "available-for-sale". Under SFAS 115, an available-for-sale
security is recorded at fair value on the balance sheet and unrealized
holding gains and losses are reported, net of taxes, in a separate
component of stockholders' equity called accumulated other comprehensive
income, until realized. The Company recorded an unrealized gain on
securities, net of tax, of $146 million to record its investment in Gadzoox
at fair value as of October 1, 1999. For the six months ended December 31,
1999, the Company recorded net unrealized gains on securities of $117
million, net of tax, with respect to its investment in Gadzoox.
10
During the quarter ended December 31, 1999, the Company identified its
investment in SanDisk as "available-for-sale" after it had sold 1,000,000
shares of stock it held in SanDisk resulting in a final ownership
percentage of 15.8%. The Company recorded an unrealized gain on
securities, net of tax, of $97 million to record its investment in SanDisk
at fair value as of December 31, 1999.
The components of comprehensive income, net of related tax, for the three
and six months ended December 31, 1999 and January 1, 1999 were as follows
(in millions):
Three Months Ended Six Months Ended
------------------ ----------------
December 31, January 1, December 31, January 1,
1999 1999 1999 1999
------------- ----------- ------------- ----------
Net income (loss) $ (58) $ 104 $ (57) $ 74
Unrealized gain (loss) on securities 66 1 211 1
Foreign currency translation adjustments - (1) - -
----- ----- ----- -----
Comprehensive income (loss) $ 8 $ 104 $ 154 $ 75
===== ===== ===== =====
The components of accumulated other comprehensive income, net of related
tax, at December 31, 1999 and July 2, 1999 were as follows (in millions):
December 31, July 2,
1999 1999
------------ --------
Unrealized gain (loss) on securities $ 206 $ (5)
Foreign currency translation adjustments (2) (2)
----- -----
Accumulated other comprehensive income (loss) $ 204 $ (7)
===== =====
9. Equity Investment in VERITAS Software Corporation
-------------------------------------------------
During the quarters ended October 1, 1999 and December 31, 1999, the
Company's Seagate Software Holdings, Inc. ("Seagate Software") subsidiary
sold 12,349,001 and 6,000,000 shares of VERITAS Software Corporation common
stock, adjusted for a 3 for 2 stock split on November 22, 1999, for
proceeds of $397 million and $437 million, respectively, net of
underwriting discounts and commissions. Seagate Software acquired such
shares in connection with Seagate Software's contribution of its Network &
Storage Management Group business to VERITAS. The sale of shares of
VERITAS common stock by Seagate Software in the quarters ended October 1,
1999 and December 31, 1999 resulted in pre-tax gains of $193 million and
$344 million, respectively. As of December 31, 1999, the Company held
approximately 33% 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.
11
Summarized income statement information for VERITAS for the three and six
months ended September 30, 1999 is as follows (in millions):
Three Months Ended Six Months Ended
September 30, September 30,
1999 1999
---- ----
Revenue $ 183 $ 298
Gross profit 151 250
Net loss (184) (346)
The Company's recorded equity in the net income of VERITAS for the three
and six months ended December 31, 1999 was $9 million and $7 million,
respectively, and differs from the Company's proportionate share of
VERITAS' reported net loss for the three and six months ended September 30,
1999. This difference is primarily because the Company eliminates from
VERITAS' net income (loss) the effect of VERITAS' accounting for the
Network & Storage Management Group business contribution, including
VERITAS' amortization expense related to intangible assets.
The Company's activity related to equity interest in VERITAS for the three
and six months ended December 31, 1999 consisted of the recorded equity in
the net income of VERITAS of $9 million and $7 million, respectively, as
described above, and the Company's amortization expense for goodwill and
other intangible assets relating to the investment in VERITAS amounting to
$93 million and $190 million, respectively.
10. Seagate Software Reorganization
-------------------------------
On October 20, 1999, the stockholders of Seagate Software, a majority-owned
subsidiary of the Company, approved the merger of Seagate Daylight Merger
Corp., a wholly-owned subsidiary of the Company, with and into Seagate
Software. Seagate Software's assets consist of the assets of the
Information Management Group ("IMG") and 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 became a wholly-owned
subsidiary of the Company. In connection with the merger, Seagate
Software's stockholders and optionees received payment in the form of 3.23
shares of the Company's common stock per share of Seagate Software common
stock less any amounts due for the payment of the exercise price for such
options. All outstanding Seagate Software stock options were accelerated
immediately prior to the merger. Seagate Technology issued 9,124,046
shares to optionees and minority stockholders of Seagate Software.
In connection with the reorganization, Seagate Software also formed a
wholly-owned subsidiary that assumed the name "Seagate Software, Inc."
("Software Operating Company"). Seagate Software transferred the IMG assets
into Software Operating Company. This new company, Software Operating
Company, is now the operating entity for the IMG business. A new stock
option plan has been established for Software Operating Company, and
employees of the IMG business are eligible to participate in the plan.
Seagate Software accounted for the exchange of shares of its common stock
as the
12
acquisition of a minority interest for Seagate Software common stock
outstanding and vested more than six months held by employees and all stock
held by former employees and consultants. The fair value of the shares of
Seagate Technology issued 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 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
=====
Compensation relating to stock purchased from employees
Dollars in millions, except per share data
-------------------------------------------------------------------
Seagate Software options exercised and
exchanged for Seagate Technology stock........................ 3,723,015
Plus: Seagate Software stock held for less than 6 months
and exchanged for Seagate Technology stock.................... 17,952
-----------
Total Seagate Software shares exchanged....................... 3,740,967
Times: Exchange ratio into Seagate Technology stock........... 3.23
-----------
Number of Seagate Technology shares issued................... 12,083,323
-----------
Value per share of Seagate Technology common
stock on October 20, 1999..................................... $ 29.00
Less: Average price paid per Seagate Technology share......... $ (5.50)
-----------
Average compensation expense per
Seagate Technology share issued........................... $ 23.50
-----------
Total compensation expense.................................... $ 284
===========
11. Subsequent Events - Acquisition of XIOtech Corporation
------------------------------------------------------
On January 28, 2000, the Company acquired XIOtech Corporation ("XIOtech"),
a provider of virtual storage and Storage Area Network (SAN) solutions, for
Seagate Technology common stock with a value of $360 million. The
acquisition will be accounted for under the purchase method. The purchase
price allocation is preliminary and it has been allocated based on the
estimated fair market value of net tangible and intangible assets
acquired as well as in-process research and development costs.
