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 27, 1996
Commission File Number 0-10630
SEAGATE TECHNOLOGY, INC.
(Registrant)
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 94-2612933
920 Disc Drive, Scotts Valley, California 95066
Telephone: (408) 438-6550
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 27, 1996, 247,216,634 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 income--
Three and six months ended December 27, 1996 and
December 29, 1995 3
Consolidated condensed balance sheets--
December 27, 1996 and June 28, 1996 4
Consolidated condensed statements of cash flows--
Six months ended December 27, 1996 and
December 29, 1995 5
Notes to consolidated condensed financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
- ---------- --------------------------------
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
December 27, December 29, December 27, December 29,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Net sales $2,400,156 $2,339,691 $4,460,981 $4,480,496
Cost of sales 1,858,657 1,885,868 3,526,706 3,630,573
Product development 113,630 105,371 220,393 202,688
Marketing and administrative 125,880 128,607 237,326 245,176
Amortization of goodwill and
other intangibles 12,516 11,261 22,926 22,045
In-process research and development - 3,600 - 6,417
Restructuring costs - - (9,554) -
---------- ---------- ---------- ----------
Total Operating Expenses 2,110,683 2,134,707 3,997,797 4,106,899
Income from Operations 289,473 204,984 463,184 373,597
Interest income 19,248 26,150 36,071 49,492
Interest expense (8,741) (16,086) (18,014) (33,625)
Other (4,702) 1,324 (6,295) 349
---------- ---------- ---------- ----------
Other Income 5,805 11,388 11,762 16,216
---------- ---------- ---------- ----------
Income before income taxes 295,278 216,372 474,946 389,813
Provision for income taxes (82,678) (67,457) (132,985) (120,089)
---------- ---------- ---------- ----------
Net Income $ 212,600 $ 148,915 $ 341,961 $ 269,724
========== ========== ========== ==========
NET INCOME PER SHARE:
Primary $0.91 $0.74 $1.51 $1.35
Fully diluted 0.84 0.63 1.36 1.15
NUMBER OF SHARES USED IN
PER SHARE COMPUTATIONS:
Primary 234,266 200,932 226,831 199,528
Fully diluted 264,302 252,122 262,935 250,834
See notes to consolidated condensed financial statements.
3
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
December 27, June 28,
1996 1996 (1)
------------ -----------
ASSETS
- ------
Cash and cash equivalents $ 729,321 $ 503,754
Short-term investments 748,580 670,308
Accounts receivable 1,214,950 1,066,519
Inventories 673,160 790,821
Deferred income taxes 250,834 222,355
Other current assets 155,673 145,523
---------- ----------
Total Current Assets 3,772,518 3,399,280
Property, equipment and leasehold improvements, net 1,567,693 1,399,883
Goodwill and other intangibles, net 238,002 274,046
Other assets 138,109 166,426
---------- ----------
Total Assets $5,716,322 $5,239,635
========== ==========
LIABILITIES
- -----------
Accounts payable $ 809,148 $ 715,396
Accrued employee compensation 194,838 180,126
Accrued expenses 521,972 490,752
Accrued income taxes 98,828 49,437
Current portion of long-term debt 2,861 2,425
---------- ----------
Total Current Liabilities 1,627,647 1,438,136
Deferred income taxes 396,798 351,527
Other liabilities 183,053 185,579
Long-term debt, less current portion 1,751 798,305
---------- ----------
Total Liabilities 2,209,249 2,773,547
---------- ----------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 2,472 1,067
Additional paid-in capital 1,853,253 1,132,328
Retained earnings 1,708,566 1,391,389
Deferred compensation (56,740) (57,656)
Foreign currency translation adjustment (478) (1,040)
---------- ----------
Total Stockholders' Equity 3,507,073 2,466,088
---------- ----------
Total Liabilities and Stockholders' Equity $5,716,322 $5,239,635
========== ==========
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of June 28, 1996.
See notes to consolidated condensed financial statements.
4
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
-----------------
December 27, December 29,
1996 1995
------------ -----------
OPERATING ACTIVITIES:
Net income $ 341,961 $ 269,724
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 258,175 183,779
Deferred income taxes 15,279 44,664
In-process research and development - 6,417
Other 27,870 1,447
Changes in operating assets and liabilities:
Accounts receivable (143,542) (240,013)
Inventories 86,470 (46,100)
Accounts payable 117,880 176,404
Accrued income taxes 69,762 (22,370)
Other assets and liabilities 30,280 (14,261)
----------- -----------
Net cash provided by operating activities 804,135 359,691
INVESTING ACTIVITIES:
Acquisition of property, equipment and leasehold
improvements, net (425,301) (463,911)
Purchases of short-term investments (1,370,036) (1,794,650)
Maturities and sales of short-term investments 1,292,926 1,642,166
Other, net 41,020 (44,340)
----------- -----------
Net cash used in investing activities (461,391) (660,735)
FINANCING ACTIVITIES:
Sale of common stock 42,255 37,233
Purchase of treasury stock (151,217) -
Other, net (8,099) (12,200)
----------- -----------
Net cash provided by (used in) financing activities (117,061) 25,033
Effect of exchange rate changes on cash and cash equivalents (116) 2,682
----------- -----------
Increase (decrease) in cash and cash equivalents 225,567 (273,329)
Elimination of Conner's net cash activity for the
six months ended December 31, 1995 - (31,906)
Cash and cash equivalents at the beginning of the period 503,754 890,667
----------- -----------
Cash and cash equivalents at the end of the period $ 729,321 $ 585,432
=========== ===========
See notes to consolidated condensed financial statements.
