-----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, Ksy6bVdHP3/H/QbBFg+P5/luWOcH1GTHdS9Pw/VTb/6rTWYAdGGzpy/7o5vuUnZc 5Lm9sKA+NINKy/LIudr3Uw== 0001012870-98-002215.txt : 19980821 0001012870-98-002215.hdr.sgml : 19980821 ACCESSION NUMBER: 0001012870-98-002215 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980703 FILED AS OF DATE: 19980820 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: 0628 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11403 FILM NUMBER: 98695272 BUSINESS ADDRESS: STREET 1: 920 DISC DR CITY: SCOTTS VALLEY STATE: CA ZIP: 95066 BUSINESS PHONE: 4084386550 MAIL ADDRESS: STREET 1: 920 DISC DRIVE CITY: SCOTTS VALLEY STATE: CA ZIP: 95066 10-K405 1 FORM 10-K405 FOR YEAR ENDED 07/03/1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 3, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-10630 SEAGATE TECHNOLOGY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 94-2612933 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 920 DISC DRIVE SCOTTS VALLEY, CALIFORNIA 95066 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (831) 438-6550 ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of Common Stock on July 3, 1998 as reported by the New York Stock Exchange, was approximately $5.182 billion. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant's Common Stock on July 3, 1998 was 244,757,152 DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference to Parts I, II, III, IV of this form 10-K Report: (1) Proxy Statement for registrant's 1998 Annual Meeting of Stockholders (the "Proxy Statement") and (2) registrant's Annual Report to Stockholders for the fiscal year ended July 3, 1998 (the "Annual Report to Stockholders"). - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I The information contained in this report includes forward-looking statements, based on current expectations, that involve risks and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Various important factors known to Seagate Technology, Inc. that could cause such material differences are identified below in Part I, Item 1 of this report and in the "Management's Discussion and Analysis of Results of Operations and Financial Condition" included in the Company's 1998 Annual Report to Stockholders, which is incorporated by reference into Part II, Item 7 of this Report. ITEM 1. BUSINESS GENERAL Seagate operates in a single industry segment by designing, manufacturing and marketing products for storage, retrieval and management of data on computer and data communications systems. These products include disc drives and disc drive components, tape drives and software. Seagate designs, manufactures and markets a broad line of rigid magnetic disc drives for use in computer systems ranging from desktop personal computers to workstations and supercomputers as well as in multimedia applications such as digital video and video-on-demand. The Company's products currently include rigid disc drive models with form factors from 3.5 to 5.25 inches and capacities from 1 gigabyte ("GB") to 47 GB. In January 1998, the Company discontinued production of 2.5 inch disc drives for the mobile computer market due to intense competition resulting in a substantial loss of market share. However, the Company is continuing research and development in this area and intends to reenter this market at a future date. The Company sells its products to original equipment manufacturers ("OEMs") for inclusion in their computer systems or subsystems, and to distributors, resellers, dealers, system integrators and retailers. The Company has pursued a strategy of vertical integration and accordingly designs and manufactures rigid disc drive components including recording heads, discs, disc substrates, motors and custom integrated circuits. It also assembles certain of the key subassemblies for use in its products including printed circuit board and head stack assemblies. The Company's products are currently manufactured primarily in the Far East with limited production in the United States. In addition to its core product line of rigid disc drives and related components, the Company has broadened its strategy to more fully address the markets for storage, retrieval and management of data. In line with this broadened strategy, the Company has made the following investments: In January 1993, the Company began investing in SanDisk Corporation ("SanDisk"), a flash memory company. In July 1994, the Company began investing in Dragon Systems, Inc., a developer of speech and language technology, including speech recognition software. In December 1994, the Company acquired Applied Magnetics Corporation's tape head subsidiary, a manufacturer of magnetic recording heads for tape drives. In February 1996, The Company added tape drives to its product line as a result of its merger with Conner Peripherals, Inc. ("Conner"). In June 1997, the Company began investing in Gadzoox Networks, Inc., a manufacturer of Fibre Channel based storage network connectivity products. In August 1997, the Company acquired Quinta Corporation ("Quinta"), a developer of optically assisted Winchester disc drives. 1 The Company has also invested in, and currently intends to continue investigating opportunities to invest in software activities. See "Seagate Software, Inc." The Company anticipates that its broadened strategy may include additional acquisitions of, investments in and strategic alliances with complementary businesses, products and technologies to enable lower cost per megabyte, faster time to market, increased capacity, and better performance characteristics for its products. The Company's strategy includes acquiring companies that possess technology and development personnel which provide long-term growth potential to the Company's business. However, implementation of this broadened strategy entails risks of entering markets in which the Company may have limited or no experience. In addition, such broadened strategy could result in the diversion of management's attention from the core rigid disc drive business which could adversely impact the core business. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired businesses, retention of management and the potential loss of key employees or customers of the acquired businesses. RIGID DISC DRIVE TECHNOLOGY Magnetic disc drives are used in computer systems to record, store and retrieve digital information. Most computer applications require access to a greater volume of data than can economically be stored in the random access memory of the computer's central processing unit (commonly known as "semiconductor" memory). This information can be stored on a variety of storage devices, including rigid disc drives, both fixed and removable, flexible disc drives, magnetic tape drives, optical disc drives and semiconductor memory. Rigid disc drives provide access to large volumes of information faster than optical disc drives, flexible disc drives or magnetic tape drives and at substantially lower cost than high-speed semiconductor memory. Although products vary, all rigid disc drives incorporate the same basic technology. One or more rigid discs are attached to a spindle assembly that rotates the discs at a high constant speed around a hub. The discs (also known as media or disc media) are the components on which data is stored and from which it is retrieved. Each disc typically consists of a substrate of finely machined aluminum or glass with a magnetic layer of a "thin-film" metallic material. Rigid disc drive performance is commonly measured by five key characteristics: average seek time (commonly expressed in milliseconds), which is the time needed to position the heads over a selected track on the disc surface; media data transfer rate (commonly expressed in megabits per second), which is the rate at which data is transferred to and from the disc; storage capacity (commonly expressed in megabytes or gigabytes), which is the amount of data that can be stored on the disc; spindle rotation speed (commonly expressed in revolutions per minute), which has an effect on speed of access to data; and interface transfer rate (commonly expressed in megabytes per second), which is the rate at which data moves between the disc drive and the computer controller. Read/write heads, mounted on an arm assembly similar in concept to that of a record player, fly extremely close to each disc surface and record data on and retrieve it from concentric tracks in the magnetic layers of the rotating discs. Upon instructions from the drive's electronic circuitry, a head positioning mechanism (an "actuator") guides the heads to the selected track of a disc where the data will be recorded or retrieved. The disc drive communicates with the host computer through an internal controller. Disc drive manufacturers may use one or more of several industry standard interfaces, such as SCSI (Small Computer System Interface), ATA (AT Attachment), and FC-AL (Fibre Channel-- Arbitrated Loop). Areal density is a measure of storage capacity per square inch on the recording surface of a disc. It represents the number of bits of information on a linear inch of the recording track (specified in bits per inch or bpi) multiplied by the number of recording tracks on a radial inch of the disc. Current areal densities are sufficient to meet the requirements of most applications today. However, the long-term demand for increased drive 2 capacities is expected to increase at an accelerating rate since sound and moving pictures require many times the storage capacity of simple text. The Company has and continues to aggressively pursue a range of technologies to increase areal densities across the entire range of its products not only to increase drive capacities, but to allow the elimination of components at a stated capacity as areal density increases, thus reducing costs. As a result, Seagate drives today use advanced signal processing techniques such as PRML (Partial Response Maximum Likelihood) read/write channels, advanced servo systems, higher precision mechanics and advanced head technologies. To attain greater areal densities, the Company currently incorporates magneto-resistive ("MR") heads into a substantial portion of its disc drives. MR heads have discrete read and write structures which take advantage of special magnetic properties in certain metals to achieve significantly higher storage capacities. There can be no assurance that the Company's MR head development effort will continue to be successful. See "Product Development." MARKET OVERVIEW Rigid disc drives are used in a broad range of computer systems as well as for multimedia applications such as digital video and video-on-demand. The Company defines the major computer system markets to include mobile computers, desktop personal computers, workstation systems and server/multi-user systems. Users of computer systems are increasingly demanding additional data storage capacity with higher performance in order to (i) use more sophisticated applications software, including database management, CAD/CAM/CAE, desktop publishing, video editing and enhanced graphics applications and (ii) operate in multi-user, multitasking and multimedia environments. There is also an emerging market for ultra-low cost personal computers. Additionally, there is a sizable market for rigid disc drives in the existing installed base of computer systems, some of which require additional storage capacity. These requirements for storage upgrades can be served through authorized distribution channels. Personal Computers--Desktop and Mobile Desktop and portable personal computers are used in a number of environments, ranging from homes to businesses and multi-user networks. Software applications are primarily word processing, spreadsheet, desktop publishing, database management, multimedia, internet caching, digital photos, games, audio/video applications and other related applications. The Company believes the minimum storage requirements in the past year for entry-level personal computers were generally 1 GB to 2.1 GB of formatted capacity with seek times ranging from 12.5 milliseconds ("msec") down to 10.5 msec. The entry level capacities continue to increase. In addition, users of personal computers have become increasingly price sensitive. The Company's objective for the personal computer market is to design drives for high-volume, low-cost manufacturing. Seagate divides the desktop market into three segments: entry-level, mainstream and performance. The Company designs and manufactures drives for each of these segments--Medalist drives for the entry-level and mainstream market segments and Medalist Pro for the performance segment. Smaller footprint systems, such as mobile, laptop, notebook and ultraportable computers require rigid disc drives in form factors of less than 3.5 inches that emphasize durability and low power consumption in addition to capacity and performance characteristics found in their desktop functional equivalents. Personal digital assistants, hand-held and pen-based computers may use 1.8 inch or 2.5 inch hard disc drives or flash memory such as a PCMCIA card for additional memory. These mobile applications also emphasize low power consumption as well as very high degrees of durability. The Company discontinued production of disc drives in form factors of less than 3.5 inches in January 1998. However, the Company is continuing research and development in this area and intends to reenter this market at a future date. Workstation Systems Workstation systems include high performance microcomputers, technical workstations, servers and minicomputers. Applications are characterized by compute-intensive and data-intensive solutions, such as 3 CAD/CAM/CAE, network management, larger database management systems, scientific applications and small to medium-sized business applications such as materials requirement planning, payroll, general ledger systems and related management reports. Workstation systems typically require rigid disc drive storage capacities of 2 GB and greater per drive, average seek times of 8 msec and rotation speeds of 7,200 rpm to 10,000 rpm. Due to the leading edge characteristics required by end-users of workstation systems, manufacturers of such systems emphasize performance as well as price as the key selling points. Server/Multi-user Systems Large systems include mainframes and supercomputers. Typical applications are medium and large business management systems, transaction processing, parallel processing and other applications requiring intensive data manipulation. Also included in high-end applications are systems designed for video-on-demand and near-line storage. Users of these systems generally require capacities of 4 GB and greater per drive with average seek times of 8 msec and rotation speeds of 5,400 rpm to 10,000 rpm. End-users of large systems are less concerned than users of smaller systems with the size, weight, power consumption and absolute cost of the drive. As with workstation systems, disc drive products are typically designed into these systems by the OEM with emphasis on performance, reliability and capacity. In this market segment, data storage subsystems are used containing large numbers of disc drives. Because data integrity is paramount, high device reliability and maintainability are key features. Mainframe, supercomputer and digital video systems also benefit from very high data transfer rates (up to ten times that in small computer systems). Users of these systems may also utilize redundant arrays of inexpensive disc drives ("RAID"). A RAID combines multiple small drives into an array of disc drives which yield performance equal to or exceeding a single high performance drive. The array of drives appears to the computer as a single storage drive. PRODUCTS Rigid Disc Drives The Company produces a broad line of rigid disc drives in 3.5 and 5.25 inch form factors and capacities from 1 GB to 47 GB. The Company provides more than one product at some capacity points and differentiates products on a price/performance and form factor basis. The Company believes that its broad range of rigid disc drives is particularly appealing to customers, such as large OEMs, which require a wide variety of drive capacities, performance levels and interfaces. Producing for several market segments also broadens the Company's customer base and reduces the Company's reliance on any one segment of the computer market. The Company continues to devote its resources to developing products with industry leading performance characteristics and to being among the first to introduce such products to market. The Company continuously seeks to enhance its market presence in emerging segments of the rigid disc drive market by drawing on its established capabilities in high- volume, low-cost production. The Company believes it offers the broadest range of disc storage products available. See "Product Development". Mobile Computing In April 1997, the Company announced the 2.5 inch Marathon 2130sl and 1420sl in the 12.7 mm high form factor with formatted capacities of 2.1 GB and 1.4 GB, respectively. These two models began volume production during the first quarter of fiscal 1998. In January 1998, the Company discontinued production of 2.5 inch disc drives for the mobile computer market due to intense competition resulting in a substantial loss of market share. The design center for mobile drives in San Jose, California was closed and relocated to Longmont, Colorado. The Company is continuing research and development for mobile products and intends to reenter this market at a future date. 4 Desktop Computing In fiscal 1998, the Company continued to introduce new 3.5 inch disc drive products for the desktop computing market. During the fourth quarter of fiscal 1997, the Company began production of the Medalist 4340 (ST34340A), a value-class 4.3 GB hard drive with a 4,500 rpm spindle rotation speed, a 12 msec seek time and multimedia-ready performance, meaning the drive can run full-screen, full-motion video. Depopulated versions of the Medalist 4340 also began production, including the Medalist 2120 (ST32120A), an entry level 2.1 GB hard drive, and the Medalist 1010 (ST31010A), an entry level, single platter 1 GB hard drive. The Medalist 1010 is targeted to entry level systems and emerging markets such as the ultra-low cost personal computer market. Volume shipments of the Medalist 4340, 2120 and 1010 began in the first quarter of fiscal 1998. The Medalist 4342 family started volume production in the first quarter of fiscal 1998. This product added the Ultra ATA interface to the Medalist 4340 product family. Products in the Medalist 4342 family include the 4.3 GB Medalist 4342 (ST34342A), the 3.2 GB Medalist 3232 (ST33232A), the 2.1 GB Medalist 2122 (ST32122A) and the 1 GB Medalist 1022 (ST31022A). The Medalist 8641 family started volume production in the third quarter of fiscal 1998. This mainstream product family has a spindle rotation speed of 5,400 rpm, features low acoustics and the Ultra-ATA interface, and includes Seagate's exclusive SeaShield to protect the printed circuit board from handling and electrostatic damage. Products include the 8.6 GB Medalist 8641 (ST38641A), 6.5 GB Medalist 6531 (ST36531A), 4.3 GB Medalist 4321 (ST34321A), 3.2 GB Medalist 3221 (ST33221A), and 2.1 GB Medalist 2110 (ST32110A). These products are positioned for the mainstream personal computer market. The Medalist 10240 family started volume production in the first quarter of fiscal 1999. This product family extensively leverages the Medalist 8641 product family, and includes the 10.2 GB Medalist 10240 (ST310240A) and the single-disc 2.5 GB Medalist 2510 (ST32510A). It has the same features as the Medalist 8641 family with more capacity. The 10.2 GB product is targeted at mainstream desktop systems while the 2.5 GB product is targeted at entry- level, low-cost systems. The Medalist Pro 9140 family was announced during the second fiscal quarter of fiscal 1998 and production began during the third quarter. This family targets the performance market segment. These drives are available in three capacities, the Medalist Pro 9140 (ST39140A) at 9.1 GB, the Medalist Pro 6530 (ST36530A) at 6.5 GB, and the Medalist Pro 4520 (ST34520A) at 4.5 GB. During fiscal 1998, Seagate addressed the new sub-$1,000 personal computer market with design and manufacturing efforts to provide an appropriate disc drive to OEMs. These efforts culminated in the announcement in June 1998 of the ST32111A. This 3.5 inch drive provides 2.1 GB of storage capacity for the entry level or first time buyer market. Workstation Systems In 1992, the Company introduced the Barracuda family of 3.5 inch disc drives. At 7,200 rpm the Barracuda had the highest spindle rotation speed of any drives produced at that time. In fiscal year 1997, the Company introduced two new products in the Barracuda family, the Barracuda 4LP and the Barracuda 4XL. The Barracuda 4 LP is a 4 GB formatted capacity, high-performance drive in the low-profile form factor. Volume production of the Barracuda 4LP began in the second quarter of fiscal 1997. The Barracuda 4XL is a 4.5 GB formatted capacity drive in the low-profile form factor. The Barracuda 4XL, which began volume production during the fourth quarter of fiscal 1997, is designed to provide a balance of price and performance for the workstation market as it matures. In the third quarter of fiscal 1998, volume production began on the Barracuda 9LP and the Barracuda 18. These are 9 GB and 18 GB formatted capacity, high-performance drives with read seek times of 7.1 msec and 7.6 msec, respectively. The Barracuda 9LP has a low-profile form factor design. 5 Server/Multi-user Systems High-end applications range from digital video, video-on-demand, high-end file servers, mainframes and minicomputers to supercomputers. The Barracuda 9, a 9.1 GB formatted capacity drive, is the third generation of ultrahigh performance disc drives in the Barracuda family, described above. The Barracuda 9 began volume production in the second quarter of fiscal 1997. The Barracuda 4LP and 4XL and the Barracuda 9LP and 18, discussed under "Workstation Systems" above, are also used in server/multi-user systems. In August 1996, the Company announced the 3.5 inch Cheetah family, with spindle rotation speeds of 10,000 rpm, formatted capacities of 4.5 GB and 9.1 GB, seek times of 7.5 msec and sustained data transfer rates in excess of 15 megabytes ("MB") per second. This drive family is focused at the very high performance segment of the market. Volume production of the Cheetah 4LP and the Cheetah 9 began in the third and fourth quarters of fiscal 1997, respectively. The Cheetah 9LP and the Cheetah 18 are the second generation 10,000 rpm drives and have formatted capacities of 9 GB and 18 GB, respectively, and read seek times of 5.2 msec and 5.7 msec, respectively. Volume production of these drives began in the fourth quarter of fiscal 1998. Both drives have data transfer rates up to 80 MB per second with the Ultra2 ATA interface or 100 MB per second with the Fibre Channel interface. Addressing the high-end 5.25 inch market the Company has continued to leverage its Elite product line. In the third quarter of fiscal 1997, production commenced on the Elite 23, a high performance, 5.25 inch disc drive with 23 GB of formatted capacity and a spindle rotation speed of 5,400 rpm. In the second quarter of fiscal 1998, production of the Elite 47 began. This drive is a 5.25 inch disc drive with 47 GB of formatted capacity and read seek times of 13 msec. The Barracuda, Cheetah and Elite families all utilize industry leading technologies such as MR heads, PRML channels, embedded servo and laser textured media. Tape Drives Tape drives are peripheral hardware devices which enable low cost storage and protection of large volumes of data through the use of small tape cartridges. Computer systems of all types increasingly need dedicated backup storage peripherals that combine high capacity, high performance, low cost and reliability. Seagate markets a broad line of Travan, Digital Audio Tape (DAT) and Advanced Intelligent Tape (AIT) drives and autoloaders ranging from 8 GB to 200 GB in capacity, for a wide range of backup and removable storage needs. The Company currently produces backup solutions for market segments from desktop personal computers to midrange servers to complement its line of disc drive products. A substantial portion of the Company's tape drive products employ head technologies developed by the Company. The Company offers tape products through a variety of channels including OEMs, distributors, VARs, resellers and system integrators. The Company works closely with OEMs to customize storage solutions that meet their customers' needs. Hornet Travan Drives Seagate's family of low-profile Hornet Travan tape drives provides backup solutions for low-cost servers with 8 GB to 20 GB of data storage on a single low-cost removable cartridge. In September 1997, Seagate launched the Hornet Travan Network Series (NS) products with read-while-write technology and hardware data compression. The Company's 8 GB Hornet Travan products are available with either SCSI or IDE interfaces and address the need for higher performance tape solutions at an economical price. All Hornet tape drives are sold either as bare drives or are bundled with software and other accessories and marketed under the "TapeStor" brand. The Company's Hornet Travan drives are manufactured by Seagate in Singapore. DAT Drives High-speed networked computer environments need automatic data protection and backup in the form of dedicated removable storage peripherals that combine high capacity, reliability, and low cost per megabyte in a 6 small form factor. The Seagate family of DAT drives and autoloaders provides a balance of these features, storing up to 96 GB of data. All Seagate DAT products use the industry accepted high speed SCSI-2 interface which is the dominant systems interface for storage peripherals of this class. In June 1998, Seagate announced its commitment to DAT technology with plans to produce a DAT drive based on the latest Digital Data Storage (DDS) standard, DDS-4. The new standard will allow up to 40 GB of storage with compression on a single DDS-4 cartridge. All DAT products are currently manufactured by Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE") in Japan. Sidewinder AIT Drives Seagate's Sidewinder AIT drives and autoloaders offer high data integrity, reliability and performance for midrange servers and tape libraries. Seagate's stand alone drive, the Sidewinder 50, offers up to 50 GB of capacity while the Sidewinder 200 autoloader offers up to 200 GB of storage on four AIT tapes. AIT offers many performance advantages such as fast cartridge load and file access times, a thorough self-cleaning head and durable AME (Advanced Metal Evaporation) media. In addition, Sidewinder drives are available in both external and compact internal form factors for easy integration. Sidewinder drives are currently manufactured for Seagate by Sony. Linear Tape Open (LTO) In April 1998, Seagate, Hewlett-Packard and IBM jointly announced Linear Tape Open ("LTO") technology for licensing to storage manufacturers. LTO is a powerful open tape architecture for tape storage products that is expected to surpass current tape capacity and performance levels. LTO is available for licensing to vendors in two formats: Accelis, for applications with fast- access requirements and Ultrium for high capacity needs. Products based on LTO technology are expected to be available sometime in 1999. Other Products The Company offers warranty and out-of-warranty repair service to users of its disc and tape drives. The Company also offers software products directed towards the client/server and network computing environments. See "Seagate Software, Inc.." SOFTWARE SOFTWARE, INC. The Company is continuing its strategy of developing and marketing software products enabling business users and Information Technology (IT) professionals to manage enterprise information. The Company believes that managing the exponential growth of information and the growing need for information infrastructures combined with increasingly decentralized decision making are key challenges inherent in today's mission critical client/server computing environments. The Company's strategy is to respond to these challenges by offering Enterprise Information Management ("EIM") software solutions which consist of three core components -- Information Delivery, Information Analysis and Information Availability. EIM integrates departmental information, optimizes decision-making and ensures consistent access to information by providing comprehensive data availability and protection. In April 1996, pursuant to the acquisition of a number of software companies beginning in May 1994 and the merger with Conner and its Arcada Software subsidiary in February 1996, the Company consolidated its software operations under Seagate Software, Inc. ("Seagate Software"). Headquartered in Scotts Valley, California and having over 40 offices and operations in 17 countries worldwide, Seagate Software is comprised of two operating groups, each focused on the growing need for superior EIM. Seagate Software's Information Management Group ("IMG") offers business intelligence ("BI") software solutions featuring the information delivery and analysis components of EIM. IMG's products include features 7 such as query and reporting, automated report scheduling and distribution, information delivery across the World Wide Web, on-line analytical processing, forecasting, statistical analysis, discovery and data mining. Seagate Software's Network and Storage Management Group ("NSMG") offers network and storage management software solutions which focus on the availability component of EIM by enabling IT professionals to manage distributed network resources and secure and protect enterprise data. NSMG's products include features such as system backup, disaster recovery, migration, replication, automated client protection, storage resource management, scheduling, event correlation and desktop management. Seagate Software is a majority-owned and consolidated subsidiary of the Company to which the Company contributed most of its software product assets in 1996. In connection with the contribution, Seagate Software issued preferred stock and common stock to the Company and its subsidiaries. As of July 3, 1998, the Company and one of its subsidiaries held 99.7% of Seagate Software's outstanding capital stock. Seagate Software is subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended, and grants options to its employees and certain employees of the Company through the Seagate Software, Inc. 1996 Stock Option Plan. No public market currently exists for the common stock of Seagate Software into which such options are exercisable. On a diluted basis, the outstanding minority interests of Seagate Software were approximately 17.8% as of July 3, 1998, and such interests consisted of outstanding common stock and options to acquire common stock held by certain employees and directors of Seagate Software and the Company. MARKETING AND CUSTOMERS The Company sells its products to OEMs, distributors, resellers, dealers, system integrators and retailers. OEM customers incorporate Seagate drives into computer systems for resale. OEMs either manufacture and assemble computer system components into computer systems; purchase components to build their systems; or purchase complete computer systems and integrate the drives and other hardware and software. Distributors typically resell Seagate disc drives to small OEMs, dealers, system integrators and other resellers. Certain resellers to which the Company directly sells its products also resell Seagate drives as part of enhanced packages (e.g., an add-on kit for a computer or as part of their own computers). Shipments to OEMs were 65%, 71% and 72% of disc drive revenue in fiscal 1998, 1997 and 1996, respectively. In 1998 and 1997 sales to Compaq Computer Corporation accounted for approximately 13% and 11%, respectively, of the Company's consolidated revenue. No other customer accounted for 10% or more of consolidated revenue in 1998 or 1997. No customer accounted for 10% or more of consolidated revenue in 1996. In 1998, consolidated revenue declined to $6.819 billion from $8.940 billion in 1997. In response to this decline in revenue the Company initiated a restructuring plan to align its worldwide operations with market conditions and to improve the productivity of its operations and the efficiency of its development efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--1998 vs 1997." OEMs OEM customers typically enter into purchase agreements with the Company. These agreements provide for pricing, volume discounts, order lead times, product support obligations and other terms and conditions, usually for periods of 12 to 24 months, although product support obligations generally extend substantially beyond this period. These master agreements typically do not commit the customer to buy any minimum quantity of products. Deliveries are scheduled only after receipt of purchase orders. In addition, with limited lead time, customers may cancel or defer most purchase orders without significant penalty. Anticipated orders from many of Seagate's customers have in the past failed to materialize or OEM delivery schedules have been deferred as a result of changes in their business needs. Such order fluctuations and deferrals have had a material adverse effect on the Company's operations in the past, and there can be no assurance that the Company will not experience such adverse effects in the future. Distributors The Company's distributors, located throughout the world, generally enter into non-exclusive agreements for the redistribution of the Company's products. Distributors typically furnish the Company with a non-binding 8 indication of their near-term requirements. Product deliveries are generally scheduled based on a weekly confirmation by the distributor of its requirements