In the quarter ending March 31, 2000, the Company expects to record a
charge of approximately $105 million associated with the purchased in-
process research and development costs. The excess of the purchase price
over the net assets is approximately $241 million, will be recorded as
goodwill and other intangibles and will be amortized on a straight-line
basis over two to seven years.
13
12. Litigation
----------
In late 1992, Rodime PLC filed a complaint alleging infringement on a
certain patent. The process of litigation ensued and elapsed through
January 2000. On January 18, 2000, the U.S. Supreme Court denied the
Company's petition for certiorari. On the following day, through a
mediation process, the Company and Rodime agreed to a settlement amount
of $45 million to bring the related litigation to an end. As a result, a
previously recorded estimate of related settlement costs was revised and
a charge of $39 million was recorded in the three months ended December
31, 1999. See Part II, Item 1 of this Form 10-Q for a description of
legal proceedings.
14
SEAGATE TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain Forward-Looking Information:
- ------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include the statements
relating to continued price erosion in the first paragraph under "Results of
Operations," the statements relating to restructuring activities in the fifth
paragraph under "Results of Operations," the statements relating to the
estimated savings resulting from the Company's restructuring activities in the
fifth paragraph under "Results of Operations," the statements regarding capital
expenditures in the third paragraph under "Liquidity and Capital Resources," the
statements relating to the purchase price and charge to operations associated
with the acquisition of XIOtech Corporation ("XIOtech") in the tenth paragraph
under "Results of Operations," the statements below under "Factors Affecting
Future Operating Results" and the statements under "Part II Other Information -
Item 1. Legal Proceedings," among others. These forward-looking statements are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties are set forth below
under "Factors Affecting Future Operating Results."
Results of Operations:
- ----------------------
Revenue for the quarter ended December 31, 1999 was $1.645 billion, as compared
with $1.801 billion for the comparable year-ago quarter ended January 1, 1999,
and $1.682 billion for the immediately preceding quarter ended October 1, 1999.
The decrease in revenue from both comparable periods was primarily due to a
continuing decline in the average unit sales prices of the Company's products as
a result of competitive market conditions partially offset by a higher level of
unit shipments. The Company shipped a record number of disc drives in its
quarter ended December 31, 1999. Price erosion accounted for $0.5 billion of
the revenue decline from the quarter ended January 1, 1999 partially offset by
$0.4 billion in improved sales volume and product mix. When compared to the
immediately preceding quarter ended October 1, 1999, price erosion accounted for
$0.1 billion of the revenue decline offset by $0.1 billion in improved sales
volume. Revenue for the six months ended December 31, 1999 was $3.327 billion,
as compared with $3.354 billion for the comparable year-ago period. Although
revenue was essentially flat compared with the year-ago period, there was $1.0
billion of price erosion that was offset by $1.0 billion in improved sales
volume and product mix. The Company expects that price erosion in the data
storage industry will continue for the foreseeable future. Industry competition
and continuing price erosion could adversely affect the Company's results of
operations in any given quarter and such adverse effects often cannot be
anticipated until late in any given quarter.
Gross margin as a percentage of revenue was 18.9% and 17.7% for the three and
six months ended December 31, 1999, compared with 23.8% and 22.3% for the
comparable year-ago periods and 16.5% for the immediately preceding quarter
ended October 1, 1999. The decrease in gross margin as a percentage of revenue
from both year-ago periods was partially due to the Company's contribution of
the Network & Storage Management Group to VERITAS during the quarter ended July
2, 1999. Excluding the Network & Storage Management Group business, the
Company's gross margins would have been 21.4% and 20.3%, respectively, for the
three and six month periods ended January 1, 1999. In addition, the decrease in
gross margins from both year-ago periods was a result of price erosion due to
intense price competition for disc drive products in the
15
three and six months ended December 31, 1999. These decreases were partially
offset by cost savings as a result of the Company's program to implement
operational efficiencies. These efficiencies include implementation of advanced
manufacturing processes resulting in lower average unit costs per disc drive
produced. The increase in gross margin as a percentage of revenue from the
immediately preceding quarter was primarily due to these cost savings partially
offset by price erosion.
Product development expenses for the three and six months ended December 31,
1999 were $146 million and $286 million, respectively, a decrease of $10 million
and $11 million when compared with the comparable year-ago periods and an
increase of $6 million when compared with the immediately preceding quarter
ended October 1, 1999. These expenses represented 8.9% and 8.6%, respectively,
of revenue for the three and six months ended December 31, 1999 compared with
8.7% and 8.9%, respectively, for the comparable year-ago periods and 8.3% for
the immediately preceding quarter ended October 1, 1999. The decrease in
expenses from the comparable year-ago quarter was primarily due to decreases of
$9 million in product development expenses related to the Company's Network &
Storage Management Group business, $6 million in accruals for profit sharing and
management bonuses, and $3 million in outside services. These decreases were
partially offset by increased investment in product development for the
Company's core business resulting in increases of $3 million in salaries and
related costs, $3 million in depreciation and $1 million in occupancy costs.
The decrease in expenses from the comparable year-ago six month period was
primarily due to decreases of $18 million in product development expenses
related to the Company's Network & Storage Management business, $5 million in
accruals for profit sharing and management bonuses, $5 million in outside
services, and $2 million in recruitment and relocation. These decreases were
partially offset by increased investment in product development for the
Company's core business resulting in an increase of $8 million in salaries and
related costs, $5 million in occupancy costs and $5 million in depreciation
costs.
Marketing and administrative expenses for the three and six months ended
December 31, 1999 were $125 million and $243 million, respectively, a decrease
of $10 million and $23 million when compared with the comparable year-ago
periods and an increase of $7 million from the immediately preceding quarter
ended October 1, 1999. These expenses represented 7.6% and 7.3%, respectively,
of revenue for the three and six months ended December 31, 1999 compared with
7.5% and 7.9%, respectively, for the comparable year-ago periods and 7.0% for
the immediately preceding quarter ended October 1, 1999. The decrease in
expenses from the comparable year-ago quarter was primarily due to decreases of
$28 million in marketing and administrative expenses related to the Company's
Network & Storage Management business and $8 million in advertising and
promotion expenses. These decreases were partially offset by increases of $13
million in the provision for bad debts, $5 million in marketing and
administrative expenses related to the Company's Information Management Group
("IMG") software products and services, $3 million in salaries and related
costs, $2 million in outside services, and $2 million in occupancy costs. The
decrease in expenses from the comparable year-ago six month period was primarily
due to decreases of $53 million in marketing and administrative expenses related
to the Company's Network & Storage Management business, $14 million in
advertising and promotion expenses, and $2 million in occupancy costs. These
decreases were partially offset by increases of $20 million in the provision for
bad debts, $11 million in marketing and administrative expenses related to the
Company's IMG software products and services, $7 million in salaries and related
costs, and $7 million in outside services.
