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 September 29, 2000
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 September 29, 2000, 231,173,962 shares of the registrant's common stock were
issued and outstanding.
1
INDEX
SEAGATE TECHNOLOGY, INC.
PART I FINANCIAL INFORMATION PAGE NO.
- -------------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated condensed statements of operations--
Three months ended September 29, 2000 and
October 1, 1999 3
Consolidated condensed balance sheets--
September 29, 2000 and June 30, 2000 4
Consolidated condensed statements of cash flows--
Three months ended September 29, 2000 and
October 1, 1999 5
Notes to consolidated condensed financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
2
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Data)
(Unaudited)
Three Months Ended
------------------
September 29, October 1,
2000 1999
---- ----
Revenue $1,748 $1,682
Cost of sales 1,380 1,404
Product development 159 140
Marketing and administrative 138 118
Amortization of goodwill and
other intangibles 16 9
Restructuring 20 112
------ ------
Total Operating Expenses 1,713 1,783
Income (Loss) from Operations 35 (101)
Interest income 34 21
Interest expense (12) (13)
Activity related to equity interest in VERITAS (67) (99)
Gain on sale of VERITAS stock - 193
Gain on sale of SanDisk stock 102 -
Gain on sale of Veeco stock 20 -
Other - (1)
------ ------
Other Income (Expense), net 77 101
------ ------
Income before income taxes 112 -
Provision (benefit) for income taxes 37 (2)
------ ------
Net Income $ 75 $ 2
====== ======
Net income per share:
Basic $ 0.33 $ 0.01
Diluted 0.31 0.01
Number of shares used in
per share computations:
Basic 228.2 216.7
Diluted 240.4 223.5
See notes to consolidated condensed financial statements.
3
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Millions)
(Unaudited)
September 29, June 30,
2000 2000 (1)
---- --------
ASSETS
- ------
Cash and cash equivalents $1,303 $ 875
Short-term investments 1,048 1,140
Accounts receivable, net 777 678
Inventories 362 430
Deferred income taxes 207 219
Other current assets 150 167
------ -------
Total Current Assets 3,847 3,509
Property, equipment and leasehold improvements, net 1,603 1,608
Investment in VERITAS Software, net 1,055 1,122
Goodwill and other intangibles, net 335 353
Other assets 235 575
------ -------
Total Assets $7,075 $ 7,167
====== =======
LIABILITIES
- -----------
Accounts payable $ 658 $ 707
Accrued employee compensation 173 195
Accrued expenses 453 494
Accrued income taxes 85 81
Current portion of long-term debt 1 1
------ -------
Total Current Liabilities 1,370 1,478
Deferred income taxes 861 1,020
Other liabilities 119 119
Long-term debt, less current portion 703 703
------ -------
Total Liabilities 3,053 3,320
------ -------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 3 3
Additional paid-in capital 2,170 1,960
Retained earnings 2,605 2,539
Accumulated other comprehensive income (loss) (68) 86
Deferred compensation (31) (33)
Treasury common stock at cost (657) (708)
------ -------
Total Stockholders' Equity 4,022 3,847
------ -------
Total Liabilities and Stockholders' Equity $7,075 $ 7,167
====== =======
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of June 30, 2000.
See notes to consolidated condensed financial statements.
4
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Three Months Ended
-------------------
September 29, October 1,
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income $ 75 $ 2
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 176 173
Deferred income taxes (46) (150)
Non-cash portion of restructuring charge 7 76
Activity related to equity interest in VERITAS 67 101
Gain on sale of VERITAS stock - (193)
Gain on sale of SanDisk stock (102) -
Gain on sale of Veeco stock (20) -
Other, net (9) 5
Changes in operating assets and liabilities:
Accounts receivable (99) 62
Inventories 71 41
Accounts payable (44) (80)
Accrued income taxes 209 139
Accrued expenses and employee compensation (80) (62)
Other assets and liabilities, net 36 39
------- -----
Net cash provided by operating activities 241 153
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (145) (117)
Purchases of short-term investments (1,175) (699)
Maturities and sales of short-term investments 1,270 850
Proceeds from sale of VERITAS stock - 397
Proceeds from sale of SanDisk stock 105 -
Proceeds from sale of Veeco stock 101 -
Other, net (13) (18)
------- -----
Net cash provided by investing activities 143 413
FINANCING ACTIVITIES:
Sale of common stock 44 20
Purchase of treasury stock - (639)
Other, net - (1)
------- -----
Net cash provided by (used in) financing activities 44 (620)
Increase (decrease) in cash and cash equivalents 428 (54)
Cash and cash equivalents at the beginning of the period 875 396
------- -----
Cash and cash equivalents at the end of the period $ 1,303 $ 342
======= =====
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 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 results of operations for the three month period ended September 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
2000 was 52 weeks and ended on June 30, 2000 and fiscal 2001 will be 52
weeks and will end on June 29, 2001.
6
2. Net Income Per Share
--------------------
The following table sets forth the computation of basic and diluted net
income per share:
(In Millions, Except Three Months Ended
------------------
Per Share Data) September 29, October 1,
2000 1999
---- ----
Numerator:
Net income $ 75 $ 2
------ ------
Denominator:
Denominator for basic net
income per share - weighted
average shares outstanding 228.2 216.7
Incremental common shares
attributable to exercise of
outstanding options (assuming
proceeds would be used to
purchase treasury stock) 12.2 6.8
------ ------
Denominator for diluted net
income per share - adjusted
weighted average shares 240.4 223.5
====== ======
Basic net income per share $ 0.33 $ 0.01
====== ======
Diluted net income per share $ 0.31 $ 0.01
====== ======
Options to purchase 0.4 million and 3.1 million shares of common stock were
outstanding during the quarters ended September 29, 2000 and October 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 shares and, therefore, the effect would
be antidilutive.