for that week. The agreements typically provide the distributors with price protection with respect to their inventory of Seagate drives at the time of a reduction by Seagate in its selling price for the drives, and also provide limited rights to return the product. Service and Warranty Seagate warrants its products against defects in design, materials and workmanship by the Company generally for two to five years depending upon the capacity category of the drive, with the higher capacity products being warranted for the longer periods. Warranty periods for drives have been increasing and may continue to increase. The Company's products are refurbished or repaired at facilities located in the United States, Singapore and Malaysia. Sales Offices The Company maintains sales offices throughout the United States and in Australia, England, France, Germany, Hong Kong, Ireland, Japan, Singapore, South Korea, Sweden and Taiwan. Foreign sales are subject to certain controls and restrictions, including, in the case of certain countries, approval by the office of Export Administration of the United States Department of Commerce and other United States governmental agencies. BACKLOG In view of customers' rights to cancel or defer orders with little or no penalty, the Company believes backlog in the disc drive industry may be misleading. The Company's backlog includes only those orders for which a delivery schedule has been specified by the customer. Substantially all orders shown as backlog at July 3, 1998 were scheduled for delivery within six months. Because many customers place large orders for delivery throughout the year, and because of the possibility of customer cancellation of orders or changes in delivery schedules, the Company's backlog as of any particular date is not indicative of the Company's potential sales for any succeeding fiscal period. The Company's order backlog at July 3, 1998 was approximately $793 million compared with approximately $960 million at June 27, 1997. MANUFACTURING The Company's business objectives require it to establish manufacturing capacity in anticipation of market demand. The key elements of the Company's manufacturing strategy are: high-volume, low-cost assembly and test; vertical integration in the manufacture of selected components; and establishment and maintenance of key vendor relationships. The highly competitive disc drive industry requires that the Company manufacture significant volumes of high- quality drives at low unit cost. To do this, the Company must rapidly achieve high manufacturing yields and obtain uninterrupted access to high-quality components in required volumes at competitive prices. Manufacturing of the Company's rigid disc drives is a complex process, requiring a "clean room" environment, the assembly of precision components within narrow tolerances and extensive testing to ensure reliability. The first step in the manufacturing of a rigid disc drive is the assembly of the actuator mechanism, heads, discs, and spindle motor in a housing to form the head-disc assembly (the "HDA"). The assembly of the HDA involves a combination of manual and semiautomated processes. After the HDA is assembled, a servo pattern is magnetically recorded on the disc surfaces. Upon completion, circuit boards are mated to the HDA and the completed unit is thoroughly tested prior to packaging and shipment. Final assembly and test operations of the Company's disc drives take place primarily at facilities located in Singapore, Malaysia, China, Minnesota and Oklahoma. Subassembly and component operations are performed at the Company's facilities in Singapore, Malaysia, Thailand, Minnesota, California, Northern Ireland, Indonesia, Mexico, and Scotland. In addition, independent entities manufacture or assemble components for the Company in the United States, Europe and 9 various Far East countries including Hong Kong, Japan, Korea, China, the Philippines, Singapore, Malaysia, Taiwan and Thailand. The Company believes that it must continue to develop automated manufacturing processes in order to remain competitive. In this regard, the Company continually selectively evaluates which steps in the manufacturing process would benefit from automation. There can be no assurance that the Company's efforts to develop and improve its automated manufacturing processes will be successful. Any failure of the Company to continue to develop and improve its automated manufacturing processes could have a material adverse effect on the Company's business. The cost, quality and availability of certain components including heads, media, ASICs (application specific integrated circuits), spindle motors, actuator motors, printed circuit boards and custom semiconductors are critical to the successful production of disc drives. The Company's design and vertical integration have allowed it to internally manufacture substantial percentages of its critical components other than ASICs and motors. The Company's objectives of vertical integration are to maintain control over component technology, quality and availability, and to reduce costs. The Company believes that its strategy of vertical integration gives it an advantage over other disc drive manufacturers. However, this strategy entails a high level of fixed costs and requires a high volume of production to be successful. During periods of decreased production, these high fixed costs in the past have had and in the future could have a material adverse effect on the Company's results of operations. All three stages of manufacturing for both magneto-resistive and inductive thin-film heads are carried out at the Company's facilities. These three stages are wafer production, slider fabrication and head gimbal assembly. While the majority of its requirements for magnetic recording heads are produced internally, the Company, in the past year, has begun purchasing some heads from third party suppliers to afford it access to the widest possible head technology available. However, the Company plans to continue to manufacture the majority of its head requirements internally. For disc, or media, production the Company purchases aluminum substrate blanks from third parties mainly in the U.S. and Japan. These blanks are machined, plated and polished to produce finished substrates at the Company's plants in California, Mexico and Northern Ireland. The Company's media manufacturing plants in California and Singapore put these substrates through the manufacturing processes necessary to deposit the magnetic storage layer, the protective carbon overcoat and the lubricant as well as to achieve the proper degree of final surface smoothness and also carry out the quality assurance activities necessary to deliver finished media to Seagate's disc drive manufacturing plants. The Company's internal media manufacturing operations supply the majority of its needs for media but media is also purchased from third party suppliers located in the U.S. and the Far East. Spindle motors are sourced principally from outside vendors in the Far East. The Company designs, in partnership with a major ASIC manufacturer, nearly all of its ASICs for motor and actuator control and manufactures a small portion of these circuits. It designs all or part of many of the other ASICs in the drive such as interface controllers, read/write channels and pre-amplifiers, and procures these from third parties. The vast majority of the high-volume surface-mount printed circuit assemblies are assembled internally. The Company evaluates the need for second sources for all of its components on a case-by-case basis and, where it is deemed desirable and feasible to do so, secures multiple sources. The Company has experienced production delays when unable to obtain sufficient quantities of certain components or assembly capacity. The Company attempts to maintain component inventory levels adequate for its short-term needs. However, an inability to obtain essential components, if prolonged, would adversely affect the Company's business. Because of the significant fixed costs associated with the production of its products and components and the industry's history of declining prices, the Company must continue to produce and sell its disc drives in significant volume, continue to lower manufacturing costs and carefully monitor inventory levels. Toward these ends, the Company continually evaluates its components and manufacturing processes as well as the desirability of transferring volume production of disc drives and related components between facilities, including transfer overseas to countries where labor costs and other manufacturing costs are significantly lower than in the U.S., principally Singapore, Thailand, Malaysia and China. Frequently, transfer of production of a product to a different facility requires qualification of such new facility by certain of the Company's OEM customers. There 10 can be no certainty that such changes and transfers will be implemented on a cost-effective basis without delays or disruption in the Company's production and without adversely affecting the Company's results of operations. Due to declining customer orders and price erosion as a result of intensely competitive market conditions in fiscal 1998, the Company has initiated a restructuring plan resulting in the closure of certain manufacturing facilities to reduce excess capacity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--1998 vs 1997." Offshore operations are subject to certain inherent risks, including delays in transportation, changes in governmental policies, tariffs, import/export regulations, and fluctuations in currency exchange rates in addition to geographic limitations on management controls and reporting. Although the Company has not had any significant adverse experience in this regard and has significant experience in the offshore production of its products, there can be no assurance that the inherent risks of offshore operations will not adversely effect the Company's future operating results. During fiscal 1998, several Far East currencies significantly declined in value relative to the U.S. dollar. As a result during fiscal 1998, the Company was required to mark- to-market a portion of its foreign currency forward exchange contracts that it had taken out as a hedge of these currencies and take a $76 million charge against income. As of July 3, 1998, the Company had effectively closed out all of its foreign currency forward exchange contracts by purchasing offsetting contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Disclosures about Market Risk." Certain of the Far East countries in which the Company operates have experienced political unrest and the Company's operations have been adversely affected for short periods of time. PRODUCT DEVELOPMENT The Company's strategy for new products emphasizes developing and introducing on a timely and cost effective basis products that offer functionality and performance equal to or better than competitive product offerings. The rigid disc drive industry is characterized by ongoing, rapid technological change, relatively short product life cycles and rapidly changing user needs. The Company believes that its future success will depend upon its ability to develop, manufacture and market products which meet changing user needs, and to successfully anticipate or respond to changes in technology and standards on a cost-effective and timely basis. Accordingly, the Company is committed to the development of new component technologies, new products, and the continuing evaluation of alternative technologies. The Company develops new disc drive products and the processes to produce them at four locations: Longmont, Colorado; Oklahoma City, Oklahoma; Bloomington, Minnesota; and Singapore. Generally speaking, Longmont and Singapore are responsible for development of 3.5 inch form factor drives intended for desktop personal computer systems; Oklahoma City is responsible for development of 3.5 inch disc drives with capacities and interfaces intended for use in minicomputers, supermicrocomputers, workstations and file servers; and Bloomington is responsible for 3.5 inch and 5.25 inch products principally intended for use in systems ranging from workstations and superminicomputers to mainframe and supercomputers as well as new markets such as digital video and video-on-demand. Development of 2.5 inch form factor drives intended for mobile personal computers is also conducted in Longmont. The Company is increasing its focus on research and development and is realigning its disc drive development process. Seagate's Advanced Concepts Labs program focuses the Company's disc drive and component research efforts into three lab groups that specialize in developing advanced technologies for future data storage products. The three groups are storage products, recording heads and recording media. These labs are designed to deliver significant advances in disc drive science to meet the advanced requirements of future data storage devices. The charter of Advanced Concepts is to ensure timely availability of mature component and subsystem technologies to the Company's product development teams and allow the Company to leverage and coordinate those technologies across products. The drive development process is being realigned to ensure a common and standard process that will consistently deliver time-to-market products. In August 1997, the Company acquired Quinta, a developer of ultra-high capacity disc drive technologies, including a 11 new optically assisted Winchester ("OAW") technology. OAW technology is designed to integrate optical, magnetic and telecommunications technologies for the purpose of building a new class of high capacity cost-effective disc drive storage devices. There can be no assurance that Quinta's OAW technology development effort will be successful. The Company has focused its component research and development efforts in four main areas: heads, media, motors and ASICs. The major emphasis of this research and development effort is higher capacity, reduced size and power consumption, improved performance and reliability, and reduced cost. The principal areas of research and development relating to spindle motors are improved bearings, lowered power requirements, reduced noise level, improved reliability, improved magnet strength, and reduced cost. With a continuous demand for increased data storage density, the Company is researching alternative motor technologies in addition to current ball bearing spindle motors, including fluid dynamic motors and air bearing motors. The motor design and development center is located in Scotts Valley, California. The Company's head research and development efforts are focused on increasing recording densities, reducing the size and mass of the slider, developing suspensions and assembly technology for reduced head size, reducing the cost and increasing the reliability. This research and development includes substantial effort to develop and manufacture MR and other head technologies such as Giant MR ("GMR") heads and advanced air bearing sliders for high areal density and small form factor products. There can be no assurance that the Company's head development efforts will be successful and a failure of the Company to successfully manufacture and market products incorporating its advanced head technology in a timely manner could have a material adverse effect on the Company's business and results of operations. Media research and development is primarily related to achieving higher areal densities consistent with the efforts undertaken in the head operations of the Company as well as developing the capability to produce media of reduced dimensions from those of current main-stream products. These media research and development efforts are subdivided into several main approaches to achieving these goals: developing smoother, flatter substrates that permit lower head flying heights; developing thinner, smaller-diameter substrates to support development of physically smaller disc drives; developing improved magnetic storage alloys, overcoat materials and surface lubricants that permit higher coercivities and improved electromagnetic performance while providing enhanced wear and reliability performance; and, finally, developing enhanced substrate and media manufacturing processes that allow the Company to implement the results of its other developments while increasing the consistency and reducing the cost of producing high performance magnetic storage media. As a consequence of these efforts, the Company reviews, on an on-going basis, not only new versions and smaller size versions of the industry-standard aluminum and glass substrates but also substrates of alternative materials. The Company experiments with the elemental content of the storage alloys and overcoat materials and the sputtering processes used to deposit them. The Company evaluates different lubricants and pursues variations in the techniques used to obtain the proper degree of surface smoothness including both mechanical and other processes. There can be no assurance that the Company's media development efforts will be successful. ASIC development has been and will continue to be focused on optimizing the architecture for system performance, cost and reliability. In addition, the focus has been and will continue to be on reducing the number of parts, the amount of power consumption, and the size, and increasing areal densities by use of advanced signal processing techniques such as PRML read/write channels. In addition to developing new products and components, the Company devotes significant resources to product engineering aimed at improving manufacturing processes, lowering manufacturing costs and increasing volume production of new and existing products. Process engineering groups are located with the disc drive development groups and the reliability engineering groups in locations listed above; however, most of the Company's volume production is done in locations remote from these groups and the development of the volume processes are completed at the volume manufacturing sites. 12 No assurance can be given that the Company will be able to successfully complete the design or introduction of new products in a timely manner, that the Company will be able to manufacture new products in volume with acceptable manufacturing yields, or successfully market these products, or that these products will perform to specifications on a long-term basis. Failure to meet any of the above objectives in a timely manner has in the past and may in the future have a material adverse effect on the Company's business and results of operations. During the fiscal years ended July 3, 1998, June 27, 1997 and June 28, 1996, the Company's product development expenses were $585 million, $459 million and $420 million, respectively. PATENTS AND LICENSES The Company has approximately 905 U.S. patents and 450 foreign patents and has approximately 696 U.S. and 831 foreign patent applications pending. Due to the rapid technological change that characterizes the rigid disc drive industry, the Company believes that the improvement of existing products, reliance upon trade secrets and unpatented proprietary know-how and development of new products are generally more important than patent protection in establishing and maintaining a competitive advantage. Nevertheless, the Company believes that patents are of value to its business and intends to continue its efforts to obtain patents, when available, in connection with its research and development program. There can be no assurance that any patents obtained will provide substantial protection or be of commercial benefit to the Company, or that their validity will not be challenged. Because of rapid technological development in the disc drive industry, certain of the Company's products have been and it is possible other products could be accused of infringement of existing patents. The rigid disc drive industry has been characterized by significant litigation relating to patent and other intellectual property rights. From time to time, the Company receives claims that certain of its products infringe patents of third parties. Although the Company has been able to resolve some such claims or potential claims by obtaining licenses or rights under the patents in question without a material adverse affect on the Company, other such claims are pending which if resolved unfavorably to the Company could have a material adverse effect on the Company's business. For a description of current disputes see the "Litigation" note to the Company's consolidated financial statements. In addition, the costs of engaging in intellectual property litigation may be substantial regardless of outcome. The Company has patent cross licenses with a number of companies in the computer industry. Additionally, the Company has agreements in principle with other major disc drive companies. COMPETITION The rigid disc drive industry is intensely competitive, with manufacturers competing for a limited number of major customers. The principal competitive factors in the rigid disc drive market include product quality and reliability, form factor, storage capacity, price per unit, price per megabyte, product performance, production volume capability and responsiveness to customers. The relative importance of these factors varies with different customers and for different products. The Company believes that it is generally competitive as to these factors. The Company has experienced and expects to continue to experience intense competition from a number of domestic and foreign companies, some of which have far greater resources than the Company. In addition to independent rigid disc drive manufacturers, the Company also faces competition from present and potential customers, including IBM, Toshiba, NEC, Fujitsu Limited and Samsung who continually evaluate whether to manufacture their own drives or purchase them from outside sources. These manufacturers also sell drives to third parties which results in direct competition with the Company. Product life cycles are relatively short in the disc drive industry. The Company expects its competitors to offer new and existing products at prices necessary to gain or retain market share and customers. To remain competitive, the Company believes it will be necessary to continue to reduce its prices and aggressively enhance its product offerings. In addition to the foregoing, the ability of the Company to compete successfully will also 13 depend on its ability to provide timely product introductions and to continue to reduce production costs. The Company's establishment of production facilities in Singapore, Thailand, Malaysia and China are directed toward such cost reductions. The Company believes that its future success will depend upon its ability to develop, manufacture and market products of high quality and reliability which meet changing user needs, and which successfully anticipate or respond to changes in technology and standards on a cost-effective and timely basis, of which there can be no assurance. The introduction of products using alternative technologies could be a significant source of competition. For example, high-speed semiconductor memory could compete with the Company's products in the future. Semiconductor memory (SRAM and DRAM) is much faster than magnetic disc drives, but currently is volatile (i.e., subject to loss of data in the event of power failure) and much more costly. Flash EE prom, a nonvolatile semiconductor memory, is currently much more costly and, while it has higher read performance than disc drives, it has lower write performance. Flash EE prom could become competitive in the near future for applications requiring less storage capacity (i.e., less than 200 MB) than is required in the Company's more traditional computer related market place. EMPLOYEES From June 27, 1997 to July 3, 1998, the number of persons employed worldwide by the Company was reduced from approximately 111,000 to approximately 87,000. This reduction was part of a restructuring plan begun in January 1998 to align the Company's worldwide operations with market conditions and to improve the productivity of its operations and the efficiency of its development efforts. Approximately 71,000 of the Company's employees were located in the Company's Far East operations as of July 3, 1998. In addition, the Company makes use of supplemental employees, principally in manufacturing, who are hired on an as- needed basis. Management believes that the future success of the Company will depend in part on its ability to attract and retain qualified employees at all levels, of which there can be no assurance. The Company believes that its employee relations are good. 14 ITEM 2. PROPERTIES Seagate's executive offices are located in Scotts Valley, California. Principal manufacturing facilities are located in Singapore, Thailand, Malaysia, Minnesota, California, Oklahoma, China and Northern Ireland. A major portion of the Company's facilities are occupied under leases which expire at various times through 2015. The following is a summary of square footage owned or leased by the Company: FACILITIES (SQUARE FEET) - --------------------------------------------------------------------------------
MANUFACTURING PRODUCT ADMINIS- LOCATION & WAREHOUSE DEVELOPMENT TRATIVE TOTAL -------- ------------- ----------- --------- ---------- NORTH AMERICA California Central California...... 16,768 36,934 30,325 84,027 (1) Northern California..... 451,813 208,722 281,830 942,365 (2) Southern California..... 345,590 107,888 46,844 500,322 (3) Colorado.................. 48,849 225,424 25,849 300,122 Minnesota................. 891,805 73,498 217,631 1,182,934 (4) Oklahoma.................. 294,301 110,097 93,502 497,900 (5) Northeast USA............. -- 21,890 12,818 34,708 Southeast USA............. 6,750 36,618 93,957 137,325 (6) Other USA................. 46,341 947 14,562 61,850 (7) Canada/Mexico............. 172,095 46,654 92,546 311,295 (8) --------- ------- --------- ---------- TOTAL NORTH AMERICA......... 2,274,312 868,672 909,864 4,052,848 --------- ------- --------- ---------- EUROPE England................... 19,878 15,632 31,283 66,793 (9) Ireland................... -- -- 1,200 1,200 (10) Northern Ireland.......... 266,031 4,900 50,169 321,100 (11) Netherlands............... 92,234 -- 28,955 121,189 (12) Scotland.................. 89,555 3,680 19,988 113,223 (13) Other Europe.............. -- -- 55,105 55,105 (14) --------- ------- --------- ---------- TOTAL EUROPE................ 467,698 24,212 186,700 678,610 --------- ------- --------- ---------- ASIA China..................... 165,420 -- 25,972 191,392 (15) Malaysia.................. 1,321,931 -- 148,556 1,470,487 (16) Philippines............... -- -- 999 999 (17) Singapore................. 1,530,717 35,519 288,569 1,854,805 (18) Thailand.................. 1,532,265 -- 226,846 1,759,111 (19) Other Pacific Rim......... 38,470 -- 66,544 105,014 (20) --------- ------- --------- ---------- TOTAL ASIA.................. 4,588,803 35,519 757,486 5,381,808 --------- ------- --------- ---------- TOTAL....................... 7,330,813 928,403 1,854,050 10,113,266 ========= ======= ========= ==========
- -------- (1) Includes approximately 30,598 square feet owned by the Company. (2) Includes approximately 324,756 square feet owned by the Company. Excludes 460,356 square feet unoccupied and approximately 50,322 square feet subleased to others. (3) Includes approximately 114,182 square feet owned by the Company. Excludes approximately 38,209 square feet subleased to others. (4) Includes approximately 650,846 square feet owned by the Company. Excludes approximately 217,802 square feet subleased to others. Excludes approximately 350,000 square feet under construction. (5) Includes approximately 268,220 square feet owned by the Company. 15 (6) Excludes approximately 5,000 square feet unoccupied. (7) Excludes approximately 19,206 square feet unoccupied. (8) Excludes approximately 478,000 square feet under construction. (9) Excludes approximately 32,206 square feet subleased to others. (10) Excludes approximately 155,000 square feet owned by the Company and unoccupied. (11) Includes approximately 321,100 square feet owned by the Company. Excludes approximately 250,000 square feet under construction. (12) Excludes approximately 130,290 square feet unoccupied. (13) Excludes approximately 10,775 square feet unoccupied. Excludes approximately 16,000 square feet under construction. (14) Excludes approximately 3,263 square feet subleased to others. (15) Excludes approximately 32,056 square feet unoccupied. (16) Includes approximately 1,639,322 square feet owned by the Company. Excludes approximately 170,595 square feet unoccupied. (17) Excludes approximately 312,365 square feet owned by the Company and unoccupied. (18) Includes approximately 1,634,039 square feet owned by the Company. Excludes approximately 218,498 square feet unoccupied. Excludes approximately 8,271 square feet under construction. (19) Includes approximately 844,594 square feet owned by the Company. Excludes approximately 201,417 square feet unoccupied. (20) Includes approximately 8,303 square feet owned by the Company. 16 ITEM 3. LEGAL PROCEEDINGS The information required by this item is incorporated by reference to pages 30 and 35 of the Annual Report to Stockholders, filed as Exhibit 13.1 hereto. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT The present executive officers of the Company are as follows:
EXECUTIVE OFFICER NAME AGE POSITION SINCE ---- --- -------- --------- Stephen J. Luczo........ 41 Chief Executive Officer, President, Chief 1993 Operating Officer and Director of the Company and Chairman of the Board of Directors, Seagate Software, Inc. Bernardo A. Carballo.... 49 Executive Vice President, Worldwide Sales, 1991 Marketing, Product Line Management, Tape Operations and Customer Service Don G. Colton........... 50 Executive Vice President, Corporate Quality 1997 Brendan C. Hegarty...... 55 Executive Vice President, Chief Operating 1989 Officer, Recording Heads Group Thomas F. Mulvaney...... 49 Senior Vice President, General Counsel, and 1996 Corporate Secretary Charles C. Pope......... 43 Senior Vice President, Finance and Chief 1998 Financial Officer Townsend H. Porter, Jr.. 52 Executive Vice President, Drive Operations 1997 and Chief Technical Officer, Storage Products Group Donald L. Waite......... 65 Executive Vice President, Chief 1983 Administrative Officer and Assistant Secretary William D. Watkins...... 45 Executive Vice President, Disc Drive 1996 Operations and Chief Operating Officer, Recording Media Group