5
SEAGATE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
On February 2, 1996 the Company merged with Conner Peripherals, Inc.
("Conner") in a transaction accounted for as a pooling of interests and, as
a result, the Company's previously issued financial statements for periods
prior to that date presented in this Form 10-Q have been restated to
include the assets, liabilities and operating results of Conner in
accordance with generally accepted accounting principles and the
instructions in Regulation S-X.
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 28, 1996 and notes thereto,
are adequate to make the information presented not misleading.
The consolidated condensed financial statements reflect, in the opinion of
management, all 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, except for the reversal
of certain restructuring costs incurred in connection with the Conner
merger and the incurrence of other non-recurring merger-related costs, both
recorded in the three months ended September 27, 1996, and the write-offs
of in-process research and development recorded in the three and six months
ended December 29, 1995.
The results of operations for the six months ended December 27, 1996 are
not necessarily indicative of the results that may be expected for the
entire year ending June 27, 1997.
During the quarter ended December 27, 1996, the Company effected a two-for-
one stock split in the form of a stock dividend. Prior periods have been
restated to reflect the stock split in the form of a stock dividend. All
references to number of shares and per share amounts are on a post-split
basis.
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
1996 ended on June 28, 1996 and fiscal 1997 will end on June 27, 1997.
2. NET INCOME PER SHARE
--------------------
Primary net income per share was based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Fully diluted net income per share further assumed the conversion
of the Company's convertible subordinated debentures for the period of time
that they were outstanding.
6
3. BALANCE SHEET INFORMATION
-------------------------
(In thousands)
December 27, June 28,
1996 1996
------------ -----------
Accounts Receivable:
Accounts receivable $ 1,281,926 $ 1,133,175
Allowance for non-collection (66,976) (66,656)
----------- -----------
$ 1,214,950 $ 1,066,519
=========== ===========
Inventories:
Components $ 361,291 $ 295,169
Work-in-process 156,185 138,854
Finished goods 155,684 356,798
----------- -----------
$ 673,160 $ 790,821
=========== ===========
Property, Equipment and Leasehold Improvements:
Property, equipment and leasehold improvements $ 2,729,330 $ 2,404,538
Allowance for depreciation and amortization (1,161,637) (1,004,655)
----------- -----------
$ 1,567,693 $ 1,399,883
=========== ===========
4. INCOME TAXES
------------
The effective tax rate used to compute the income tax provision for the six
months ended December 27, 1996 and December 29, 1995 was based on the
Company's estimate of its domestic and foreign operating income for each
respective year. The effective tax rate for the six months ended December
27, 1996 was 28% compared with 31% for the comparable period last year.
The Company's overall effective tax rate is less than the domestic
statutory rate because a portion of its operating income is not subject to
foreign income taxes and is considered to be permanently invested in non-
U.S. operations. Accordingly, taxes have not been provided on such income.
7
5. STOCKHOLDERS' EQUITY
--------------------
Shares authorized and outstanding are as follows:
Shares Outstanding
------------------
December 27, June 28,
1996 1996
------------ ----------
Preferred stock, par value $.01 per share,
1,000,000 shares authorized - -
Common stock, par value $.01 per share,
600,000,000 shares authorized 247,216,634 213,430,184
6. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
(In thousands)
Six Months Ended
----------------
December 27, December 29,
1996 1995
------------ ------------
Cash Transactions:
Cash paid for interest $ 24,074 $33,276
Cash paid for income taxes 40,386 95,800
Non-Cash Transactions:
Conversion of 6-3/4%, 6-1/2% and 5% debentures 788,020 -
7. CERTAIN INVESTMENTS
-------------------
The Company has classified its entire investment portfolio as available-
for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in stockholders' equity. The
amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses are included in other income
(expense). The cost of securities sold is based on the specific
identification method.