3. Balance Sheet Information
-------------------------
(In millions)
September 29, June 30,
2000 2000
---- ----
Accounts Receivable:
Accounts receivable $ 854 $ 752
Allowance for non-collection (77) (74)
------- -------
$ 777 $ 678
======= =======
7
Inventories:
Components $ 139 $ 142
Work-in-process 50 51
Finished goods 173 237
------- -------
$ 362 $ 430
======= =======
Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements $ 3,837 $ 3,754
Allowance for depreciation and amortization (2,234) (2,146)
------- -------
$ 1,603 $ 1,608
======= =======
4. Income Taxes
------------
The Company recorded a $37 million provision for income taxes at an
effective tax rate of 33% for the three months ended September 29, 2000
compared with a $2 million benefit from income taxes for the three months
ended October 1, 1999. The effective tax rate used to record the provision
for income taxes for the three months ended September 29, 2000 resulted
primarily from applying a 39% combined U.S. federal and state rate to
certain non-recurring restructuring costs and activity related to the
Company's equity interest in VERITAS partially offset by gains from the
sale of SanDisk Corporation ("SanDisk") common stock and Veeco Instruments,
Inc. ("Veeco") common stock. Excluding these items, the pro forma effective
tax rate used to record the provision for income taxes for the three months
ended September 29, 2000 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)
Three Months Ended
------------------
September 29, October 1,
2000 1999
---- ----
Cash Transactions:
Cash paid for interest $ 26 $ 26
Cash paid (received) for income
taxes, net of refunds (126) 4
8
6. Restructuring Costs
-------------------
During the three months ended September 29, 2000, the Company 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 the Company'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 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 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 2001 restructuring plan, the Company plans to
reduce its workforce by approximately 2,000 employees, primarily in
manufacturing. 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 $4 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.
In connection with the fiscal 2000 restructuring plan, the Company 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 21,300 of the
24,000 employees had been terminated as of September 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 $88
million, respectively. The Company expects 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 1998, the
Company revised its original lease cost estimates on certain of its
facilities and recorded an additional $6 million in restructuring charges.
9
The following table summarizes the Company's restructuring activities for
the three months ended September 29, 2000:
Severance
and Excess Contract
In millions Benefits Facilities Equipment Cancellations Other Total
--------------------------------------------------------------------
Reserve balances,
June 30, 2000 $ 23 $10 $ - $5 $15 $ 53
FY2001 restructuring charge 3 6 1 - 1 11
Cash charges (11) (2) - - (1) (14)
Non-cash charges - (6) (1) - - (7)
Adjustments 3 6 - - - 9
------------------------------------------------------------
Reserve balances,
September 29, 2000 $ 18 $14 $ - $5 $15 $ 52
============================================================
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 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
------------------
September 29, October 1,
2000 1999
---- ----
Revenue:
Disc Drives $1,632 $1,566
Other 116 116
------ ------
Consolidated $1,748 $1,682
====== ======
Gross Profit:
Disc Drives $ 321 $ 231
Other 47 47
------ ------
Consolidated $ 368 $ 278
====== ======
10
September 29, June 30,
2000 2000
---- ----
Total Assets:
Disc Drives $ 21,678 $ 19,900
Other 773 1,066
-------- --------
Operating Segments 22,451 20,966
Investment in VERITAS 1,055 1,122
Eliminations (16,431) (14,921)
-------- --------
Consolidated $ 7,075 $ 7,167
======== ========
8. 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.
During the quarter ended September 29, 2000, the Company recorded net
unrealized losses on securities of $88 million, net of tax, with respect to
its investments in Gadzoox Networks, Inc. ("Gadzoox"), Lernout & Hauspie
Speech Products N.V. ("LHSP"), and GlobeSpan, Inc. During the quarter ended
September 29, 2000, the Company sold its remaining investments in SanDisk
and Veeco resulting in pre-tax gains of $102 million and $20 million,
respectively, net of underwriting discounts and commissions. In connection
with the liquidation of its investments in SanDisk and Veeco, the Company
realized gains of $69 million, net of related income tax, that were
previously recorded as a component of accumulated other comprehensive
income.
The components of comprehensive income, net of related tax, for the three
months ended September 29, 2000 and October 1, 1999 were as follows (in
millions):
Three Months Ended
------------------
September 29, October 1,
2000 1999
---- ----
Net income $ 75 $ 2
Unrealized gain (loss) on securities (155) 145
Foreign currency translation adjustments 1 -
----- -----
Comprehensive income (loss) $ (79) $ 147
===== =====
The components of accumulated other comprehensive income (loss), net of
related tax, at September 29, 2000 and June 30, 2000 were as follows (in
millions):
September 29, June 30,
2000 2000
---- ----
Unrealized gain (loss) on securities $ (67) $ 88
Foreign currency translation adjustments (1) (2)
----- -----
Accumulated other comprehensive income (loss) $ (68) $ 86
===== =====
11
9. Equity Investment in VERITAS Software Corporation
-------------------------------------------------
As of September 29, 2000, Seagate Software held approximately 32% of the
outstanding shares of VERITAS' common stock. The Company accounts for its
investment in VERITAS under the equity method and records its equity
interest in VERITAS' net income (loss) on a one-quarter lag.