Officers are elected annually by the Board of Directors and serve at the discretion of the Board. Mr. Luczo joined the Company in October 1993 as Senior Vice President, Corporate Development. In March 1995, he was appointed Executive Vice President, Corporate Development and Chief Operating Officer of Seagate Software. In July 1997, he was appointed Chairman of the Board of Seagate Software. Mr. Luczo was promoted to President and Chief Operating Officer of the Company in September 1997. In July 1998, Mr. Luczo was promoted to Chief Executive Officer and appointed to the Board of Directors of the Company. Prior to joining the Company he was Senior Managing Director of the Global Technology Group of Bear, Stearns & Co. Inc., an investment banking firm, from February 1992 to October 1993. Mr. Carballo was General Manager, Product Line Management for the Company's Oklahoma City operations at the time of the Company's acquisition of Imprimis in 1989. In 1990 he was promoted to Vice President, Product Line Management, Oklahoma City operations, in September 1991 he was promoted to Senior Vice President, Sales, Marketing and Product Line Management and in March 1995 he was promoted to 17 Executive Vice President Worldwide Sales, Marketing, Product Line Management and Customer Service. In September 1997, he also assumed responsibility for Seagate's Tape Division. Mr. Colton was Vice President, Product Line Management for Seagate's Oklahoma City and Twin Cities operations from 1991 until his promotion to Senior Vice President, Product Line Management in August 1995. In September 1997 he was promoted to Executive Vice President, Corporate Quality. Mr. Colton joined the Company in 1989 upon the Company's acquisition of Imprimis, Inc. Dr. Hegarty joined Control Data/Imprimis in 1988 as Vice President, Thin- Film Heads. In October 1989 he was named Seagate's Vice President of Recording Heads Group in Bloomington, Minnesota, and in August 1990 was promoted to Senior Vice President and Chief Technical Officer. In March 1995 he was promoted to Executive Vice President, Chief Operating Officer, Recording Heads Group. From October 1990 to October 1993 Dr. Hegarty was also a Director of the Company. Dr. Hegarty serves as a Director of MTS Systems Corporation, an engineering company. Mr. Mulvaney joined the Company in February 1996 with the Company's merger with Conner Peripherals as Senior Vice President, General Counsel, and Assistant Secretary. In July 1998, Mr. Mulvaney was appointed Corporate Secretary. Mr. Mulvaney was Vice President, General Counsel and Secretary at Conner Peripherals from May 1995 until February 1996. Prior to joining Conner Peripherals, Mr. Mulvaney was with VLSI Technology, Inc., a semiconductor company, from May 1990 to May 1995 where he served as Vice President, General Counsel and Secretary, and held departmental responsibility for legal, human resources, corporate communications and facilities. Mr. Pope was promoted to Senior Vice President in January 1997 and Chief Financial Officer in February 1998. Mr. Pope joined Seagate as director of Budgets and Analysis with the Company's acquisition of Grenex in 1985. He has held a variety of positions in his 13 years with Seagate including Director of Finance for Thailand operations; Vice President, Finance, Far East operations; Vice President, Finance and Treasurer; Vice President and General Manager, Seagate Magnetics; and most recently, Senior Vice President Finance, Storage Products. Mr. Porter joined the Company on June 2, 1997 as Chief Technology Officer, Storage Products Group. In September 1997 he was promoted to Executive Vice President. Mr. Porter was Vice President of Research and Development, Enterprise Storage Group at Western Digital, a disc drive company, from November 1994 to May 1997. From 1968 to 1994, Mr. Porter held engineering, program management, and executive positions at IBM. Mr. Waite joined the Company in 1983 as Vice President of Finance and Chief Financial Officer, and was promoted to Senior Vice President, Finance in 1984. In March 1995 he was promoted to Executive Vice President, Chief Administrative Officer and Chief Financial Officer. Mr. Waite was Chief Financial Officer of the Company from October 1983 until February 1998 and Secretary of the Company from October 1983 until July 1998. He was appointed Assistant Secretary of the Company in July 1998. Mr. Waite serves as a Director of California Micro Devices, a manufacturer of integrated passive devices, and Seagate Software, Inc., a subsidiary of the Company. Mr. Watkins joined the Company in February 1996 with the Company's merger with Conner Peripherals as Executive Vice President, Recording Media Group. In October 1997, Mr. Watkins' was appointed Executive Vice President, Disc Drive Operations and Chief Operating Officer, Recording Media Group. Prior to joining the Company he was President and General Manager of the Conner Peripherals Disk Division from January 1990 until December 1992. In January 1993, Mr. Watkins was promoted to Senior Vice President, Manufacturing Operations. 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference to pages 1-3 of the Annual Report to Stockholders, filed as Exhibit 13.1 hereto. There have been no sales of unregistered securities by the Company since July 1, 1995. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference to pages 1-3 of the Annual Report to Stockholders, filed as Exhibit 13.1 hereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference to pages 3-14 of the Annual Report to Stockholders, filed as Exhibit 13.1 hereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference to pages 1-3 and 15-37 of the Annual Report to Stockholders, filed as Exhibit 13.1 hereto. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, are hereby incorporated herein by reference to the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," respectively, in the Company's Proxy Statement to be filed with the Commission within 120 days of the end of the Registrant's fiscal year pursuant to General Instruction G(3) to Form 10-K. The information required by that Item concerning executive officers is set forth in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission within 120 days of the end of the Registrant's fiscal year pursuant to General Instruction G(3) to Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission within 120 days of the end of the Registrant's fiscal year pursuant to General Instruction G(3) to Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission within 120 days of the end of the Registrant's fiscal year pursuant to General Instruction G(3) to Form 10-K. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1.Financial Statements. The following Consolidated Financial Statements of Seagate Technology, Inc. and Report of Independent Auditors are incorporated by reference in Item 8: Report of Independent Auditors Consolidated Balance Sheets July 3, 1998 and June 27, 1997. Consolidated Statements of Operations Years Ended July 3, 1998; June 27, 1997; and June 28, 1996. Consolidated Statements of Stockholders' Equity Years Ended July 3, 1998; June 27, 1997; and June 28, 1996. Consolidated Statements of Cash Flows Years Ended July 3, 1998; June 27, 1997; and June 28, 1996. Notes to Consolidated Financial Statements. 2.Financial Statement Schedules. The following consolidated financial statement schedule of Seagate Technology, Inc. is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Seagate Technology, Inc.:
SCHEDULE PAGE -------- ---- II--Valuation and Qualifying Accounts................................. 24
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. 3.Exhibits:
NOTES: ------ 3.1 Certificate of Incorporation of Registrant, as amended. (A) 3.2 By-Laws of Registrant, as amended. (B) 4.1 Indenture, dated as of March 1, 1997 (the "Indenture"), between Seagate Technology, Inc. (the "Company") and First Trust of California, National Association, as Trustee. (C) 4.2 Officers' Certificate pursuant to Section 301 of the Indenture, without Exhibits, establishing the terms of the Company's senior notes and senior debentures. (C) 4.3 Form of Senior Note. (C) 4.4 Form of Senior Debenture. (C) 10.1 1983 Incentive Stock Option Plan and form of Stock Option Agreement. (E) 10.2 Seagate Technology Employee Stock Purchase Plan, as amended. 10.3 Registrant's Executive Stock Plan. (I) 10.4 Conner Peripherals, Inc. 1986 Incentive Stock Plan. (I) 10.5 Building Agreement for Land At Private Lot A14547 in Yio Chu Kang dated May 30, 1996 between Seagate Technology International and Jurong Town Corporation. 10.6 Lease Agreement dated July 18, 1994 between Universal Appliances Limited and Seagate Technology (Thailand) Limited. 10.7 1991 Incentive Stock Option Plan and Form of Option Agreement, as amended. 10.8 Acquisition Agreement dated as of September 29, 1989 by and among Seagate Technology, Inc. and Control Data Corporation, Imprimis Technology Incorporated and Magnetic Peripherals, Inc. (G) 10.9 Amended and Restated Directors' Option Plan and Form of Option Agreement. (H)
21
NOTES: ------ 10.10 Amended and Restated Archive Corporation Stock Option and Restricted Stock Purchase Plan--1981. (I) 10.11 Amended and Restated Archive Corporation Incentive Stock Option Plan--1981. (I) 10.12 Conner Peripherals, Inc.--Arcada Holdings, Inc. Stock Option Plan. (J) 10.13 Arcada Holdings, Inc. 1994 Stock Option Plan. (J) 10.14 Separation Agreement and Release between the Registrant and Alan F. Shugart dated as of July 29, 1998. 13.1 Portions of the 1998 Annual Report to Stockholders. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney (included on page 23). 27 Financial Data Schedule
- -------- (A) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-3 (File No. 33-13430) filed with the Securities and Exchange Commission on April 14, 1987. (B) Incorporated by reference to exhibits filed in response to Item 14 (a), "Exhibits," of the Company's Form 10-K, as amended, for the year ended June 30, 1990. (C) Incorporated by reference to exhibits filed in response to Item 7(b), "Financial Statements and Exhibits" of the Company's Current Report on Form 8-K dated March 4, 1997. (E) Incorporated by reference to exhibits filed in response to Item 14(a), "Exhibits," of the Company's Form 10-K for the year ended June 30, 1983. (G) Incorporated by reference to exhibits filed in response to Item 7(c), "Exhibits," of the Company's Current Report on Form 8-K dated October 2, 1989. (H) Incorporated by reference to exhibits filed in response to Item 14(a), "Exhibits," of the Company's Form 10-K for the year ended June 30, 1991. (I) Incorporated by reference to exhibits filed with Registrant's Registration Statement on Form S-8 (registration number 333-00697) as filed with the Commission on February 5, 1996. (J) Incorporated by reference to exhibits filed with Registrant's Registration Statement on Form S-8 (registration number 333-01059) as filed with the Commission on February 21, 1996. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the quarter ended July 3, 1998. 22 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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. /s/ Stephen J. Luczo By: _________________________________ (Stephen J. Luczo, Chief Executive Officer, President, Chief Operating Officer and a Director) Dated: August 20, 1998 POWER OF ATTORNEY Know All Men By These Presents, that each person whose signature appears below constitutes and appoints Stephen J. Luczo and Charles C. Pope, jointly and severally, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys- in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ STEPHEN J. LUCZO Chief Executive Officer, August 20, 1998 ____________________________________ President, Chief Operating Stephen J. Luczo Officer and a Director (Principal Executive Officer) /s/ CHARLES C. POPE Senior Vice President and August 20, 1998 ____________________________________ Chief Financial Officer Charles C. Pope (Principal Financial and Accounting Officer) /s/ GARY B. FILLER Co-Chairman of the Board August 20, 1998 ____________________________________ Gary B. Filler /s/ LAWRENCE PERLMAN Co-Chairman of the Board August 20, 1998 ____________________________________ Lawrence Perlman /s/ KENNETH HAUGHTON Director August 20, 1998 ____________________________________ Kenneth Haughton /s/ ROBERT A. KLEIST Director August 20, 1998 ____________________________________ Robert A. Kleist /s/ THOMAS P. STAFFORD Director August 20, 1998 ____________________________________ Thomas P. Stafford /s/ LAUREL L. WILKENING Director August 20, 1998 ____________________________________ Laurel L. Wilkening
23 SEAGATE TECHNOLOGY, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E COL. F ------ ------------ ---------- ---------- ------------ ----------- ADDITIONS --------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING OF COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE (1) PERIOD ----------- ------------ ---------- ---------- ------------ ----------- YEAR ENDED JULY 3, 1998: Deducted from asset accounts: Allowance for doubtful accounts.. $60,413,000 $1,182,000 $-- $ 7,465,000 $54,130,000 =========== ========== ==== =========== =========== YEAR ENDED JUNE 27, 1997: Deducted from asset accounts: Allowance for doubtful accounts.. $66,656,000 $5,729,000 $-- $11,972,000 $60,413,000 =========== ========== ==== =========== =========== YEAR ENDED JUNE 28, 1996: Deducted from asset accounts: Allowance for doubtful accounts.. $71,702,000 $3,744,000 $-- $ 8,790,000 $66,656,000 =========== ========== ==== =========== ===========
- -------- (1)Uncollectible accounts written off, net of recoveries. 24 SEAGATE TECHNOLOGY, INC. INDEX TO EXHIBITS
EXHIBITS NOTES: -------- ------ 3.1 Certificate of Incorporation of Registrant, as amended. (A) 3.2 By-Laws of Registrant, as amended. (B) 4.1 Indenture, dated as of March 1, 1997 (the "Indenture"), between Seagate Technology, Inc. (the "Company") and First Trust of California, National Association, as Trustee. (C) 4.2 Officers' Certificate pursuant to Section 301 of the Indenture, without Exhibits, establishing the terms of the Company's senior notes and senior debentures. (C) 4.3 Form of Senior Note. (C) 4.4 Form of Senior Debenture. (C) 10.1 1983 Incentive Stock Option Plan and form of Stock Option Agreement. (E) 10.2 Seagate Technology Employee Stock Purchase Plan, as amended. 10.3 Registrant's Executive Stock Plan. (I) 10.4 Conner Peripherals, Inc. 1986 Incentive Stock Plan. (I) 10.5 Building Agreement for Land At Private Lot A14547 in Yio Chu Kang dated May 30, 1996 between Seagate Technology International and Jurong Town Corporation. 10.6 Lease Agreement dated July 18, 1994 between Universal Appliances Limited and Seagate Technology (Thailand) Limited. 10.7 1991 Incentive Stock Option Plan and Form of Option Agreement, as amended. 10.8 Acquisition Agreement dated as of September 29, 1989 by and among Seagate Technology, Inc. and Control Data Corporation, Imprimis Technology Incorporated and Magnetic Peripherals, Inc. (G) 10.9 Amended and Restated Directors' Option Plan and Form of Option Agreement. (H) 10.10 Amended and Restated Archive Corporation Stock Option and Restricted Stock Purchase Plan--1981. (I) 10.11 Amended and Restated Archive Corporation Incentive Stock Option Plan--1981. (I) 10.12 Conner Peripherals, Inc.--Arcada Holdings, Inc. Stock Option Plan. (J) 10.13 Arcada Holdings, Inc. 1994 Stock Option Plan. (J) 10.14 Separation Agreement and Release between the Registrant and Alan F. Shugart dated as of July 29, 1998. 13.1 Portions of the 1998 Annual Report to Stockholders. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney (included on page 23). 27 Financial Data Schedule
- -------- (A) Incorporated by reference to exhibits filed in response to Item 16, "Exhibits," of the Company's Registration Statement on Form S-3 (File No. 33-13430) filed with the Securities and Exchange Commission on April 14, 1987. (B) Incorporated by reference to exhibits filed in response to Item 14 (a), "Exhibits," of the Company's Form 10-K, as amended, for the year ended June 30, 1990. (C) Incorporated by reference to exhibits filed in response to Item 7(b), "Financial Statements and Exhibits" of the Company's Current Report on Form 8-K dated March 4, 1997. (E) Incorporated by reference to exhibits filed in response to Item 14(a), "Exhibits," of the Company's Form 10-K for the year ended June 30, 1983. (G) Incorporated by reference to exhibits filed in response to Item 7(c), "Exhibits," of the Company's Current Report on Form 8-K dated October 2, 1989. (H) Incorporated by reference to exhibits filed in response to Item 14(a), "Exhibits," of the Company's Form 10-K for the year ended June 30, 1991. (I) Incorporated by reference to exhibits filed with Registrant's Registration Statement on Form S-8 (registration number 333-00697) as filed with the Commission on February 5, 1996. (J) Incorporated by reference to exhibits filed with Registrant's Registration Statement on Form S-8 (registration number 333-01059) as filed with the Commission on February 21, 1996. EX-10.2 2 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.2 SEAGATE TECHNOLOGY EMPLOYEE STOCK PURCHASE PLAN ---------------------------- (Restated August 6, 1987) (As Amended Through October 27, 1994) (As Amended Through April, 1997) (As Amended Through August, 1998) The following constitutes the provisions of the Employee Stock Purchase Plan (herein called the "Plan") of Seagate Technology (herein called the "Company"). 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Subsidiaries (as defined in paragraph 2(f)) with an opportunity to purchase Common Stock of the Company through payroll deductions. It is the intention of the Company that the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986 (the "Code"). The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" means the Board of Directors of the Company. (b) "Common Stock" means the Common Stock, $0.01 par value, of the Company. (c) "Compensation" means base pay, excluding all other emoluments such as amounts attributable to overtime, shift premium, incentive compensation, bonuses and commissions; except that commissions paid with respect to the Company's sales activities shall be treated as a part of base pay. The Board or its Committee (as defined in Paragraph 13) may specifically direct the inclusions of any excluded item of compensation in a manner consistent with the requirements of Section 423 of the Code, as provided in Paragraph 1, but subject to the limitations contained in Paragraph 19 hereof. (d) "Employee" means any person, including an officer, who is employed by the Company or one of its Designated Subsidiaries. (e) "Subsidiary" means any corporation, domestic or foreign, in which the Company owns, directly or indirectly, 50% or more of the voting shares. (f) "Designated Subsidiaries" means the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Offering Date" means the first day of each offering period of the Plan. (h) "Termination Date" means the last day of each offering period of the Plan. 3. Eligibility. ----------- (a) General Rule. Any employee, as defined in paragraph 2, who has ------------ been employed by the Company or one of its Designated Subsidiaries for at least 30 days prior to the Offering Date shall be eligible to participate in the Plan, subject to the limitations imposed by Section 423(b) of the Code. (b) Exceptions. Any provisions of the Plan to the contrary ---------- notwithstanding, no employee shall be granted an option under the Plan if, (i) immediately after the grant, such employee (or any other person whose stock ownership would be attributed to such employee pursuant to Section 425(d) of the Code) would own shares and/or hold outstanding options to purchase shares possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or of any subsidiary of the Company, or (ii) the rate of withholding under such option would permit the employee's rights to purchase shares under all employee stock purchase plans of the Company and its subsidiaries to accrue (i.e., become exercisable) at a rate which exceeds Twelve Thousand Five Hundred Dollars ($12,500) of fair market value of such shares (determined at the time such option is granted) for each offering period. 4. Offerings. The Plan shall be implemented by one offering during each --------- six month period of the Plan, commencing on September 24, 1981, the date of effectiveness with the Securities and Exchange Commission of the Company's Registration Statement on Form S-1 relating to its initial public offering and continuing thereafter until terminated in accordance with paragraph 19 hereof. 5. Participation. ------------- (a) An eligible employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions on the form provided by the Company and filing it with the Company's payroll office not less than 15 days prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible employees with respect to a given offering. (b) Payroll deductions for a participant shall commence with the first payroll following the Offering Date, or the first payroll following the date of valid filing of the subscription agreement, whichever is later, and shall end on the Termination Date of the offering, unless sooner terminated by the participant as provided in paragraph 10. 6. Payroll Deductions. ------------------ (a) At the time a participant files his subscription agreement, he shall elect to have payroll deductions made on each payday during the offering period at a rate not exceeding ten percent (10%), or such other maximum rate as may be determined from time to time by the Board, of the Compensation which he would otherwise receive on such payday, provided that the aggregate of such payroll deductions during the offering period shall not exceed ten percent (10%), or such other maximum percentage as may be determined from time to time by the Board, of the Compensation which he would otherwise have received during said offering period. (b) All payroll deductions authorized by a participant shall be credited to his account under the Plan. A participant may not make any additional payments into such account. (c) A participant may discontinue his participation in the Plan as provided in paragraph 10, but may not decrease or increase the rate of his payroll deductions during the offering period. 7. Grant of Option. --------------- (a) On each Offering Date, each participant shall be granted an option to purchase (at the option price) the number of full shares of the Company's Common Stock arrived at by dividing such participant's total payroll deductions accumulated during such offering period by the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock at the Offering Date, or (ii) eighty-five percent (85%) of the fair market value of a share of the Common Stock of the Company at the Termination Date, subject to the limitations set forth in paragraphs 3(b) and 12 hereof. The fair market value of a share of the Company's Common Stock shall be determined as provided in paragraph 7(b) herein. (b) The option price per share of such shares shall be the lower of: (i) 85% of the fair market value of a share of the Common Stock of the Company at the Offering Date; or (ii) 85% of the fair market value of a share of the Common Stock of the Company at the Termination Date unless: (a) the number of shares available for grant on the first day of the offering period is less than the number of shares required to be issued for that offering period, and (b) the fair market value of the Company's stock on the date additional shares are authorized by the stockholders is higher than it was on the first day of the offering period, in which case the offering price shall be the lower of (i) 85% of the fair market value on the date additional shares are authorized by the stockholders or (ii) 85% of the fair market value on the last day of the offering period. The fair market value of the Company's Common Stock on said dates shall be determined by the Company's Board of Directors, based upon such factors as the Board determines relevant; provided, however, that if there is a public market for the Common Stock, the fair market value of a share of Common Stock on a given date shall be the reported bid price for the Common Stock as of such date; or, in the event that the Common Stock is listed on a stock exchange, the fair market value of a share of Common Stock shall be the closing price on the exchange as of such date. 8. Exercise of Option. Unless a participant withdraws from the Plan as ------------------ provided in paragraph 10, his option for the purchase of shares will be exercised automatically at the Termination Date, and the minimum number of full shares subject to option will be purchased for him at the applicable option price with the accumulated payroll deductions in his account. During his lifetime, a participant's option to purchase shares hereunder is exercisable only by him. 9. Delivery. As promptly as practicable after the Termination Date of -------- each offering, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his option. Any cash remaining to the credit of a participant's account under the Plan after a purchase by him of shares at the Termination Date of each offering period shall be returned to said participant. 10. Withdrawal; Termination of Employment. ------------------------------------- (a) A participant may withdraw all, but not less than all, the payroll deductions credited to his account under the Plan at any time prior to the Termination Date by giving written notice to the Company on a form provided for such purpose. All of the participant's payroll deductions credited to his account will be paid to him as soon as practicable after receipt of his notice of withdrawal, and his option for the current offering period will be automatically cancelled, and no further payroll deductions for the purchase of shares will be made during such offering period. (b) Upon termination of the participant's employment for any reason, including retirement or death, the payroll deductions accumulated in his account will be returned to him as soon as practicable after such termination or, in the case of his death, to the person or persons entitled thereto under paragraph 14, and his option will be automatically cancelled. (c) A participant's withdrawal from an offering will not have any effect upon his eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. 11. Interest. No interest shall accrue on the payroll deductions of a -------- participant in the Plan. 12. Stock. ----- (a) The maximum number of shares of the Company's Common Stock which shall be reserved for sale under the Plan shall be 19,600,000 shares, subject to further adjustment upon changes in capitalization of the Company as provided in paragraph 18. The shares to be sold to participants in the Plan may be, at the election of the Company, either treasury shares or shares authorized but unissued. If the total number of shares which would otherwise be subject to options granted pursuant to paragraph 7(a) hereof at the Offering Date exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform and equitable a manner as is practicable. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each participant affected thereby and shall return any excess funds accumulated in each participant's account as soon as practicable after the termination date of such offering period. (b) The participant will have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his spouse. 13. Administration. The Plan shall be administered by the Board of -------------- Directors of the Company or a committee (the "Committee") appointed by the Board. The administration, interpretation or application of the Plan by the Board or the Committee shall be final, conclusive and binding upon all participants. Members of the Board or the Committee who are eligible employees are permitted to participate in the Plan, provided that: (a) Members of the Board who are eligible to participate in the Plan may not vote on any matter affecting the administration of the Plan or the grant of any option pursuant to the Plan. (b) No member of the Board who is eligible to participate in the Plan may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of options pursuant to the Plan. (c) If a Committee is established to administer the Plan, no member of the Board who is eligible to participate in the Plan may be a member of the Committee. 14. Designation of Beneficiary. -------------------------- (a) A participant may file a written designation of a beneficiary who is to receive shares and/or cash, if any, from the participant's account under the Plan in the event of such participant's death at a time when cash or shares are held for his account. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant in the absence of a valid designation of a beneficiary who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant; or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant; or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a --------------- participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in paragraph 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with paragraph 10. 16. Use of Funds. All payroll deductions received or held by the Company ------------ under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each participant ------- in the Plan. Statements of account will be given to participating employees semi-annually as soon as practicable following the Termination Date, which statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization. Subject to any required ------------------------------------------ action by the shareholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to option. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. Amendment or Termination. The Board of Directors of the Company may ------------------------ at any time terminate or amend the Plan. No such termination will affect options previously granted, nor may an amendment make any change in any option theretofore granted which adversely affects the rights of any participant, nor may an amendment be made without prior approval of the shareholders of the Company if such amendment would: (a) Increase the number of shares that may be issued under the Plan; (b) Materially modify the requirements as to eligibility for participation in the Plan; or (c) Materially increase the benefits which may accrue to participants under the Plan. 20. Notices. All notices or other communications by a participant to the ------- Company in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Shareholder Approval. Continuance of the Plan shall be subject to -------------------- approval by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon, which approval shall be: (a) (1) solicited substantially in accordance with Section 14(a) of the Securities Act of 1934, as amended (the "Act") and the rules and regulations promulgated thereunder, or (2) solicited after the Company has furnished in writing to the holders entitled to vote substantially the same information concerning the Plan as that which would be required by the rules and regulations in effect under Section 4(a) of the Act at the time such information is furnished; and (b) obtained at or prior to the first annual meeting of shareholders held subsequent to the first registration of Common Stock under Section 12 of the Act. In the case of approval by written consent, the shares "present or represented" shall mean all outstanding shares. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option and if required by applicable securities laws, the Company may require the participant for whose account the option is being exercised to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. SEAGATE TECHNOLOGY EMPLOYEE STOCK PURCHASE PLAN ---------------------------- SUBSCRIPTION AGREEMENT ---------------------- ______ Original Application ______ Change in Payroll Deduction Rate ______ Change of Beneficiary(ies) 1. ___________________________________ hereby elects to participate in the SEAGATE TECHNOLOGY Employee Stock Purchase Plan (the "Plan") and subscribes to purchase shares of the Company Common Stock in accordance with this Agreement and the Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ______% of my base pay in accordance with the Plan. 3. I understand that said payroll deductions shall be accumulated for the purchase of shares in accordance with the Plan, and that shares will be purchased for me automatically at the end of the offering period unless I withdraw from the Plan by giving written notice to the Company. 4. I understand that prior to the delivery of any shares I will receive a copy of the Company's most recent prospectus which describes the Plan. A copy of the complete "Seagate Technology Employee Stock Purchase Plan" is on file with the Company. 5. Shares purchased for me under the Plan should be issued in the name(s) of: _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the first day of the offering period during which I purchased such shares or within 1 year after the date on which such shares were delivered to me, I may be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were delivered to me over the option price paid for the shares. I hereby agree to notify the Company in writing within 30 days -------------------------------------------------------------- after the date of any such disposition. However, if I dispose of such -------------------------------------- shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the amount paid for the shares under the option, or (2) the excess of the fair market value of the shares over the option price, measured as if the option had been exercised on the first day of the offering period during which I purchased such shares. The remainder of the gain, if any, recognized on such disposition will be taxed at capital gains rates. 7. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Plan: NAME: (Please print) ________________________________________ First Middle Last ______________________ ________________________________________ Relationship ________________________________________ Address NAME: (Please print) ________________________________________ First Middle Last ______________________ ________________________________________ Relationship ________________________________________ Address Date: ____________________ _____________________________ Signature of Employee _________________________________________________________________ _________________________________________________________________ I do not wish to participate in the Employee Stock Purchase Plan. Date: ___________________ _____________________________________ Signature of Employee EX-10.5 3 BUILDING AGREEMENT FOR LAND AT PRIVATE LOT EXHIBIT 10.5 JTC(L)3729/1379 Pt 1(2745)/KM/ZMY BUILDING AGREEMENT RELATING TO PRIVATE LOT A14547 MUKIM NO. 18 ANG MO KIO AREA: 58,437 SQUARE METRES B E T W E E N J U R 0 N G T 0 W N C 0 R P 0 R A T I 0 N AND SEAGATE TECHNOLOGY INTERNATIONAL BUILDING AGREEMENT FOR LAND --------------------------- AT PRIVATE LOT A14541 IN YIO CHU KANG ------------------------------------- (INLAND) THIS AGREEMENT is made the 30th day of May 1996 BETWEEN JURONG TOWN CORPORATION a body corporate incorporated under the Jurong Town Corporation Act and having its Head office at Jurong Town Hall, Jurong Town Hall Road, Singapore (hereinafter called "the Owner" which expression shall include --------- its successors-in-title and assigns) of the one part AND SEAGATE TECHNOLOGY INTERNATIONAL a company incorporated in Cayman Islands and having its Singapore registered office at 202 KALLANG BAHRU, SEAGATE BUILDING, SINGAPORE 1233 (hereinafter called "the Licensee" which expression shall include its ------------ successors-in-title) of the other part. WHEREBY IT IS AGREED as follows :- 1 For the period of THIRTY (30) months from 30TH day of JANUARY 1995 (hereinafter referred to as "the date hereof") or for such further period as may --------------- be extended by the Owner the Licensee shall have the license and authority to enter upon all that piece of land known as Private Lot A14547 FORMING PART OF GOVERNMENT SURVEY LOTS 242, 8022, 9416, 9417, 9421 AND PART OF STATE RESERVE, MUKIM NO. 18 ANG MO KIO and situated in the Republic of Singapore as shown on the plan annexed hereto and estimated to contain an area of 58,437 square metres more or less subject to survey (hereinafter called "the said land") for the ------------- construction of factory building and other structures therein and for the installation of equipment fixtures and fittings thereat for the purpose of THE MANUFACTURE OF DATA STORAGE HARDWARE, SOFTWARE AND RELATED PRODUCTS ONLY in accordance with the stipulations hereinafter contained and for no other purpose whatsoever. - 2 - 2 The Licensee hereby agrees to perform and observe the following stipulations :- (i) To hold the said land until the same shall be comprised in a lease to be granted as hereinafter provided as licensee upon the same terms relating to the lease referred to in clause 2(ii) herein at the same rent and subject to the same covenants and stipulations so far as applicable as if a lease thereto has been actually granted and so that the owner shall have all the remedies by whatsoever means for rent in arrears that are incidental to the relationship of landlord and tenant but so that nothing herein contained shall be construed as creating a legal demise or any greater interest in the licence than a tenancy at will. (ii) pay in advance as from the date hereof a licence fee calculated at the same rate and on the dates specified as for the rent reserved in the lease of the said land set out in the First Schedule hereto as ------------------ if such lease has actually been granted. (iii) To pay on the owner's behalf to the comptroller of Property Tax an amount equivalent to the sum payable by the owner as property tax in respect of the said land improvements and structures thereon during the said period or of such extended period (if any) permitted under clause 3(c) hereof by way of additional licence fee or for the period prior to the issue of the lease to be granted under clause 4 herein. (iv) To pay interest at the rate of 8.5% per annum or such higher rate as may be determined from time to time by the Owner in respect of any outstanding - 3 - amount payable by the Licensee under this Agreement from the date such amount becomes due until payment in full is received by the owner. (v) To pay to the Owner all survey fees and other charges including those payable to and claimed by the relevant Government Planning Authorities for the survey of the said land for the purpose of sub- division of the land of which the said land forms part and the preparation and issue of a Certificate of Title PROVIDED THAT the Owner shall have the right to employ his own surveyor to carry out the said survey in which event the Licensee shall bear all costs incurred. (vi) At his own cost and expense - (a) to engage a professional engineer to carry out soil investigations to advise on the soil conditions and to design structurally sound buildings proposed to be erected taking into consideration the condition of the said land; and (b) to execute such work as may be required to be done in respect of the state and condition of the said land (especially its ground levels, topography and soil conditions) which state and condition the Licensee shall be deemed to have full knowledge. (vii) Without prejudice to sub-clause (vi) above to submit within three (3) months from the date hereof firstly to the Owner for his approval and then to the relevant Government Planning and Building Authorities full and complete plans elevations and specifications of the buildings proposed to be erected on the said land in accordance in every way - 4 - with the requirements under the Planning Act and the Local Government Integration Act PROVIDED THAT the Owner may give or refuse his approval at his absolute discretion. (viii) At his own cost to commence erection on the said land either within six (6) months from the date hereof or within one (1) month from the date of approval of the plans by the relevant Government Building Authorities, whichever is the earlier, and in a substantial and workman-like manner with the best materials of their available kinds and in conformity in every respect with the plans, elevations, sections and specifications approved by the Owner and the relevant Government Building Authorities to finish the warehousing building, structures and other appurtenances including the installations of all equipment, fixtures and fittings so as to be completely fit for immediate occupation and operation within the said period of thirty (30) MONTHS from the date hereof PROVIDED ALWAYS THAT in the planning, erection, construction and completion of the said buildings, to develop to a gross plot ratio of not less than 1.6 and not more than 2.5 AND PROVIDED FURTHER THAT the Licensee shall not install or use any electrical installation, machine or apparatus that may cause or causes heavy power surge, high frequency voltage and current, air borne noise, vibration or any electrical or mechanical interference or disturbance whatsoever which may prevent or prevents in any way the service or use of any communication system or affects the operation of other equipment, installations, machinery, apparatus or plants of other Licensees. - 5 - (ix) At his own cost to take such steps and execute such works upon the said land as may be necessary for the protection of shores and embankments if any and for the prevention of earth-slip erosion of soil and failure of slopes expeditiously in a workman-like manner and to the satisfaction of the Owner and other relevant governmental and statutory authorities. (x) if the Licensee shall fail to complete the said buildings works and installations and to commence operations within the period specified in clause 2(viii) or within any extended period under clause 3(c) hereof the Licensee shall pay to the Owner a sum calculated at the rate of $50.00 per day as liquidated damages for the period during which the said buildings shall so remain or have remained incomplete. (xi) To remove and replace any materials brought on the said land or used in any of the said buildings works and installations which the owner shall require to be removed as being inferior or unfit and to make good any workmanship which he shall consider imperfect and if the Licensee fails to remedy such defects the Owner may enter upon the said land and remedy such defects at the expense of the Licensee after expiry of fourteen (14) days' notice being given to the Licensee to do so. (xii) Not to erect or build or permit or suffer to be erected or built any building, structure or installation other than those conforming with the plans elevations sections and specifications approved by the Owner and the relevant Government Building Authorities nor to make any alterations in the external elevation of any of the said buildings when erected without the prior consent in writing of the Owner. - 6 - (xiii) In the erection and completion of the said buildings, structures and installations to do all acts and things required by and to perform the works in conformity with all respects with the provisions of any laws or regulations made thereunder and to pay and keep the Owner indemnified against all claims and other payments whatsoever which during the progress of the works may become payable in respect of the said works or of anything done under the authority herein contained and from time to time to discharge and pay all claims, assessments and outgoings now or at any time hereafter be chargeable against the Owner under any law or other-wise in regard to the said land, the said buildings or any structures or installations thereon. (xiv) Not to do or permit or suffer to be done in or upon the said land or any part thereof anything which in the opinion of the owner may be or become a nuisance or annoyance or cause damage or inconvenience to the owner or to the Licensees or occupiers of any adjoining or neighbouring premises or whereby any insurance for the time being effected on the premises under sub-clause (xix) herein may be rendered void or voidable or be in any way affected. (xv) Not to sell or dispose of any earth, clay, gravel or sand from the said land or permit or suffer any of the same to be removed except so far as shall be necessary for the execution of the said works PROVIDED nevertheless that the Licensee may use for the purpose of the said works any of the approved materials if so required. - 7 - (xvi) Not without the prior consent in writing of the Owner to remove or permit or suffer to be removed until after completion of the said buildings in accordance with the provisions herein contained any building materials (other than inferior or unfit materials removed for the purpose of being replaced by proper materials) or plant which shall be brought upon the said land for the purpose of the said works. (xvii) Not without the prior consent in writing of the Owner to affix or exhibit or erect or paint or permit or suffer to be affixed or exhibited or erected or painted on or upon any part of the exterior of the said land or of the external walls or rails or fences thereof any nameplate, signboard, placard, poster or other advertisement or hoarding. (xviii) Not at any time to deposit or make up or manufacture or permit or suffer to be deposited made up or manufactured upon the said land any building or other materials except such as shall be actually required for the buildings to be erected on the said land in accordance with this Agreement and as soon as the buildings hereinbefore agreed to be erected shall be completed at his own expense to remove from the road or footpath adjoining the said land or the ground intended to be used for such road or footpath all building and other materials and waste whatsoever. (xix) As soon as any of the said buildings shall have reached a height of five (5) feet above ground level to insure the same to the full value thereof in the joint names of the Owner and the Licensee against loss or damage by fire in some insurance office approved by the owner and shall increase such insurance proportionately as the said buildings approach completion and to keep the same so insured until a lease shall be granted as hereinafter provided and to pay all premiums thereof at least seven - 8 - (7) days before the expiry date of such insurance policy and to produce to the owner or his agent without demand the policy or policies of such insurance and the receipt for each such payment and in the event the said buildings or any part thereof are destroyed or damaged by fire then to forthwith give to the Owner written notice of such destruction or damage and to forthwith cause all monies received by virtue of any such insurance to be forthwith laid out in rebuilding and reinstating the buildings to the satisfaction of the Owner and to make up any deficiency thereof out of his own monies, but the rebuilding and reinstatement shall in any event commence and be completed within the period specified by the Owner PROVIDED ALWAYS THAT if the Licensee shall at any time fail to keep the premises insured as aforesaid the owner may without being under any obligation to do so do all things necessary to effect or maintain such insurance and any monies expended by him for that purpose shall be repayable by the Licensee on demand and be recovered forthwith from the Licensee as a debt. (xx) Not to assign sublet grant a licence or part with or share his interest under this Agreement, or the possession or occupation of the said land, or any part thereof EXCEPT THAT, subject to the Owner's prior written consent, which consent shall not be unreasonably withheld, the Licensee may mortgage his interest under this Agreement by way of assignment to secure the repayment of such sum or sums as the Licensee may require for the purpose of erecting or completing the building or other structure to be built on the said land in accordance with the provisions of this Agreement PROVIDED THAT the Licensee shall thereafter continue to be liable for the observance and performance of the several stipulations herein contained until the grant of the lease as hereinafter provided. - 9 - (xxi) Not to permit or suffer any person to occupy reside or make use of any building erected on the said land before a Temporary Occupation Permit or a Certificate of Statutory Completion issued by or except with the permission of the relevant Governmental and Statutory authority. (xxii) To make reasonable provision against and be responsible for all loss, injury and damage to any person, (including loss of life) or property including that of the Owner for which the Licensee may be held liable arising out of or in connection with the occupation and use of the said land and the structures erected thereon and to indemnify the Owner against all proceedings, claims, costs and expenses which he may incur or for which he may be held liable as a result of any act, neglect or default of the Licensee his servants, contractors, or agents or their respective servants. (xxiii) To make good and sufficient provision for the safe and efficient disposal of all waste including but not limited to pollutants generated at the said land to the requirements and satisfaction of the Owner and other relevant Governmental and Statutory authorities PROVIDED THAT in the event of any default by the Licensee under this covenant the Owner may carry out such remedial measures as he thinks necessary and costs and expenses incurred thereby shall be recoverable forthwith from the Licensee as a debt. (xxiv) Subject always to clause 2(xx) hereinbefore appearing, to give to the Owner written notice of every change of name within one month from the date of each change. - 10 - (xxv) To construct an internal drainage system to the satisfaction of the Owner to ensure that all surface water collected is discharged into the public drains and will not flow into adjoining properties. (xxvi) To construct and complete a permanent culvert within nine (9) months from the date hereof or any extension thereof as may be approved by the owner and in connection thereof to submit plans to and to obtain the prior approval in writing of the Owner for the construction of a temporary crossing. (xxvii) Within one (1) month of the completion of the permanent culvert mentioned in sub-clause (xxvi) above to remove the temporary crossing and to reinstate any roads, roadside kerbs, drains, turfing or the like damaged by the Licensee, his servants, contractors, sub- contractors, or agents or their respective servants to the satisfaction of the owner and the relevant Governmental and Statutory authorities. (xxviii) Within one (1) month of the completion of the construction of the said buildings and related civil works to reinstate any damage caused to the roads, roadside kerbs, drains, turfing and the said permanent culvert by the Licensee his servants contractors or agents or their respective agents to the satisfaction of the Owner and the relevant Governmental and Statutory authorities, (xxix) To place with the Owner a deposit of $5,000.00 which shall be forfeited in the event of any breach of any of the provisions in sub-clauses (xxvi), (xxvii) and (xxviii) herein without prejudice to the rights and remedies of the owner contained in this Agreement and the Lease. - 11 - (xxx) At his own cost to plant and maintain trees and landscape the said land in accordance with all the requirements of the Parks and Recreation Department, Ministry of National Development and other relevant Governmental and Statutory authorities. (xxxi) At his own cost to execute such work as may be necessary to divert existing utility services such as pipes, cables and the like (if any) to the requirements and satisfaction of the Owner and other relevant Governmental and Statutory authorities. (xxxii) If the Licensee shall at any time be found to have encroached upon any area beyond the allocated boundaries of the said land, the Licensee shall at his own cost and expense, but without prejudice to any other right or remedy the Owner may have against him, immediately or within the time specified (if any) by the Owner rectify and remove the encroachment to the satisfaction of the Owner and pay to the Owner such compensation as may be specified by the Owner. If, however, the owner in his absolute discretion permits the Licensee to regularise and retain the encroached area or any part thereof upon such terms and conditions as may be stipulated by the owner and any other relevant Governmental and Statutory authorities, the Licensee shall pay licence fee on the encroached area with retrospective effect from the date hereof, and the Licensee shall also pay all survey fees, amalgamation fees, legal fees (including solicitor and client costs and expense), and all other costs and charges relating thereto. (xxxiii) If any damage of whatsoever nature or description shall at any time occur or be caused to the said land or any building or structure or installation thereon, or any part thereof, to forthwith give to the Owner written notice of the damage and to remedy the damage to the satisfaction of the Owner within such time as the Owner may specify, all at the cost of the Licensee. (xxxiv) Not to keep or allow to be kept any livestock or other animals on the said land or any part thereof. (xxxv) The licence fees and other taxable sums payable by the Licensee under or in connection with the Licence herein shall be exclusive of the goods and services tax (hereinafter called "tax") chargeable by any government, statutory or tax authority calculated by reference to the amount of the licence fees and any other taxable sums received or receivable by the Owner from the Licensee and which tax is payable by the Licensee. The Licensee shall pay the tax and the owner acting as the collecting agent for the government, statutory or - 11A - tax authority shall collect tax from the Licensee together with the licence fees hereinbefore reserved without any deduction and in advance without demand on the 1st day of each of the months of January, April, July and October, and in the manner and within the period prescribed in accordance with the applicable laws and regulations. (xxxvi) At all times and at his own cost and expense, to comply with and observe any height restriction on buildings and structures at the said land which may be imposed by any governmental or statutory authority and to ensure that the maximum height for all buildings and structures on the said land shall not exceed 70 metres AMSL. (xxxvii) At the Licensee's own cost to construct aesthetically designed high-quality buildings, with extensive landscaping to the satisfaction of the owner in accordance with Clause 4 hereof. The building facade shall front Ang Mo Kio Avenue 5 and the external walls of the buildings shall be either aluminum-clad or tiled or of equivalent standard of materials. (xxxviii) Without prejudice to the generality of Clause 2(xii) and 2(xiii) hereinbefore appearing, the Licencee shall not place, construct or erect or permit the placing, construction or erection of any building, structure or equipment whatsoever on the 6.0 metre and 10.0 metre wide buffers situated within the boundary of the said land as shown on the plan annexed hereto. (xxxix) The Licensee accepts that as infrastructure development, which shall include a permanent road, public sewer, water pipes and street lighting for the whole of Yio Chu Kang area of which the said land forms only a part, is being carried out by the owner and is targetted for completion on or about November 1995 at the earliest, the Licensee shall meanwhile at his own cost make temporary arrangements with the relevant governmental and statutory authorities to obtain public utilities for the Licensee's own needs. (xl) The Licensee accepts the said land with full knowledge that the proposed permanent road and service road shown on the said plan annexed hereto have yet to be constructed and further accepts and agrees at all times to permit the Owner, its contractors, sub- contractors, and their workmen to enter upon the said land facing the said proposed permanent road for purposes of a working area to carry out and complete the said infrastructure development. - 12 - (xli) The Licensee has to liaise with the Owners contractors before placing the temporary crossing to the said land along the proposed road and at his own costs to shift its position from time to time so as not to impede the Owner's infrastructure development programme. (xlii) The Owner shall not be liable to the Licensee or any other person for any claim, demand, action, proceeding, inconvenience, damage, loss, costs whatsoever that may arise in respect of or in connection with Clauses 2(xxxix) to 2(xli) above. (xliii) To ensure that the maximum height of any boundary wall or chain link fence (including the anti-climb) erected by the Licensee at the said land shall not exceed two (2) metres, 3 It is hereby mutually agreed that until the Licensee has performed all his obligations herein contained the owner shall possess the rights and powers following :- a) The right for himself and his agents with or without workmen or others at all reasonable times to enter upon the said land to view the state and progress of the said buildings and works and to inspect and test the materials and workmanship in connection therewith and for any other reasonable purpose including the construction and installation of sewers drains pipes and cables on or leading from any adjoining or neighbouring land of the Owner as may be required by the Owner. b) Full right and liberty in case any of the said buildings and other structures or installations hereby agreed to be erected be not completed and fit for immediate occupation within the period hereinbefore limited (time in this respect shall be of the essence of the contract) and in accordance in every way with the stipulations hereinbefore contained or in case the Licensee shall in any other way fail to perform and observe any of the stipulations on his part herein contained or if any charging order writ of seizure and sale or its equivalent made in respect of the said land or any structure thereon shall be enforced without the written consent of the Owner having first been obtained by the Licensee or by the person in whose favour the charging order writ of seizure and sale or its equivalent shall have been made, to re-enter upon and take possession of the said land and all buildings structures fixtures plant material and effects whatsoever thereon with power to hold and dispose thereof as if this Agreement had not been entered into and without making to the Licensee any compensation or allowance for the same and this Agreement shall thereupon determine but without prejudice to any right of action or other remedy of the owner for the recovery of any licence fee or monies due to him from the Licensee or in respect of any breach of this Agreement PROVIDED ALWAYS THAT if the said - 13 - land has been assigned by way of mortgage the provisions of this clause shall not take effect until the Owner has served upon the mortgagee notice in writing specifying the breach and the mortgagee has failed to remedy such breach. (c) PROVIDED nevertheless that notwithstanding any such default as aforesaid in completing the said buildings and works the owner may in his discretion give notice in writing to the Licensee of his intention not to enforce the stipulations herein contained and may fix any extended period for the completion of the said works in substitution for the said period of two (2) years hereby fixed for such completion and thereupon the obligations hereunder of the Licensee to complete the said works and to accept a lease hereinafter mentioned shall be taken to refer to such substituted period. (d) Without prejudice to the generality of clause 3(b) hereof full right and liberty in the event that the Licensee has failed to either :- (1) develop the said land to the gross plot ratio specified in clause 2(viii), or (2) fulfil the investment criterion as stipulated in Clause 4 with full and absolute discretion to the owner to either : (i) re-enter upon and take possession of the said land or any part thereof and all buildings, structures, fixtures, plant, material and effects whatsoever thereon with power to hold and dispose thereof as if this Agreement had not been entered into and without making to the Licensee any compensation or allowance for the same and this Agreement shall thereupon determine but without prejudice to any right of action or other remedy of the Owner or recovery of any licence fee or monies due to him from the Licensee or in respect of any breach of this Agreement, or - 14 - (ii) reduce the term of lease proportionately as the actual amount invested bears with the required fixed investment on the said land as stipulated in clause 4 in which event the Licensee shall execute such documents as the Owner shall deem necessary and in connection therewith, pay all costs disbursements fees and charges legal or otherwise as provided in clause 5. PROVIDED ALWAYS that if the said land has been assigned by way of mortgage, the provisions of this sub-clause (d) shall not take effect until the Owner had served upon the Mortgagee notice in writing specifying the breach and the Mortgagee has failed to remedy such breach. 3A Without prejudice to Clauses 2(vi) and 2(ix) hereinbefore appearing, the Licensee shall execute and complete site preparation and slope protection works on the said land (hereinafter referred to as the "THE LAND PREPARATION WORKS") in accordance with the requirements and subject to the approval and satisfaction of the Owner by the 30th day of SEPTEMBER 1996, Upon submission of due proof to the satisfaction of the owner on or before the 30TH day of DECEMBER 1996 that the Licensee has duly completed the land preparation works in accordance with this clause and that the Licensee has expended monies for the land preparation works, the Owner shall offset the Licensee's aforesaid expenditure by offsetting the same against the licence fees due on the 30TH day of JANUARY 1997 up to a maximum of DOLLARS ONE MILLION AND FIVE HUNDRED THOUSAND ONLY ($1,500,000/-). Nothing in this clause shall be construed as or deemed to construe that the Owner shall offset or compensate the Licensee for work done or monies expended for the land preparation works in addition to or of better standard than that required by the Owner. 3B The owner shall offset the Licensee's expenditure on the provision of the cables to supply electricity to the Licensee (hereinafter referred to as "ELECTRICITY EXPENDITURE") by offsetting the same against the licence fees due on the 30th day of JANUARY 1997 up to a maximum of DOLLARS EIGHT HUNDRED AND SIXTY -ONE THOUSAND FOUR HUNDRED AND THIRTY-SEVEN ONLY ($861,437.08cts) upon submission of due proof to the satisfaction of the Owner of the electricity expenditure on or before the 30th day of DECEMBER 1996, 4 If the said buildings and works shall have been completely finished to the satisfaction of the Owner and the relevant Government Building Authorities (to be evidenced by their certificates in writing to that effect) within the said period of THIRTY (30) MONTHS or of such extended period (if any) as aforesaid and if the Licensee shall have performed and observed all the stipulations herein on his part contained other than such as may have been waived as aforesaid AND IF THE LICENSEE'S INVESTMENT SHALL HAVE BEEN THE MINIMUM SUM OF $1000/- PER SQUARE METRE OF THE GROSS FLOOR AREA OF THE BUILDING(S) ON BUILDING AND CIVIL WORKS OF WHICH AT LEAST 1.5% OF THE BUILDING AND CIVIL WORKS COST, UP TO A MAXIMUM OF $300,000/- MUST BE ON LANDSCAPING AND THE MINIMUM SUM OF $500/- PER SQUARE METRE OF THE SAID LAND ON PLANT AND MACHINERY WITHIN THIRTY (30) MONTHS - 15 - FROM THE 30TH DAY OF JANUARY 1995 (DUE PROOF OF SUCH INVESTMENT SHALL BE PRODUCED TO THE SATISFACTION OF THE OWNER ON OR BEFORE THE 30TH DAY OF JUNE 1998) then the owner shall grant and the Licensee shall accept and execute a counter-part of one good and sufficient lease or sub-lease of the said land and premises together with the buildings so erected thereon with their appurtenances for the term of THIRTY-TWO (32) YEARS from the 30TH DAY OF JANUARY 1995 at the rent and in the form containing the reservation exceptions covenants conditions and provisions set forth in the FIRST SCHEDULE hereto with such -------------- modifications as circumstances may render necessary and such other covenants conditions or stipulations to be performed by the Licensee governing or regulating the use of the said land as the owner thinks fit with a view to preserving the value thereof or protecting the interests of the licensees or occupiers of land or premises adjacent to the said land from any dangerous or obnoxious or otherwise harmful activities which may be carried out by the Licensee whether or not such activities are incidental to the Licensee's trade PROVIDED THAT until such lease is executed the Licensee shall be deemed to be the Lessee of the said land as though a lease has been executed at the same rent and subject to the covenants and conditions contained in the First Schedule -------------- hereto so far as the same are applicable. 5 The Licensee shall pay all costs disbursements fees and charges legal or otherwise including stamp and registration fees in connection with the preparation stamping and issue of this Agreement and the Lease herein agreed to be granted and any prior accompanying or future documents or deeds supplementary collateral or in any way relating to this Agreement and the lease. 6 The Licensee shall pay all costs and fees legal or otherwise, including the owner's costs as between solicitor and client, in connection with the enforcement of the covenants and conditions of this Agreement and the lease. 7 The Licensee may, at any time during the said period of THIRTY (30) MONTHS and any extensions thereof' granted under clause 3(c) and subject to the prior written consent and the conditions of consent of the owner, terminate this Agreement or surrender part of the said land PROVIDED ALWAYS THAT such termination or surrender shall be without prejudice to any right or remedy of the owner which may have accrued prior to such termination or surrender AND PROVIDED FURTHER THAT the Licensee shall in addition to the licence fee (which at the discretion of the Owner may be apportioned for the period commencing from the date hereof up to the date of delivery of vacant possession of the said land or part thereof to the Owner) survey fees, property tax and other charges specified herein pay to the Owner as liquidated damages a sum made up of firstly an amount equivalent to three (3) months' licence fee, secondly an amount equivalent to one (1) additional year's property tax and thirdly an amount of $500/- being administrative costs or such other sum as may be determined from time to time by the Owner, AND PROVIDED FURTHER THAT before the delivery of vacant possession as aforesaid if the Owner shall so desire the Licensee shall at the cost and expense of the Licensee render the said land or part thereof as the case may be to its original state and condition. - 16 - IN WITNESS WHEREOF the parties hereto have hereunto set their respective hands or seals the day and year first above written. SIGNED on behalf of ) ) THE JURONG TOWN CORPORATION ) ) By : SWEE KEE SIONG ) Deputy Chief Executive ) Officer ) ) ) in the presence of :- ) ............................................ The Common Seal of ) ) ) SEAGATE TECHNOLOGY INTERNATIONAL ) ) ) was hereunto affixed ) ) in the presence of :- ) Signature:/s/ Signature Illegible Name: Designation: Signature:/s/ Signature Illegible Name: Designation: BA(Co Ltd) - 17 - I, an Advocate and solicitor of the Supreme Court of Singapore hereby certify that on the day of 19 the Common Seal of SEAGATE TECHNOLOGY INTERNATIONAL was duly affixed to the within written instrument at Singapore in my presence in accordance with the regulations of the said Company which regulations have been produced and shown to me. Witness my hand this day of 19 ....................... Advocate and Solicitor, Singapore BA(Co Ltd) THE FIRST SCHEDULE ABOVE REFERRED TO L 1 Ver 1 THE LAND TITLES ACT LEASE DESCRIPTION OF LAND - ------------------- CT/SSCT/SCT Property Address MK TS Lot No. Whole or part (if part lot, to Vol Fol state appd new lot/strata lot) 18 (Private Lot A14547) LESSOR - ------ Name: JURONG TOWN CORPORATION Address: a body corporate incorporated under Jurong Town Corporation Act and having its office at Jurong Town Hall, 301 Jurong Town Hall Road, Singapore 2260. (the registered proprietor) HEREBY LEASES the registered estate or interest in the land to LESSEE - ------ I/D/Co Regn NO: Name: SEAGATE TECHNOLOGY INTERNATIONAL Address: a company Incorporated in Cayman islands and having its Singapore registered office at - 2 - FOR TERM OF LEASE - ----------------- Term of Lease: THIRTY-TWO (32) YEARS Commencement date: 30TH DAY OF JANUARY 1995 Consideration : the minimum investment by the Lessee of $1,000/- per square metre of the gross building floor area on building and civil works of which at least 1.5% of the building and civil works cost, up to a maximum of $300,000/must be on landscaping and $500/- per square metre of the demised promises on plant and machinery (hereinafter referred to as "the fixed investment criteria") and YIELDING and PAYING therefor during the said term rent in the manner and at the times set out as follows:- (a) Dollars Five hundred thousand ($500,000/-) only on the 27th day of January 1995; (b) Dollars Twelve million Eight hundred and Forty thousand ($12,840,000/- ) only on the 30th day of January 1997 or immediately upon the issuance by the Building Authority of the Temporary Occupation Permit in respect of any building structure or installation on the demised premises (hereinafter referred to as "TOP") whichever is earlier; (c) Dollars Thirteen million Three hundred and Forty thousand ($13,340,000/-) only on the 30th day of January 1998 or one (1) year from the date of TOP whichever is earlier; (d) Dollars Thirteen million Three hundred and Forty thousand ($13,340,000/-) only on the 30th day of January 1999 or two (2) years from the date of TOP whichever is earlier; (e) Dollars Thirteen million Three hundred and Forty thousand ($13,340,000/-) only on the 10th day of January 2006 or nine (9) years from the date of TOP whichever is earlier; and (f) Dollars Thirteen million Three hundred and Forty thousand ($13,340,000/-) only on the 30th day of January 2012 or fifteen (15) years from the date of TOP whichever is earlier (hereinafter collectively referred to as "the Initial Rent"). AND RESERVING to the Lessor as APPURTENANT TO DESCRIPTION OF LAND - ------------------- CT/SSCT/SCT Lot Property Address MK TS No. whole or part (if part lot, to Volume Folio state appd new lot/strata lot) 18 - 3 - a RIGHT OF PASSAGE AND RUNNING of water soil electricity power gas telephone communication and other similar amenities from the adjoining and neighbouring premises thereon through sewers drains pipes channel cables and ducts upon or under the land hereinafter described and to make connections with such sewers drains pipes channels cables and ducts or any of them for the purpose of exercising the said right of passage and of running the aforesaid amenities over the land hereinafter described.
