-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UR3jwC/+sFIt07Dz8emH6wa+9oPxd1hi+xElcVpDJZRtWzSFeo44Gr83IMoyk32m CjhMSDhqlgJls5mgVmLFjA== 0000912057-96-001184.txt : 19960202 0000912057-96-001184.hdr.sgml : 19960202 ACCESSION NUMBER: 0000912057-96-001184 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951229 FILED AS OF DATE: 19960201 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEAGATE TECHNOLOGY INC CENTRAL INDEX KEY: 0000354952 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 942612933 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11403 FILM NUMBER: 96510171 BUSINESS ADDRESS: STREET 1: 920 DISC DR CITY: SCOTTS VALLEY STATE: CA ZIP: 95066 BUSINESS PHONE: 4084386550 10-Q 1 10-Q 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 29, 1995 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 29, 1995, 73,103,326 shares of the registrant's common stock were issued and outstanding. INDEX SEAGATE TECHNOLOGY, INC. PART I FINANCIAL INFORMATION PAGE NO. - -------------------------------------------------------------------------------- Item 1. Financial Statements (Unaudited) Consolidated condensed statements of income-- Three and six months ended December 29, 1995 and December 30, 1994 3 Consolidated condensed balance sheets-- December 29, 1995 and June 30, 1995 4 Consolidated condensed statements of cash flows-- Six months ended December 29, 1995 and December 30, 1994 5 Notes to consolidated condensed financial statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II OTHER INFORMATION - ---------------------------------- Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 2 SEAGATE TECHNOLOGY, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In Thousands Except Per Share Data) (Unaudited)
Three Months Ended Six Months Ended ------------------ ---------------- Dec. 29, Dec. 30, Dec. 29, Dec. 30, 1995 1994 1995 1994 ---- ---- ---- ---- Net sales $1,562,964 $1,129,563 $3,016,590 $2,062,709 Cost of sales 1,235,502 903,032 2,397,477 1,638,033 Product development 71,931 53,037 139,607 100,289 Marketing and administrative 76,957 62,084 146,926 118,247 Amortization of goodwill and other intangibles 7,585 4,868 15,201 9,118 In-process research and development - - - 43,000 ---------- ---------- ---------- ---------- Total Operating Expenses 1,391,975 1,023,021 2,699,211 1,908,687 Income from Operations 170,989 106,542 317,379 154,022 Interest income 19,058 14,989 37,098 29,687 Interest expense (7,902) (8,085) (16,770) (16,292) Other 308 (205) (903) 1,117 ---------- ---------- ---------- ---------- Other Income 11,464 6,699 19,425 14,512 ---------- ---------- ---------- ---------- Income before income taxes 182,453 113,241 336,804 168,534 Provision for income taxes 54,736 33,972 101,041 66,728 ---------- ---------- ---------- ---------- Net Income $ 127,717 $ 79,269 $ 235,763 $ 101,806 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME PER SHARE: Primary $ 1.69 $ 1.07 $ 3.13 $ 1.37 Fully diluted 1.44 0.93 2.67 1.23 NUMBER OF SHARES USED IN PER SHARE COMPUTATIONS: Primary 75,655 74,118 75,372 74,511 Fully diluted 92,249 90,712 92,056 91,108 See notes to consolidated condensed financial statements.