Summarized income statement information for VERITAS for the three months
ended June 30, 2000 is as follows (in millions):
Three Months Ended
June 30,
2000
----
Revenue $ 275
Gross profit 232
Net loss (172)
The Company's recorded equity in the net income of VERITAS for the three
months ended September 29, 2000 was $11 million and differs from the
Company's proportionate share of VERITAS' reported net loss for the three
months ended June 30, 2000. This difference is primarily because the
Company eliminates 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.
The Company's activity related to equity interest in VERITAS for the three
months ended September 29, 2000 consisted of the Company's amortization
expense for goodwill and other intangible assets relating to the investment
in VERITAS of $78 million partially offset by recorded equity in the net
income of VERITAS of $11 million, as described above.
10. Pending Going Private Transaction and Merger
--------------------------------------------
On March 29, 2000, Seagate, Seagate Software Holdings, Inc. ("Seagate
Software"), a subsidiary of Seagate, 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, VERITAS Software Corporation
("VERITAS") and a wholly owned subsidiary of VERITAS entered into an
Agreement and Plan of Merger and Reorganization (the "Merger Agreement").
Under the Stock Purchase Agreement, SAC has agreed to purchase for cash,
all of the operating assets of Seagate and its consolidated subsidiaries,
including Seagate'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 currently held by Seagate Software
and Seagate's equity investments in Gadzoox and LHSP, to the extent held at
the closing. In addition, under the Stock Purchase Agreement, SAC has
12
agreed to assume substantially all of the operating liabilities of Seagate
and its consolidated subsidiaries. This transaction is referred to herein
as the SAC transaction.
Under the Merger Agreement, immediately following and contingent upon the
consummation of the SAC transaction, a wholly-owned subsidiary of VERITAS
will merge with and into Seagate, with Seagate to survive the merger and to
become a wholly-owned subsidiary of VERITAS. This transaction is referred
to herein as the Merger. VERITAS is not acquiring Seagate's disc drive
business or any other Seagate operating business. In the Merger, the
Seagate stockholders will receive merger consideration consisting of
VERITAS stock and cash. The Merger is intended to qualify as a tax-free
reorganization.
On March 29, 2000, Seagate, VERITAS and SAC entered into an Indemnification
Agreement, pursuant to which these entities and certain other subsidiaries
of Seagate have agreed to certain indemnification provisions regarding tax
and other matters that may arise in connection with the SAC transaction and
the Merger. Also on March 29, 2000, VERITAS and SAC entered into a letter
agreement, pursuant to which VERITAS agreed to a no-shop provision and an
alternative termination fee provision.
All of the transactions contemplated by the SAC transaction and the Merger
are herein referred to as the VERITAS/Silver Lake transaction. The
VERITAS/Silver Lake transaction is expected to close in the second quarter
of fiscal 2001, subject to the approval of the VERITAS stockholders and
Seagate stockholders and funding of the debt commitments, as well as other
customary closing conditions. Special meetings of the VERITAS and Seagate
stockholders will be held on November 21, 2000 to vote on the
VERITAS/Silver Lake transaction. In the event of favorable votes, the
transaction is expected to close promptly thereafter. Seagate expects that
while the VERITAS/Silver Lake transaction is pending, the value of Seagate
common stock will depend primarily on the value of VERITAS common stock.
11. Litigation
----------
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
13
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 sixth
paragraph under "Results of Operations," the statements relating to the Stock
Purchase Agreement and the Merger Agreement in the ninth through thirteenth
paragraphs under "Results of Operations," the statements regarding capital
expenditures in the third paragraph under "Liquidity and Capital Resources," the
statements below under "Factors Affecting Future Operating Results" and the
statements under "Part II Other Information - Item 1. Legal Proceedings," among
others. These forward-looking statements are based on current expectations and
entail various risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties are set forth below under "Factors Affecting Future Operating
Results."
RESULTS OF OPERATIONS
Revenue for the quarter ended September 29, 2000 was $1.748 billion, as compared
with $1.682 billion for the comparable year-ago quarter ended October 1, 1999,
and $1.548 billion for the immediately preceding quarter ended June 30, 2000.
The increase in revenue from both comparable periods was primarily due to a
higher level of unit shipments and an improved product mix partially offset by a
continuing decline in the average unit sales prices of the Company's products.
Improved sales volume and product mix accounted for $0.2 billion of the revenue
increase from the quarter ended October 1, 1999 partially offset by $0.1 billion
in price erosion. The Company shipped a record 11.6 million disc drives in its
quarter ended September 29, 2000, however, the Company's ability to satisfy
total customer demand was constrained by a limited supply of certain electrical
components from some of our external suppliers. 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 21.1% for the three months ended
September 29, 2000, compared with 16.5% for the comparable year-ago quarter and
21.8% for the immediately preceding quarter ended June 30, 2000. The increase
in gross margin as a percentage of revenue from the year-ago quarter was
primarily due to a higher level of unit shipments as stated above combined with
ongoing cost savings as a result of the Company's restructuring activities and
its 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 for the three months ended September 29, 2000 were
$159 million, an increase of $19 million when compared with the comparable
year-ago quarter and an increase of $2 million when compared with the
immediately preceding quarter ended June 30, 2000. These expenses represented
9.1% of revenue for the three months ended September 29, 2000 compared with 8.3%
for the comparable year-ago quarter and 10.1% for the immediately preceding
quarter
14
ended June 30, 2000. The increase in expenses from the comparable year-ago
quarter was primarily due to increases of $8 million in salaries and related
costs, $5 million in depreciation expense, $5 million in occupancy costs and $2
million in material costs.