DESCRIPTION CT/SSCT/SCT Lot Property Address OF LAND MK TS No. Whole or part (if part (Reservation Volume Folio lot, to state appd new of right of lot/strata lot) passage and running of 18 amenities over land hereby transferred)
SUBJECT TO: PRIOR PRIOR ENCUMBRANCE ENCUMBRANCES ----------------- NIL - 4- AND the following :- COVENANTS AND CONDITIONS ------------------------ (a) the covenants, conditions and powers implied by law in instruments of lease (or to such of them as are not hereinafter expressly negatived or modified); (b) the covenants and conditions set forth in the Memorandum of Lease filed in the Registry of Titles and numbered as ML I/30809F with the exception of covenants 1(x), 1(xi) and 1(xxv) of ML I/30809F. SPECIAL COVENANTS AND CONDITIONS -------------------------------- 1 (x) As often as any building or structure on the demised premises or any part thereof shall be destroyed or damaged as aforesaid forthwith to give to the Lessor written notice of such destruction or damage and forthwith to cause all monies received by virtue of such insurance to be laid out in rebuilding and reinstating the same to the satisfaction of the Lessor and in accordance with the plans and specifications approved by the Lessor and in accordance with the laws, bye-laws regulations and planning schemes of every relevant governmental and statutory authority prevailing at the time, and in case the monies so received shall be insufficient for that purpose then to make up the deficiency out of his own monies PROVIDED THAT the rebuilding and reinstatement shall in any event commence and be completed within the period specified by the Lessor. (xi) Not to charge, mortgage, create a trust, demise, assign or transfer the demised premises in whole or in part without first obtaining the consent of the Lessor in writing PROVIDED ALWAYS that any demise, assignment or transfer of the demised premises by the Lessee shall be permitted during the initial lease term of 32 years PROVIDED THAT: (a) such demise, assignment or transfer shall be for an industrial use acceptable to the Lessor; (b) any consent, clearance or approval, if required, of any Governmental or Statutory authorities shall be obtained by the Lessee prior to such demise, assignment or transfer; - 4A - (c) the sale price received for such demise assignment or transfer shall be approved by the Lessor (hereinafter referred to as "the Consideration"); (d) the Lessor and Lessee shall share equally the appreciation in value of the demised premises; (e) the appreciation in the value of the demised premises shall be determined always by the Consideration LESS the cost incurred by the Lessee for the construction of the building and other structures on the demised premises (hereinafter referred to as "the Cost of Building"); and (f) the Cost of Building shall INCLUDE the cost of any improvements made up to the time of such demise, assignment or transfer and shall EXCLUDE any investment on plant and machinery, SUBJECT ALWAYS to due proof of the Cost of Building being produced to the satisfaction of the Lessor. Any consent, if granted by the Lessor shall be given on such terms and conditions as the Lessor shall impose and shall include:- (a) payment of such administrative fee as may be determined by the Lessor; and (b) absolute discretion on the part of the Lessor to require the Lessee to meet the fixed investment criteria and to show due proof thereof within such period of time as the Lessor may stipulate, and in the event of the non-observance thereof, the Lessor shall be entitled to exercise its rights under clause 3(c) herein. For the avoidance of any doubt, the words "meet" in this clause shall include the maintenance of the fixed investment criteria and if it has not been maintained then that it be met. The restrictions contained in Section 17 of the Conveyancing and Law of Property Act (cap. 61) shall not apply. (xxv) Subject always to Clause 1(xi) herein, to give to the Lessor written notice of every change of name within one month from the date of each change. - 4B - (xxxvi) Not to use or permit or suffer the demised premises or any part thereof to be used otherwise than for the MANUFACTURE OF DATA STORAGE HARDWARE, SOFTWARE AND RELATED PRODUCTS ONLY except with the prior consent in writing of the Lessor. In giving its consent, the Lessor may in its absolute discretion require, inter alia, the Lessee to meet the fixed investment criteria and to show due proof within such period of time as the Lessor may stipulate, and in the event of the non-observant thereof, the Lessor shall be entitled to exercise its rights under clause 3(c) of ML I/30809F. For the avoidance of any doubt, the words "meet" in this clause and "met" in clause (xi) shall include the maintenance of the fixed investment criteria and if it has not been maintained then that it be met. (xxxvii) Without prejudice to clause 1(viii) of ML I/30809F to ensure that the gross plot ratio shall not be less than 1.6 and not more than 2.5. (xxxviii) Not to keep or allow to be kept any livestock or other animals at the demised premises or any part thereof. (xxxix) At the Lessee's own cost and expense and subject to the Lessor's prior written approval, to execute such works as may be deemed necessary by the Lessee in respect of the state and condition of the demised premises (especially its ground levels, topography and soil conditions) which state and condition the Lessee shall be deemed to have full knowledge. (xl) Without prejudice to the generality of clauses 1(iii) and 1(vii) in ML I/30809F, the rent and other taxable sums payable by the Lessee under or in connection with this lease shall be exclusive of the goods and services tax (hereinafter called "tax") chargeable by any government, statutory or tax authority calculated by reference to the amount of rent and any other taxable sums received or receivable by the Lessor from the Lessee and which tax is payable by the Lessee. The Lessee shall pay the tax and the Lessor acting as the collecting agent for the government, statutory or tax authority shall collect the tax from the Lessee together with the rent hereinbefore reserved without deduction and in advance without demand on the 1st day of each of the months of January, April, July and October, and in the manner and within the period prescribed in accordance with the applicable laws and regulations. -4C- (xli) At all times and at his own cost and expense, to comply with and observe any height restriction on buildings and structures at the demised premises which may be imposed by any governmental or statutory authority and to ensure that the maximum height for any building and structures on the demised premises shall not exceed 70 metres AMSL. (xlii) Without prejudice to the generality of Clause 1(vii) of ML I/30809F, the Lessee shall not place, construct or erect or permit the placing, construction or erection of any building, structure or equipment whatsoever on the 6.0 metre and 10.0 metre buffers situated within the boundary of the demised premises shown on the plan annexed hereto. (xliii) To ensure that the maximum height of any boundary wall or chain link fence (including the anti-climb) erected by the Lessee at the demised premises shall not exceed two (2) metres. (xliv) Without prejudice to the generality of Clause 1(iv) of ML I/30809F and at the Lessee's own cost, to maintain and upkeep aesthetically designed high-quality buildings (with extensive landscaping) and the external walls of the building(s), which external walls shall be either aluminium clad or tiled or of equivalent standard of materials, all to the approval of and the satisfaction of the Lessor. (xlv) At the termination, by expiry or otherwise, of the term hereby created, to yield up the demised premises to the Lessor in tenantable repair in accordance with the Lessee's covenants herein contained PROVIDED THAT the Lessee shall carry out such decontamination works to and upon the demised premises as may be required by the relevant Governmental and Statutory authorities and if the Lessee shall fail to observe or perform this covenant the Lessor shall execute such works and/or recover the costs thereof from the Lessee - 4D - as a debt together with all rent, tax and other amounts which the Lessor would have been entitled to receive from the Lessee had the period within which such works are effected by the Lessor been added to the said term. (xlvi) Not to let, sublet, underlet or grant a licence or part with or share the possession or occupation of the demised premises in whole or in part, (hereinafter referred to as "such letting") without first obtaining the consent of the Lessor in writing PROVIDED ALWAYS that such letting, by the Lessee shall be permitted:- (a) PROVIDED THAT such letting shall be for an industrial use acceptable to the Lessor; (b) PROVIDED FURTHER that any consent, clearance or approval, if required, of any Governmental or Statutory Authorities shall be obtained by the Lessee prior to such letting; and (c) SUBJECT ALWAYS to the payment of 10% of the total rental, fees or consideration received by the Lessee for such letting, to the Lessor. Any consent, if granted by the Lessor shall be given on such terms and conditions as the Lessor shall impose and shall provide for the payment of such administrative fee and other sums as may be determined by the Lessor, The restrictions contained in Section 17 of the Conveyancing and Law of Property Act (Cap. 61) shall not apply. - 5 - 2A The Lessor further covenants with the Lessee that he shall grant to the Lessee a lease of the demised premises for a further term of THIRTY (30) YEARS (hereinafter referred to as "the further term") from the expiry of the said term upon the same terms and conditions and containing like covenants as are contained in this lease - with the EXCEPTION of the present covenant for renewal PROVIDED THAT: (i) the Lessee shall have made a minimum investment of $1,000/- per square metre of the gross building floor area on building and civil works of which at least 1.5% of the building and civil works cost, up to a maximum of $300,000/- must be on landscaping and $500/- per square metre of the demised premises on plant and machinery, (also referred to as "the fixed investment criteria") within THIRTY (30) months from the 30TH day of JANUARY 1995 and due proof of such investment is produced to the satisfaction of the Lessor on or before the 31ST day of JUNE 1998; (ii) Subject to clause 1(viii) of ML I/30809F, there shall be a gross plot ratio of not less than 1.6 and not more than 2.5; (iii) at the time due proof of such investment is produced and at the expiry of the said term, there be no existing breach or non-observant of any of the covenants and conditions herein contained on the part of the Lessee to be observed or performed; (iv) the rental payable for the further term shall be as set out hereunder; (a) the yearly rent for the further term shall be at the rate based on the market rent at the commencement of the further term (hereinafter referred to as "the Second Initial Rent") which rate shall however be subject to a revision on the 30TH DAY OF JANUARY 2028 to a rate based on the market rent on the date of such revision determined in the manner following but so that the increase shall not exceed 7.6% of the Second Initial Rent; (b) the yearly rent so revised on the 30TH day of JANUARY 2028 shall be subject to revision on the 30TH day of JANUARY of every year thereafter at the rate based on the market rent on the respective dates determined in the manner following but so that the increase shall not exceed 7.6% of the annual rent for each immediately preceding year; - 6- (c) the yearly rent for the further term shall be payable by equal quarterly instalments without any deductions and in advance without demand on the 1st day of each of the months of January, April, July and October in every year of the further term at the office of the Lessor or at such other office as the Lessor may designate the 1st of such payments to be made on or before the commencement of the further term; (d) for the purposes of (a) and (b) above, the market rent shall mean the rent per square metre per annum of the demised premises excluding the buildings and other structures erected thereon and shall be determined by the Lessor on or about the dates mentioned (and payable retrospectively with effect from the dates mentioned if determined after the dates mentioned) and the decision of the Lessor shall be final; (v) if required by the Lessor, the Lessee shall within four (4) months from the commencement of the further term and at his own cost and expense, carry out and complete such improvements to the landscaping at the demises premises as may be stipulated in writing by the Lessor; (vi) the Lessee shall six (6) months before the expiry of the said term submit, for the approval of the Lessor and the relevant governmental and statutory authorities, plans for the upgrading of the exterior of buildings on the demised premises to the same highest quality of new buildings which the Lessor will be building at that time, and the Lessee shall expeditiously do all acts and things necessary to obtain the approval, all the cost and expense of the Lessee; and (vii) the Lessee shall at his own cost and expense complete within eighteen (18) months from the commencement of the further term, the upgrading of the buildings in accordance with the plans approved by the Lessor and the relevant governmental and statutory authorities and to the satisfaction of the Lessor. - 7 - 3 This Lease shall be interpreted in accordance with the laws of Singapore and any legal proceedings, actions or claims arising from or in connection with this Lease herein shall be commenced in and heard before the courts of Singapore and the Lessee agrees to submit itself to the jurisdiction of the courts of Singapore. 5 For avoidance of any doubt, it is hereby agreed and declared that the Initial Rent shall not be repaid or refunded, nor shall the Lessor be liable to repay or refund the Initial Rent, in part or in whole to the Lessee or any other person in the event that the Lessor exercises his right of re-entry under clause 3(c) of ML I/30809F nor in any other event or under any circumstances whatsoever. - 8 - DATE OF LEASE __________________________ EXECUTION THE COMMON SEAL OF ) BY LESSOR ) JURONG TOWN CORPORATION ) ) was hereunto affixed in ) ) the presence of :- ) ....................... CHIEF EXECUTIVE OFFICER ....................... SECRETARY EXECUTION THE COMMON SEAL OF ) BY LESSEE ) ) was hereunto affixed in ) ) the presence of :- ) Signature :...................................... Name : Designation : Signature :...................................... Name : Designation : I, a duly authorised officer of the Jurong Town Corporation, under Section 31 of the Jurong Town Corporation Act (Cap 150) for and on behalf of the Lessor hereby certify that this instrument is correct for the purposes of the Land Titles Act. I, the Solicitor of the Lessee hereby certify that this instrument is correct for the purposes of the Land Titles Act. Lease (Co Ltd) BELOW THIS LINE FOR OFFICE USE ONLY Special Remarks Endorsing Instruction First Schedule: Second Schedule: EXAMINED REGISTERED ON Initials of Signing Officer Date : REGISTRAR OF TITLES ------------------- ML I/30809P OFFICE USE ONLY THE LAND TITLES ACT (CHAPTER 157) M E M 0 R A N D U M ------------------- To the Registrar of Titles On behalf of THE JURONG TOWN CORPORATION, a body corporate incorporated under the Jurong own Corporation Act and having its office at Jurong Town Hall, Jurong Town Hall Road, Singapore, the Registered proprietor. I, GLORIA ONG SIEW CHOO, certify that this memorandum (comprising seven pages), contains the provisions which are deemed to be incorporated in any instrument in which the above mentioned corporation is named as a lessor and such instrument has reference to this memorandum. Signature Authorised Officer Filed in the REGISTRY OF TITLES LODGED BY ON 26TH JUNE, 1990 Jurong Town Corporation Jurong Town Hall Jurong Town Hall Road Singapore 2260 REGISTRAR OF TITLES SPECIAL COVENANTS AND CONDITIONS -------------------------------- 1 The Lessee hereby covenants with the Lessor as follows (i) To pay the yearly rent hereinbefore reserved on the days and in the manner appearing in the reddendum. (ii) To pay unto the Lessor on demand by way of additional rent a sum equal to all such sums as the Lessor may from time to time pay for insuring and keeping insured the demised premises against loss or damage by fire in case the Lessee shall make default in insuring and keeping insured the demised premises pursuant to the covenant in that behalf hereinafter contained PROVIDED ALWAYS THAT nothing herein shall render it obligatory on the part of the Lessor to insure and keep insured the demised premises or any part thereof. (iii) To pay all rates taxes assessments and outgoings whatsoever which now are or which at any time hereafter during the said term may be imposed or charged upon or in respect of the demised premises or any part thereof. (iv) To repair and keep in tenantable repair the demised premises and every part thereof throughout the said term. (v) To pay a reasonable proportion of the expense of constructing repairing rebuilding and cleansing all party walls fences sewers drains pipes water-courses and other things the use of which is common to the demised premises and the occupiers of any adjoining or neighbouring premises and such proportion in the case of a dispute shall be conclusively determined by the Lessor's surveyor for the time being. (vi) To permit the Lessor and his surveyors or agents with or without workmen or others during the said term at reasonable times in the day-time to enter upon the demised premises and every part thereof to examine the state and condition of the same and of defects decays and wants of reparations and of all breaches of covenant there found and the Lessor may thereupon serve on the Lessee notice in writing by leaving the same at or on the demised premises to or for the Lessee to make good the same within such reasonable time as specified in such notice. (vii) To perform and observe all the obligations which the Lessor of the demised premises may be liable to perform or observe during the term hereby created by any direction or requirement of any governmental or statutory authority and if the Lessee shall fail to observe or perform this covenant the Lessor may in its absolute discretion perform the same and all expenses and costs incurred thereby shall be recoverable from the Lessee as a debt PROVIDED ALWAYS THAT the Lessor shall not be liable to the Lessee for any loss damage or inconvenience caused thereby. - 2 - (viii) Not to make or cause to be made any addition or alteration affecting the elevation external structure or stability of the demised premises or any part thereof without the prior written consent of the Lessor and the relevant governmental and statutory authorities PROVIDED THAT on the granting of such consent and without prejudice to other terms and conditions which may be imposed the Lessee shall give to the Lessor security that the proposed addition alteration or rebuilding will in fact be carried out within a reasonable time. (ix) Forthwith to insure and keep insured the demised premises against loss or damage by fire to the full value thereof with a well established insurance company approved by the Lessor and to make all payments necessary for that purpose within seven days after the same shall become payable and upon reasonable notice to produce to the Lessor the policy or policies of such insurance and the receipts for all such payments. (x) As often as the demised premises or any part thereof shall be destroyed or damaged as aforesaid forthwith to cause all monies received by virtue of such insurance to be laid out in rebuilding and reinstating the same in accordance with the plans and specifications approved by the Lessor and in accordance with the existing laws, bye-laws, regulations and planning schemes of every relevant governmental and statutory authority prevailing at the time, and in case the monies so received shall be insufficient for that purpose then to make up the deficiency out of his own monies PROVIDED THAT the rebuilding and reinstatement shall in any event commence and be completed within the period specified by the Lessor. (xi) Not to demise assign mortgage let sublet or underlet or grant a licence or part with or share the possession or occupation of the demised premises in whole or in part without first obtaining the consent of the Lessor in writing. The restrictions contained in Section 17 of the Conveyancing and Law of Property Act (Chapter 61) shall not apply. In addition, the Lessor may in its absolute discretion in giving the consent require, inter alia, that the fixed investment criteria be met and due proof thereof be shown within such period of time as the Lessor may stipulate and in the event of the non-observance thereof, the Lessor shall be entitled to exercise its rights under Clause 3(c) herein. (xii) Within six months of the devolution of the interest of the Lessee not perfected by an assent to give notice thereof in writing with particulars thereof to the Lessor and produce to the Lessor such documentary evidence as may be required by the Lessor. - 3 - (xiii) Not to use the demised premises or any part thereof for any illegal or immoral purpose and not to do or permit or suffer to be done upon the demised premises anything which in the opinion of the Lessor may be or become a nuisance annoyance or cause damage or inconvenience to the Lessor or his lessees or the occupiers of any adjoining or neighbouring premises or whereby any insurance for the time being effected on the demised premises may be rendered void or voidable or be in any way affected. (xiv) Not without the prior consent in writing of the Lessor to affix or exhibit or erect or paint or permit or suffer to be affixed or exhibited or erected or painted on or upon any part of the exterior of the demised premises or of the external rails or fences thereof any nameplate signboard placard poster or other advertisement or hoarding, (xv) To make reasonable provision against and be responsible for all loss injury or damage to any person or property including that of the Lessor for which the Lessee may be held liable arising out of or in connection with the occupation and use of the demised premises and to indemnify the Lessor against all proceedings claims costs and expenses which he may incur or for which he may be held liable as a result of any act neglect or default of the Lessee his servants contractors sub-contractors or agents. (xvi) To pay interest at the rate of 8.5% per annum or such higher rate as may be determined from time to time by the Lessor in respect of any arrears of rent or other outstanding sums due and payable under this Lease from the due dates thereof until payment in full is received by the Lessor. (xvii) At the termination, by expiry or otherwise, of the term hereby created, to yield up the demised premises to the Lessor in tenantable repair in accordance with the Lessee's covenants herein contained PROVIDED THAT, if so required by the Lessor and upon notice thereof, the Lessee shall remove the fixtures and fittings, or any part thereof, as may be specified by the Lessor and reinstate the demised premises to the satisfaction of the Lessor and if the Lessee shall fail to observe or perform this covenant the Lessor shall execute such works and recover the costs thereof from the Lessee as a debt. (xviii) To make good and sufficient provision for the safe and efficient disposal of all waste including but not limited to pollutants to the requirements and satisfaction of the Lessor PROVIDED THAT in the event of default by the Lessee under this covenant the Lessor may carry out such remedial measures as he thinks necessary and all costs and expenses incurred thereby shall forthwith be recoverable from the Lessee as a debt. - 4 - (xix) Not to do or omit or suffer to be done or omitted any act matter or thing in or on the demised premises in respect of the operations business, trade or industry carried out or conducted therein which shall contravene the provisions of any laws, bye-laws, orders, rules or regulations now or hereafter affecting the same but at his own cost and expense to comply with all such provisions and at all times hereafter to indemnify and keep indemnified the Lessor against all actions, proceedings, costs, expenses, claims, fines, losses, penalties and demands in respect of any act matter or thing done or omitted to be done in contravention of the said provisions. (xx) To pay all costs disbursements fees and charges legal or otherwise including stamp and registration fees in connection with the preparation stamping and issue of this Lease and any prior accompanying or future documents or deeds supplementary collateral or in any way relating to this Lease. (xxi) To pay all costs and fees legal or otherwise including costs as between solicitor and client in connection with the enforcement of the covenants and conditions herein. (xxii) To pay to the Lessor all survey fees and other charges including those payable to and claimed by the relevant Government Planning Authorities and other relevant governmental and statutory authorities for the survey of the demised premises for the purpose of sub-division of the land of which the demised premises forms part and issue of this Lease and a Certificate of Title PROVIDED THAT the Lessor shall have the right to employ his own surveyor to carry out the said survey in which event the Lessee shall bear all costs thereby incurred. (xxiii) At his own cost to take such steps and execute such works upon the demised premises as may be necessary for the protection of shores and embankments if any and for the prevention of earthslip erosion of soil and failure of slopes expeditiously in a workmanlike manner and to the satisfaction of the Lessor. (xxiv) To construct an internal drainage system within the demised premises to the satisfaction of the Lessor to ensure that all surface water collected thereon is discharged into the public drains. (xv) Not to effect a change of name except with the prior consent in writing of the Lessor PROVIDED THAT on every change of name the Lessee shall pay to the Lessor a fee to be specified by the Lessor in relation to such consent. (xxvi) To perform and observe the covenants on the Lessor's part contained in the Head Lease made between the President of the Republic of Singapore and the Lessor so far as they are not varied herein and to keep the Lessor indemnified against all claims damages costs and expenses in any way relating thereto. - 5 - (xxvii) To maintain the demised premises and every part thereof in a neat and tidy condition, and forthwith to comply with the Lessor's direction to remove and clear any materials, goods or articles of whatever nature and description from the demised premises or such part thereof as may be stipulated in writing by the Lessor. (xxviii) At his own cost to plant and maintain trees and landscape the demised premises in accordance with all the requirements of the Parks and Recreation Department, Ministry of National Development and other relevant governmental and statutory authorities. (xxix) Not to install or use any electrical installation, machine or apparatus that may cause or causes heavy power surge, high frequency voltage and current, air borne noise, vibration or any electrical or mechanical interference or disturbance whatsoever which may prevent or prevents in any way the service or use of any communication system or affects the operation of other equipment, installations, machinery, apparatus or plants of other Lessees in connection therewith, to allow the Lessor or any authorised person to inspect at all reasonable times, such installation, machine or apparatus in the demised premises to determine the source of the interference or disturbance and thereupon, to take suitable measures, at the Lessee's own expense, to eliminate or reduce such interference or disturbance to the Lessor's satisfaction, if it is found by the Lessor or such authorised person that the Lessee's electrical installation, machine or apparatus is causing or contributing to the said interference or disturbance. (xxx) To indemnify the Lessor against each and every claim, proceeding, action, loss, penalty, damage, expense, cost and demand which may arise in connection with clause (xxix) above. (xxxi) At the Lessee's own cost to execute such works as may be necessary to divert existing utility services such am pipes, cables and the like (if any) to the requirements and satisfaction of the Lessor and other relevant governmental and statutory authorities. (xxxii) Subject to that clause in the Special Covenants and Conditions of this Lease which stipulates the specific use the Lessor permits for the demised premises, the Lessee shall use and shall ensure that at least sixty per centum (60%) of the total floor area of the demised premises shall be used for purely industrial activities, and may use the remaining floor area for ancillary stores and offices, neutral areas, communal facilities and such other uses as may be approved in writing by the Lessor and the relevant governmental and statutory authorities PROVIDED THAT the said ancillary offices shall not exceed twenty-five per centum (25%) of the total floor area AND PROVIDED FURTHER THAT the Lessee shall not use and occupy the demised premises for the purpose of commercial office and storage unrelated to the Lessee's approved industrial activity. - 6 - (xxxiii) If the Lessee shall at any time be found to have encroached upon any area beyond the boundaries of the demised premises, the Lessee shall at his own cost and expenses, but without prejudice to any other right or remedy the Lessor may have against him, immediately or within the time specified (if any) by the Lessor rectify and remove the encroachment to the satisfaction of the Lessor and pay to the Lessor such compensation as may be specified by the Lessor. If, however, the Lessor in his absolute discretion permits the Lessee to regularise and retain the encroached area or any part thereof upon such terms and conditions as may be stipulated by the Lessor and any other relevant governmental and statutory authorities, the Lessee shall pay land rent on the encroached area with retrospective effect from the date of commencement of the term hereby created, and the Lessee shall also pay all survey fees, amalgamation fees, legal fees (including solicitor and client costs and expense), and all other costs and charges relating thereto. (xxxiv) If any damage of whatsoever nature or description shall at any time occur or be caused to the demised premises or any part thereof, to forthwith give to the Lessor written notice of the damage and to remedy the damage to the satisfaction of the Lessor within such time as the Lessor may specify, all at the cost of the Lessee. (xxxv) Not to keep or permit to be used or stored in the demised premises or any part thereof any materials of a dangerous or explosive nature without the prior consent in writing of the Lessor and to keep the Lessor indemnified against all damages claims and action caused by the use of storage of such materials whether or not the same is done with the consent of the Lessor. 2 The Lessor hereby covenants with the Lessee that the Lessee paying the rent hereinbefore reserved and performing and observing the covenants conditions and agreements on the part of the Lessee hereinbefore contained shall peaceably hold and enjoy the demised premises during the term hereby granted without any interruption of or by the Lessor or any person lawfully claiming through under or in trust for him. 3 PROVIDED ALWAYS and it is hereby agreed between the parties as follows :- (a) That no estate or interest in the soil of the road and footpath adjacent to the demised premises is or shall be deemed to be included in the demise hereinbefore contained. (b) That the Lessee shall not be entitled to any right of access of light or air to the demised premises or any part thereof, which would restrict or interfere with the user of any adjoining or neighbouring land for building or any other purpose. - 7 - (c) That if the said rent hereby reserved or any part thereof shall be unpaid for fourteen days after becoming payable (whether the same shall have been formally demanded or not) or if any of the covenants or obligations on the part of the Lessee herein contained shall not be performed or observed or if any charging order made in respect of the demised premises shall be enforced by sale or by entry into possession without the written consent of the Lessor having first been obtained (Section 17 of the Conveyancing and Law of Property Act shall also not apply in such event) by the Lessee or by the person in whose favour the charging order shall have been made, then and in any such case it shall be lawful for the Lessor or any person or persons authorised by him in that behalf at any time thereafter to re-enter upon the demised premises or any part thereof in the name of the whole and thereupon the term hereby created shall absolutely determine but without prejudice to any right of action or remedy of the Lessor in respect of any breach of any of the covenants or conditions by the Lessee herein contained PROVIDED THAT if the demised premises have been assigned by way of mortgage the provisions of this clause shall not take effect until the Lessor has served upon the mortgagee a notice in writing that such breach has occurred and the mortgagee has failed to remedy such breach. 