3 SEAGATE TECHNOLOGY, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands) (Unaudited)
Dec. 29, June 30, 1995 1995(1) ---- ------- ASSETS Cash and cash equivalents $ 396,959 $ 702,194 Short-term investments 765,105 544,432 Accounts receivable 712,462 567,747 Inventories 462,952 395,838 Deferred income taxes 151,222 127,769 Other current assets 177,867 106,906 ------------ ------------ Total Current Assets 2,666,567 2,444,886 Property, equipment and leasehold improvements, net 871,040 615,251 Goodwill and other intangibles, net 175,436 189,328 Other assets 116,689 111,797 ------------ ------------ Total Assets $ 3,829,732 $ 3,361,262 ------------ ------------ ------------ ------------ LIABILITIES Accounts payable $ 568,538 $ 460,213 Accrued employee compensation 128,334 112,988 Accrued expenses 286,132 251,696 Accrued income taxes 45,986 74,288 Current portion of long-term debt 356 10,561 ------------ ------------ Total Current Liabilities 1,029,346 909,746 Deferred income taxes 294,605 244,731 Other liabilities 159,725 125,143 Long-term debt, less current portion 539,408 539,874 ------------ ------------ Total Liabilities 2,023,084 1,819,494 ------------ ------------ STOCKHOLDERS' EQUITY Common stock 731 729 Additional paid-in capital 408,015 393,849 Retained earnings 1,398,946 1,171,067 Treasury common stock at cost - (22,839) Foreign currency translation adjustment (1,044) (1,038) ------------ ------------ Total Stockholders' Equity 1,806,648 1,541,768 ------------ ------------ Total Liabilities and Stockholders' Equity $ 3,829,732 $ 3,361,262 ------------ ------------ ------------ ------------
See notes to consolidated condensed financial statements. (1) The information in this column was derived from the Company's audited consolidated balance sheet as of June 30, 1995. 4 SEAGATE TECHNOLOGY, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Six Months Ended ---------------- Dec. 29, Dec. 30, 1995 1994 ---- ---- OPERATING ACTIVITIES: Net income $ 235,763 $ 101,806 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 135,599 94,520 Deferred income taxes 25,451 1,958 In-process research and development - 43,000 Other 258 314 Changes in operating assets and liabilities: Accounts receivable (144,582) (84,936) Inventories (75,760) (76,035) Accounts payable 108,888 102,070 Accrued income taxes (18,553) (36,714) Other assets and liabilities 16,458 48,150 ----------- ----------- Net cash provided by operating activities 283,522 194,133 INVESTING ACTIVITIES: Acquisition of property, equipment and leasehold improvements, net (364,387) (132,742) Purchases of short-term investments (1,136,304) (743,892) Sales of short-term investments 917,351 669,365 Acquisitions of businesses, net of cash acquired - (91,397) Equity investments (12,582) (18,550) Increase in other non-current assets, net (3,169) (1,401) Other, net (194) 277 ----------- ----------- Net cash used in investing activities (599,285) (318,340) FINANCING ACTIVITIES: Repayment of long-term debt (10,856) (164) Sale of common stock 18,702 17,967 Purchase of treasury stock - (74,870) ----------- ----------- Net cash provided by (used in) financing activities 7,846 (57,067) Effect of exchange rate changes on cash and cash equivalents 2,682 (277) ----------- ----------- Decrease in cash and cash equivalents (305,235) (181,551) Cash and cash equivalents at the beginning of the period 702,194 804,717 ----------- ----------- Cash and cash equivalents at the end of the period $ 396,959 $ 623,166 ----------- ----------- ----------- -----------
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, 1995 are adequate to make the information presented not misleading. The consolidated condensed financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to summarize fairly the consolidated financial position, results of operations and cash flows for such periods. The results of operations for the six months ended December 29, 1995 are not necessarily indicative of the results that may be expected for the entire year ending June 28, 1996. 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 1995 ended on June 30, 1995 and fiscal 1996 will end on June 28, 1996. 2. NET INCOME PER SHARE Primary net income per share is 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 assumes the conversion of the Company's 5% and 6-3/4% convertible subordinated debentures. 3. BALANCE SHEET INFORMATION (In thousands)
Dec. 29, June 30, 1995 1995 ---- ---- Accounts Receivable: Accounts receivable $ 767,464 $ 621,146 Allowance for non-collection (55,002) (53,399) ------------ ------------ $ 712,462 $ 567,747 ------------ ------------ ------------ ------------
6
Dec. 29, June 30, 1995 1995 ---- ---- Inventories: Components $ 276,969 $ 203,036 Work-in-process 87,881 65,124 Finished goods 98,102 127,678 ------------ ------------ $ 462,952 $ 395,838 ------------ ------------ ------------ ------------ Property, Equipment and Leasehold Improvements: Property, equipment and leasehold improvements $ 1,518,426 $ 1,302,018 Allowance for depreciation and amortization (647,386) (686,767) ------------ ------------ $ 871,040 $ 615,251 ------------ ------------ ------------ ------------