Marketing and administrative expenses for the three months ended September 29,
2000 were $138 million, an increase of $20 million when compared with the
comparable year-ago quarter and a decrease of $11 million from the immediately
preceding quarter ended June 30, 2000. These expenses represented 7.9% of
revenue for the three months ended September 29, 2000 compared with 7.0% for the
comparable year-ago quarter and 9.6% for the immediately preceding quarter ended
June 30, 2000. The increase in expenses from the comparable year-ago quarter was
primarily due to increases of $17 million in salaries and related costs, $8
million in outside services, $4 million in legal expenses, $3 million in
equipment costs and $2 million in marketing and administrative expenses related
to the Company's Information Management Group ("IMG") software products and
services. These increases were partially offset by decreases of $11 million in
occupancy costs and $3 million in the provision for bad debts. The decrease in
expenses from the immediately preceding quarter was primarily due to decreases
of $5 million in salaries and related costs, $4 million in occupancy costs and
$4 million in expenses related to the pending VERITAS/Silver Lake transaction.
These decreases were partially offset by an increase of $2 million in the
provision for bad debts.
Amortization of goodwill and other intangibles increased $7 million for the
three months ended September 29, 2000, when compared with the comparable year-
ago quarter. The increase in amortization from the year-ago quarter was
primarily due to additional amortization of $8 million related to goodwill and
other intangibles arising from the acquisition of XIOtech Corporation
("XIOtech") in January 2000.
During the three months ended September 29, 2000, the Company 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 the
Company'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
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, the Company
plans to reduce its workforce by approximately 2,000 employees, primarily in
manufacturing. 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 $4 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. In
connection with the fiscal 2000 restructuring plan, the Company 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 21,300 of the 24,000 employees had been terminated
as of September 29, 2000. As a result of employee terminations
15
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 $88 million, respectively. The Company expects
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 1998, the Company revised its original lease cost
estimates on certain of its facilities and recorded an additional $6 million in
restructuring charges. The restructuring activities undertaken in fiscal year
2000 and the three months ended September 29, 2000 are part 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. While a
significant portion of the cash and non-cash charges associated with the plan
have been incurred in fiscal year 2000, we expect to incur material charges in
the future.
Net other income decreased by $24 million for the three months ended September
29, 2000 when compared with the comparable year-ago quarter and decreased by
$270 million when compared with the immediately preceding quarter ended June 30,
2000. The decrease in net other income from the comparable year-ago quarter was
primarily due to a gain on the sale of VERITAS Software Corporation ("VERITAS")
common stock in the comparable year ago quarter substantially offset by gains on
sales of SanDisk Corporation ("SanDisk") and Veeco Instruments, Inc. ("Veeco")
common stock in the current quarter, as well as a decrease in the charge for
activity related to equity interest in VERITAS. The decrease from the
immediately preceding quarter was primarily due to a gain on the exchange of
certain investments in equity securities in the immediately preceding quarter
and smaller gains on sales of SanDisk common stock this quarter than last
quarter, partially offset by a gain on the sale of Veeco common stock in the
current quarter.
The Company recorded a $37 million provision for income taxes at an effective
tax rate of 33% for the three months ended September 29, 2000 compared with a $2
million benefit from income taxes for the three months ended October 1, 1999.
The effective tax rate used to record the provision for income taxes for the
three months ended September 29, 2000 resulted primarily from applying a 39%
combined U.S. federal and state rate to certain non-recurring restructuring
costs and activity related to the Company's equity interest in VERITAS partially
offset by gains from the sale of SanDisk common stock and Veeco common stock.
Excluding these items, the pro forma effective tax rate used to record the
provision for income taxes for the three months ended September 29, 2000 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 March 29, 2000, Seagate, Seagate Software Holdings, Inc. ("Seagate
Software"), a subsidiary of Seagate, 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, VERITAS and a wholly owned subsidiary of
VERITAS entered into an Agreement and Plan of Merger and Reorganization (the
"Merger Agreement").
Under the Stock Purchase Agreement, SAC has agreed to purchase for cash, all of
the operating assets of Seagate and its consolidated subsidiaries, including
Seagate'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 currently held by Seagate Software and Seagate's equity
investments in Gadzoox Networks, Inc. ("Gadzoox") and Lernout & Hauspie Speech
Products N.V. ("LHSP"), to the extent held at the closing. In addition, under
the Stock Purchase Agreement, SAC has agreed to assume substantially all of the
operating liabilities of Seagate and its consolidated subsidiaries. This
transaction is referred to herein as the SAC transaction.
Under the Merger Agreement, immediately following and contingent upon the
consummation of the SAC transaction, a wholly-owned subsidiary of VERITAS will
merge with and into Seagate, with Seagate to survive the merger and to become a
wholly-owned subsidiary of VERITAS. This
16
transaction is referred to herein as the Merger. VERITAS is not acquiring
Seagate's disc drive business or any other Seagate operating business. In the
Merger, the Seagate stockholders will receive merger consideration consisting of
VERITAS stock and cash. The Merger is intended to qualify as a tax-free
reorganization.
On March 29, 2000, Seagate, VERITAS and SAC entered into an Indemnification
Agreement, pursuant to which these entities and certain other subsidiaries of
Seagate have agreed to certain indemnification provisions regarding tax and
other matters that may arise in connection with the SAC transaction and the
Merger. Also on March 29, 2000, VERITAS and SAC entered into a letter agreement,
pursuant to which VERITAS agreed to a no-shop provision and an alternative
termination fee provision.