In the quarters ended October 1, 1999 and December 31, 1999, the Company
recorded restructuring charges of $112 million and $23 million, respectively,
for a total of $135 million. These charges were a result of a restructuring
plan established to align the Company's global
16
workforce and manufacturing capacity with existing and anticipated future
market requirements and necessitated by the Company's improved productivity
and operating efficiencies (the "fiscal 2000 restructuring plan"). These
actions include workforce reductions, capacity reductions including closure of
facilities or portions of facilities, write-off of excess equipment and
consolidation of operations in the Company's recording media operations, disc
drive assembly and test facilities, printed circuit board assembly
manufacturing, recording head operations, software operations, customer
service operations, sales and marketing activities, and research and
development activities. In connection with the restructuring activities taken to
date, the Company plans to reduce its workforce by approximately 11,300
employees. Approximately 8,800 of the 11,300 employees had been terminated as of
December 31, 1999. As a result of employee terminations and the write-off of
equipment and facilities in connection with the restructuring charges recorded
in the quarters ended October 1, 1999 and December 31, 1999 related to the
fiscal year 2000 restructuring plan, the Company estimates that after completion
of these restructuring activities, annual salary and depreciation expense will
be reduced by approximately $82 million and $73 million, respectively. As the
Company implements additional actions pursuant to the fiscal 2000 restructuring
plan, the Company anticipates that additional charges will be taken related to
these actions and that the implementation of the fiscal 2000 restructuring plan
will be substantially complete by September 30, 2000. In connection with the
restructuring plan implemented in fiscal 1999, approximately 800 of the planned
workforce reduction of 1,250 employees had been terminated as of December 31,
1999.
Unusual items during the quarter ended December 31, 1999 consisted of a $39
million charge as a result of the settlement in the Rodime PLC ("Rodime")
litigation (see note #12, Litigation, to the consolidated condensed financial
statements) and $284 million for compensation expense, plus payroll taxes of
$2 million, related to the purchase of the minority interest in the Company's
Seagate Software Holdings, Inc. ("Seagate Software") subsidiary. On October
20, 1999, the stockholders of Seagate Software, a majority-owned subsidiary of
the Company, approved the merger of Seagate Daylight Merger Corp., a wholly-
owned subsidiary of the Company, with and into Seagate Software. Seagate
Software's assets consist of the assets of the Information Management Group
("IMG") and an investment in the common stock of VERITAS Software Corporation.
The merger was effected on October 20, 1999. As a result of the merger,
Seagate Software became a wholly-owned subsidiary of the Company. In
connection with the merger, Seagate Software's stockholders and optionees
received payment in the form of 3.23 shares of the Company's common stock per
share of Seagate Software common stock less any amounts due for the payment of
the exercise price for such options. All outstanding Seagate Software stock
options were accelerated immediately prior to the merger. Seagate Technology
issued 9,124,046 shares to optionees and minority stockholders of Seagate
Software. In connection with the reorganization, Seagate Software also formed
a wholly-owned subsidiary that assumed the name "Seagate Software, Inc."
("Software Operating Company"). Seagate Software transferred the IMG assets
into Software Operating Company. This new company, Software Operating Company,
is now the operating entity for the IMG business. A new stock option plan has
been established for Software Operating Company, and employees of the IMG
business are eligible to participate in the plan. Seagate Software accounted
for the exchange of shares of its common stock as the acquisition of a
minority interest for Seagate Software common stock outstanding and vested
more than six months held by employees and all stock held by former employees
and consultants. The fair value of the shares of Seagate Technology issued 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 held by employees and stock
held and vested by employees less than six months as the settlement of an
earlier stock award. See note #10,
17
Seagate Software Reorganization, to the consolidated condensed financial
statements.
Net other income increased by $311 million and $394 million for the three and
six months ended December 31, 1999, respectively, when compared with the
comparable year-ago periods and by $229 million when compared with the
immediately preceding quarter ended October 1, 1999. The increase in net other
income from the comparable year-ago quarter was primarily due to gains on sales
of portions of the Company's investments in VERITAS and SanDisk Corporation
("SanDisk") common stock of $344 million and $62 million, respectively,
partially offset by activity related to the Company's equity interest in VERITAS
of $84 million. The increase in net other income from the comparable year-ago
six month period was primarily due to gains on sales of portions of the
Company's investments in VERITAS and SanDisk common stock of $537 million and
$62 million, respectively, partially offset by activity related to the Company's
equity interest in VERITAS of $183 million and a decrease of $11 million in
interest income primarily resulting from lower average invested cash.
During the quarters ended October 1, 1999 and December 31, 1999, Seagate
Software sold 12,349,001 and 6,000,000 shares of VERITAS Software Corporation
common stock, adjusted for a 3 for 2 stock split on November 22, 1999, for
proceeds of $397 million and $437 million, respectively, net of underwriting
discounts and commissions. Seagate Software acquired such shares in connection
with its contribution of the Network & Storage Management Group business to
VERITAS. The sales of VERITAS shares resulted in pre-tax gains of $193 million
and $344 million, respectively. As of December 31, 1999, the Company held
approximately 33% 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 in lag.
The effective tax rate used to record the provision for income taxes for the six
months ended December 31, 1999 was 534% compared with a 40% effective tax rate
used to record the provision for income taxes for the six months ended January
1, 1999. The higher effective tax rate used to record the provision for income
taxes for the six months ended December 31, 1999 resulted primarily from the
effects of net non-deductible charges associated with the acquisition of the
minority interest in Seagate Software, the net gain from the sales of VERITAS
and SanDisk common stock and activity related to the Company's equity interest
in VERITAS. Excluding these items, the Company's settlement of litigation with
Rodime PLC (the "Rodime settlement") and certain non-recurring restructuring
costs, the pro forma effective tax rate used to record the provision for income
taxes for the six months ended December 31, 1999 would have been 28%. The pro
forma effective tax rate of 28% is less than the statutory rate because a
portion of the Company's anticipated foreign operating income is not subject to
foreign income taxes and is considered to be permanently reinvested in non-U.S.
operations.