8
The following is a summary of available-for-sale securities at December 27,
1996 (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
Corporate Bonds $ 147,182 $ 292 $ (26) $ 147,448
U.S. Government
Obligations 167,937 348 (77) 168,208
Commercial Paper 243,247 2 (28) 243,221
Money Market
Mutual Funds 124,264 - - 124,264
Municipal Bonds 66,631 125 (161) 66,595
Repurchase Agreements 104,203 - - 104,203
Auction Rate
Preferred Stock 232,604 - - 232,604
Euro/Yankee
Time Deposits 117,457 - - 117,457
---------- -------- ----- ----------
Total $1,203,525 $ 767 $(292) $1,204,000
========== ======== ===== ==========
Included in short-term investments $748,580
Included in cash and cash equivalents 455,420
--------
Total $1,204,000
==========
The gross realized gains and losses on the sale of available-for-sale
securities were immaterial for the six month periods ended December 27,
1996 and December 29, 1995.
The fair value of the Company's investment in debt securities at December
27, 1996, by contractual maturity, is as follows (in thousands):
Due in less than 1 year $644,007
Due in 1 to 2-1/2 years 203,124
--------
Total $847,131
========
8. MERGER WITH CONNER
------------------
On February 2, 1996 the Company and Conner Peripherals, Inc. ("Conner")
merged after approval by the stockholders of both companies. To effect the
combination Seagate issued 48,956,044 shares of its common stock in
exchange for all the outstanding common stock of Conner and issued options
to purchase 4,939,160 shares of Seagate common stock in exchange for all
the outstanding options to purchase Conner common stock. The merger has
been accounted for as a pooling of interests and, accordingly, all periods
prior to the merger presented in the accompanying consolidated financial
statements have been restated to include the accounts and operations of
Conner. Conner
9
was involved in the design, manufacture and marketing of information
storage products including disc drives, tape drives and storage
management software.
Combined and separate results of the Company and Conner for the periods
prior to the acquisition were as follows:
Three Months Ended Six Months Ended
------------------ ----------------
In thousands Dec. 27, 1996 Dec. 29, 1995 Dec. 27, 1996 Dec. 29, 1995
- ------------ ------------- ------------- ------------- -------------
Net Sales:
Prior to Dec. 30, 1995:
Seagate $ - $1,562,964 $ - $3,016,590
Conner - 776,727 - 1,463,906
Combined results after Dec. 29, 1995 2,400,156 - 4,460,981 -
---------- ---------- ---------- ----------
$2,400,156 $2,339,691 $4,460,981 $4,480,496
========== ========== ========== ==========
Net Income:
Prior to Dec. 30, 1995:
Seagate $ - $ 123,908 $ - $ 232,473
Conner - 25,007 - 37,251
Combined results after Dec. 29, 1995 212,600 - 341,961 -
---------- ---------- ---------- ----------
$ 212,600 $ 148,915 $ 341,961 $ 269,724
========== ========== ========== ==========
The two companies maintained a majority of similar accounting practices.
However, as a result of certain differing accounting practices relating to
the capitalization of fixed assets and inventory, certain adjustments to
net assets were made to conform accounting practices of the two companies.
None of these adjustments was material to any of the periods presented.
9. RESTRUCTURING COSTS
-------------------
During fiscal year 1996, the Company recorded restructuring charges
totaling $241.7 million as a result of the merger with Conner. The
restructuring charges comprised $60.7 million for employee severance
benefits, $97.2 million to write off or write down equipment, inventory,
intangibles and other assets, $45.1 million for closure of duplicate and
excess facilities, $24.0 million for fees of financial advisors, attorneys
and accountants and $14.7 million for contract cancellations and other
expenses. In connection with the restructure, the Company currently expects
a total workforce reduction of approximately 2,400 employees. Of that
number, the employment of 875 employees has been terminated as of December
27, 1996.
During the six months ended December 27, 1996 the Company reversed
approximately $9.6 million of its restructuring reserves as a result of the
completion of certain aspects of the restructuring plan at less than the
originally estimated cost.
10
The following table summarizes the Company's restructuring activity for the
six months ended December 27, 1996 (in thousands):
EQUIPMENT, CONTRACT
INVENTORY, CANCELLATIONS
SEVERANCES EXCESS INTANGIBLES PROFESSIONAL AND OTHER
AND BENEFITS FACILITIES* AND OTHER ASSETS FEES EXPENSES TOTAL
------------- ------------ ----------------- ------------- ---------- ---------
Reserve balances,
June 28, 1996 $ 33,166 $35,319 $11,954 $ 3,185 $ 9,792 $ 93,416
Cash charges (12,071) (5,350) - (1,297) (5,552) (24,270)
Non-cash charges - (440) (7,419) - 69 (7,790)
Adjustments (4,567) (3,658) - - (1,329) (9,554)
-------- ------- ---------------- ------------ ------- --------
Reserve balances,
December 27, 1996 $ 16,528 $25,871 $ 4,535 $ 1,888 $ 2,980 $ 51,802
-------- ------- ---------------- ------------ ------- --------
*Primarily relates to future lease payments and write-off of leasehold
improvements on facilities that will no longer be utilized.