All of the transactions contemplated by the SAC transaction and the Merger are
herein referred to as the VERITAS/Silver Lake transaction. The VERITAS/Silver
Lake transaction is expected to close in the second quarter of fiscal 2001,
subject to the approval of the VERITAS stockholders and Seagate stockholders and
funding of the debt commitments, as well as other customary closing conditions.
Special meetings of the VERITAS and Seagate stockholders will be held on
November 21, 2000 to vote on the VERITAS/Silver Lake transaction. In the event
of favorable votes, the transaction is expected to close promptly thereafter.
Seagate expects that while the VERITAS/Silver Lake transaction is pending, the
value of Seagate common stock will depend primarily on the value of VERITAS
common stock.
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 2000, the Company's cash, cash equivalents and short-term
investments totaled $2.351 billion, an increase of $336 million from the June
30, 2000 balance. This increase was primarily a result of $241 million provided
by operating activities, proceeds from sales of SanDisk and Veeco common stock
of $105 million and $101 million, respectively, and $44 million from sales of
the Company's common stock. This increase was partially offset by expenditures
of $145 million for property, equipment and leasehold improvements. 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 September 29, 2000, the Company had committed lines of credit of $85
million that can be used for standby letters of credit or bankers' guarantees.
At September 29, 2000, $40 million of these lines of credit were utilized.
The Company anticipates investments of approximately $650 million in property
and equipment in fiscal 2001, of which approximately $139 million had been
incurred as of September 29, 2000. The Company plans to finance these
investments from existing cash balances and cash flows from operations. The $139
million year-to-date investment comprised $73 million for manufacturing
facilities and equipment related to the Company's subassembly and disc drive
final assembly and test facilities in the United States, Asia Pacific and the
United Kingdom; $32 million for manufacturing facilities and equipment for the
recording head operations in the United States, Northern Ireland, Thailand and
Malaysia; $18 million to upgrade the capabilities of the Company's thin-film
media operations in the United States, Singapore and Northern Ireland; and $16
million for other purposes.
17
FACTORS AFFECTING FUTURE OPERATING RESULTS
- ------------------------------------------
We face risks from the VERITAS/Silver Lake transaction
Holders of Seagate common stock face a number of risks in connection with
their investment in Seagate common stock as a result of the pending
VERITAS/Silver Lake transaction, including the following:
. the transaction may not close for many reasons including but not limited
to: the fact that our stockholders or VERITAS' stockholders may not
approve it, SAC may not be able to obtain the funding necessary to
finance the transaction, we may fail to obtain regulatory approval for
the transaction, the transaction may not close due to pending litigation,
or other reasons;
. the price of VERITAS' common stock may decline and we do not have
meaningful control over the management of VERITAS, although currently we
have two representatives on its board of directors;
. our management personnel may be distracted from our day to day operations
by the time demands associated with closing the transactions, and
therefore may be unable to timely identify and address business issues as
they arise;
. our customers and vendors may discontinue their relationship with us,
or delay or cancel orders as a result of uncertainty about our business
after the transaction; and
. our employees may be distracted by concerns about the VERITAS/Silver Lake
transaction, and therefore may not meet critical deadlines in their
assigned tasks or otherwise perform effectively.
If we do not close the VERITAS/Silver Lake transaction, we face a number of
additional risks resulting from the announcement and pendency of the
VERITAS/Silver Lake transaction which could negatively affect our business,
financial condition, results of operations, and ultimately, the market price of
our common stock including:
. our earnings will be impacted because our income statement will reflect
the fees, costs and expenses we incurred in connection with the
transaction, such as legal, accounting and financial advisor fees, costs
and expenses, even if the transaction is not completed;
. we may be required to pay a substantial termination fee if the
VERITAS/Silver Lake transaction is terminated for certain reasons;
. our stockholders may be unable to realize the value of the VERITAS common
stock we hold and the price of our common stock may not reflect the full
value of the VERITAS shares; and
. the market price of our common stock may decline to the extent that the
current market price of our common stock reflects a market assumption
that the transaction will be completed.
If the market price of VERITAS common stock declines, Seagate and VERITAS may
be unable to terminate the merger agreement and Seagate stockholders will
receive shares with a lower market value in connection with the merger
A significant portion of the consideration to be issued to Seagate's
stockholders in connection with the merger will consist of a fixed number of
shares of VERITAS common stock. There will be no adjustment to the fixed number
of shares of VERITAS common stock issued to Seagate's stockholders in connection
with the merger based upon changes in the market price of VERITAS common stock.
In addition, neither Seagate nor VERITAS may terminate the merger
18
agreement or "walk away" from the merger solely due to changes in the market
price of VERITAS common stock. Accordingly, the specific dollar value of the
consideration that Seagate's stockholders will receive in connection with the
merger will depend, in part, on the market value of VERITAS common stock, and
may decrease from the date Seagate's stockholders submit their proxies. The
market price of VERITAS common stock is subject to fluctuations in the market
for publicly traded equity securities generally and has experienced significant
volatility.
VERITAS cannot predict or give any assurances as to the market price of its
common stock at any time before or after the completion of the merger. Seagate
stockholders should obtain recent market quotations for VERITAS common stock in
making a determination on how to vote on the merger agreement and the merger. In
addition, you should call the toll free telephone number that Seagate and
VERITAS have established in order to find out the most recent estimate as to the
amount of cash payable and the number of shares of VERITAS common stock issuable
in exchange for each share of Seagate common stock in connection with the
merger.