On January 28, 2000, the Company acquired XIOtech Corporation ("XIOtech"), a
provider of virtual storage and Storage Area Network (SAN) solutions, for
Seagate Technology common stock with a value of $360 million. The acquisition
will be accounted for under the purchase method. The purchase price allocation
is preliminary and it has been allocated based on the estimated fair market
value of net tangible and intangible assets acquired as well as in-process
research and development costs. In the quarter ending March 31, 2000, the
Company expects to record a charge of approximately $105 million associated with
the purchased in-process research and development costs. The excess of the
purchase price over the net assets is approximately $241 million, will be
recorded as goodwill and other intangibles and will be amortized on a straight-
line basis over two to seven years.
Liquidity and Capital Resources:
- --------------------------------
At December 31, 1999, the Company's cash, cash equivalents and short-term
investments totaled $1.543 billion, a decrease of $80 million from the July 2,
1999 balance. This decrease was
18
primarily a result of expenditures for property, equipment and leasehold
improvements of $279 million and the repurchase of 25 million shares of the
Company's common stock for $776 million. However, this decrease was partially
offset by proceeds from sales of VERITAS and SanDisk common stock of $834
million and $67 million, respectively, and net cash provided by operating
activities. Until required for other purposes, the Company's cash and cash
equivalents are maintained in highly liquid investments with remaining
maturities of 90 days or less at the time of purchase. The Company's short-term
investments consist primarily of readily marketable debt securities with
remaining maturities of more than 90 days at the time of purchase.
As of December 31, 1999, the Company had committed lines of credit of $90
million that can be used for standby letters of credit and bankers' guarantees.
At December 31, 1999, $72 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 December 31, 1999 this facility was unutilized.
The Company expects investments in property and equipment in the current fiscal
year to approximate $700 million, of which approximately $281 million had been
incurred as of December 31, 1999. The Company plans to finance these
investments from existing cash balances and cash flows from operations. The
$281 million year-to-date investment comprised $129 million for manufacturing
facilities and equipment related to the Company's subassembly and disc drive
final assembly and test facilities in the United States and the Far East; $90
million for manufacturing facilities and equipment for the recording head
operations in the United States, Northern Ireland and Malaysia; $35 million to
upgrade the capabilities of the Company's thin-film media operations in
California and Northern Ireland; and $27 million for other purposes.
During the six months ended December 31, 1999, the Company acquired
approximately 25 million shares of its common stock for approximately $776
million. The repurchase of a portion of these shares completed the June 1997
stock repurchase program as amended in February 1999. The remainder of the
shares were repurchased under an April 1999 amendment to the program in which up
to an additional 25 million shares of the Company's common stock may be acquired
in the open market. In November 1999, the Company's Board of Directors
authorized an increase to the existing stock repurchase program pursuant to
which an additional 50 million shares of the Company's common stock may be
acquired in the open market.
During the quarter ended October 1, 1999, Gadzoox Networks Inc. ("Gadzoox"), a
company in which Seagate Technology holds a 19.89% interest, completed an
initial public offering of its common stock. The Company is required to account
for its investment under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
The Company has identified this investment as "available-for-sale". Under SFAS
115, an available-for-sale security is recorded at fair value on the balance
sheet and unrealized holding gains and losses are reported, net of taxes, in a
separate component of stockholders' equity called accumulated other
comprehensive income, until realized. The Company recorded an unrealized gain
on securities, net of tax, of $146 million to record its investment in Gadzoox
at fair value as of October 1, 1999. For the six months ended December 31,
1999, the Company recorded net unrealized gains on securities of $117 million,
net of tax, with respect to its investment in Gadzoox.
On January 28, 2000, the Company paid $45 million to Rodime PLC in settlement of
patent litigation. See note #12, Litigation, to the consolidated condensed
financial statements.
19
Factors Affecting Future Operating Results:
- -------------------------------------------
We compete in the data storage industry, and there are a number of factors that,
in the past, have affected all of the companies in our industry, including
Seagate. Many of these factors may also impact our business in the future.
Slowdown in demand for computer systems may cause a decline in demand for our
products
Our products are components in computer systems. The demand for computer
systems has been volatile in the past and often has had an exaggerated effect on
the demand for our disc drive and tape drive products, in any given period. In
the past, unexpected slowdowns in demand for computer systems have generally
caused sharp declines in demand for disc drives and tape drive products. We
expect that this situation will occur again in the future and that at such time
demand for our disc drive and tape drive products may be reduced. Causes of the
declines in demand in the past for our products have included the announcement
or introduction of major operating system or semiconductor improvements, such as
Windows 95 or the Pentium II. We believe these announcements and introductions
caused consumers to defer their purchases and made existing inventory obsolete.
In the data storage industry, the supply of drives periodically exceeds demand.
When this happens, the over supply of available products causes the Company to
have higher than anticipated inventory levels and it experiences intense price
competition from other disc drive and/or tape drive manufacturers.
Our financial results will vary
We often experience a high volume of sales at the end of a quarter, so we may
be unable to determine whether our fixed costs are too high relative to sales
until late in any given quarter. As a result, we often do not have enough time
to reduce these fixed costs. Consequently, our net income would be reduced or
we may even incur a loss. In addition, our operating results have been and may
in the future be subject to significant quarterly fluctuations as a result of a
number of other factors including:
. the timing of orders from and shipment of products to major customers;
. our product mix, and the related margins of the various products;
. accelerated reduction in the price of our disc drive products due to an
oversupply of disc drives in the world market;
. manufacturing delays or interruptions, particularly at our major
manufacturing facilities in Malaysia, Thailand, China and Singapore;
. acceptance by customers of competing technologies in lieu of our
products;
. variations in the cost of components used in manufacturing our products;
. limited access to components that we obtain from a single or a limited
number of suppliers;
. our inability to reduce our fixed costs to match revenue in any quarter
because of our vertical manufacturing strategy;
. our ability to develop, introduce and market new products and product
enhancements in a timely fashion;
. the impact of changes in foreign currency exchange rates on the cost of
our products and the effective price of such products to foreign
consumers; and
. competition and consolidation in the data storage industry.
20
In addition, our future operating results may also be adversely affected if we
receive an adverse judgment or settlement in any of the legal proceedings to
which we are a party. For example, we incurred a one-time expense of $39
million in the quarter ended December 31, 1999 in connection with the settlement
of our litigation with Rodime PLC.
We face intense competition and may not be able to compete effectively
Even during periods when demand is stable, the data storage industry is
intensely competitive and vendors experience price erosion over the life of a
product. Historically our competitors have offered new or existing products at
lower prices as part of a strategy to gain or retain market share and customers.