4. INCOME TAXES The estimated tax rate used to compute the provision for income taxes for the six months ended December 29, 1995 and December 30, 1994 is 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 29, 1995 was 30% compared with 40% for the comparable period last year. The higher effective tax rate in the comparable period last year was due to the $43,000,000 write-off of in-process research and development incurred in connection with the acquisition of Palindrome Corporation that was not deductible for domestic tax purposes. Excluding the one time write-off of in-process research and development, the Company's overall effective tax rate for the comparable period last year would have been 30%. The Company's overall effective tax rate is less than the domestic statutory rate because a portion of the foreign operating income is not subject to foreign income taxes and is considered to be permanently invested in non-US operations. Accordingly, taxes have not been provided on such income. The Company's effective tax rate for the quarter ending March 29, 1996 may be higher than 30% due to charges expected to be incurred relating to the merger with Conner which may not be deductible for domestic tax purposes and the write-off of in-process research and development to be incurred in connection with the acquisition of the minority interest in Arcada Software (see Note # 8, "Merger With Conner", below). The overall effective tax rate for the year should be higher than 30% due to the anticipated higher effective tax rate in the quarter ending March 29, 1996. 7 5. STOCKHOLDERS' EQUITY Shares authorized and outstanding are as follows:
Shares Outstanding ------------------ Dec. 29, June 30, 1995 1995 ---- ---- Preferred stock, par value $.01 per share, 1,000,000 shares authorized - - Common stock, par value $.01 per share, 200,000,000 shares authorized (shares outstanding exclude treasury shares of 856,234 at June 30, 1995) 73,103,326 71,990,271
6. SUPPLEMENTAL CASH FLOW INFORMATION (In thousands)
Six Months Ended ---------------- Dec. 29, Dec. 30, 1995 1994 ---- ---- Cash paid for interest $ 16,227 $ 16,439 Cash paid for income taxes 93,853 100,602
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 shareholders' 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 29, 1995 (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAIN LOSS FAIR VALUE --------- ---------- ---------- ---------- Corporate Bonds $ 195,525 $ 947 $ 1 $ 196,471 U.S. Government Obligations 245,664 970 19 246,615 Commercial Paper 262,829 6 0 262,835 Money Market Mutual Funds 100,171 768 0 100,939 Municipal Bonds 99,879 33 6 99,906 Taxable Auction Rate Preferred Stock 61,359 81 21 61,419 --------- --------- --------- --------- Total $ 965,427 $ 2,805 $ 47 $ 968,185 --------- --------- --------- --------- --------- --------- --------- ---------
Included in short-term investments $ 765,105 Included in cash and cash equivalents 203,080 --------- Total $ 968,185 --------- ---------
The gross realized gains and losses on the sale of available-for-sale securities were immaterial for the six month periods ended December 29, 1995 and December 30, 1994. The fair value of the Company's investment in debt securities at December 29, 1995, by contractual maturity, is as follows (in thousands): Due in less than 1 year $ 634,627 Due in 1 to 2-1/2 years 171,200 --------- Total $ 805,827 --------- ---------
8. MERGER WITH CONNER In October 1995 the Company and Conner Peripherals, Inc. ("Conner") signed a definitive agreement to merge the two companies. Conner designs, manufactures and sells information storage products including disc drives, tape drives and storage management software. Pursuant to the agreement, the stockholders of Conner will receive 0.442 of a share of Seagate common stock for each share of Conner common stock and the Company will issue options to purchase 0.442 of a share of Seagate Common Stock in exchange for each outstanding option to purchase Conner Common Stock. The transaction will be accounted for as a pooling of interests. In addition, Seagate has the option to purchase up to 15% of Conner common stock outstanding at an exercise price of $17.90 per share. The option is exercisable in the event a third party acquires a 20% share ownership of Conner, or commences a tender offer for at least 20% of the outstanding Conner Common Stock, or 9 Conner enters into an agreement with a third party in connection with a merger, consolidation or acquisition or purchase of all or a material portion of the assets or the equity interest in Conner. The transaction has been approved by the Boards of Directors of both companies, but is still subject to normal conditions of closing, including stockholder approval of both companies. The meetings of the stockholders of the Company and Conner to approve the merger are scheduled to be held on February 2, 1996. If stockholder approval is obtained the Company intends to close the merger as soon as practicable thereafter. In connection with the merger with Conner, in December 1995 the Company and Arcada Software, Inc. ("Arcada"), a majority-owned subsidiary of Conner, signed a definitive agreement for the Company to acquire the minority interest of Arcada. Conner presently owns approximately 69 percent of Arcada, assuming exercise of all outstanding options to acquire Arcada common stock. Pursuant to the definitive agreement, the minority stockholders of Arcada will receive .1545 of a share of Seagate common stock for each share of Arcada common stock, and each option to acquire Arcada common stock will be converted into an option to purchase .1545 of a share of Seagate common stock. This purchase is contingent upon normal closing conditions, including the consummation of the merger of Seagate and Conner and approval by the stockholders of Arcada at a meeting scheduled to be held on February 16, 1996. This transaction will be accounted for as a purchase. Based on a preliminary purchase price allocation and assuming consummation of the transaction in the quarter ending March 29, 1996, the Company estimates it will incur a charge to operations of approximately $35 million to $40 million in that quarter in connection with the write-off of in-process research and development. The Company also expects to incur certain expenses in connection with the merger, including nonrecurring expenses associated with consolidating the two companies' operations and the fees of financial advisors, attorneys and accountants. Such expenses will adversely impact the Company's results of operations