4 In this Lease where the context so requires or permits, words importing the singular number or the masculine gender include the plural number or the feminine gender and words importing persons include corporation and vice versa, the expression "the Lessor" shall include its successors-in-title and assigns, the expression "the Lessee" shall include its successors-in-title and permitted assigns (if any), where there are two or more persons included in the expression "the Lessee" covenants expressed to be made by "the Lessee" shall be deemed to be made by such persons jointly and severally, and except where otherwise provided the expression "the demised premises" shall mean the land hereby demised and all buildings, structures, fixtures and fittings therein. BELOW THIS LINE FOR OFFICE USE ONLY Special Remarks Endorsing Instruction First schedule: Second Schedule: EXAMINED REGISTERED ON Initials of Signing Officer Date: REGISTRAR OF TITLES EX-10.6 4 LEASE AGREEMENT EXHIBIT 10.6 LEASE AGREEMENT between Universal Appliances Limited and Seagate Technology (Thailand) Limited Effective on July 18, 1994 Chandler and Thong-Ek Law Offices Limited 7th Floor, Bubhajit Building 20 North Sathorn Road Bangkok 10500 Thailand Tel: (662) 266-6485 thru 6510 Fax: (662) 266-6483 - 4 LEASE AGREEMENT THIS LEASE is made by and between UNIVERSAL APPLIANCES LIMITED, represented by Mr. John C. K. Sham, the authorized director, having its office at 889 Thai CC Tower, 18th Floor Room No. 183, South Sathorn Road, Yanawa, Sathorn, Bangkok 10120 (hereinafter referred to as "the Lessor") as party of the one part and SEAGATE TECHNOLOGY (Thailand) limited represented by Mr. Pornchai Piemsomboon and Mrs. Jirapannee Supratya, the authorized directors, having its office at 1627 Moo 7, Teparuk Road, Tumbol Teparuk, Amphur Muang, Samutprakarn (hereinafter referred to as "the Lessee") as party of the other part. Both parties hereby agree as follow: 1. PREMISES: The Lessor hereby agrees to lease aid the Lessee hereby agrees to take on lease of a building evidenced by a house registration No. 73 Moo 5, Bangna-Trad Highway Km. 36, Tambol Bangsamak, Amphur Bangpakong, Cha Choeng Soa province; and part of the land evidenced by the title deed (Chanod) No. 13234 for the area of 8 rai, - ngan and 50 square wah and including the facilities built thereon and roadway (hereinafter referred to as the "Premises"), details of which is attached as Schedule 1. 2. PURPOSE OF THE LEASE: The Lessee takes the lease of the Premises for their purpose of furthering its business of assembly of disc drives and its related subassemblies. Lessee shall not make use of the Premises for any unlawful business or purpose. 3. LEASE TERM: 3.1 This Lease shall be for a period of 6 (six) years effective from July 18, 1994 ("Effective Date"). It may be renewed in accordance with Clause 10, Renewal of Lease. The Lease Term of this lease shall be from the July 18, 19941 to the expiration date of July 17, 2000, both days inclusive. 3.2 The parties agree to enter into the Registered Lease Agreement in the form attached hereto in Schedule 2 which shall be registered within 30 (thirty) days from the Effective Date or such later dates as may be mutually agreed upon. Registration fees and stamp duties in connection with registration of the Lease Agreement shall be paid by the Lessee. 4. RENT: 4.1 On the Effective Date, the Lessee agrees to pay one month rent in advance for the amount of Baht 1,206,000 (One Million Two Hundred and Six Thousand Baht only) to the Lessor. This amount shall be deemed as the rent paid for the last month of the Lease Term or any renewal term thereof. 2 4.2 Within the 5th day of the succeeding calendar months, (the first rental is payable within the 5th day of September 1994), the Lessee agrees to pay monthly rent to the Lessor at the rate of Baht 1,206,400 (One Million Two Hundred and Six Thousand Baht only). 4.3 The parties agree that rent shall be adjusted after the first three years of the Lease Term and next 3 year term period of the total 6 year Lease Term and any renewal term thereof. The adjustment of rent shall be based the Lessor and the Lessee. For the purpose of this Clause, "Fair Market Rental Rate" means the amount at which the Premises (without addition renovation or alteration made by the Lessee) would be leased between a willing lessor and a willing lessee, neither being under compulsion, both parties having reasonable knowledge of all relevant facts and with equity to both, and taking into consideration that the lessee shall be responsible for all repairs, as determined by appraisers acceptable to both the Lessor and the Lessee or as provided for herein. 5. DEPOSIT: The Lessee agrees to make a deposit as performance guarantee of the Lease with the Lessor on the Effective Date of this lease in the sum of 3,618,000 (Baht Three Million Six Hundred Eighteen Thousand, the equivalent of 3 (three) months rent, which payment is made to Lessor as directed in writing by the Lessor. Subject to Clauses 9.2 and 9.4, this deposit shall be returned to the Lessee by the Lessor within 7 days from the date on which a notice of returning the Premises is properly given to the Lessor after the Lessee has fully complied with this Lease and has returned the Premises to the Lessor in good condition without causing any damage to the Lessor and the Premises and not owing any rent or other expenses relating to the Premises. If it appears that the Lessee is in breach of any part of this Lease and such breach is not remedied within the period prescribed, the Lessor shall have the right to forfeit all of the deposit. The deposit shall not bear interest and shall not be set off for the rent. 6. LESSEE UNDERTAKINGS: Throughout the Lease Term and/or throughout the period the Lessee occupies the Premises, the Lessee undertakes: 6.1 To pay rent strictly within 5 (Five) days of the due date. If the rent is not paid within such time and the Lessor does not terminate this Lease, the Lessee agrees to pay a fine in the sum equal to 2 (two) percent per month of the rent overdue. 6.2 To strictly observe all rules and regulations published or to be published and informed to the Lessee by the Lessor as well as by Wellgrow Industrial Estate. Copies of the current rules and regulations published by the Lessor and Wellgrow Industrial Estate are attached as Schedule 3. 3 6.3 To use the Premises for lawful business operation only. 6.4 Not to use nor allow any other person to use the Premises as residence or for sleeping purpose for whatever period of time, except as may be required for security with prior written consent of the Lessor. 6.5 Not to cause disturbance or annoyance to other tenants or neighbors. 6.6 Not to affix any advertisement or any signs or any materials whether electric, wire, or aerial within the Premises without prior written consent of the Lessor except the name of the Lessee. 6.7 To repair and maintain the Premises, including systems and equipment in good condition and clean at all times at the cost and expense of the Lessee. 6.8 To allow the Lessor or his representative(s) to enter and inspect the Premises during normal office hours, upon reasonable prior notice given to the Lessee. 6.9 Within 90 (ninety) days before the expiration of the Lease, to allow the Lessor or his representative(s) with any prospective tenants to enter and inspect the Premises at all reasonable times upon reasonable prior notice given to the Lessee. 6.10 Not to keep flammable (except for IPA) or illegal material on the Premises. The Lessee shall not cook any food on the Premises, except in the canteen area. The Lessee shall not cause or permit its business to be used to generate, manufacture, refine, store, handle, produce or process hazardous substances, dangerous or toxic substances or solid waste, except other than as outlined in the product and process instruction and approved by the Wellgrow Industrial Estate Authority of Thailand. 6.11 To alter or renovate the Premises suitable for the Lessee's purpose at his own cost and expenses. Before any alteration or renovation or any facility expansion shall be made, the Lessee shall first obtain written consent from the Lessor, which shall not be unreasonably withheld. Any request properly given by the Lessee to the Lessor, of which the Lessee has not received any reply in writing within 7 days, shall be deemed that the Lessor approves according to such request. All movable properties, i.e. air pipes, electrical wires, telephone wires and water pipes and systems relating to such properties, used in the alteration or renovation which are affixed firmly to the Premises shall, immediately after the expiration of the Lease Term or any renewal thereof, become the property of the Lessor. The Lessee agrees that the Lessee will use of the vacant land which is not under the Premises but is covered under the title deed as referred to in Clause 1 (the "Additional Utilized Area") as carpark and recreation area without any charge, but if the Lessee wishes to use it for other purposes such as construction of any concrete or asphalt structure, the Lessee will have to pay an additional monthly rent on all utilized area or all usable area, whichever, is the greater amount, of such construction on the Additional 4 Utilized Area at the rate of Baht 55 (Fifty-Five Baht Only) per square meter. Such additional lease or use of all the Additional Utilized Area shall be subject to the same terms and conditions herein. The Lessor agrees that all other movable properties, e.g. machinery, equipment and accessories brought onto or installed by the Lessee shall be at all times the Lessee's properties. 6.12 To be responsible for loss or damage to the Lessee's property. 6.13 The Lessee shall have the right to sublease all or any portion of the Premises to any persons of its choice subject to obtaining the prior consent of the Lessor, which consent shall not be unreasonably withheld, and subject to the terms and conditions of this Lease. The Lessor shall cooperate in the registration of any sublease of registering such sublease. The cost shall be borne by the Lessee or its sub-lessee In the special case that the Lessee decides to remove its business from the Premises because the Premises are not suitable for its use due to a condition in the land not apparent before registration of the Registered Lease Agreement, the Lessor hereby consents to either an assignment or a sublease of this Lease to a third party of the Lessee's choice in order to allow the Lessee to recover a portion of its investment in the Premises. 6.14 To pay for the electricity used and recorded by the meter fixed thereto at the rate directly charged by supplier. All payments shall be made directly to supplier. 6.15 To pay for all the water used and recorded by the meter fixed thereto at the rate charged by supplier. All payments shall be made directly to supplier. 6.16 To pay the Telephone Organization of Thailand ("TOT") for the telephone charges at the rate charged by the TOT. 6.17 To pay any applicable fees charged onto the Premises by Wellgrow Industrial Estate. 7. LESSOR'S UNDERTAKINGS AND REPRESENTATIONS: Throughout the period that the Lessee has fully complied with this Lease, the Lessor undertakes and represents that: 7.1 The Lessor has full title to the Premises free and clear to all encumbrances, charges, liens, squatters or other claims including but not limited to suits or notices with respect to violations of any laws or regulations (save for any applicable land and house tax due and payable before the Effective Date of this Lease which shall be solely responsible by the Lessor. Any land and house taxes due and payable after the Effective Date hereof until the expiration of this Lease or any renewal term thereof, shall be reimbursed by the Lessee). 5 Subject to Clause 13, the Lessor agrees not to sell, assign, dispose of, transfer, mortgage or otherwise encumber the Premises or any future or contingent interest in the Premises during the period of this Lease unless with a prior written approval of the Lessee, In the case where the Lessee agrees that the Lessor may sell the Premises the Lessor agrees that this Lease shall not be extinguished by the transfer of ownership of the Premises, if any. The Lessor shall cause the transferee to assume rights and liabilities of the Lessor under this Lease towards the Lessee. The Lessor has the rights and its legal and corporate authorities to lease the Premises to the Lessee for the Lease Term and any renewal period prescribed within. 7.2 The Lessor shall give the Lessee immediate notice in writing of any proposals of the taking over of the Premises or any portion thereof by governmental action of condemnation, nationalization, expropriation, confiscation or otherwise. 7.3 That the Lessee shall enjoy using the Premises without interference from the Lessor or any other person. 7.4 The Lessor shall have no duty to maintain or repair any building systems including, but not limited to all facilities and HVAC. 7.5 On the Effective Date of this Lease, the Lessor shall enter into a service agreement with the Lessee for a provision of certain services in connection with the Premises. Both parties agree to arrange in due course of time for the transfer of utility services received from any governmental agencies to be under the Lessee's name who shall be responsible for providing performance guarantees required under the relevant laws. The Lessee agrees to retransfer such utility services to be under the Lessor's name after the Lease Term or any renewal term thereof. 7.6 Subject to the provision under Clause 6.11, The Lessor agrees that the Lessee may utilize or have the priority right to lease the Additional Utilized Area as allowed thereunder. The Lessor shall not lease or dispose of or create any liens or encumbrances on such Additional Utilized Area throughout the term of this Lease and any renewal period thereof. The parties agree that said Additional Utilized Area shall be subject further to Clause 13. 8. TERMINATION: This Lease shall be terminated if any of the following events occurs: 8.1 The Premises is destroyed, in whole or in part, and the Lessor decides not to restore the Premises to the previous condition or the Lessee determines that the Premises are no longer serving the purpose for which the Lessee entered into this Lease. 8.2 In the event the Lessee is in default or violation of any provision hereof, the Lessor may, at its option, give to the Lessee 30 (thirty) days written notice thereof; and if such default or violation has not been cured or made good within the said 30 (thirty) 6 days, the Lessor may forthwith terminate the Lease and demand or claim against the Lessee for any amount outstanding including any and all damages whatsoever. 8.3 The Lessee shall have the right upon six (6) months prior written notice after the expiration of this Lease, and without payment of penalty or premium, to terminate this Lease. 8.4 After the expiration of the Lease Term, the Lessor shall have the right upon 6 (six) months prior written notice to terminate this Lease if the Lessor decides to sell the Premises to a third party and the Lessee, after it has been offered under Clause 13, refuses to purchase the Premises. 9. RETURN OF THE PREMISES AND DEPOSIT: 9.1 At the end of this Lease, whether by termination, by expiration or by any other reason other that Clauses 7.2, 8. 1, or force majeure, the Lessee shall return the Premises to the Lessor in good condition, wear and tear excepted. 9.2 If, at the time this Lease ends and within 1 month thereafter, the Premises are not in the required condition in the reasonable determination of the Lessor, then the Lessor shall notify the Lessee of the deficiency in the condition of the Premises and the cost of correcting that deficiency. The Lessee shall then be permitted, at its option, to correct the deficiencies in the condition of the Premises; provided, however, that such corrective action must be completed within 60 (sixty) days following the Lessee's receipt of the Lessor's notice of deficiency. If the Lessee does not correct the deficiencies within that period of time, to the Lessor's reasonable determination, the Lessor shall undertake such corrective action. 9.3 If the Lessee fails to return the Premises to the, Lessor, the Lessee agrees to pay damages, at a daily rate equal to the normal daily rent to the Lessor, continuously until the Premises have been repaired to the satisfaction of the Lessor. 9.4 If the security deposit is inadequate to pay for the correction of any deficiency in the condition of the Premises, the Lessee shall pay to the Lessor such additional amounts as are required for this purpose. However, if the Lessee corrects or repairs the deficiencies, the Lessor agrees to return the full amount of deposit as referred to in Clause 5 within 7 days from the date of a notice of returning the Premises is given properly to the Lessor by the Lessee. 10. RENEWAL OF LEASE: The Lessee may, at its option, renew this Lease upon the same terms and conditions prescribed herein except the rent which shall be determined under Clause 4, for 1 (one) term exercise the of 3 (three) years. If the Lessee wishes exercise this option, the Lessee shall notify the Lessor in writing 90 (ninety) days prior to the expiration of this Lease. The renewal period will be subject to the same terms and conditions of this lease. 7 11. INSURANCE: The parties agree that the Lessee shall keep insured the Premises to its full value throughout the Lease Term by specifying the Lessor and Lessee as co- beneficiaries and the Lessee shall have the duty to pay the premium. In the event of any insurance claim in respect of the Premises, the Lessor shall receive the first Baht 95,000,000 (Ninety-five Million Baht only) of any insurance monies recovered. In addition, the Lessor agrees that the Lessee shall be entitled to keep insured the properties brought onto or installed by the Lessee throughout the Lease Term, and the Lessee shall be named as the sole beneficiary or sole loss payee for any insurance proceeds to be received from the insurer(s) or reinsurer(s). 12. ABANDONED PROPERTY: Subject to any prior written request of the Lessee, all of the Lessee's property remaining on the Premises after the termination of this Lease shall be deemed abandoned and may be removed or stored by lessor at the Lessee's expense and risk of loss or damage. 13. PURCHASE OF PREMISES: If at any time from the Effective Date the Lessor shall desire to sell the Premises the Lessor shall notify the Lessee and Lessee shall have the first and exclusive right to purchase at a Fair Market Value, within 60 days of receipt of such notice. Should the Lessee fail to exercise the right, the Lessor, upon expiration of the said period shall be free to sell to any third party provided that the transferee shall be caused by the Lessor to assume rights and obligations of the Lessors against the lessee under this Lease. However, should the Lessor desire to sell the Premises during the renewal period, the Lessor has the right terminate this Lease under Clause 8.4 provided that the Lessee shall also have the same first and exclusive right as mentioned in the first paragraph but the Lessor, without having to cause the transferee to assume rights and obligations hereunder towards the Lessee. For the purpose of this Clause, "Fair Market Value" means the amount for which the Premises (without renovation and/or alteration made onto by the Lessee) would be sold to a willing buyer by a willing seller, neither being under compulsion, both parties having reasonable knowledge of all relevant facts and with equity to both, as agreed to by the parties or as determined by three appraisers acceptable to both the Lessor and the Lessee or as provided for herein. 14. NOTICE: Any notice given hereunder shall be in writing and shall be delivered by hand or registered letter or facsimile to the parties at the addresses set out below or at such other address as shall be advised to the other party in writing upon change. 8 IN WITNESS WHEREOF, this Lease is executed in English and Thai (for the purpose of the lease registration) in triplicate with the same contents. Any discrepancies occur between the Thai and English versions, the parties agree that the English version shall be the governing version in interpreting the intention of the parties under this Agreement. Each party and the competent land officer keeps one copy. Both parties have read and understood its contents before the execution of this Lease. LESSOR: LESSEE: UNIVERSAL APPLIANCES LIMITED SEAGATE TECHNOLOGY (THAILAND)LIMITED Address: 889 Thai CC Tower, Address: 1627 Moo 7, Teparuk Road, 18th Floor Room No. 183, Tumbol Teparuk, Amphur Muang, South Sathom Road, Yannawa, Samutprakarn Sathom, Bangkok 10120 Fax: 210-0165 Fax: 383-5755
By: /s/ John C.K. Sham By: /s/ Pornchai Piemsomboon (Mr. John C. K. Sham) (Mr. Pornchai Piemsomboon Title: Authorized Director Title: Authorized Director ON THIS __ DAY OF JULY 1994 By: /s/ Jirapannee Supratya (Mrs. Jirapannee Supratya) Title: Authorized Director ON THIS ___ DAY OF JULY 1994 By: /s/ Khun Kumkit Kunavonggorakul Witness By:__________________Witness (Khun Kumkit Kunavonggorakul By: /s/ ILLEGIBLE Witness By:__________________Witness
(__________________) (___________________) (in Hong Kong) SCHEDULE 1 DESCRIPTION OF THE PREMISES 1. BUILDING As evidenced by house registration card No. 73 moo 5 Tumbol Bangsamak, Amphur Bangpakong, Cha Choeng Soa province, total area of 13,400 square meters. Building pictures and building plan are attached hereto. 2. LAND, PARTLY As evidenced by Chanod No. 13234, Land ?To. 171, Survey page No. 1138 Book No. 133, Page 34, located at Tumbol Bangsamak, Amphur Bangpakong, Cha Choeng Soa province. Total area under the chanod is 18 rai 3 ngan 61 square wah. Total area under the Lease is 8 rai - ngan 50 square wah. A map showing the boundaries of the land is attached hereto. EX-10.7 5 1991 INCENTIVE STOCK OPTION PLAN EXHIBIT 10.7 SEAGATE TECHNOLOGY, INC. 1991 INCENTIVE STOCK OPTION PLAN (AS AMENDED THROUGH AUGUST 1998) 1. Purposes of the Plan. The purposes of this 1991 Incentive Stock -------------------- Option Plan are: o to attract and retain the best available personnel for positions of substantial responsibility, o to provide additional incentive to Employees and Consultants, and o to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees as ------------- shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the legal requirements relating to --------------- the administration of stock option plans under state corporate and securities laws and the Code. (c) "Board" means the Board of Directors of the Company. ----- (d) "Code" means the Internal Revenue Code of 1986, as amended. ---- (e) "Committee" means a Committee appointed by the Board in --------- accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. ------------ (g) "Company" means Seagate Technology, Inc., a Delaware ------- corporation. (h) "Consultant" means any Director and any person engaged by the ---------- Company or a Parent or Subsidiary to render services and who is compensated for such services. (i) "Continuous Status as an Employee or Consultant" means that the ---------------------------------------------- employment or consulting relationship is not interrupted or terminated by the Company, any Parent or Subsidiary. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; provided, however, that for purposes of Incentive Stock Options, any -1- such leave may not exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; or (ii) transfers between locations of the Company or between the Company, its Parent, its Subsidiaries or its successor. (j) "Director" means a member of the Board. -------- (k) "Disability" means total and permanent disability as defined in ---------- Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, -------- employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (n) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as ---------------------- an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option. -2- (q) "Notice of Grant" means a written notice evidencing certain --------------- terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (r) "Officer" means a person who is an officer of the Company ------- within the meaning of Section 15 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. ------ (t) "Option Agreement" means a written agreement between the ---------------- Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby ----------------------- outstanding options are surrendered in exchange for options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option. -------------- (w) "Optionee" means an Employee or Consultant who holds an -------- outstanding Option. (x) "Parent" means a "parent corporation", whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (y) "Plan" means this 1991 Incentive Stock Option Plan. ---- (aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any ---------- successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (bb) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 12 of the Plan. (cc) "Subsidiary" means a "subsidiary corporation", whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of ------------------------- the Plan, the maximum aggregate number of Shares which may be optioned under the Plan is 49,000,000 Shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. However, should the Company reacquire Shares which were issued pursuant to the exercise of an Option, such Shares shall not become available for future grant under the Plan. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). -3- 4. Administration of the Plan. -------------------------- (a) Procedure. --------- (i) Multiple Administrative Bodies. If permitted by ------------------------------ Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers. (ii) Administration With Respect to Directors and Officers ----------------------------------------------------- Subject to Section 16(b). With respect to Option grants made to Employees who - ------------------------ are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in compliance with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted to comply with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3. (iii) Administration With Respect to Other Persons. With -------------------------------------------- respect to Option grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted to satisfy Applicable Laws. Once appointed, such Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(n) of the Plan; (ii) to select the Consultants and Employees to whom Options may be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; -4- (iv) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (ix) to construe and interpret the terms of the Plan; (x) to prescribe, amend and rescind rules and regulations relating to the Plan; (xi) to modify or amend each Option (subject to Section 14(c) of the Plan); (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xiii) to institute an Option Exchange Program; (xiv) to determine the terms and restrictions applicable to Options; and (xv) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's ---------------------------------- decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. Nonstatutory Stock Options may be granted to Employees ----------- and Consultants. Incentive Stock Options may be granted only to Employees. If otherwise eligible, an Employee or Consultant who has been granted an Option may be granted additional Options. -5- 6. Limitations. ----------- (a) Each Option shall be designated in the Notice of Grant as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value: (i) of Shares subject to an Optionee's incentive stock options granted by the Company, any Parent or Subsidiary, which (ii) become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), incentive stock options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time of grant. (b) Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause. (c) Beginning October 28, 1993, the following limitations shall apply to grants of Options to Officers: (i) no Officer shall be granted in any fiscal year of the Company, Options to purchase more than 160,000 Shares, provided that, a newly- hired Officer may in addition receive a one-time grant of up to 300,000 Shares upon acceptance of employment with the Company; and (ii) over the remaining term of the Plan, no Officer shall be granted Options to purchase more than 500,000 Shares. The foregoing limitations set forth in this Section 6(c) are intended to satisfy the requirements applicable to Options intended to qualify as "performance-based compensation" (within the meaning of Section 162(k) of the Code). In the event the Administrator determines that such limitations are not required to qualify Options as performance-based compensation, the Administrator may modify or eliminate such limitations. 7. Term of Plan. Subject to Section 18 of the Plan, the Plan shall ------------ become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company as described in Section 18 of the Plan. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 14 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Notice -------------- of Grant; provided, however, that in the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock -6- Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Notice of Grant. 9. Option Exercise Price and Consideration. --------------------------------------- (a) Exercise Price. The per share exercise price for the Shares -------------- to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (b) Waiting Period and Exercise Dates. At the time an Option is --------------------------------- granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. In so doing, the Administrator may specify that an Option may not be exercised until the completion of a service period. (c) Form of Consideration. The Administrator shall determine the --------------------- acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; -7- (v) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the Optionee's broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; (vi) any combination of the foregoing methods of payment; or (vii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment or Consulting Relationship. In the ---------------------------------------------------- event that an Optionee's Continuous Status as an Employee or Consultant terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within such period of time as is determined by the Administrator, and only to the extent that the Optionee was entitled to exercise it at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). In the case of an Incentive Stock Option, the Administrator shall determine such period of time (in no event to exceed ninety (90) days from the date of termination) when the Option is granted. If, at the date of termination, the Optionee is not -8- entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. In the event that an Optionee's ---------------------- Continuous Status as an Employee or Consultant terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within six (6) months from the date of such termination, but only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee, ----------------- the Option may be exercised at any time within six (6) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall immediately revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 11. Non-Transferability of Options. ------------------------------ (a) Unless determined otherwise by the Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. (b) An Optionee may file a written designation of a beneficiary who is to receive any options that remain unexercised in the event of the Optionee's death. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (c) Such designation of beneficiary may be changed by the Optionee at any time by written notice, subject to the above spousal consent conditions. In the event of the death of the Optionee and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Optionee's, the Company shall deliver such options to the executor or administrator of the estate of the Optionee, or if no such executor or administrator has been appointed (to the -9- knowledge of the Company), the Company, in its discretion, may deliver such options to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset ---------------------------------------------------------------------- Sale or Change of Control. ------------------------- (a) Changes in Capitalization. Subject to any required action by ------------------------- the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. (c) Merger or Asset Sale. Subject to the provisions of paragraph -------------------- hereof, in the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option shall be substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation does not agree to assume the Option or to substitute an equivalent option, the Administrator shall, in lieu of such assumption or substitution, provide for the Optionee to have the right to exercise the Option as to all or a portion of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If the Administrator makes an Option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option will terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option confers the right to purchase, for each Share subject to the Option immediately prior to the merger or sale of assets, the consideration -10- (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the merger or sale of assets. (d) Change in Control. In the event of a "Change in Control" of ----------------- the Company, as defined in paragraph (e) below, then the following acceleration and valuation provisions shall apply: (i) Except as otherwise determined by the Board, in its discretion, prior to the occurrence of a Change in Control, any Options outstanding on the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested; (ii) Except as otherwise determined by the Board, in its discretion, prior to the occurrence of a Change in Control, all outstanding Options, to the extent they are exercisable and vested (including Options that shall become exercisable and vested pursuant to subparagraph (i) above), shall be terminated in exchange for a cash payment equal to the Change in Control Price (reduced by the exercise price applicable to such Options). These cash proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option by bequest or inheritance. (e) Definition of "Change in Control". For purposes of this --------------------------------- Section 12, a "Change in Control" means the happening of any of the following: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (ii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power repre- -11- sented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; or (iii) A change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company). (f) Change in Control Price. For purposes of this Section 12, ----------------------- "Change in Control Price" shall be, as determined by the Board, (i) the highest Fair Market Value of a Share within the 60 day period immediately preceding the date of determination of the Change in Control Price by the Board (the "60-Day Period"), or (ii) the highest price paid or offered per Share, as determined by the Board, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the 60-Day Period, or (iii) some lower price as the Board, in its discretion, determines to be a reasonable estimate of the fair market value of a Share. 