10. CONVERSION OF DEBENTURES
------------------------
In October 1996, the Company called for redemption on November 22, 1996 all
of its 6-1/2% Convertible Subordinated Debentures due 2002. Holders were
given the option to convert their debentures into shares of the Company's
common stock at a price of $27.15 per share through November 22, 1996 or
have their debentures redeemed at a total redemption price of $1,053.63 per
$1,000 principal amount of debentures consisting of $1,039.00 principal
amount plus accrued interest of $14.63. All debentures not converted by
5:00pm eastern time on November 22, 1996 were automatically redeemed.
In November 1996, the Company called for redemption on December 17, 1996
all of its 5% Convertible Subordinated Debentures due 2003 and on December
19, 1996 all of its 6-3/4% Convertible Subordinated Debentures due 2001.
Holders of the 5% debentures were given the option to convert their
debentures into shares of the Company's common stock at a price of $13.125
per share through December 16, 1996 or have their debentures redeemed at a
total redemption price of $1,041.39 per $1,000 principal amount of
debentures consisting of $1,035.00 principal amount plus accrued interest
of $6.39. All of the 5% debentures were converted. Holders of the 6-3/4%
debentures were given the option to convert their debentures into shares of
the Company's common stock at a price of $32.805 per share through December
19, 1996 or have their debentures redeemed at a total redemption price of
$1,054.00 per $1,000 principal amount of debentures consisting of $1,033.75
principal amount plus accrued interest of $20.25. All 6-3/4% debentures not
converted by 5:00pm eastern time on December 19, 1996 were automatically
redeemed.
Approximately $788 million principal amount of the 5%, 6-1/2% and 6-3/4%
debentures were converted to approximately 38.4 million shares of the
Company's common stock and approximately $1.2 million principal amount of
the 6-1/2% and 6-3/4% debentures were redeemed.
11. LITIGATION
----------
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
11
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 paragraph below
relating to customs duties, the paragraph below relating to the effective tax
rate, the statements below under "Factors Affecting Future Operating Results,"
the statements regarding capital expenditures under "Liquidity and Capital
Resources" 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:
Effective February 2, 1996 the Company merged with Conner Peripherals, Inc.
("Conner"). Conner was involved in the design, manufacture and marketing of
information storage products, including disc drives, tape drives and storage
management software. The merger was accounted for as a pooling of interests and
accordingly all prior period financial statements have been restated as if the
merger took place at the beginning of such periods. The comparisons to prior
periods discussed below should be read in light of this. See Note 8, Merger
with Conner, to the accompanying consolidated condensed financial statements.
Net sales for the quarter ended December 27, 1996 were $2,400,156,000 as
compared with $2,339,691,000 for the comparable year-ago quarter, and
$2,060,825,000 for the immediately preceding quarter ended September 27, 1996.
Net sales for the six months ended December 27, 1996 were $4,460,981,000 as
compared with $4,480,496,000 for the comparable year-ago period. The increase
in net sales from the comparable year ago quarter was primarily due to a shift
in mix to the Company's higher priced products partially offset by a decrease in
units shipped and a continuing decline in the average unit sales prices of the
Company's products as a result of competitive market conditions. The increase
in net sales from the immediately preceding quarter was primarily due to a
higher level of unit shipments and a shift in mix to the Company's higher priced
products partially offset by a continuing decline in the average unit sales
prices of the Company's products as a result of competitive market conditions.
The decrease in net sales from the comparable six month period 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 and a shift in mix to the Company's higher priced
products.
Gross margin as a percentage of net sales was 22.6% and 20.9% for the three and
six months ended December 27, 1996, compared with 19.4% and 19.0% for the
comparable periods last year and 19.1% for the immediately preceding quarter.
The increase in gross margin as a percentage of net sales from the comparable
periods last year and the immediately preceding quarter was primarily due to a
shift in mix to the Company's newer, higher capacity disc drives and a
12
reduction in material costs per unit, partially offset by a continuing decline
in the average unit sales prices of the Company's products as a result of
competitive market conditions.
During calendar 1995, Singapore progressively lost its status as a beneficiary
country under the European Union's ("EU") General System of Preferences ("GSP").
As a result, hard disc drives produced in Singapore and imported into the EU
have realized no reduction from full Most Favored Nation customs duties
(generally 1.6% at the present time) since December 31, 1995, whereas disc
drives imported into the EU from certain other GSP favored countries are subject
to more favorable customs duties. In addition, there is currently under
consideration within the Commission of the European Union, a proposal to
increase duty rates on multimedia products. Under this proposal, duties would
be assessed at a rate of 14% whereas under the current code duties would decline
to zero within two years. If this proposal were implemented, certain selected
high-capacity drives of the Company may be subjected to this higher tariff. The
imposition of such customs duties would negatively impact revenues or increase
costs and adversely impact gross margins.