in the quarter in which the merger is consummated. Although the Company has not yet finalized the estimated level of such expenses, it currently anticipates that it will incur a charge to operations, prior to the effect of any tax benefits, of between $140 million and $180 million. Furthermore, the Company expects the merger with Conner to result in a dilutive effect on net income per share in the near term. The estimates reflected above are based upon assumptions of the number of employees and the facilities that will be required by the combined operations, the amount of severance and other benefits that will be paid to terminated employees and preliminary appraisals of Arcada's tangible and intangible assets and in-process research and development as well as the assumption that the Company will not face any unforeseen difficulties in combining the operations of the two companies. Any of the assumptions could prove inaccurate and therefore there can be no assurance that the forward-looking financial information will prove to be accurate. 9. LITIGATION See Part II, Item 1 of this Form 10-Q for a description of legal proceedings. 10 SEAGATE TECHNOLOGY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Net sales for the quarter ended December 29, 1995 were $1,562,964,000 as compared with $1,129,563,000 for the comparable year-ago quarter, and $1,453,626,000 for the immediately preceding quarter ended September 29, 1995. Net sales for the six months ended December 29, 1995 were $3,016,590,000 as compared with $2,062,709,000 for the comparable year-ago period. The increase in net sales from the comparable year-ago quarter, the immediately preceding quarter and the comparable six month period last year was primarily due to a higher level of unit shipments and a shift in mix to the Company's higher priced products partially offset by a continuing decline in the average unit sales prices of the Company's products as a result of competitive market conditions. The rigid disc drive industry in which the Company operates is characterized by declining unit sales prices over the life of a product and the Company believes this characteristic will continue. Gross margin as a percentage of net sales was 21.0% and 20.5% for the three and six months ended December 29, 1995, respectively, compared with 20.1% and 20.6% for the comparable periods last year and 20.1% for the immediately preceding quarter. The increase in gross margin as a percentage of net sales from the comparable year-ago quarter and the immediately preceding quarter was primarily due to a shift in mix to the Company's newer, higher capacity disc drives and a reduction in material costs per unit partially offset by a decline in average unit sales prices of the Company's products as a result of competitive market conditions. Effective January 1, 1995, the European Union ("EU") established a new General System of Preferences ("GSP"). Under this revised code certain products which had been exempt from customs duties under the previous GSP rules, including hard disc drives imported into the EU from Singapore, again became subject to such duties (although at a rate lower than Most Favored Nation (MFN) duties). In addition, during calendar 1995 Singapore progressively lost its status as a beneficiary country under GSP. As a result, hard disc drives produced in Singapore and imported into the EU will realize no reduction from full MFN customs duties after December 31, 1995. The imposition of such customs duties could negatively impact revenues or increase costs and adversely impact gross margins depending upon the extent to which such duties are absorbed by the Company. Product development expenses for the three and six months ended December 29, 1995 were $71,931,000 and $139,607,000 respectively, an increase of $18,894,000 and $39,318,000 when compared with the comparable periods last year and an increase of $4,255,000 when compared with the immediately preceding quarter ended September 29, 1995. These expenses represented 4.6% of net sales for both the three and six months ended December 29, 1995 compared with 4.7% and 4.9%, respectively, for the comparable year-ago periods and 4.7% for the immediately preceding quarter. The increase in expenses from the comparable year-ago periods and the immediately preceding quarter was primarily due to increases in salaries and related costs and, with respect to the comparable year-ago periods, ongoing product development expenses of the 11 Company's recently acquired businesses, as well as an overall increase in the Company's product development efforts. Marketing and administrative expenses for the three and six months ended December 29, 1995 were $76,957,000 and $146,926,000 respectively, an increase of $14,873,000 and $28,679,000 respectively, when compared with the comparable year-ago periods and an increase of $6,988,000 when compared with the immediately preceding quarter ended September 29, 1995. These expenses represented 4.9% of net sales for both the three and six months ended December 29, 1995, compared with 5.5% and 5.7% for the comparable year-ago periods, and 4.8% for the immediately preceding quarter. The increase in expenses from the comparable year-ago quarter was primarily due to increases in salaries and related costs, ongoing marketing and administrative expenses of the Company's recently acquired businesses and increases in outside services and legal expenses partially offset by decreases in advertising expenses. The increase in expenses from the comparable six month period last year was primarily due to ongoing marketing and administrative expenses of the Company's recently acquired businesses and increases in salaries and related costs, outside services, and travel and entertainment expenses partially offset by decreases in advertising expenses and the provision for bad debts. The