We expect these practices to continue in the future. We also expect that price
erosion in our industry will continue for the foreseeable future. Because we
may need to reduce our prices to retain our market share, the competition could
adversely affect our results of operations in any given quarter. We have
experienced and expect to continue to experience intense competition from a
number of domestic and foreign companies including other independent disc drive
manufacturers, and large integrated multinational manufacturers such as:
INTEGRATED INDEPENDENT
---------- -----------
Fujitsu Limited Maxtor Corporation
International Business Machines Quantum Corporation
Corporation Western Digital Corporation
NEC Corporation
Samsung Electronics Co. Ltd.
Toshiba Corporation
Integrated multinational manufacturers are formidable competitors because they
possess greater resources and are able to access their customers without having
to consider the profitability of the disc drive business in pricing their
components. For example, IBM entered into agreements with both EMC and Dell
under which IBM will likely supply a substantial portion of EMC's and Dell's
disc drive needs. We face the risk that IBM and other integrated multinational
manufacturers will enter into similar agreements with a substantial number of
our customers to supply those customers' disc drive requirements as part of a
more expansive agreement.
We also face indirect competition from present and potential customers,
including several of the computer manufacturers listed above, who are
continuously evaluating whether to manufacture their own drives or whether to
purchase their drives from outside sources. If our customers manufacture their
own drives, it could have a material adverse effect on our business, results of
operations and financial condition.
We also compete with manufacturers of products that use alternative data storage
and retrieval technologies. Products based upon such alternative technologies,
including optical recording technology and semiconductor memory (flash memory,
SRAM and DRAM), may become competition for our products.
We may not be able to compete successfully against current or future
competitors. If we fail to compete successfully, our business, operating
results and financial condition may be materially adversely affected.
21
We may not develop products in time to meet changing technologies
Our customers have demanded new generations of drive products as advances in
other hardware components and software have created the need for improved
storage products with features such as increased storage capacity or improved
performance and reliability. As a result, the life cycles of our products have
been shortened, and we have been required to constantly develop and introduce
new cost-effective drive products quickly in order to meet market windows that
become progressively shorter. We had research and development expenses of $581
million, $585 million and $459 million in fiscal 1999, 1998 and 1997,
respectively.
When we develop new disc and tape drive products with higher capacity and more
advanced technology, our operating results may decline because the increased
difficulty and complexity associated with producing such disc drives increases
the likelihood of reliability, quality or operability problems. If our products
suffer increased failure rates, are of low quality or are not reliable,
customers may reduce their purchases of our products. Our manufacturing rework
and scrap costs and our service and warranty costs may also increase. In
addition, a decline in the reliability of our products may reduce our
competitiveness in the data storage industry.
Our products are used in combination with other hardware, such as
microprocessors, and other software. The Company's future success will also
require strong demand by consumers and businesses for computer systems, storage
upgrades to computer systems and multimedia applications. If delivery of our
products is delayed, our original equipment manufacturer ("OEM") customers may
use our competitors' products in order to meet their production requirements.
In addition, if delivery of those OEMs' computer systems into which our products
are integrated is delayed, consumers and businesses may purchase comparable
products from the OEMs' competitors. If customers elect to wait to make their
purchases in anticipation of a new product, or buy from a competitor instead,
our operating results may be significantly adversely impacted.
Consumers have shown that they want to purchase personal computers costing less
than $1,000. We are producing and selling low cost disc drives to meet the
demand for disc drives that are components of low cost personal computers.
However, we may not be able to produce disc drives that meet our quality and
performance standards at a cost low enough to yield gross margins at acceptable
levels to sustain the development efforts for our future products.
The Company discontinued production of disc drives that use media that is 2.5
inches or smaller in January 1998. We are continuing research and development
of smaller drives, because we believe that to successfully compete in the supply
of components for mobile, laptop, notebook and ultraportable computers, we must
produce a smaller product. We intend to re-enter this market with a durable,
low power application in the future, although there can be no assurance that we
will be able to do so successfully.
Our vertical integration strategy entails a high level of fixed costs
The cost, quality and availability of certain components, including heads,
media, application specific integrated circuits, motors, printed circuit boards
and custom semiconductors are critical to the successful production of disc
drives. Our strategy of vertical integration has allowed us to internally
manufacture many of the critical components used in our products. We have
pursued a strategy of vertical integration of our manufacturing processes in
order to reduce costs, control quality and assure availability and quality of
certain components.
22
The Company's vertical integration strategy entails a high level of fixed costs
and requires a high volume of production and sales to be successful. During
periods of decreased production, these high fixed costs have had, and could in
the future have, a material adverse effect on our operating results and our
financial condition. In addition, a strategy of vertical integration has
delayed in the past and could continue to delay in the future our ability to
introduce products containing market-leading technology. Such delays may be due
to the fact that we may not have developed the technology in-house or because we
do not have access to inexpensive external sources of supply. For example, over
the past two years we have experienced delays in product launches due to delays
in production of certain components as a result of slower than anticipated
internal development and manufacturing scale-up of new designs.
We have experienced delays in the introduction of products due to supply of
components
The Company also relies on independent suppliers for certain components. In
the past we have experienced production delays when we were unable to obtain
sufficient quantities of certain components. Any prolonged interruption or
reduction in the supply of a key component could have a material adverse effect
on our business, our operating results and our financial condition. We may rely
on single or limited source suppliers for certain components used in our
products. We may not be able to obtain components that meet our specifications
and quality standards at prices that enable us to earn a profit on the finished
products. For example, in the past the Company has experienced delays obtaining
head stack assemblies and certain integrated circuits for printed circuit board
assemblies due to lead-time requirements or changes in specifications. As a
result, a few of our suppliers substantially increased the price of such
components, and we have incurred increased costs for certain of these components
as a result of supply shortages.
If our customers delay or cancel orders, our revenue will be adversely affected
The data storage industry has been characterized by large volume OEM purchase
agreements and large distributor orders. Typically, our OEM purchase agreements
permit the OEMs to cancel orders and reschedule delivery dates without
significant penalties. In the past, orders from many of our OEMs were cancelled
or delivery schedules were delayed as a result of changes in the requirements of
the OEMs' customers. These order cancellations and delays in delivery schedules
have had a material adverse effect on our results of operations in the past, and
may again in the future. Our OEMs and foreign distributors typically furnish us
with non-binding indications of their near-term requirements, with their product
deliveries based on weekly confirmations. To the extent actual orders from
foreign distributors and OEMs are reduced from their non-binding forecasts, the
Company's business, results of operations and financial condition could be
adversely effected.