13. Date of Grant. The date of grant of an Option shall be, for all ------------- purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, ------------------------- alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder -------------------- approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. (c) Effect of Amendment or Termination. No amendment, alteration, ---------------------------------- suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. -12- 15. Conditions Upon Issuance of Shares. ---------------------------------- (a) Legal Compliance. Shares shall not be issued pursuant to the ---------------- exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of -------------------------- an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Liability of Company. -------------------- (a) Inability to Obtain Authority. The inability of the Company to ----------------------------- obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. (b) Grants Exceeding Allotted Shares. If the Optioned Stock -------------------------------- covered by an Option exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Option shall be void with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 14(b) of the Plan. 17. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. Shareholder Approval. Continuance of the Plan shall be subject -------------------- to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under applicable federal and state law. -13- 1991 INCENTIVE STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the 1991 Incentive Stock Option Plan (the "Plan") shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT ---------------------------- Optionee's Name Optionee's Address You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Stock Option Agreement, as follows: Grant Number __________________ Date of Grant __________________ Vesting Commencement Date __________________ Exercise Price per Share $ __________________ Total Number of Shares Granted __________________ Total Exercise Price $ __________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________ Vesting Schedule: - ---------------- This Option may be exercised, in whole or in part, in accordance with the following schedule: Termination Period: ------------------ This Option may be exercised for ninety (90) days after termination of employment or consulting relationship, or such longer period as may be applicable upon death or Disability of Optionee as provided in the Plan, but in no event later than the Term/Expiration Date as provided above. II. AGREEMENT --------- 1. Grant of Option. The Plan Administrator of the Company hereby grants --------------- to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee"), an option (the "Option") to purchase a number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. 2. Exercise of Option. ------------------ (a) Right to Exercise. This Option is exercisable during its ----------------- term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. In the event of Optionee's death, Disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of ------------------ an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange -2- upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be ----------------- by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; or (b) check; or (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the Optionee's broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Transferability of Option. This Option may not be transferred in any ------------------------- manner otherwise than by will or by the laws of descent and distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to ---------------- this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. --------------------- (i) Nonqualified Stock Option ("NSO"). If this Option does --------------------------------- not qualify as an ISO, the Optionee may incur regular federal income tax liability upon exercise. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an employee, the Company will be required to withhold -3- from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (ii) Incentive Stock Option ("ISO"). If this Option qualifies ------------------------------ as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. (b) Disposition of Shares. --------------------- (i) NSO. If the Optionee holds NSO Shares for at least one --- year, any gain realized on disposition of the Shares will be treated as long- term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one --- year after exercise AND two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the LESSER OF (A) the difference between the FAIR MARKET VALUE OF THE SHARES ACQUIRED ON THE DATE OF EXERCISE and the aggregate Exercise Price, or (B) the difference between the SALE PRICE of such Shares and the aggregate Exercise Price. (c) Notice of Disqualifying Disposition of ISO Shares. If the ------------------------------------------------- Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. OPTIONEE: SEAGATE TECHNOLOGY, INC. ______________________________ By:___________________________ Signature ______________________________ Title:________________________ Print Name -4- DESIGNATION OF BENEFICIARY -------------------------- In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all of my options that are unexercised at that time. NAME: (Please print) _____________________________________________ (First) (Middle) (Last) ____________________ ______________________________________ Relationship ______________________________________ (Address) Dated: ______________ ______________________________________ Signature of Employee -5- CONSENT OF SPOUSE ----------------- The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. _________________________________________ Spouse of Optionee -6- 1991 INCENTIVE STOCK OPTION PLAN STOCK OPTION AGREEMENT EARLY EXERCISE Unless otherwise defined herein, the terms defined in the 1991 Incentive Stock Option Plan (the "Plan") shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT ---------------------------- Optionee's Name Optionee's Address You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Stock Option Agreement, as follows: Grant Number __________________ Date of Grant __________________ Vesting Commencement Date __________________ Exercise Price per Share $ __________________ Total Number of Shares Granted __________________ Total Exercise Price $ __________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________ Vesting Schedule: - ---------------- This Option vests in accordance with the following schedule: Termination Period: - ------------------ This Option may be exercised for ninety (90) days after termination of employment or consulting relationship, or such longer period as may be applicable upon death or Disability of -1- Optionee as provided in the Plan, but in no event later than the Term/Expiration Date as provided above. II. AGREEMENT --------- 1. Grant of Option. The Plan Administrator of the Company hereby grants --------------- to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee"), an option (the "Option") to purchase a number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. 2. Exercise of Option. ------------------ (a) Right to Exercise. This Option is exercisable during its ----------------- term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement; provided, -------- however,that upon execution of a Restricted Stock Agreement in the form of - ------- Exhibit A-1 hereto and upon compliance with the terms thereof, the Optionee may exercise this Option with respect to unvested shares. In the event of Optionee's death, Disability or other termination of Optionee's employment or consulting relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of ------------------ an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- 3. Method of Payment. Payment of the aggregate Exercise Price shall be ----------------- by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; or (b) check; or (c) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the Optionee's broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (d) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Transferability of Option. This Option may not be transferred in any ------------------------- manner otherwise than by will or by the laws of descent and distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to ---------------- this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. --------------------- (i) Nonqualified Stock Option ("NSO"). If this Option does --------------------------------- not qualify as an ISO, the Optionee may incur regular federal income tax liability upon exercise. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (ii) Incentive Stock Option ("ISO"). If this Option qualifies ------------------------------ as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if -3- any, of the fair market value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. (b) Disposition of Shares. --------------------- (i) NSO. If the Optionee holds NSO Shares for at least one --- year, any gain realized on disposition of the Shares will be treated as long- term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one --- year after exercise AND two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the LESSER OF (A) the difference between the FAIR MARKET VALUE OF THE SHARES ACQUIRED ON THE DATE OF EXERCISE and the aggregate Exercise Price, or (B) the difference between the SALE PRICE of such Shares and the aggregate Exercise Price. (c) Notice of Disqualifying Disposition of ISO Shares. If the ------------------------------------------------- Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. OPTIONEE: SEAGATE TECHNOLOGY, INC. ______________________________ By:___________________________ Signature ______________________________ Title:________________________ Print Name -4- DESIGNATION OF BENEFICIARY -------------------------- In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all of my options that are unexercised at that time. NAME: (Please print) _____________________________________________ (First) (Middle) (Last) ____________________ ______________________________________ Relationship ______________________________________ (Address) Dated: ______________ ______________________________________ Signature of Employee -5- CONSENT OF SPOUSE ----------------- The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. ------------------------- Spouse of Optionee -6- EXHIBIT A --------- 1991 INCENTIVE STOCK OPTION PLAN EXERCISE NOTICE Seagate Technology, Inc. 920 Disc Drive Scotts Valley, California 95066 Attention: Secretary 1. Exercise of Option. Effective as of today, ___________, 199__, the ------------------ undersigned ("Purchaser") hereby elects to purchase _________ shares (the "Shares") of the Common Stock of Seagate Technology, Inc. (the "Company") under and pursuant to the 1991 Incentive Stock Option Plan (the "Plan") and the Stock Option Agreement dated _______________ (the "Option Agreement"). The purchase price for the Shares shall be $__________, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company ------------------- the full purchase price for the Shares. 3. Representations of Optionee. Optionee acknowledges that Optionee has --------------------------- received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Subject to the terms and conditions of this --------------------- Agreement, Optionee shall have all of the rights of a shareholder of the Company with respect to the Shares from and after the date that Optionee delivers full payment of the Exercise Price until such time as Optionee disposes of the Shares. 5. Tax Consultation. Optionee understands that Optionee may suffer ---------------- adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are ------------------------------- incorporated herein by reference. This Exercise Notice, the Plan and the Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and such agreement is governed by Delaware law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: SEAGATE TECHNOLOGY, INC. ______________________________ By:__________________________ Signature ______________________________ Its:___________________________ Print Name Address: Address: - ------- ------- ______________________________ 920 Disc Drive ______________________________ Scotts Valley, California 95066 -2- EXHIBIT A-1 ----------- 1991 INCENTIVE STOCK OPTION PLAN RESTRICTED STOCK AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Purchase Agreement. WHEREAS, the Purchaser named in the Notice of Grant, (the "Purchaser") is an employee or consultant of the Company, and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS, in order to give the Purchaser an opportunity to acquire an equity interest in the Company as an incentive for the Purchaser to participate in the affairs of the Company, the Admin istrator has granted to the Purchaser the right to exercise options relating to unvested shares subject to the terms and conditions of the Plan and the Notice of Grant, which are incorporated herein by reference, and pursuant to this restricted stock purchase agreement (the "Agreement"). THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and ------------- the Purchaser hereby agrees to purchase shares of the Company's Common Stock (the "Shares"), at the exercise price per share and as otherwise described in the Notice of Grant. 2. Payment of Purchase Price. The purchase price for the Shares may be ------------------------- paid by delivery to the Company at the time of execution of this Agreement by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; or (c) surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, AND (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 3. Repurchase Option. ----------------- a. In the event the Purchaser's Continuous Status as an Employee or Consultant terminates for any or no reason (including death or disability) before all of the Shares are released from the Company's repurchase option (see Section 4), the Company shall, upon the date of such termination (as reasonably fixed and determined by the Company) have an irrevocable, exclusive option for a period of sixty (60) days from such date to repurchase up to that number of shares which constitute the Unreleased Shares (as defined in Section 4) at the original purchase price per share (the "Repurchase Price"). Said option shall be exercised by the Company by delivering written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at the Company's option, (i) by delivering to the Purchaser or the Purchaser's executor a check in the amount of the aggregate Repurchase Price, or (ii) by the Company canceling an amount of the Purchaser's indebtedness to the Company equal to the aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals such aggregate Repurchase Price. Upon delivery of such notice and the payment of the aggregate Repurchase Price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. b. Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's purchase rights under this Agreement and purchase all or a part of such Shares; provided that if the Fair Market Value of the Shares to be repurchased on the date of such designation or assignment (the "Repurchase FMV") exceeds the aggregate Repurchase Price of such Shares, then each such designee or assignee shall pay the Company cash equal to the difference between the Repurchase FMV and the aggregate Repurchase Price of such Shares. 4. Release of Shares From Repurchase Option. ---------------------------------------- a. ___________________ (_______) of the Shares shall be released from the Company's repurchase option___________________________________________ ______________________, provided in each case that the Purchaser's Continuous Status as an Employee or Consultant has not terminated prior to the date of any such release. b. Any of the Shares which have not yet been released from the Company's repurchase option are referred to herein as "Unreleased Shares." c. The Shares which have been released from the Company's repurchase option shall be delivered to the Purchaser at the Purchaser's request (see Section 6). 5. Restriction on Transfer. Except for the escrow described in Section 6 ----------------------- or transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until the release of such Shares from the Company's repurchase option in accordance with the provi sions of this Agreement, other than by will or the laws of descent and distribution. 6. Escrow of Shares. ---------------- a. To ensure the availability for delivery of the Purchaser's Unreleased Shares upon repurchase by the Company pursuant to the Company's repurchase option under Section 3 above, the Purchaser shall, upon execution of this Agreement, deliver and deposit with an escrow holder designated by the Company (the "Escrow Holder") the share certificates representing the Unreleased Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached as Exhibit A-3 hereto, until such time as the Company's repurchase option expires. As a further condition to the Company's obligations under this Agreement, the spouse of Purchaser, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4. b. The Escrow Holder shall not be liable for any act it may do or omit to do with respect to holding the Unreleased Shares in escrow and while acting in good faith and in the exercise of its judgment. c. If the Company or any assignee exercises its repurchase option hereunder, the Escrow Holder, upon receipt of written notice of such option exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. d. When the repurchase option has been exercised or expires unexercised or a portion of the Shares has been released from such repurchase option, upon Purchaser's request the Escrow Holder shall promptly cause a new certificate to be issued for such released Shares and shall deliver such certificate to the Company or the Purchaser, as the case may be. e. Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares and receive any cash dividends declared thereon. If, from time to time during the term of the Company's repurchase option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Company's repurchase option. 7. Legends. The share certificate evidencing the Shares issued hereunder ------- shall be endorsed with the following legend (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 8. Adjustment for Stock Split. All references to the number of Shares -------------------------- and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 9. Tax Consequences. The Purchaser has reviewed with the Purchaser's own ---------------- tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the purchase price for the Shares and the Fair Market Value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the right of the Company to buy back the Shares pursuant to its repurchase option. The Purchaser understands that the Purchaser may elect to be taxed at the time the Shares are purchased rather than when and as the Company's repurchase option expires by filing an election under Section 83(b) of the Code with the I.R.S. within 30 days from the date of purchase. The form for making this election is attached as Exhibit A-5 hereto. THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER'S BEHALF. 10. General Provisions. ------------------ a. This Agreement shall be governed by the laws of the State of California. This Agreement, subject to the terms and conditions of the Plan and the Notice of Grant, represents the entire agreement between the parties with respect to the purchase of Common Stock by the Purchaser. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. b. Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party not sending the notice. c. The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. d. Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party from thereafter enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances. e. The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. f. PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE. By Purchaser's signature below, Purchaser represents that he or she is familiar with the terms and provisions of the Plan, and hereby accepts this Agreement subject to all of the terms and provisions thereof. Purchaser has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Purchaser agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement. Purchaser further agrees to notify the Company upon any change in the residence indicated in the Notice of Grant. PURCHASER: SEAGATE TECHNOLOGY, INC. ______________________________ By:____________________________ Signature ______________________________ Title:_________________________ Print Name EXHIBIT A-2 ----------- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I,__________________________, hereby sell, assign and transfer unto__________________________________________________________________ ______________________________ (__________) shares of the Common Stock of Seagate Technology, Inc. standing in my name of the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint _____________________________________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement between Seagate Technology, Inc. and the undersigned dated ______________, 19__. Dated: _______________, 19__ Signature:______________________________ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise its "repurchase option," as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. EXHIBIT A-3 ----------- JOINT ESCROW INSTRUCTIONS ------------------------- ______________________, 19__ Seagate Technology, Inc. 920 Disc Drive Scotts Valley, California 95066 Attention: Secretary Dear Secretary: As Escrow Agent for both Seagate Technology, Inc., a Delaware corporation (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Company's repurchase option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company's repurchase option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company's repurchase option has been exercised, you will deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company's repurchase option. Within 90 days after cessation of Purchaser's continuous employment by or services to the Company, or any parent or subsidiary of the Company, you will deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company's repurchase option. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Seagate Technology, Inc. 920 Disc Drive Scotts Valley, California 95066 PURCHASER: _________________________________ ESCROW AGENT: Seagate Technology, Inc. 920 Disc Drive Scotts Valley, California 95066 Attention: Secretary 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the laws of the State of California. Very truly yours, SEAGATE TECHNOLOGY, INC. By: __________________________ Title: _______________________ PURCHASER: ------------------------------- (Signature) ------------------------------- (Typed or Printed Name) ESCROW AGENT: - --------------------------------- Secretary EXHIBIT A-4 ----------- CONSENT OF SPOUSE ----------------- I,____________________, spouse of___________________, have read and approve the foregoing Agreement. In consideration of granting of the right to my spouse to purchase shares of Seagate Technology, Inc., as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated:_______________, 19____ ______________________________ EXHIBIT A-5 ----------- ELECTION UNDER SECTION 83(b) ---------------------------- OF THE INTERNAL REVENUE CODE OF 1986 ------------------------------------ The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal Tax Code, to include in taxpayer's gross income for the current taxable year, the amount of any compensation taxable to taxpayer in connection with his receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME : TAXPAYER: SPOUSE: ADDRESS: : IDENTIFICATION NO.: TAXPAYER: SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows: __________ shares (the "Shares") of the Common Stock of Seagate Technology, Inc. (the "Company"). 3. The date on which the property was transferred is: ______________, 19__. 4. The property is subject to the following restrictions: The Shares may be repurchased by the Company, or its assignee, on certain events. This right lapses with regard to a portion of the Shares based on the continued performance of services by the taxpayer over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $_______________. 6. The amount (if any) paid for such property is: $_______________. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person per forming the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked - -------------------------------------------------------------------------- except with the consent of the Commissioner. - ------------------------------------------- Dated: _______________, 19__ ___________________________________ _________________________, Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: _______________, 19__ ___________________________________ Spouse of Taxpayer EX-10.14 6 SETTLEMENT AGREEMENT AND RELEASE EXHIBIT 10.14 SEPARATION AGREEMENT AND RELEASE This Separation Agreement and Release ("Agreement") is made by and between Seagate Technology, Inc. (the "Company") and Al Shugart ("Employee"). RECITALS -------- 1. Employee was employed by the Company as its Chief Executive Officer and Chairman of its Board of Directors, and was a member of the Board of Directors of the Company and an officer and/or director of certain of the Company's subsidiaries. 2. The Company and Employee (collectively referred to as "the Parties") wish to document the severance and other benefits the Company has agreed to pay Employee in connection with (i) Employee's termination as Chief Executive Officer and Chairman of the Board of Directors of the Company and for his resignation as a member of the Company's Board of Directors and of each of its subsidiaries and other related companies upon which he serves as a director and/or officer and (ii) the consulting arrangement and restrictive covenants that will be in effect for Employee following such termination. NOW THEREFORE, in connection with the promises made herein, the Company and Employee hereby agree as follows: 1. Termination Date. Employee's termination as Chief Executive Officer ---------------- and Chairman of the Board of Directors of the Company, and as an employee of the Company and of each of its subsidiaries upon which he serves as a director and/or officer is effective as of July 19, 1998 (the "Termination Date"). 2. Payment of Salary; Benefits. Employee will receive his normal salary --------------------------- through the Termination Date and all regular and mandatory payroll deductions will be taken from Employee's final paycheck. Employee's participation in the Company's employee benefit programs shall cease as of the Termination Date, except to the limited extent provided in Sections 5 and 6 below. 3. Severance Payments. Employee will receive $750,000 per annum over the ------------------ three-year period beginning July 20, 1998 and ending July 19, 2001. These payments will be made in equal installments at monthly intervals over the three- year period, with the first payment to be made as of August 31, 1998. All payments will be subject to the Company's collection of applicable withholding taxes. However, all such payments will immediately terminate in the event of a material breach of any of Employee's covenants under Section 9 of this Agreement. 4. Restricted Stock. In November 1995, Employee received a restricted ---------------- stock award for a total of 300,000 shares of the Company's common stock. As of the Termination Date, 145,000 of those shares were unvested. All of Employee's unvested shares shall vest (the Company's repurchase right shall lapse) on the Effective Date of this Agreement (as defined in Section 28 below). At the time of such vesting, Employee will recognize immediate taxable income equal to the fair market value of those previously unvested shares, less the issue price Employee paid for such shares, and Employee agrees to satisfy the applicable withholding taxes on that income before the certificates for the shares will be released. Employee may satisfy the withholding tax obligation by directing the Company to withhold from the vested shares that number of shares having a fair market value equal to the amount required to be withheld, subject to such other limitations and conditions as the Company may impose in connection with applicable legal and accounting considerations. 5. Stock Options. ------------- (a) Employee currently holds outstanding stock options for 1,060,000 shares of the Company's common stock ("Company Options") and for 100,000 shares of the common stock of Seagate Software ("Seagate Software Options"). As of the Termination Date, the Company Options were exercisable for a total of 440,000 shares, and the Seagate Software Options were exercisable for a total of 12,000 shares. The specific breakdown of Employee's vested and unvested stock options as of the Termination Date is also included in attached Schedule A. Subject to Section 5(b) below, Employee's Company Options, to the extent vested and exercisable as of the Termination Date, shall remain exercisable and may be exercised at any time during the Consultancy Period (as defined in Section 8 below) and for the ninety (90)-day period thereafter, subject to the original term of such Company Options. To the extent Employee's Company Options are unvested as of the Termination Date, the Company Options shall continue to vest and may be exercised (to the extent vested) during the Consultancy Period (as defined in Section 8 below) and for the ninety (90)-day period thereafter, subject to the original term of such Company Option. To the extent Employee's Seagate Software Options were vested immediately prior to the Termination Date, Employee agrees to exercise such vested Seagate Software Options on or before August 18, 1998; to the extent such vested Seagate Software Options are not exercised on or before August 18, 1998, they shall be cancelled without consideration to Employee. To the extent Employee's Seagate Software Options were unvested immediately prior to the Termination Date, such unvested Seagate Software Options shall become fully vested and exercisable as of the Effective Date and may be exercised at any time during the Consultancy Period and for the thirty (30)-day period thereafter, subject to the original term of such Seagate Software Options. Employee's Company Options and Seagate Software Options may be exercised by Employee consistent with the procedures available to him prior to the Termination Date. To the extent Employee's options are non-qualified options under the federal income tax laws, Employee will recognize compensation income in connection with his exercise of those options, and agrees to satisfy all applicable withholding taxes associated with each such exercise. (b) The Company previously established a deferred bonus amount with respect to certain of Employee's Company Options. Such bonus amounts are reflected in the attached Schedule A. In consideration of Employee's agreement to exercise certain vested Company Options as provided herein, deferred bonus amounts attributable to Employee's Company Options that were unvested immediately prior to the Termination Date shall be available to reduce the exercise price of such unvested Company Options to the extent such Options vest and are exercised in accordance with Section 5(a) above. In consideration of Employee's eligibility to receive deferred bonus amounts pursuant to the preceding sentence, Employee agrees to exercise on or before October 17, 1998, all of his Company Options that (i) were vested immediately prior to the Termination Date, and (ii) have a per -2- share exercise price at or below $17.00; to the extent such Options are not exercised on or before October 17, 1998, they shall be cancelled without consideration to Employee. 