increase in expenses from the immediately preceding quarter was primarily due to increases in salaries and related costs and legal expenses. Amortization of goodwill and other intangibles increased by $2,717,000 and $6,083,000 for the three and six months ended December 29, 1995, when compared with the comparable year-ago periods, primarily due to additional goodwill and other intangibles arising from various investments in and acquisitions of businesses during fiscal 1995. Net other income increased by $4,765,000 and $4,913,000 for the three and six months ended December 29, 1995 when compared with the comparable year-ago periods and increased by $3,503,000 from the immediately preceding quarter ended September 29, 1995. The increase in net other income from the comparable year- ago quarter was primarily due to higher interest income from higher levels of average invested cash and higher interest rates. The increase in net other income from the comparable six month period last year was primarily due to higher interest income from higher levels of average invested cash and higher interest rates, partially offset by losses on foreign currency translation. The increase in net other income from the immediately preceding quarter was primarily due to higher interest income from higher interest rates on the Company's invested cash and reduced losses on foreign exchange contracts. The effective tax rate for the six months ended December 29, 1995 was 30% compared with 40% for the comparable period last year. The higher effective tax rate in the comparable period last year was due to the $43,000,000 write-off of in-process research and development incurred in connection with the acquisition of Palindrome Corporation that was not deductible for domestic tax purposes. Excluding the one time write-off of in-process research and development, the Company's overall effective tax rate for the comparable period last year would have been 30%. The Company's overall effective tax rate is less than the domestic statutory rate because a portion of the foreign operating income is not subject to foreign income taxes and is considered to be permanently invested in non-US operations. Accordingly, taxes have not been provided on such income. The Company's effective tax rate for the quarter ending March 29, 1996 may be higher than 30% due to charges expected to be incurred relating to the merger with Conner which may not be 12 deductible for domestic tax purposes and the write-off of in-process research and development to be incurred in connection with the acquisition of the minority interest in Arcada Software, Inc. (see Note #8, "Merger With Conner", to Notes to Consolidated Condensed Financial Statements). The overall effective tax rate for the year should be higher than 30% due to the anticipated higher rate in the third quarter. ACQUISITION OF CONNER PERIPHERALS, INC.: In October 1995, the Company and Conner Peripherals, Inc. ("Conner") entered into a definitive agreement to merge the two companies (the "Conner Merger"). The negotiation and implementation of the Conner Merger will result in an aggregate pre-tax restructuring charge of approximately $140 million to $180 million. The restructuring charge, before estimated tax benefits, primarily relates to costs associated with combining the operations of the two companies and includes employee severance benefits of $87 million, closure of duplicate and excess facilities of $53 million and fees of financial advisors, attorneys and accountants of $20 million. The Company has not yet finalized the amount of the restructuring charge or components thereof, and therefore these amounts are preliminary estimates, subject to change based upon a final analysis after the Merger closes. There can be no assurance that the Company's estimate is correct, that the costs of negotiating and implementing the Merger will not exceed the aforementioned range or that unanticipated contingencies will not occur that will substantially increase the costs of combining the operations of the two companies. In any event, costs associated with the Conner Merger will negatively impact the Company's results of operations in the quarter ending March 29, 1996. The transaction has been approved by the Boards of Directors of both companies and is still subject to normal conditions of closing, including stockholder approval of both companies. The meetings of the stockholders of the Company and Conner to approve the Conner Merger are scheduled to be held on February 2, 1996. If stockholder approval is obtained at such meetings, the Company intends to close the Conner Merger as soon as practicable thereafter. See also Note #8 to Notes to Consolidated Condensed Financial Statements. In connection with the Conner Merger, the Company has also agreed to acquire the outstanding minority interests in Arcada Holdings, Inc. ("Arcada"), a majority- owned subsidiary of Conner. The acquisition of the minority interests in Arcada will be accounted for as a purchase, and accordingly, the acquired assets and liabilities pertaining to the minority interests will be recorded at estimated fair values at the date of the acquisition. Based upon a preliminary purchase price allocation, the Company estimates that it will capitalize goodwill and other intangibles of approximately $64.2 million in connection with the acquisition of the minority interests in Arcada. The amortization of such goodwill and other intangibles will negatively impact the Company's results of operations in future periods. In addition, in connection with the acquisition of the minority interests in Arcada, the Company estimates that it will incur a charge to operations of approximately $35 million to $40 million in the quarter ending March 29, 1996, in connection with the write-off of in-process research and development. The Company has not yet