We face risks from our international operations
The Company has significant offshore operations including manufacturing
facilities, sales personnel and customer support operations. We have
manufacturing facilities in Singapore, Thailand, the People's Republic of China,
Northern Ireland, Malaysia, and Mexico, in addition to those in the United
States. Our offshore operations are subject to certain inherent risks
including:
. fluctuations in currency exchange rates;
. longer payment cycles for sales in foreign countries;
23
. difficulties in staffing and managing international manufacturing
operations;
. seasonal reductions in business activity in the summer months in Europe and
certain other countries;
. increases in tariffs and duties, price controls, restrictions on foreign
currencies and trade barriers imposed by foreign countries; and
. political unrest, particularly in areas in which we have manufacturing
facilities.
These factors could have a material adverse effect on our business, operating
results and financial condition in the future.
We face risks from our investment in VERITAS
We contributed our Network & Storage Management Group business to VERITAS
Software Corporation ("VERITAS"), consisting of NSMG and VERITAS Software
Corporation on May 28, 1999 and received a 40% interest in VERITAS. As of
December 31, 1999, the Company held approximately 33% of the outstanding common
stock of VERITAS.
We face a number of risks from our investment in VERITAS including:
. we do not have significant control over the management of VERITAS, although
currently we have two representatives on its board of directors; and
. our financial statements and results of operations reflect our ownership of
approximately 33% of VERITAS which may impact our stock price.
Acquisition related accounting charges will reduce our profits
We intend to continue our expansion into complementary data technology
businesses through internal growth as well as acquisitions. Acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations and products of the acquired businesses and the potential loss of key
employees or customers of the acquired businesses. We expect that we will
continue to incur substantial expenses as we acquire other businesses including
charges for the write-off of in-process research and development. Our operating
results have fluctuated in the past and may fluctuate in the future because of
the timing of such write-offs. For example, we expect to incur a charge to
operations in the third quarter of fiscal 2000 of approximately $105 million for
the write-off of in-process research and development related to our acquisition
of XIOtech Corporation ("XIOtech"). We also incurred a charge to operations in
the fourth quarter of fiscal 1999 related to the contribution of the NSMG
business to VERITAS of approximately $85 million for the write-off of in-process
research and development, and we will experience ongoing charges related to that
contribution for amortization of purchased intangibles currently amounting to
approximately $100 million per quarter.
Systems failures could adversely affect our business
The Company's operations are dependent on our ability to protect our computer
equipment and the information stored in our databases from damage by fire,
natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. We believe that we have taken prudent
measures to reduce the risk of interruption in our operations. However, we
cannot be sure that these measures are sufficient. Any damage or failure that
causes interruptions
24
in our operations could have a material adverse effect on our business, results
of operations and financial condition.
We may experience Year 2000 computer problems that harm our business
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or a
miscalculation causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
normal business activities. The Company considers a product to be in "Year 2000
compliance" if
. the product's performance and functionality are unaffected by processing of
dates prior to, during and after the year 2000; but only if
. all products (for example hardware, software and firmware) used with
the product properly exchange accurate date data with it.
As of the date of this filing, we have not incurred any significant business
disruptions nor any significant product issues as a result of Year 2000 issues.
However, while no such occurrence has developed as of the date of this filing to
our knowledge, Year 2000 issues may not become apparent as of this date and
therefore, there is no assurance that the Company will not be affected by future
disruptions. The Company will continue to monitor the issue vigilantly and work
to remediate any issues that arise.
Our Products. Although we believe our disc and tape drive products and certain
of our software products are in Year 2000 compliance, we have determined that
certain software products produced by Seagate Software, which are not material
to the Company, are not and will not be Year 2000 compliant. We have taken
measures to inform our customers that those products are not and will not be
Year 2000 compliant. To assist our customers in evaluating their Year 2000
issues, our Seagate Software subsidiary has developed a list of those products
that are Year 2000 compliant as stand-alone products. The list is located on
Seagate Software's World Wide Web page and is periodically updated when
assessment of the Year 2000 compliance of additional products is completed. To
date, the costs that the Company has incurred in relation to these programs have
been immaterial.
We are incurring various costs to provide customer support and customer
satisfaction services regarding Year 2000 issues and anticipate that these
expenditures will continue in 2000 and thereafter. In addition, we have
contacted our major customers to determine whether their products into which our
products have been and will be integrated are Year 2000 compliant. The Company
has received assurances of Year 2000 compliance from its major US customers.
Many offshore customers have not responded and are under no contractual
obligation to provide us with Year 2000 compliance information. The Company is
taking steps with respect to new customer agreements to ensure that the
customers' products and internal systems are Year 2000 compliant.
Even if our products are Year 2000 compliant, we may be named as a defendant in
litigation against the vendors of all of the component products of systems if
some components of the systems are unable to properly manage data related to the
Year 2000. Our customer agreements typically contain provisions designed to
limit our liability for such claims. It is possible, however, that these
measures will not provide protection from liability claims, as a result of
existing or future federal, state or local laws or ordinances or unfavorable
judicial decisions. If any such
25
claims are brought against the Company, regardless of their merit, our business,
financial condition and results of operations could be materially adversely
affected due to increased warranty costs, customer satisfaction issues and the
costs from potential lawsuits.
Our Systems. We have also initiated a comprehensive program to address Year
2000 readiness in our internal systems and with our customers and suppliers.
Our program was designed to address our most critical internal systems first and
to gather information regarding the Year 2000 compliance of products supplied to
the Company and into which our products are integrated. The Company conducted a
Year 2000 inventory of information technology systems in the first quarter of
1997. Risk assessment was substantially completed and remediation activities
were fully completed by the end of the second quarter of 1997. Approximately
2,200 items were identified, and as of October 1999, all items were resolved.
Before new technology acquisitions are implemented, they are inventoried and
assessed; these are not included in the foregoing project dates. An initial
inventory of technology systems not managed by the Information Technology
organization was completed in the third calendar quarter of 1997. A second
inventory in the second and third calendar quarters of 1998 included all
manufacturing operations with special emphasis on embedded technology and
facilities. Approximately 6,000 items were identified (non-information
technology and embedded combined) of which approximately two-thirds were Year
2000 compliant. The remaining one-third were modified such that the risks posed
by Year 2000 issues were reduced.
We used the following phased approach to achieve Year 2000 readiness: inventory,
assessment, disposition, test and audit. All of these phases were completed by
December 31, 1999.
These activities were intended to encompass all major categories of systems in
use by the Company, including manufacturing, engineering, sales, finance and
human resources. To date, we have not incurred material costs related to
assessment and remediation of Year 2000 issues. We currently expect that the
total cost of our Year 2000 readiness programs, excluding redeployed resources,
will not exceed $10 million. This total cost estimate does not include
potential costs related to any customer or other claims or the costs of internal
software or hardware replaced in the normal course of business.