Product development expenses for the three and six months ended December 27,
1996 were $113,630,000 and $220,393,000 respectively, an increase of $8,259,000
and $17,705,000 when compared with the comparable periods last year and an
increase of $6,867,000 when compared with the immediately preceding quarter
ended September 27, 1996. These expenses represented 4.7% and 4.9%,
respectively, of net sales for the three and six months ended December 27, 1996
compared with 4.5% for both comparable periods last year and 5.2% for the
immediately preceding quarter. The increase in expenses from the comparable
year ago periods was primarily due to increases in salaries and related costs,
increasing product development expenses of the Company's software businesses and
an overall increase in the Company's product development efforts offset by a
decrease in allocated occupancy costs with respect to the year ago quarter and a
decrease in outside services with respect to the six months ended December 29,
1995. The increase in expenses from the immediately preceding quarter was
primarily due to increases in salaries and related costs.
Marketing and administrative expenses for the three and six months ended
December 27, 1996 were $125,880,000 and $237,326,000 respectively, a decrease of
$2,727,000 and $7,850,000 when compared with the comparable periods last year
and an increase of $14,434,000 when compared with the immediately preceding
quarter ended September 27, 1996. These expenses represented 5.2% and 5.3%,
respectively, of net sales for the three and six months ended December 27, 1996
compared with 5.5% for both comparable year-ago periods and 5.4% for the
immediately preceding quarter. The decrease in expenses from the comparable
year-ago periods reflects cost savings resulting from the combination of the
operations of the Company and Conner pursuant to the February 1996 merger of the
two companies. The decreases in expenses were primarily in the areas of
salaries and related costs, advertising and promotion, outside services,
allocated occupancy costs, depreciation and legal expenses partially offset by
increasing marketing and administrative expenses of the Company's software
businesses. The increase in expenses from the immediately preceding quarter was
primarily due to increases in salaries and related costs, increasing marketing
and administrative expenses of the Company's software businesses, an increased
provision for bad debts and increases in travel and entertainment expenses.
Amortization of goodwill and other intangibles increased by $1,255,000 and
$881,000 for the three and six months ended December 27, 1996, when compared
with the comparable year-ago
13
periods and increased by $2,106,000 when compared with the immediately preceding
quarter ended September 27, 1996. The increase in amortization from the
comparable year-ago periods and the immediately preceding quarter was primarily
due to the write-down of goodwill and write-offs of certain intangible assets in
the Company's software businesses whose value had become impaired and, with
respect to the comparable year-ago periods, additional goodwill and other
intangibles arising from the acquisition of Holistic Systems Ltd. in June 1996.
The increase in amortization from the comparable year-ago periods was partially
offset by write-offs, in the quarter ended March 29, 1996, of certain intangible
assets in the Company's tape drive and software businesses whose value had
become impaired.
During the six months ended December 27, 1996 the Company reversed $9,554,000 of
its restructuring reserves as a result of the completion of certain aspects of
the restructuring plan at less than the originally estimated cost. The reversal
consisted of $4,567,000 in severances and benefits, $3,658,000 in excess
facilities and $1,329,000 in other expenses.
Net other income decreased by $5,583,000 and $4,454,000 for the three and six
months ended December 27, 1996 when compared with the comparable year-ago
periods and decreased by $152,000 from the immediately preceding quarter ended
September 27, 1996. The decrease in net other income from the comparable year-
ago periods was primarily due to lower interest income from lower average
invested cash and lower interest rates and an increase in amortization of the
premium on foreign currency option contracts offset by a reduction in interest
expense as a result of the redemption or conversion of the Company's 5%, 6-1/2%
and 6-3/4% convertible subordinated debentures.
The effective tax rate for the six months ended December 27, 1996 was 28%
compared with 31% for the comparable period last year. The effective tax rate
used to compute the income tax provision for each quarter was based on the
Company's estimate of its domestic and foreign operating income for each
respective year. The Company's overall effective tax rate is less than the
domestic statutory rate because a portion of its operating income is not subject
to foreign income taxes and is considered to be permanently invested in non-U.S.
operations. Accordingly, taxes have not been provided on such income.
The Company expects its effective tax rate on operating income for the remaining
quarters of fiscal 1997 to approximate 28%. However, the actual effective tax
rate may vary from 28% if, for example, the Company incurs charges in connection
with future acquisitions.
FACTORS AFFECTING FUTURE OPERATING RESULTS:
The data storage industry in which the Company competes is subject to a number
of risks, each of which has affected the Company's operating results in the past
and could impact the Company's future operating results. The demand for disc
drive and tape drive products depends principally on demand for computer systems
and storage upgrades to computer systems, which has historically been volatile.