finalized the estimated level of the write-off of in-process research and development or the purchase price allocation to goodwill and other intangibles and therefore these amounts are preliminary estimates, subject to change based upon completion of the final purchase price allocation. There can be no assurance that the Company's estimate is correct or that unanticipated contingencies will not occur that will substantially increase or decrease the amount of the write-off of in-process research and development or the amount of goodwill and other intangibles capitalized. The transaction has been approved by the Boards of Directors of both companies and is still subject to normal conditions of closing, including stockholder approval by 13 the stockholders of Arcada. The meeting of the stockholders of Arcada to approve the transaction is scheduled to be held on February 16, 1996. If stockholder approval is obtained at such meeting, the Company intends to close the transaction as soon as practicable thereafter. See also Note #8 to Notes to Consolidated Condensed Financial Statements. The statements contained in the preceding two paragraphs regarding estimates of the restructuring charge in connection with the Conner Merger and estimates of the amount of goodwill and other intangibles to be capitalized and the amount of the write-off of in-process research and development in connection with the acquisition of the minority interests in Arcada constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These estimates are based upon assumptions of the number of employees and the facilities that will be required by the combined operations, the amount of severance and other benefits that will be paid to terminated employees and preliminary appraisals of Arcada's tangible and intangible assets and in-process research and development as well as the assumption that the Company will not face any unforeseen difficulties in combining the operations of the two companies. Any of the assumptions could prove inaccurate and therefore there can be no assurance that the forward- looking financial information will prove to be accurate. As further disclosed under "Factors Affecting Future Operating Results", the business and operations of the Company are subject to substantial risks. These risks also increase the uncertainty inherent in such estimates. FACTORS AFFECTING FUTURE OPERATING RESULTS: The rigid disc drive industry in which the Company competes is subject to a number of risks, each of which could impact the Company's future operating results. The demand for rigid disc 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 rigid disc drive products in any given period, and unexpected slowdowns in demand for computer systems generally cause sharp declines in demand for rigid disc drive products. The rigid disc drive industry has been characterized by periodic situations in which the supply of rigid disc drives exceeds demand, resulting in higher than anticipated inventory levels and strong price competition. Even during periods of consistent demand, the industry is characterized by intense competition and ongoing price erosion over the life of a given rigid disc 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 rigid disc drive 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 rigid disc drive customers for new generations of products has led to short product life cycles that require the Company to constantly develop and introduce new rigid disc 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 rigid disc drives, remain strong. In addition, the Company's operating results may 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, variations in product cost and pricing, delays in product development, introduction and production, increased competition and general economic and industry fluctuations. 14 The Company's future operating results will also be impacted by its ability to combine successfully the operations of Seagate and Conner after the Conner Merger. The transition to a combined Company will 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 will also require integration of the companies' product offerings and the 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 could cause the interruption of, or loss of momentum in, the activities of either or both of the companies' businesses, which could have a material adverse effect on the Company. There can be no assurance that either company will retain its technical personnel, that the engineering teams of the Company and Conner will successfully cooperate and realize any of the technological benefits or that the Company will realize any of the other potential benefits of the Conner Merger. LIQUIDITY AND CAPITAL RESOURCES: At December 29, 1995, the Company's cash, cash equivalents and short-term investments totaled $1,162,064,000, a decrease of $84,562,000 from the June 30, 1995 balance. This decrease was primarily a result of the Company's additions to property, equipment and leasehold improvements partially offset by cash provided by operating activities. The Company's cash, cash equivalents and short-term investments are being maintained in short-term liquid investments until required for other purposes. As of December 29, 1995, the Company had a domestic credit facility consisting of a $50 million line of credit. There were no borrowings under this line of credit at December 29, 1995 although approximately $8 million had been utilized for letters of credit. Additionally, the Company had approximately $32 million of non-domestic lines of credit which can be used for borrowings as well as letters of credit, bankers' guarantees, and overdraft facilities. Although there were no borrowings under these lines at December 29, 1995, approximately $3 million had been utilized for bankers' guarantees. The Company also had approximately $26 