The Company's material third party relationships include relationships with
suppliers, customers and financial institutions. The Company identified 600
suppliers which are critical to our operations, and we surveyed each for details
of their Year 2000 efforts, including internal systems, operations and supply
chain as well as a schedule for their projects. By March 1999, 99% of such
suppliers had responded affirmatively and had been approved. In May 1999, we
initiated an onsite validation process for those suppliers considered most
critical. This phase was completed in September 1999; three suppliers failed
the on-site validation process and contingent plans were developed for these
three. In addition, the Company joined the High Tech Consortium for Year 2000
to pool supply chain efforts with other companies in our industry.
The Company's largest customers were also surveyed regarding their Year 2000
efforts. We have not experienced nor do we anticipate experiencing any material
impact due to a Year 2000-related failure of a major customer. All of our
financial institutions have been surveyed. All of our primary banking
activities can be accommodated by our two major multi-national banking partners.
While the Company currently does not expect Year 2000 issues to pose significant
operational problems, we could still experience material adverse effects on our
business. Those material adverse effects could include delays in the delivery
or sale of the Company's products. Therefore,
26
the Company has developed contingency plans, such as a reversion to manual
procedures, for continuing operations in the event such problems arise.
Our dependence on key personnel
Our future performance depends to a significant degree upon the continued
service of our key members of management as well as marketing, sales, and
product development personnel. The loss of one or more of our key personnel
would have a material adverse effect on our business, operating results, and
financial condition. We believe our future success will also depend in large
part upon our ability to attract and retain highly skilled management,
marketing, sales, and product development personnel. We have experienced
intense competition for such personnel and there can be no assurance that we
will be able to retain our key employees or that we will be successful in
attracting, assimilating and retaining them in the future.
Our stock price will fluctuate
Our stock price has varied greatly as has the volume of shares of our common
stock that are traded. We expect these fluctuations to continue due to factors
such as:
. changes in the price of VERITAS' common stock and the resulting impact on
investors and analysts perceptions of the change in our valuation as a
result of our holdings of approximately 33% of VERITAS' outstanding common
stock;
. announcements of new products, services or technological innovations by the
Company or its competitors;
. announcements of major restructurings by the Company or its competitors;
. quarterly variations in our results of operations as a result of our fixed
short-term cost structure and volatility in the demand for our products;
. changes in revenue or earnings estimates by the investment community and
speculation in the press or investment community stemming from our past
performance, concerns about demand for our products, or announcements by our
competitors;
. general conditions in the data storage industry or the personal computer
industry such as the substantial decline in demand for disc drive products
that occurred during fiscal 1998;
. changes in our revenue growth rates or the growth rates of our competitors;
. sales of large blocks of our stock that may lead to investors' concerns that
our performance will falter and leading those investors to liquidate their
holdings of our shares;
. adverse impacts on our operating results if we receive an adverse judgment
or settlement in any of the legal proceedings to which we are a party, such
as the impact on our earnings in fiscal 1997 from the costs resulting from
the settlement of a lawsuit by Amstrad PLC; and
. price erosion.
The stock market may from time to time experience extreme price and volume
fluctuations. Many technology companies have experienced such fluctuations. In
addition, our stock price may be affected by general market conditions and
domestic and international macroeconomic factors unrelated to our performance.
In addition, our stock price may reflect the impact of changes in the price of
VERITAS' common stock, although we do not control VERITAS or its management.
Often such fluctuations have been unrelated to the operating performance of the
specific companies. The market price of our common stock may experience
significant fluctuations in the
27
future. For example, our stock price fluctuated from a high of $44 1/4 to a low
of $16 1/8 during fiscal 1999.
28
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to the Company's legal
proceedings described below. Litigation is inherently uncertain and may result
in adverse rulings or decisions. Additionally, the Company may enter into
settlements or be subject to judgments that may, individually or in the
aggregate, have a material adverse effect on the Company's results of
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements.
Intellectual Property Litigation
- --------------------------------
In November 1992, Rodime PLC ("Rodime") filed a complaint in the U.S. District
Court for the Central District of California, alleging infringement of U.S.
Patent No. B1 4,638,383 and various state law unfair competition claims. On
October 24, 1997, the Court entered a Final Judgment against Rodime and in favor
of Seagate. Rodime appealed from the final judgment, and on April 13, 1999, the
Court of Appeals for the Federal Circuit issued a decision which vacated the
judgments of the District Court on non-infringement and no liability under
Rodime's state claims, affirmed the exclusion of Rodime's consequential business
damages, and remanded the case to the District Court for further proceedings.
The Company filed a petition to the U.S Supreme Court on October 1, 1999, to
review the Federal Circuit's decision. Trial was scheduled to begin on April 4,
2000. The U.S. Supreme Court denied the Company's petition for certiorari on
January 18, 2000, thus allowing to stand the April 13, 1999 ruling of the Court
of Appeals for the Federal Circuit. The Company and Rodime settled the
litigation during a mediation held on January 19, 2000. The settlement amount of
$45 million was paid on January 28, 2000. A charge of $39 million associated
with this settlement is reflected in the Company's consolidated condensed
financial statements for the quarter ended December 31, 1999 and is included in
unusual items.
Papst Licensing, GmbH ("Papst"), has given the Company notice that it believes
certain former Conner Peripherals, Inc. ("Conner") disc drives infringe several
of its patents covering the use of spindle motors in disc drives. It is the
opinion of the Company's patent counsel that the former Conner disc drives do
not infringe any valid claims of the patents. The Company also believes that
subsequent to the merger with Conner, the Company's earlier paid-up license
under Papst's patents extinguishes any ongoing liability. The Company also
believes it enjoys the benefit of a license under Papst's patents since Papst
Licensing had granted a license to motor vendors of Conner. Papst is currently
involved in litigation with other disc drive and disc drive motor manufacturers.
Ronald Maynard and Microdomain Corporation filed suit in Santa Clara County
Superior Court against Quinta Corporation, the Quinta Venture, the four Quinta
founders as individuals, Sierra Ventures, Read-Rite Corporation and the Company
alleging misappropriation of trade secrets, breach of contract, conspiracy,
unfair competition and unjust enrichment. Quinta, Read-Rite and the Company
filed a cross-complaint against Ronald Maynard for misappropriation of trade
secrets, breach of contract and fraud. The case relates to concepts and design
for magneto optical recording heads. Trial is set for March 6, 2000. The
Company believes the Maynard lawsuit is without merit and intends to vigorously
defend the case and pursue its claims against Maynard.