Changes in demand for computer systems often have an exaggerated effect on the
demand for disc drive and tape drive products in any given period, and
unexpected slowdowns in demand for computer systems generally cause sharp
declines in demand for such products. The data storage industry has been
characterized by periodic situations in which the supply of drives exceeds
demand, resulting in higher than anticipated inventory levels and intense price
competition. Even during periods of consistent demand, this industry is
characterized by intense competition and ongoing price erosion over the life of
a
14
given drive product. The Company expects that competitors will offer new and
existing products at prices necessary to gain or retain market share and
customers. The Company expects that price erosion in the data storage industry
will continue for the foreseeable future. This competition and continuing price
erosion could adversely affect the Company's results of operations in any given
quarter and such adverse effect often cannot be anticipated until late in any
given quarter. In addition, the demand of drive customers for new generations
of products has led to short product life cycles that require the Company to
constantly develop and introduce new drive products on a cost effective and
timely basis. In addition, the Company's future success will require, in part,
that the market for computer systems, storage upgrades to computer systems and
multimedia applications, such as digital video and video-on-demand, and hence
the market for disc drives, remain strong. In addition, the Company's operating
results have been and may in the future be subject to significant quarterly
fluctuations as a result of a number of other factors, including the timing of
orders from and shipment of products to major customers, product mix, pricing,
delays in the development, introduction and production of new products, delays
or interruptions in the production of existing products, competing technologies,
variations in product cost, component availability due to single or limited
sources of supply, high fixed costs resulting from the Company's vertical
integration strategy, foreign exchange fluctuations, increased competition and
general economic and industry fluctuations. The Company's future operating
results may also be adversely affected by an adverse judgment or settlement in
the legal proceedings in which the Company is currently involved (see "Part II,
Item 1. Legal Proceedings").
The Company's future operating results will also be impacted by its ability to
combine successfully the operations of Seagate and Conner. The transition to a
combined Company has required and will continue to require substantial attention
from the Company's management. The diversion of the attention of management and
any difficulties encountered in the transition process could have an adverse
impact on the revenues and operating results of the Company. The combination of
the Company and Conner also requires the continued integration of the companies'
product offerings and the continued coordination of their research and
development and sales and marketing efforts. The difficulties of assimilation
may be increased by the necessity of coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining two different corporate cultures. In addition, the process of
combining the two organizations has caused and could continue to cause the
interruption of, or loss of momentum in, the activities of the Company's
businesses, which could have a material adverse effect on the Company. There can
be no assurance that the Company will retain its technical and other key
personnel nor realize any of the technological or other benefits of the Merger.
The Company is in the process of incorporating several of its software
businesses into a single entity called Seagate Software, Inc. and is offering
employees of Seagate Software, Inc. and selected employees of the Company an
opportunity to acquire an equity interest in the software business. The
software business is subject to a number of risks including the highly
competitive nature of the business, the Company's ability to successfully
integrate its various software business acquisitions, possible delays in product
development and introduction, competitors' technological innovations and loss of
key personnel. The Company intends to continue its expansion into software and
other complementary businesses. As a result, the Company expects that it will
continue to incur charges as it acquires businesses, including charges for the
write-off of in-process research and development. The timing of such write-offs
has in the past and may in the future lead to fluctuations in the Company's
operating results on a quarterly and annual basis.
15
LIQUIDITY AND CAPITAL RESOURCES:
During the quarter ended December 27, 1996, the Company effected a two-for-one
stock split in the form of a stock dividend. All references to the Company's
common stock in the discussion below are presented on a post-split basis.
At December 27, 1996, the Company's cash, cash equivalents and short-term
investments totaled $1.478 billion, an increase of $304 million from the June
28, 1996 balance. This increase was primarily a result of cash provided by
operating activities, offset by the Company's additions to property, equipment
and leasehold improvements and the repurchase by the Company of approximately 4
million shares of its common stock. Until required for other purposes, the
Company's cash and cash equivalents are maintained in highly liquid investments
with remaining maturities of 90 days or less at the time of purchase, while its
short-term investments consist of readily marketable debt securities with
remaining maturities of more than 90 days at the time of purchase.
As of December 27, 1996, the Company had committed lines of credit of $82
million which can be used for standby letters of credit and bankers' guarantees.
At December 27, 1996, approximately $78 million had been utilized.
The Company expects investments in property and equipment in the current fiscal
year to approximate $1 billion, of which approximately $427 million had been
incurred as of December 27, 1996. The Company plans to finance these
investments from existing cash balances and cash flows from operations. The
$427 million comprised $126 million for manufacturing facilities and equipment
related to the Company's subassembly and disc drive final assembly and test
facilities in the United States, Far East and Ireland, $137 million for
manufacturing facilities and equipment for the thin-film head operations in the
United States, Malaysia and Northern Ireland, $120 million for expansion of the
Company's thin-film media operations in California and Singapore and $44 million
for other purposes.