million of lines of credit worldwide which can be used for letters of credit and bankers' guarantees, but not borrowings. Of the $26 million, approximately $7 million had been utilized at December 29, 1995. The Company expects investments in property and equipment in the current fiscal year, before giving effect to the impact of the merger (see Note #8 to Notes to Consolidated Condensed Financial Statements), to approximate $950 million, of which approximately $364 million had been incurred as of December 29, 1995. The Company plans to finance these investments from existing cash balances and cash flows from operations. The $364 million comprised $181 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, $110 million for manufacturing facilities and equipment for the thin- film head operations in the United States, Malaysia and Northern Ireland, $60 million for expansion of the Company's thin-film media operations in California and Singapore and $13 million for other purposes. 15 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS SECURITIES LITIGATION The Company and certain of its officers and certain directors are defendants in a series of securities class action lawsuits filed in 1988 in the United States District Court for the Northern District of California by a group of plaintiffs purporting to represent a class of investors that purchased Seagate Common Stock or 6 3/4% Convertible Subordinated Debentures of Seagate between September 23, 1987 and October 8, 1988. The plaintiffs in this series of lawsuits have filed a consolidated amended complaint, consolidating all of the lawsuits into a single complaint. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint seeks unspecified damages and reimbursement of costs of the suit. On February 8, 1995, the court granted defendants' motion for summary judgment completely dismissing all claims against the Company and the other defendants. On Mach 31, 1995, the court also denied plaintiffs' motion for reconsideration of the summary judgment decision. Plaintiffs have appealed this judgment to the United States Court of Appeals for the Ninth Circuit, which appeal is pending. While the Company cannot predict the ultimate outcome of this litigation, based upon its review of the allegations and upon the district court's dismissal of the claims, the Company believes that the outcome of this matter will not have a material adverse effect on the Company's financial condition or results of operations. The Company, certain of its officers, directors and other employees, certain underwriters retained by the Company in connection with a public offering completed in February 1991 and other parties are defendants in a series of securities class action lawsuits filed in 1991 in the United States District Court for the Northern District of California by a group of plaintiffs purporting to represent a class of investors that purchased Seagate Common Stock between October 11, 1990 and June 26, 1991. The plaintiffs in this series of lawsuits have filed a consolidated amended complaint, consolidating all of the lawsuits into a single complaint. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint seeks unspecified damages, equitable relief and reimbursement of costs of the suit. The case is currently in discovery and a trial date has been set for February 1997. While the Company cannot predict the ultimate outcome of this litigation, based upon its review of the allegations and the discovery completed to date, the Company believes that the outcome of this matter will not have a material adverse 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 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. 16 The Company's portion of the estimated cost of investigation and remediation of known contamination at the sites to be incurred after June 30, 1995 was approximately $14,900,000. Through June 30, 1995 the Company had recovered approximately $2,500,000 from Ceridian through its indemnification and cost sharing agreements with Ceridian and, in addition, expects to recover approximately $9,800,000 from Ceridian over the next 30 years. After deducting the expected recoveries from Ceridian, the expected aggregate undiscounted liability was approximately $5,100,000 at June 30, 1995 with expected payments by the Company of approximately $600,000 in 1999, $304,000 in 2000 and the remainder thereafter. Approximately $14,000,000 of the $14,900,000 total estimated costs described above is attributable to one site in Omaha, Nebraska. In 1994 the Company sold the Omaha property; however, the Company 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 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, reimbursements by Ceridian and discounting was approximately $3,000,000 at June 30, 1995. 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. No trial date has been scheduled. 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. However, many other companies, such as IBM, Conner Peripherals, 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 judgment holding that (1) certain claims of the Rodime patent were invalid, and (2) certain accused products did not infringe as a matter of law, except that fact issues remain to be decided regarding the ST157, a product no longer in production. Although the Court denied the Company's summary judgment on the state law causes of action, the Company has moved for reconsideration in light of a recent California Supreme Court case which the Company believes is controlling in this case. The hearing on pending motions and the pretrial conference have been taken off calendar pending possible reassignment to another judge. Based upon its review of the patent and the allegedly infringing product in question, it is the opinion of 17 Seagate's patent counsel that the product did not and does not infringe any valid claims of the Rodime patent. Therefore, while the Company cannot predict the ultimate outcome of this litigation, it believes the outcome of this matter will not have a material adverse effect on the Company's financial condition and results of operations. 