29
In November 1997 TeraStor Corporation filed a cross-complaint against the
Company in an action pending in the Superior Court of California, County of
Santa Clara entitled Maxoptix Corporation v. TeraStor Corporation and Gordon
Knight. The cross-complaint alleges causes of action against the Company for
unfair business practices, misappropriation of trade secrets, attempted
monopolization, refusal to deal, breach of contract, specific performance,
breach of the covenant of good faith and fair dealing, fraud, negligent
misrepresentation, intentional interference with prospective economic advantage
and negligent interference with prospective economic advantage. The allegations
against the Company arose out of the Company's dealings with TeraStor pursuant
to a joint development agreement concerning the development of magneto optical
recording heads. In December 1997 TeraStor sought a preliminary injunction
against the Company seeking to prevent certain Company employees who formerly
worked with TeraStor under the joint development agreement from engaging in work
related to the Company's Quinta subsidiary. In January 1998 the Court denied
TeraStor's motion for injunctive relief. The Company has asserted cross-claims
against TeraStor for trade secret misappropriation, fraud, negligent
misrepresentation, breach of contract, declaratory relief, recission, violation
of Business & Professions Code Section 17200, common law unfair competition,
intentional interference with contractual relations, negligent interference with
contractual relations, and inducing breach of fiduciary duty. The Company also
filed claims against Rick Wilmer and Amyl Ahola, two former Seagate employees
employed by TeraStor, for breach of contract and breach of fiduciary duty.
Discovery is ongoing and trial is currently set to begin on June 5, 2000. The
Company denies TeraStor's allegations and intends to vigorously defend itself.
Other Matters
- -------------
The Company is involved in a number of other judicial and administrative
proceedings incidental to its business. Although occasional adverse decisions
(or settlements) may occur, the Company believes that the final disposition of
such matters will not have a material adverse effect on the Company's financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's 1999 Annual Meeting of Stockholders was held on November 2, 1999.
The following is a brief description of each matter voted upon at the meeting
and a statement of the number of votes cast for, against or withheld and the
number of abstentions with respect to each matter.
(a) The stockholders elected the following directors to serve for the ensuing
year or until their successors are elected:
FOR WITHHELD
----------- ---------
Gary B. Filler 179,747,664 3,175,727
Kenneth E. Haughton 179,737,948 3,185,443
Robert A. Kleist 179,747,755 3,175,636
Stephen J. Luczo 179,772,844 3,150,547
Lawrence Perlman 179,635,687 3,287,704
Thomas P. Stafford 179,723,916 3,199,475
Laurel L. Wilkening 179,788,351 3,135,040
30
(b) The stockholders approved the adoption of the 1999 Stock Option Plan and
the reservation of 10,500,000 shares of Common Stock for issuance
thereunder.
FOR AGAINST ABSTAIN
--- ------- -------
105,848,992 76,275,998 798,401
(c) The stockholders ratified the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending June 30,
2000.
FOR AGAINST ABSTAIN
--- ------- -------
181,911,678 482,766 528,947
(d) The stockholders turned down a stockholder proposal regarding employment
practices and policies in Northern Ireland.
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ----------
28,930,256 101,362,272 10,555,028 42,075,835
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following exhibits are included herein:
10.16(1) 1999 Stock Option Plan
10.17(2) XIOtech Corporation 1996 Stock Option Plan
10.18(3) Form of Stockholder Agreement between Seagate Software, Inc., a
wholly-owned subsidiary of Seagate Technology, Inc., and
VERITAS Software Corporation
10.19(4) Form of Registration Rights Agreement between Seagate Software,
Inc., a wholly-owned subsidiary of Seagate Technology, Inc. and
VERITAS Software Corporation
27. Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities and Exchange
Commission during the fiscal quarter ended December 31, 1999 and the month of
January 2000:
A Form 8-K dated December 17, 1999 regarding the Company's announcement of its
agreement to acquire XIOtech Corporation.
A Form 8-K dated January 27, 2000 regarding the Company's announcement that it
had entered into a settlement with Rodime PLC.
31
- -------------
(1) Incorporated by reference to exhibits filed by the Company in connection
with its Registration statement on Form S-8 (Reg. No. 333-92277) dated
December 7, 1999.
(2) Incorporated by reference to exhibits filed by the Company in connection
with its Registration statement on Form S-8 (Reg. No. 333-95719) dated
January 31, 2000.
(3) Incorporated by reference to exhibits filed by Seagate Software, Inc. (File
No. 000-23169) in connection with its Quarterly Report on Form 10-Q/A for
the period ended January 1, 1999 filed with the Securities and Exchange
Commission on April 21, 1999.
(4) Incorporated by reference to exhibits filed by Seagate Software, Inc. (File
No. 000-23169) in connection with its Quarterly Report on Form 10-Q/A for
the period ended January 1, 1999 filed with the Securities and Exchange
Commission on April 16, 1999.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEAGATE TECHNOLOGY, INC.
------------------------
(Registrant)
DATE: February 3, 2000 BY: /s/ Charles C. Pope
_______________________
CHARLES C. POPE
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
DATE: February 3, 2000 BY: /s/ Stephen J. Luczo
_______________________
STEPHEN J. LUCZO
Chief Executive Officer and President
(Principal Executive Officer
and Director)
33
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
Exhibit
Number
- -------
10.16(1) 1999 Stock Option Plan
10.17(2) XIOtech Corporation 1996 Stock Option Plan
10.18(3) Form of Stockholder Agreement between Seagate Software, Inc.,
a wholly-owned subsidiary of Seagate Technology, Inc., and
VERITAS Software Corporation
10.19(4) Form of Registration Rights Agreement between Seagate
Software, Inc., a wholly-owned subsidiary of Seagate
Technology, Inc. and VERITAS Software Corporation
27 Financial Data Schedule
(1) Incorporated by reference to exhibits filed by the Company in
connection with its Registration statement on Form S-8 (Reg.
No. 333-92277) dated December 7, 1999.
(2) Incorporated by reference to exhibits filed by the Company in
connection with its Registration statement on Form S-8 (Reg.
No. 333-95719) dated January 31, 2000.
(3) Incorporated by reference to exhibits filed by Seagate
Software, Inc. (File No. 000-23169) in connection with its
Quarterly Report on Form 10-Q/A for the period ended January
1, 1999 filed with the Securities and Exchange Commission on
April 21, 1999.
(4) Incorporated by reference to exhibits filed by Seagate
Software, Inc. (File No. 000-23169) in connection with its
Quarterly Report on Form 10-Q/A for the period ended January
1, 1999 filed with the Securities and Exchange Commission on
April 16, 1999.
34