During the six months ended December 27, 1996 the Company acquired approximately
4 million shares of its common stock for approximately $151 million. The
repurchase of these shares was in connection with a stock repurchase program
announced in September 1996 in which up to 14 million shares of the Company's
common stock were authorized to be acquired in the open market.
During the quarter ended December 27, 1996, the Company called for redemption
all of its 5%, 6-1/2% and 6-3/4% debentures. By the end of the quarter, all of
the debentures had been redeemed or converted to the Company's common stock.
Approximately $788 million principal amount of the 5%, 6-1/2% and 6-3/4%
debentures were converted to approximately 38.4 million shares of the Company's
common stock and approximately $1.2 million principal amount of the 6-1/2% and
6-3/4% debentures were redeemed.
16
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 which 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 LITIGATION
- ---------------------
In 1988 a series of lawsuits were filed in Federal Court for the Northern
District of California against the Company, alleging violations of the federal
securities laws on behalf of a class of purchasers of the Company's securities.
On February 8, 1995 the Court granted defendants summary judgment completely
dismissing all claims against the Company. On March 31, 1995 the Court denied
plaintiffs' motion for reconsideration of the summary judgment decision.
Plaintiffs have appealed this judgment to the Ninth Circuit Court of Appeals. A
hearing on the matter was held on September 18, 1996 and on October 2, 1996, the
Ninth Circuit affirmed the judgment of the District Court, dismissing all claims
against the Company. The time for plaintiff to petition for further review of
the judgment has now expired and no such petition has been filed.
In 1991 another series of lawsuits were filed in Federal Court for the Northern
District of California against the Company, alleging violations of the federal
securities laws on behalf of a class of purchasers of the Company's securities.
The parties have tentatively agreed to settle this series of lawsuits. The
settlement is subject to completion of final documentation and court approval.
In 1993 a series of lawsuits were filed in Federal Court for the Northern
District of California against Conner Peripherals, Inc. As a result of the
merger with Conner the Company assumed the defense of this litigation. These
class action lawsuits allege violations of the federal securities laws and seek
damages on behalf of a class of purchasers of Conner's securities. The parties
have tentatively agreed to settle this series of lawsuits. The settlement is
subject to completion of final documentation and court approval.
The Company believes that the final settlement of the 1991 and 1993 lawsuits
will have an insignificant effect on the Company's financial condition and
results of operations.
ENVIRONMENTAL MATTERS
- ---------------------
The United States Environmental Protection Agency ("EPA") and/or similar state
agencies have identified the Company as a potentially responsible party with
respect to environmental conditions at several different sites to which
hazardous wastes had been shipped or from which they were released. These sites
were acquired by the Company from Ceridian Corporation ("Ceridian") (formerly
Control Data Corporation) in fiscal 1990. Other parties have also been
identified at
17
certain of these sites as potentially responsible parties. many of these parties
either have shared or likely will share in the costs associated with the sites.
Investigative and/or remedial activities are ongoing at such sites.
The Company's portion of the estimated cost of investigation and remediation of
known contamination at the sites to be incurred after June 28, 1996, is
approximately $16,000,000. Through June 28, 1996, the Company had recovered
approximately $3,500,000 from Ceridian and, in addition, expects to recover
approximately $9,900,000 from Ceridian over the next 30 years. After deducting
the expected recoveries from Ceridian, the expected aggregate undiscounted
liability was approximately $6,100,000 at June 28, 1996, with expected payments
by the Company of approximately $329,000 in 1999, $671,000 in 2000 and the
remained after 2001.
Approximately $15,100,000 of the $16,000,000 total estimated costs described
above is attributable to one site in Omaha, Nebraska. In 1994, the Company sold
the Omaha property; however, the Company retains responsibility for and has
indemnified the buyer with respect to all environmental contamination existing
on the site at the time of sale. IT Corporation, a nationally known
environmental consulting firm, has provided consulting services to Ceridian and
the Company for the Omaha site for several years and has assisted the Company in
estimating the liability related to the cost of remediation. This liability is
based on a plan of investigation and remediation developed by IT Corporation
pursuant to a Consent Order entered into by the Company and the EPA in 1990.
The extent of the contamination in the groundwater has been investigated and
generally defined. According to the plan, the likely technology for remediation
of groundwater at the facility will be pumping and treatment, while remediation
of soils will most likely be accomplished by soil vapor extraction. A
substantial portion of the Omaha liability was discounted by applying a risk
free rate of 6% to the expected payments to be made by the Company over the next
30 years. None of the liabilities for any of the other sites has been
discounted. The total liability for all sites recorded by the Company after
considering the estimated effects of inflation, reimbursement by Ceridian and
discounting was approximately $3,100,000 at June 28, 1996.