Seagate will remain liable to third parties after the leveraged buyout and the
merger
In the leveraged buyout, Seagate will sell all of its operating assets to
SAC, and SAC has agreed to assume and indemnify VERITAS and Seagate for
substantially all liabilities arising in connection with Seagate's operating
assets. However, third parties may nevertheless try to seek recourse against
Seagate for these liabilities. Seagate currently is a large, multinational
enterprise that owns or leases facilities and offices in numerous states and
foreign countries and employs over 57,000 persons worldwide. As a result,
Seagate could continue to face a wide range of possible liabilities after the
leveraged buyout and the merger are completed, both for actions, events or
circumstances arising or occurring before the leveraged buyout and the merger as
well as after. Some areas of potential liability include:
. environmental cleanup costs and liabilities for claims made under
federal, state or foreign environmental laws;
. tax liabilities;
. obligations under federal, state and foreign pension and retirement
benefit laws;
. existing and future litigation arising from the restructuring that
Seagate commenced last year, including litigation initiated by
terminated employees; and
. existing and future patent litigation.
If SAC fails to make payments to VERITAS or Seagate under the
indemnification agreement for any of these liabilities, VERITAS could experience
a material adverse effect on its business and financial performance which could
adversely impact the market price of VERITAS common stock received in connection
with the merger.
The leveraged buyout and the merger may be delayed if Seagate and VERITAS are
unable to timely obtain all necessary consents from government
In order to complete the leveraged buyout and the merger, Seagate and
VERITAS have each filed notifications under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and Seagate has made various filings with
state and foreign governmental authorities with jurisdiction over applicable
antitrust laws. In addition, Mr. Stephen Luczo, a director and executive
officer of Seagate and a member of Seagate's senior management team who will
participate in the ownership of SAC, is required to file a notification under
the Hart-Scott-Rodino Antitrust Improvements Act. The waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act for Seagate's and VERITAS' filings
was terminated early by the Federal Trade
19
Commission in July 2000. Although Seagate, VERITAS and SAC do not currently
anticipate any challenges to the leveraged buyout or the merger based upon
antitrust grounds, any state or foreign governmental authorities could still
take action under various antitrust laws against the leveraged buyout or the
merger as they deem necessary in the public interest. Private parties may also
seek to take action under various antitrust laws against the leveraged buyout
and/or the merger. If any of these events occur, the leveraged buyout and the
merger may be delayed. Based upon available information, Seagate, VERITAS and
SAC believe that the leveraged buyout and the merger comply with all significant
federal, state and foreign antitrust laws. We cannot assure you, however, that
there will not be a challenge to the leveraged buyout and/or the merger based on
antitrust grounds, or that if so challenged, Seagate, VERITAS and SAC will
prevail.
We face risks from our ongoing operations
In addition to the risks related to the VERITAS/Silver Lake transaction, we
face other risks related to our ongoing business operations. 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. These risks include the
following:
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.
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
20
suppliers;
. our inability to reduce our fixed costs to match revenue in any quarter
because of our vertical manufacturing strategy;
. our ability to develop, introduce and market new products and product
enhancements in a timely fashion;
. the impact of changes in foreign currency exchange rates on the cost of
our products and the effective price of such products to foreign
consumers; and
. competition and consolidation in the data storage industry.
In addition, our future operating results may also be adversely affected if
we receive an adverse judgment or settlement in any of the legal proceedings to
which we are a party. For example, in fiscal 2000 we recorded $64 million in
litigation settlement costs.
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 Corporation Quantum Corporation
NEC Corporation Western Digital Corporation
Samsung Electronics Co. Ltd.
Toshiba Corporation
Integrated multinational manufacturers are formidable competitors because
they possess greater resources and are able to access their customers without
having to consider the profitability of the disc drive business in pricing their
components. In addition, the merger of Maxtor and Quantum, which is expected to
close in the first quarter of 2001, if completed, would make the combined
company 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, 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.
21
We may not be able to compete successfully against current or future
competitors. If we fail to compete successfully, our business, operating results
and financial condition may be materially adversely affected.
We have experienced delays in the introduction of products due to supply of
components
Seagate evaluates the need for second sources for all of its components on
a case-by-case basis and, where it is deemed desirable and feasible to do so,
secures multiple sources. Seagate has experienced production delays when unable
to obtain sufficient quantities of certain components or assembly capacity. For
example, in the fourth quarter of fiscal year 2000 and in the first quarter of
fiscal year 2001, Seagate and other rigid disc drive manufacturers experienced
shortages and delays in the receipt of ASICs due to a reduction in the supply to
us of these components. We believe these shortages and delays were caused by
several reasons, including a consolidation among their manufacturers 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 could last until at least the end of
the third quarter of fiscal year 2001, given the lead times and capital required
to design and manufacture ASICs on a profitable scale. The shortage of ASICs in
the fourth quarter of fiscal year 2000 and in the first quarter of fiscal year
2001 did not have a material adverse effect on our financial condition or
results of operations. If the situation worsens, our financial condition and
results of operations could be materially adversely affected. Seagate attempts
to maintain component inventory levels adequate for its short-term needs.
However, an inability to obtain essential components, if prolonged, would
adversely affect Seagate's business.
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 product development expenses of $587
million, $581 million and $585 million in fiscal 2000, fiscal 1999, and fiscal
1998, respectively.
When we develop new disc and tape drive products with higher capacity and
more advanced technology, our operating results may decline because the
increased difficulty and complexity associated with producing such disc drives
increases the likelihood of reliability, quality or operability problems. If our
products suffer 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 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.