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. Based upon its review of the patents, it is the opinion of the Company's patent counsel that the claims of the two White patents are invalid. Two other parties have filed Petitions for Reexamination of the White Patents and the Reexaminations have been consolidated. TAX DEFICIENCY The Company has received a Notice of Deficiency (the "Notice") from the Internal Revenue Service for fiscal years 1988 through 1990. The majority of the proposed adjustments to income in those fiscal years related to the allocation of income between the Company and its foreign subsidiaries. Proposed adjustments to income and tax credits in the Notice resulted in proposed tax deficiencies of approximately $66,000,000 plus penalties and interest of approximately $62,300,000 as of December 29, 1995. The proposed income adjustments would also eliminate tax net operating loss and tax credit carryovers that have been used to offset taxable income and tax liabilities in other fiscal years. The impact on tax net operating losses and tax credit carryovers from the adjustments proposed in the Notice would result in additional taxes of approximately $22,000,000 for the three years ended July 2, 1993 plus interest of approximately $6,700,000 as of December 29, 1995. The Company filed a Petition with the United States Tax Court in June 1994 contesting the proposed deficiencies and related penalties. In addition, the Company's federal income tax returns for the fiscal years 1991 through 1993 are presently under examination by the Internal Revenue Service. 18 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 many affirmative defenses. Factual discovery is almost complete, fact witness statements have been exchanged and supplemented and the parties are in the process of exchanging expert witness reports and rebuttals. As part of the expert report exchange, Amstrad has been required to give further details of its damages claim and of its liability claim. The trial date in London is set for April 16, 1996. Although the Company believes that the outcome of the Amstrad litigation will not have a material adverse effect on its financial condition or results of operations, the Company cannot predict the ultimate outcome and therefore, there can be no assurance that an adverse judgment in this matter will not have an adverse effect on the Company's results of operations and financial condition. Although the Company believes that the outcome of each of the matters described above will not have a material adverse effect on its financial condition or results of operations, the Company cannot predict the ultimate outcome and therefore, there can be no assurance that an adverse judgment in one or more of these legal disputes will not have a material adverse effect on the Company's results of operations and financial condition. The Company is also 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 additional 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 29, 1995. 19 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 1, 1996 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 1, 1996 BY: /s/ Alan F. Shugart _______________________ ALAN F. SHUGART Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer and Director) 20 EX-11.1 2 EXHIBIT 11.1 EXHIBIT 11.1 SEAGATE TECHNOLOGY, INC. COMPUTATION OF NET INCOME PER SHARE (In thousands except per share data)
Three Months Ended Six Months Ended ------------------ ---------------- Dec. 29, Dec. 30, Dec. 29, Dec. 30, 1995 1994 1995 1994 ---- ---- ---- ---- PRIMARY Weighted average number of common shares outstanding during the period 73,010 72,235 72,742 72,504 Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) 2,645 1,883 2,630 2,007 --------- --------- --------- --------- Total shares 75,655 74,118 75,372 74,511 --------- --------- --------- --------- --------- --------- --------- --------- Net Income: Amount $ 127,717 $ 79,269 $ 235,763 $ 101,806 Per share $ 1.69 $ 1.07 $ 3.13 $ 1.37 FULLY DILUTED Weighted average number of common shares outstanding during the period 73,010 72,235 72,742 72,504 Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) and conversion of 6-3/4% and 5% convertible subordinated debentures 19,239 18,477 19,314 18,604 --------- --------- --------- --------- Total shares 92,249 90,712 92,056 91,108 --------- --------- --------- --------- --------- --------- --------- --------- Net Income: Amount $ 127,717 $ 79,269 $ 235,763 $ 101,806 Add 6-3/4% convertible subordinated debentures interest, net of income tax effect 2,734 2,810 5,470 5,620 Add 5% convertible subordinated debentures interest, net of income tax effect 2,057 2,112 4,113 4,224 --------- --------- --------- --------- Total $ 132,508 $ 84,191 $ 245,346 $ 111,650 --------- --------- --------- --------- --------- --------- --------- --------- Per share $ 1.44 $ 0.93 $ 2.67 $ 1.23 --------- --------- --------- --------- --------- --------- --------- ---------
21 SEAGATE TECHNOLOGY, INC. INDEX TO EXHIBITS EXHIBIT NUMBER _______ 11.1 Computation of Net Income per Share (see page 21) 27 Financial Data Schedule 22 EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 29, 1995 AND THE CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED DECEMBER 29, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS JUN-28-1996 JUL-01-1995 DEC-29-1995 396,959 765,105 767,464 55,002 462,952 2,666,567 1,518,426 647,386 3,829,732 1,029,346 539,408 0 0 731 1,805,917 3,829,732 3,016,590 3,016,590 2,397,477 2,397,477 302,637 0 16,770 336,804 101,041 235,763 0 0 0 235,763 3.13 2.67
-----END PRIVACY-ENHANCED MESSAGE-----