The Company believes that the indemnification and cost-sharing agreements
entered into with Ceridian and the reserves that the Company has established
with respect to its future environmental costs are such that, based on present
information available to it, future environmental costs related to currently
known contamination will not have a material adverse effect on its financial
condition or results of operations.
PATENT LITIGATION
_________________
In November 1992, Rodime, PLC ("Rodime") filed a complaint in Federal Court for
the Central District of California, alleging infringement of U.S. Patent No. B1
4,638,383 and various state law unfair competition claims. It is the opinion of
the Company's patent counsel that the Company's products do not infringe any
valid claims of the Rodime patent in suit and thus the Company refused Rodime's
offer of a license for its patents. Other companies, however, such as IBM,
Hewlett-Packard and a number of Japanese companies have reportedly made payments
to and taken licenses from Rodime. In 1995 the Court granted the Company's
motions for summary judgement finding that all of the Company's accused
products, with the exception of the ST157, did not infringe any claims of the
Rodime patent, and that the majority of the claims in the Rodime patent were
invalid as a matter of law. The ST157 is no longer in production. This case
was reassigned on July 19, 1996 to a different U.S. District Court Judge. The
case has been set for trial on March
18
4, 1997. While the Company believes its defenses to Rodime's claims are
meritorious, should Rodime prevail at trial, a judgment in a material amount
could be awarded against the Company.
On October 5, 1994 a patent infringement action was filed against the Company by
an individual, James M. White, in the U.S. District Court for the Northern
District of California for alleged infringement of U.S. Patent Nos. 4,673,996
and 4,870,519. Both patents relate to air bearing sliders. Prior to the filing
of the lawsuit, the Company filed a Petition for Reexamination of U.S. Patent
No. 4,673,996 with the United States Patent and Trademark Office ("PTO") and
this Petition was granted shortly after the lawsuit was filed. Subsequently,
the Company filed a Petition for Reexamination of U.S. Patent No. 4,870,519.
This second petition has also been granted by the PTO. The District Court
stayed the action pending the outcome of the Reexaminations. The applications
for Reexamination of the patents involved in the White case are still pending
and the suit remains stayed pending completion of the Reexaminations. On
November 14, 1996 and November 18, 1996, the PTO issued a Notice of Intent to
Issue Reexamination Certificate ("NIRC") in the '996 and the '519
Reexaminations, respectively. The Company expects the District Court action to
resume once the Reexamination Certificates are actually issued by the PTO. It
is the opinion of the Company's patent counsel that the Company's products
charged with infringement do not infringe any of the claims of either the
reexamined '996 patent or the reexamined '519 patent.
On December 16, 1996, a patent infringement action was filed against the Company
by an individual, Virgil Hedgcoth, in the U.S. District Court for the Northern
District of California, San Jose Division, for alleged infringement of U.S.
Patent Nos. 4,735,840, 5,082,747, and 5,316,864. These patents allegedly relate
to sputtered magnetic thin-film recording discs for computers and their
manufacture. It is the opinion of the Company's patent counsel that the
Company's products do not infringe any claims of the patents in suit, and that
the claims of the patents in suit are invalid.
Papst Licensing, Gmbh, has given the Company notice that it believes certain
former Conner Peripherals, Inc. disc drives infringe several of its patents
covering the use of spin motors in disc drives. It is the opinion of the
Company's patent counsel that the former Conner disc drives do not infringe any
claims of the patents and that the alleged claims of the patents are invalid.
In the normal course of business, the Company receives and makes inquiry with
regard to other possible intellectual property matters including alleged patent
infringement. Where deemed advisable, the Company may seek or extend licenses
or negotiate settlements.
BUSINESS LITIGATION
- -------------------
Amstrad PLC ("Amstrad") initiated a lawsuit against the Company in London,
England on December 11, 1992 concerning the Company's sale of allegedly
defective disc drives to Amstrad. The Company replied to the allegations made
against it by Amstrad by denying all material points of Amstrad's claim and
asserted affirmative defenses. Trial began April 16, 1996 and concluded on July
31, 1996. No decision has yet been issued by the Court and there is no
assurance that a decision will be forthcoming for several months. The Company
believes that it asserted meritorious defenses to Amstrad's claim, including
substantial objections to the methodology and calculation of Amstrad's alleged
damages but believes that, should Amstrad prevail on its liability claims, a
judgment in a material amount would be awarded against the Company.
19
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:
11.1 Computation of Net Income per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the three months ended December 27, 1996.
20
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, 1997 BY: /s/ Donald L. Waite
_______________________
DONALD L. WAITE
Executive Vice President,
Chief Administrative Officer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
DATE: February 3, 1997 BY: /s/ Alan F. Shugart
_______________________
ALAN F. SHUGART
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer and Director)
21
SEAGATE TECHNOLOGY, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER
_______
11.1 Computation of Net Income per Share
27 Financial Data Schedule