22
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.
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.
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.
23
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, China, Northern Ireland,
Malaysia, and Mexico, in addition to those in the United States. Our offshore
operations are subject to certain inherent risks including:
. fluctuations in currency exchange rates;
. longer payment cycles for sales in foreign countries;
. difficulties in staffing and managing international manufacturing
operations;
. seasonal reductions in business activity in the summer months in
Europe and certain other countries;
. increases in tariffs and duties, price controls, restrictions on
foreign currencies and trade barriers imposed by foreign countries; and
. political unrest, particularly in areas in which we have manufacturing
facilities.
These factors could have a material adverse effect on our business,
operating results and financial condition in the future.
In addition to the risks we face from the VERITAS/Silver Lake transaction, we
face risks from our investment in VERITAS
We contributed our Network & Storage Management Group ("NSMG") business to
VERITAS on May 28, 1999 and received a then 42% interest in VERITAS. As of
September 29, 2000, the Company held approximately 32% of the outstanding shares
of VERITAS' common stock.
In addition to the risks we face from the VERITAS/Silver Lake transaction,
we face a number of risks from our investment in VERITAS including the fact
that:
. we do not have meaningful 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 32% of VERITAS which impacts 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 incurred a charge to operations in the third
quarter of fiscal 2000 of $105 million for the write-off of in-process research
and development related to our acquisition of XIOtech and we will experience
ongoing charges related to that acquisition for amortization of purchased
intangibles currently amounting to approximately $10 million per quarter. We
also incurred a charge to operations in the fourth quarter of fiscal 1999
related to the contribution of NSMG 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
24
currently amounting to approximately $80 million per quarter. In addition, in
the second quarter of fiscal 2000, we incurred a charge to operations of $284
million plus $2 million in payroll taxes, related to the purchase of the
minority interest in Seagate Software.
Systems failures could adversely affect our business
The Company's operations are dependent on our ability to protect our
computer equipment and the information stored in our databases from damage by
fire, natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. We believe that we have taken prudent
measures to reduce the risk of interruption in our operations. However, we
cannot be sure that these measures are sufficient. Any damage or failure that
causes interruptions in our operations could have a material adverse effect on
our business, results of operations and financial condition.
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 that while the VERITAS/Silver Lake
transaction is pending, the value of our common stock will depend primarily on
the value of VERITAS' common stock. In the event that the VERITAS/Silver Lake
transaction does not occur, 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 32% 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
25
in any of the legal proceedings to which we are a party; and
. price erosion.
The stock market may from time to time experience extreme price and volume
fluctuations. Many technology companies have experienced such fluctuations. In
addition, our stock price may be affected by general market conditions and
domestic and international macroeconomic factors unrelated to our performance.
Often such fluctuations have been unrelated to the operating performance of the
specific companies. The market price of our common stock may experience
significant fluctuations in the future. For example, our stock price fluctuated
from a high of $76 to a low of $25 1/8 during fiscal 2000.
26
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.
Securities Class Actions
- ------------------------
Following the Company's announcement on March 29, 2000 of the signing of a stock
purchase agreement and merger agreement, Seagate stockholders filed 17 lawsuits
in Delaware and five lawsuits in California against the Company, the individual
members of the Board of Directors, certain executive officers, Silver Lake
Partners, LP, and VERITAS Software Corporation ("VERITAS"). Between April 18,
2000 and October 13, 2000, the Delaware Chancery Court consolidated the 17
lawsuits into a single action captioned In Re Seagate Technology, Inc.
Shareholders Litigation and certified the class action, and the plaintiffs filed
two amended complaints and a motion for a preliminary injunction to enjoin the
closing of the proposed transactions. The plaintiffs' second amended complaint
alleges that the Company's Board of Directors breached their fiduciary duties to
the shareholders by entering into the stock purchase and merger agreements and
that they did not secure the highest possible price for the Company's shares.
The plaintiffs seek unspecified damages and an injunction of the closing of the
transaction. On October 13, 2000, the parties to the Delaware lawsuit entered
into a Memorandum of Understanding ("MOU") to settle the action. The primary
elements of the MOU are the following:
. Suez Acquisition Company, the investor group, agreed to increase the cash
purchase price under the stock purchase agreement by $50 million. This
amount:
- will be funded by the investor group on the closing of the
transactions into an escrow account to be held by VERITAS, pending
its distribution to the Company's shareholders, if specified
conditions are satisfied as discussed below;
- will be paid to the Company's 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
- plus interest, will be returned to Suez Acquisition Company 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.
. The Company 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.
. The merger agreement will be amended to 1) reduce the maximum amount that may
be required to be held in escrow to cover potential tax liabilities of the
Company 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, the consummation of the
stock purchase and merger transactions and final court approval of the
settlement.
Between March 30, 2000 and October 27, 2000, one of the California complaints
was voluntarily dismissed and the others were coordinated, with venue in Santa
Clara County. The plaintiffs seek class certification and allege that the
Company's Board of Directors and certain officers breached their fiduciary
duties to the shareholders and that they did not secure the highest possible
price for the shares. Plaintiffs seek unspecified damages and an injunction of
the closing of the transactions contemplated by the stock purchase agreement and
the merger agreement. Defendants have not yet answered the complaints. The
Company believes these actions are without merit and intends to vigorously
defend them.
Intellectual Property Litigation
- --------------------------------
Papst Licensing, GmbH -- Papst has given the Company 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
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.
Terastor/Maxoptix -- 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
27
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 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. On September 7, 2000, the litigation was settled. The actions
were dismissed with prejudice as part of the settlement.
Cambrian Consultants, Inc. -- Cambrian Consultants, Inc. filed suit in the U.S.
District Court for the Central District of California on May 23, 2000, alleging
patent infringement. The single patent at issue, U.S. Patent No. 4,371,903, is
on an Emergency Head Retract System. The Company filed an answer on August 18,
2000, asserting invalidity, unenforceability and non-infringement defenses and
counterclaims. The court bifurcated the liability and damages phases and
scheduled a hearing on claim construction and summary judgment for March 12,
2001. Trial on liability, if necessary after the claims are construed and
summary judgment motions are heard, is scheduled for May 18, 2001. Discovery on
liability issues is in progress with discovery on damages stayed. The Company
believes it has meritorious defenses and intends to defend the case vigorously.
Convolve, Inc. -- On July 13, 2000, Convolve and Massachusetts Institute of
Technology filed suit against Compaq Computer Corporation and Seagate Technology
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(R) and Quick and Quiet(TM) technology. The plaintiffs claim their
technology is incorporated in the Company'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. The Company 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 the Company owns
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 on those issues. Convolve served a trade secrets
disclosure on August 4, 2000. The court is expected to rule in November 2000 on
the Company's motion challenging Convolve's trade secrets disclosure statement.
The Company believes this matter is without merit and intends to defend it
vigorously.
Labor Litigation
- ----------------
White -- On March 15, 2000 Royston White filed a breach of contract action
against the Company 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. The Company filed a summary
judgment motion,
28
which was to be heard on October 26, 2000. The court took the motion off the
calendar pending resolution of a writ filed with the Oklahoma Supreme Court by
plaintiff on a discovery issue and a motion for recusal of the judge. The
Company believes it has substantive defenses to the complaint and will pursue
such defenses vigorously.
Other Matters
- -------------
The Company is involved in a number of other judicial and administrative
proceedings incidental to its business. Although occasional adverse decisions
(or settlements) may occur, the Company believes that the final disposition of
such matters will not have a material adverse effect on the Company's financial
position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following exhibits are included herein:
10.29 Consolidated Amendment to Stock Purchase Agreement, Agreement and Plan of (A)
Merger and Reorganization, and Indemnification Agreement, and Consent
entered into as of August 29, 2000 by and among the Company, Suez, Seagate
Software, VERITAS and Victory Merger Sub.
10.30 Consolidated Amendment No. 2 to Stock Purchase Agreement, Agreement and (B)
Plan of Merger and Reorganization, and Indemnification Agreement, and
Consent entered into as of October 18, 2000 by and among the Company,
Suez, Seagate Software, VERITAS and Victory Merger Sub.
27 Financial Data Schedule.
(A) Incorporated by reference to Annex D of a Joint Proxy Statement/Prospectus
for a Special Meeting of Shareholders of the Company and VERITAS which the
Company filed as an exhibit in connection with its Schedule 13E-3/A (file
number 005-33914) dated October 20, 2000.
(B) Incorporated by reference to Annex E of a Joint Proxy Statement/Prospectus
for a Special Meeting of Shareholders of the Company and VERITAS which the
Company filed as an exhibit in connection with its Schedule 13E-3/A (file
number 005-33914) dated October 20, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended September 29, 2000. The following
reports on Form 8-K were filed in October 2000:
A Form 8-K dated October 18, 2000 regarding the Company's announcement of
its financial results for the first quarter of fiscal year 2001, which
ended on September 29, 2000.
A Form 8-K dated October 31, 2000 regarding the Company's announcement
that the Company, VERITAS, Suez and other dependent parties had entered
into an agreement in principal to settle the pending Delaware class action
lawsuit in connection with the pending sale of Seagate's operating assets
to Suez and subsequent merger with VERITAS (the "Proposed Transaction") as
well as the Company's announcement that it had received a fairness opinion
from Lehman Brothers as to the fairness of the consideration received by
the Company's stockholders in the Proposed Transaction.
29
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: November 3, 2000 BY: /s/ Charles C. Pope
----------------------------
CHARLES C. POPE
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
DATE: November 3, 2000 BY: /s/ Stephen J. Luczo
----------------------------
STEPHEN J. LUCZO
Chief Executive Officer
(Principal Executive Officer
and Director)
30
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
Exhibit
Number
_______
Notes
-----
10.29 Consolidated Amendment to Stock Purchase Agreement, Agreement (A)
and Plan of Merger and Reorganization, and Indemnification Agreement, and
Consent entered into as of August 29, 2000 by and among the Company, Suez,
Seagate Software, VERITAS and Victory Merger Sub.
10.30 Consolidated Amendment No. 2 to Stock Purchase Agreement, Agreement and (B)
Plan of Merger and Reorganization, and Indemnification Agreement, and
Consent entered into as of October 18, 2000 by and among the Company, Suez,
Seagate Software, VERITAS and Victory Merger Sub.
27 Financial Data Schedule.
(A) Incorporated by reference to Annex D of a Joint Proxy Statement/Prospectus
for a Special Meeting of Shareholders of the Company and VERITAS which the
Company filed as an exhibit in connection with its Schedule 13E-3/A (file
number 005-33914) dated October 20, 2000.
(B) Incorporated by reference to Annex E of a Joint Proxy Statement/Prospectus
for a Special Meeting of Shareholders of the Company and VERITAS which the
Company filed as an exhibit in connection with its Schedule
13E-3/A (file number 005-33914) dated October 20, 2000.
31