6. Benefits. -------- (a) The Company shall continue to provide Employee, for thirty-six (36) months after the Termination Date, medical and group insurance benefits or such comparable alternative medical and insurance benefits as the Company may, in its discretion, determine to be sufficient to satisfy its obligations to Employee under this Agreement, which are at least as favorable as the most favorable medical and group insurance benefits available to the Company's senior executives as of the Termination Date. Notwithstanding the foregoing, if Employee is covered under any medical or group insurance plan(s) provided by a subsequent employer, then the amount of coverage required to be provided by the Company hereunder shall be reduced by the amount of coverage provided by the subsequent employer's medical or group insurance plan(s). (b) Following Employee's request on or after the Effective Date, the Company shall furnish Employee during the Consultancy Period (as defined in Section 8) with an automobile of Employee's choosing, provided that the retail value of such automobile shall not exceed $50,000. The Company shall remain the legal owner of the automobile and will be responsible for license, insurance and registration thereof. All other costs and expenses relating to the use and maintenance of such automobile shall be the sole responsibility of Employee. Employee agrees to return the automobile to the Company's corporate headquarters in Scotts Valley, California, or such other place as the Parties may mutually agree, on or before the end of the Consultancy Period. 7. Indemnification. Employee shall be entitled to indemnification, in --------------- accordance with the applicable provisions of the Company's articles of incorporation and bylaws, against all expense, liability and loss (including attorneys' fees and settlement payments) that Employee may incur by reason of any action, suit or proceeding arising from or relating to the performance of Employee's duties as an officer or director of the Company or any of its subsidiaries. The Company agrees to maintain directors and officers coverage for Employee's benefit during the Consultancy Period (as defined in Section 8 below). 8. Consulting. As a condition to, and in consideration for, the ---------- severance benefits Employee is to receive herein, Employee agrees to make himself available to perform consulting services reasonably requested of him during the three (3)-year period beginning July 20, 1998 and ending July 19, 2001 (the "Consultancy Period"). Employee agrees to make himself reasonably available to render up to 30 hours of consulting services per each of the Company's fiscal quarters during the Consultancy Period, provided that such consulting services do not materially conflict with Employee's then-existing activities or commitments. All assignments will come from the Chief Executive Officer of the Company, and Employee will report directly to such person with respect to each assignment. Should Employee be requested to render more than the required 30 hours of consulting services per fiscal quarter, then Employee will be compensated for those additional hours at an hourly rate to be agreed upon by Employee and the Chief Executive Officer of the Company at the time such consulting services are to be rendered. Employee will be reimbursed for all reasonable out-of-pocket expenses incurred in rendering such consulting services upon Employee's submission of appropriate documentation for those expenses. During the Consultancy Period, Employee will not make any representations to any third party -3- that he is an officer or employee of the Company and, following his resignation as a member of the Company's Board of Directors, a director of the Company. Any proprietary information or other confidential information of the Company to which he may have access in the performance of his consulting services will be held in confidence and will not be disclosed to any third party otherwise directly or indirectly used by Employee, except to the extent necessary to perform his consulting services. 9. Employee Covenants. As a condition to, and a consideration for, the ------------------ severance and other benefits Employee is to receive herein, Employee agrees that: (a) he will not, at any time during the three (3)-year period beginning July 20, 1998 and ending July 19, 2001, directly or indirectly, whether for his own account or as an employee, director, consultant or advisor, provide services to any business enterprise that is at the time in competition with any of the Company's or any of its subsidiaries' existing product lines or business activities as of the Effective Date and that is located geographically in an area where the Company or any of its subsidiaries maintains substantial business activities, unless Employee obtains the prior written consent of the Company's Chief Executive Officer, or (b) he will not, at any time during the three (3)-year period beginning July 20, 1998 and ending July 19, 2001, directly or indirectly solicit any individuals to leave the Company's (or any of its subsidiaries') employ for any reason or interfere in any other manner with the employment relationships at the time existing between the Company (or any of its subsidiaries) and its current or prospective employees; provided, however, that Employee shall not be considered to have interfered with existing employment relationships in the event he responds to good faith inquiries initiated other than by Employee, or (c) he will not, at any time during the three (3)-year period beginning July 20, 1998 and ending July 19, 2001, induce or attempt to induce any customer, supplier, distributor, licensor, licensee or other business relation of the Company (or any of its subsidiaries) to cease doing business with the Company (or any of its subsidiaries) or in any way interfere with the existing business relationship between any such customer, supplier, distributor, licensor, licensee or other business relation and the Company (or any of its subsidiaries), or (d) he will not, at any time during the four and one-half (4 1/2)-year period beginning July 20, 1998 and ending January 19, 2002, disparage, defame or slander the Company (or any of its subsidiaries) or any of their (i) officers (within the meaning of Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended, hereinafter "Officers") or directors as of the Termination Date, (ii) then-existing directors, or (iii) any of its products or services, to any one, including but not limited to any past, present or prospective customers. The foregoing sentence is not applicable to comments Employee makes to his immediate family. For such four and one- half (4 1/2) year-period the Company's Board of Directors and its current Officers shall refrain from disparagement, defamation or slander of Employee. (e) he will resign as a member of the boards of the Company's subsidiaries (as applicable) on or before delivery of a fully executed copy of this Agreement and will transfer to -4- the Company (or its designee) any and all shares he currently owns or holds in the Company's foreign subsidiaries (such transfer to occur within fifteen (15) days of the Effective Date). Employee shall resign as a member of the Company's Board of Directors as of the Effective Date. Employee acknowledges that monetary damages may not be sufficient to compensate the Company for any economic loss that may be incurred by reason of Employee's breach of the foregoing restrictive covenants. Accordingly, in the event of any such breach, the Company will, in addition to the cessation of the severance benefits provided Employee under this Agreement and any remedies available to the Company at law, be entitled to obtain equitable relief in the form of an injunction precluding Employee from continuing to engage in such breach. In the event of any material breach by the Company of its obligation to Employee under Section 9(d) above, the Company shall pay Employee liquidated damages in the amount of $100,000 for each such breach. 10. Confidential Information. Employee shall continue to maintain the ------------------------ confidentiality of all confidential and proprietary information of the Company. 11. Payment of Salary. The Company represents and Employee acknowledges ----------------- and represents that the Company has paid (or will pay pursuant to the terms of the applicable plan or program) all salary, wages, bonuses, commissions and any and all other benefits due to Employee through the Employee's Termination Date. 12. Release of Claims. Employee agrees that the foregoing consideration ----------------- represents settlement in full of all outstanding obligations owed to Employee by the Company or any subsidiary of the Company. Employee and the Company, on behalf of themselves and their respective heirs, agents, representatives, immediate family members, executors, successors, and assigns, hereby fully and forever release each other and their respective heirs, agents, directors, employees, attorneys, investors, shareholders, administrators, affiliates, divisions, subsidiaries, parents, predecessor and successor corporations, and assigns, and agree not to sue or otherwise institute or cause to be instituted any legal or administrative proceedings concerning, any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that either of them may possess against the other arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation, (a) any and all claims relating to or arising from Employee's relationship with the Company or any subsidiary of the Company and the termination of that relationship; (b) any and all claims relating to, or arising from, Employee's right to purchase, or actual purchase of shares of stock of the Company or any subsidiary of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law; -5- (c) any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; invasion of privacy; false imprisonment; and conversion; (d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, The Worker Adjustment and Retraining Notification Act, Older Workers Benefit Protection Act; the California Fair Employment and Housing Act, and the California Labor Code; (e) any and all claims for violation of the federal, or any state, constitution; (f) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and (g) any and all claims for attorneys' fees and costs. Each of the Parties agrees that the release set forth in this Section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. Each of the Parties acknowledges and agrees that any breach of this Section shall construe a material breach of the Agreement and in the case of a breach by Employee, shall entitle the Company immediately to recover the monetary consideration discussed in Section 3 above. If any legal action or other legal proceeding relating to the enforcement of any provision of this Agreement is brought by either Party hereto, the prevailing Party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (in addition to any other relief to which the prevailing Party may be entitled). 13. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges --------------------------------------------- that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and release is knowing and voluntary. Employee and the Company agree that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date of this Agreement. Employee acknowledges that the consideration given for this waiver and release Agreement is in addition to anything of value to which Employee was already entitled. Employee further acknowledges that he has been advised by this writing that (a) he should consult with an attorney prior to executing this Agreement; (b) he has at least twenty- ----- one (21) days within which to consider this Agreement; (c) he has seven (7) days following the execution of this Agreement by the Parties to revoke the Agreement; and (d) this Agreement shall not be effective until the revocation period has expired. Any revocation should be in writing and delivered to Tom Mulvaney, Senior Vice President and General Counsel, Seagate Technology, Inc., 920 Disc Drive, Scotts Valley, CA 95066, by close of business on the seventh day from the date that Employee signs this Agreement. -6- 14. Civil Code Section 1542. Employee and the Company each represent that ----------------------- neither is aware of any claim other than the claims that are released by this Agreement. Employee and the Company each acknowledge that they have been advised by legal counsel and are familiar with the provisions of California Civil Code Section 1542, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Employee and the Company, being aware of said code section, agree to expressly waive any rights they may have thereunder, as well as under any other federal or state statute or common law principles of similar effect. 15. No Pending or Future Lawsuits. Each Party represents to the other ----------------------------- that he or it has no lawsuits, claims, or actions pending in his or its name, or on behalf of any other person or entity, against the other or any other person or entity referred to herein. Each Party also represents to the other that as of the Effective Date, he or it does not have any basis for, and does not intend to bring any claims on his or its own behalf or on behalf of any other person or entity against the other or any other person or entity referred to herein. 16. Application for Employment. Employee understands and agrees that, as -------------------------- a condition of this Agreement, he shall not be entitled to any employment with the Company, its parents, its subsidiaries, or any successor, and he hereby waives any right, or alleged right, of employment or re-employment with the Company, its parents, its subsidiaries and any successor. Subject to the terms of this Agreement, Employee also waives any right to work as an independent contractor for the Company, its subsidiaries, its parents and any successor. Employee further agrees that he will not apply for employment with the Company, its subsidiaries, its parents, or related companies, or any successor and will not apply to work as an independent contractor for the Company, its parents, its subsidiaries or any successor. 17. Confidentiality. The Parties agree to maintain in complete confidence --------------- the contents and terms of this Agreement, and the consideration for this Agreement. The Parties may disclose Employee's status as a consultant to the Company and agree to disclose the contents and terms of this Agreement only to Employee's immediate family and to those attorneys, accountants, tribunals and governmental entities who have a reasonable need to know (or as required by applicable law or governmental agency or tribunal) the contents and terms of this Agreement to prevent disclosure of the contents and terms of this Agreement to other third parties. 18. No Cooperation. Employee and the Company agree that he or it will not -------------- counsel or assist any attorneys or their clients in the presentation or prosecution of any lawsuits, disputes, claims, charges, or complaints by any third party against the other (including in the case of the Company any subsidiary of the Company, and/or any officer, director, employee, agent, representative, shareholder or attorney of the Company or any subsidiary in his, her or its capacity as such on behalf of the Company or any -7- subsidiary) unless under a subpoena, court order or otherwise required by law to do so. Nothing in this Section 18 shall preclude Employee from exercising his rights as a stockholder of the Company. 19. Tax Consequences. The Company makes no representations or warranties ---------------- with respect to the tax consequences of the payment of any sums to Employee under the terms of this Agreement. Employee agrees and understands that he is responsible for payment, if any, of local, state and/or federal taxes on the sums paid hereunder by the Company and any penalties or assessments thereon. 20. Costs. The Parties shall each bear their own costs, expert fees, ----- attorneys' fees and other fees incurred in connection with this Agreement. 21. Non-Binding Mediation. The Parties shall make a good faith attempt to --------------------- resolve any dispute or claim arising out of or related to this Agreement through negotiation. In the event that any dispute or claim arising out of or related to this Agreement is not settled by the Parties, the Parties will attempt in good faith to resolve such dispute or claim by non-binding mediation in Santa Cruz, California to be conducted by JAMS-Endispute or such other mediator as the parties shall mutually agree. The mediation shall be held within thirty (30) days of the request therefor. The costs of mediation shall be shared equally by the Parties to the mediation. 22. Authority. The Company represents and warrants that the undersigned --------- has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein. 23. No Representations. Each Party represents that it has had the ------------------ opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement. 24. Severability. In the event that any provision hereof becomes or is ------------ declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 25. Entire Agreement. This Agreement represent the entire agreement and ---------------- understanding between the Company and Employee concerning the subject matter herein, and supersede and replace any and all prior agreements and understandings. 26. No Oral Modification. This Agreement may only be amended in writing -------------------- signed by Employee and the Chief Executive Officer of the Company. 27. Governing Law. This Agreement shall be governed by the internal ------------- substantive laws, but not the choice of law rules, of the State of California. -8- 28. Effective Date. This Agreement is effective eight days after it has -------------- been signed by both Parties (the "Effective Date"). 29. Office Space. Employee agrees that he will vacate his current office ------------ at the Company's corporate headquarters in Scotts Valley, California by August 15, 1998. 30. Paintings. Employee hereby conveys, without consideration to --------- Employee, all right, title and interest in all paintings previously provided to the Company and its subsidiaries by Rita Shugart. 31. Counterparts. This Agreement may be executed in counterparts, and ------------ each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. 32. Voluntary Execution of Agreement. This Agreement is executed -------------------------------- voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that: (a) They have read this Agreement; (b) They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; (c) They understand the terms and consequences of this Agreement and of the releases it contains; (d) They are fully aware of the legal and binding effect of this Agreement. IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below. SEAGATE TECHNOLOGY, INC. Dated: 7/29/98 By /s/ Stephen J. Luezo ________________ __________________________________ AL SHUGART, an individual Dated: 7/29/98 /s/ Al Shugart ________________ _____________________________________ Al Shugart -9- EX-13.1 7 PORTIONS OF THE 1998 ANNUAL REPORT EXHIBIT 13.1 SEAGATE TECHNOLOGY, INC. ANNUAL REPORT TO STOCKHOLDERS SELECTED FINANCIAL DATA
FISCAL YEAR ENDED In millions, except July 3, June 27, June 28, June 30, July 1, per share data 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------- Revenue $6,819 $8,940 $8,588 $7,256 $5,865 Gross margin 989 2,022 1,581 1,373 1,171 Income (loss) from operations (686) 858 287 459 473 Income (loss) before extraordinary gain (530) 658 213 313 330 Net income (loss) (530) 658 213 319 330 Basic income (loss) per share before extraordinary gain (2.17) 2.82 1.07 1.64 1.76 Basic net income (loss) per share (2.17) 2.82 1.07 1.67 1.76 Diluted income (loss) per share before extraordinary gain (2.17) 2.62 .97 1.44 1.56 Diluted net income (loss) per share (2.17) 2.62 .97 1.47 1.56 Total assets 5,645 6,723 5,240 4,900 4,308 Long-term debt, less current portion 704 702 798 1,066 1,177 Stockholders' equity $2,937 $3,476 $2,466 $1,936 $1,635 Number of shares used in per share computations: Basic 243.6 233.6 199.7 190.6 186.9 Diluted 243.6 257.9 236.1 244.7 235.8
The 1998 results of operations include a $347 million restructuring charge, a $223 million write-off of in-process research and development incurred primarily in connection with the acquisition of Quinta Corporation, a $76 million charge for mark-to-market adjustments on certain of the Company's foreign currency forward exchange contracts and a $22 million reduction in the charge recorded in 1997 as a result of the adverse judgment in the Amstrad PLC litigation (see "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The 1997 results of operations include a $153 million charge as a result of the adverse judgment in the Amstrad PLC litigation. The 1996 results of operations include a $242 million restructuring charge as a result of the merger with Conner Peripherals, Inc. and a $99 million write-off of in-process research and development incurred in connection with the acquisition of software companies. The 1995 results of operations include a $73 million write-off of in-process research and development incurred in connection with business acquisitions. Prior periods have been restated to reflect the merger with Conner Peripherals, Inc. in February 1996 on a pooling of interests basis, a two-for-one stock split, effected in the form of a stock dividend, in November 1996, and Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," adopted in the second quarter of fiscal 1998. 1 QUARTERLY/1998 Unaudited, in millions except per share data 1st 2nd 3rd 4th ________________________________________________________________________________ Revenue $1,896 $1,673 $1,675 $1,575 Gross margin 295 192 204 298 Income (loss) from operations (200) (277) (221) 12 Net income (loss) (240) (183) (129) 22 Net income (loss) per share: Basic (.98) (.75) (.53) .09 Diluted (.98) (.75) (.53) .09 Price range per share: Low 34-1/8 18-7/16 17-3/4 19-7/16 High $45-3/4 $40-5/8 $27-3/16 $29-5/8 The results for the first quarter include a $216 million write-off of in-process research and development incurred primarily in connection with the acquisition of Quinta Corporation and a $63 million charge for mark-to-market adjustments on certain of the Company's foreign currency forward exchange contracts. The results for the second quarter include a $205 million restructuring charge, a $22 million reduction in the $153 million charge recorded in 1997 as a result of the adverse judgment in the Amstrad PLC litigation (See "Management's Discussion and Analysis of Financial Condition and Results of Operations") and a $13 million charge for mark-to-market adjustments on certain of the Company's foreign currency forward exchange contracts. The results for the third quarter include a $142 million restructuring charge. The results for the fourth quarter include a $7 million write-off of in-process research and development incurred in connection with the acquisition of Eastman Software Storage Management Group, Inc. in June 1998. Prior periods have been restated to reflect SFAS 128, "Earnings Per Share," adopted in the second quarter of fiscal 1998. QUARTERLY/1997 Unaudited, in millions except per share data 1st 2nd 3rd 4th ________________________________________________________________________________ Revenue $2,061 $ 2,400 $ 2,502 $1,977 Gross margin 393 541 631 457 Income from operations 174 289 347 48 Net income 129 213 257 59 Net income per share: Basic .61 .94 1.04 .24 Diluted .53 .84 1.01 .23 Price range per share: Low 18-1/16 25-7/8 37-3/8 32-1/2 2 High $29-5/16 $42-3/4 $56-1/4 $54-1/4 The results for the first quarter include the reversal of restructuring charges of $10 million related to the completion of certain aspects of the restructuring in connection with the merger with Conner Peripherals, Inc. at a lower cost than originally estimated. The results for the third quarter include compensation expense and in-process research and development charges of $13 million and $3 million, respectively, in connection with additional amounts paid with respect to the June 1996 acquisition of Holistic Systems Ltd. The results for the fourth quarter include a $153 million charge as a result of the adverse judgment in the Amstrad PLC litigation (See "Management's Discussion and Analysis of Financial Condition and Results of Operations") and restructuring charges of $3 million related to certain software operations. Prior periods have been restated to reflect a two-for-one stock split, effected in the form of a stock dividend, in November 1996 and SFAS 128, "Earnings Per Share," adopted in the second quarter of fiscal 1998. STOCK AND DIVIDEND INFORMATION The Company's common stock trades on the New York Stock Exchange under the symbol "SEG." The price range per share, reflected in the above tables, is the highest and lowest sale prices for the Company's stock as reported by the New York Stock Exchange during each quarter. The Company's present policy is to retain its earnings to finance future growth. The Company has never paid cash dividends and has no present intention to pay cash dividends. At July 3, 1998, there were 7,821 stockholders of record of the Company's common stock. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the five-year summary of selected financial data and the Company's consolidated financial statements and the notes thereto. All references to years represent fiscal years unless otherwise noted. In November 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. CERTAIN FORWARD-LOOKING INFORMATION Certain statements in this Management's Discussion and Analysis ("MD&A"), elsewhere in this Annual Report to Stockholders and in the Company's Annual Report on Form 10-K for the Fiscal Year Ended July 3, 1998 into which this MD&A is incorporated are forward-looking statements based on current expectations, and entail various risks and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements. Certain of these risks and uncertainties are set forth below under "Foreign Currency Risks," "Factors Affecting Future Operating Results," elsewhere in this MD&A, elsewhere in this Annual Report to Stockholders and in the Company's Annual Report on Form 10-K for 1998. These forward-looking statements include the statements relating to continued price erosion in the first paragraph under "Results of Operations - 1998 vs 1997," the statements relating to continued expansion into complementary markets and write-offs of in-process research and development in the sixth paragraph under "Results of Operations - 1998 vs 1997," the statements relating to the 1999 effective tax rate in the tenth paragraph under "Results of Operations - 1998 vs 1997," the statements relating to the IRS adjustments in the last paragraph under "Results of Operations - 1998 vs 1997," the statements regarding the decline in value of the Thai baht and Malaysian ringgit relative to the U.S. dollar and future movements in currency exchange rates under "Disclosures about Market Risk - Foreign Currency Risk," the statements regarding capital expenditures in the third paragraph under "Liquidity and Capital Resources," the statements regarding continued expansion into complementary markets in the sixth paragraph under "Liquidity and Capital Resources," the statements regarding the sufficiency of the Company's resources in the last paragraph under "Liquidity and Capital Resources," the statements under "Factors Affecting Future Operating Results," and the statements in the Litigation note to the consolidated financial statements, among others. BUSINESS Seagate operates in a single industry segment by designing, manufacturing and marketing products for storage, retrieval and management of data on computer and data communications systems. These products include disc drives and disc drive components, tape drives and software. The Company designs, manufactures and markets a broad line of rigid magnetic disc drives for use in 3 computer systems ranging from desktop personal computers to workstations and supercomputers as well as in multimedia applications such as digital video and video-on-demand. The Company sells its products to original equipment manufacturers for inclusion in their computer systems or subsystems, and to distributors, resellers, dealers and retailers. In addition, the Company markets a broad line of Travan, Digital Audio Tape (DAT) and Advanced Intelligent Tape (AIT) products. These products are dedicated back-up storage peripherals designed to meet the needs of market segments ranging from desktop PCs to midrange servers. The Company has pursued a strategy of vertical integration and accordingly designs and manufactures rigid disc drive components including recording heads, discs, substrates, motors and custom integrated circuits. It also assembles certain of the key subassemblies for use in its products including printed circuit board and head stack assemblies. The Company has also invested in, and currently intends to continue investigating opportunities to invest in software activities. The Company anticipates that users of computer systems will increasingly rely upon client/server network computing environments and believes that as this reliance increases, users will demand software that more efficiently and securely stores, manages and accesses data and transforms it into usable information. As such, the Company has broadened its core competencies to include software products and technologies to meet these requirements. RESULTS OF OPERATIONS The following table sets forth certain items in the Company's Consolidated Statements of Operations as a percentage of revenue for each of the three years in the period ended July 3, 1998. Percentage of Revenue --------------------- 1998 1997 1996 ------------------------------------------------------------------------------ Revenue 100% 100% 100% Cost of sales 85 77 82 ---- ---- ---- Gross margin 15 23 18 Product development 9 5 5 Marketing and administrative 7 6 6 Amortization of goodwill and other intangibles 1 - - In-process research and development 3 - 1 Restructuring 5 - 3 Unusual items - 2 - ---- ---- ---- Income (loss) from operations (10) 10 3 Other income, net - - 1 ---- ---- ---- Income (loss) before income taxes (10) 10 4 Benefit (provision) for income taxes 2 (3) (1) ---- ---- ---- Net income (loss) (8)% 7% 3% ==== ==== ==== 1998 VS 1997 Revenue in 1998 was 24% lower than that reported in 1997. The decrease in revenue from the prior year was due primarily to a continuing decline in the average unit sales prices of the Company's products as a result of intensely competitive market conditions, a lower level of unit shipments reflecting continuing 4 weakness in demand for the Company's disc drive products and a shift in mix away from the Company's higher priced products. The Company expects that price erosion in the data storage industry will continue for the foreseeable future. This competition and continuing price erosion may adversely affect the Company's results of operations in any given quarter and such an adverse effect often cannot be anticipated until late in any given quarter. The decrease in gross margin as a percentage of revenue from the prior year was primarily due to a continuing decline in the average unit sales prices of the Company's products, particularly its desktop products, as a result of intensely competitive market conditions, lower revenue and a shift in mix away from the Company's higher performance disc drives, partially offset by a reduction in material and scrap costs per unit, increased consolidated revenue and an increase in revenue of the Company's Seagate Software, Inc. subsidiary ("Seagate Software") which subsidiary's products generally have higher gross margins. Excluding the gross margin of Seagate Software, the Company's gross margins would have been 11% and 22% in 1998 and 1997, respectively. Product development expenses increased by $126 million (27%) compared with 1997, primarily due to increases in salaries and related costs, increases in allocated occupancy costs, payments or accruals for such payments to former shareholders of Quinta Corporation ("Quinta"), acquired by the Company in August 1997, for achievement of certain product development milestones, and an overall increase in the Company's product development efforts. The Company's product development activities include efforts to improve its time-to-market performance, the development of ultra-high capacity disc drive technologies, including a new optically-assisted Winchester (OAW) technology being developed by Quinta and development efforts related to its software and tape drive products. These increases in expenses were partially offset by substantially reduced employee profit sharing and executive bonuses in 1998. Marketing and administrative expenses increased by $9 million (2%) compared with 1997, primarily due to increases in advertising and promotion expenses, increased marketing and administrative expenses related to the Company's software products and services, particularly those of Seagate Software's Information Management Group and increases in salaries and related costs. These increases in expenses were partially offset by decreases in allocated occupancy costs, substantially reduced employee profit sharing and executive bonuses in 1998, lower legal expenses and a reduction in the provision for bad debts. The Company expects to take an $8 million to $10 million charge in the first quarter of fiscal 1999 associated with a separation agreement entered into between Alan F. Shugart, the Company's former Chief Executive Officer, and the Company in July 1998. Amortization of goodwill and other intangibles decreased by $10 million (20%) compared with 1997, primarily due to the inclusion in amortization expense of the write-down of goodwill and the write-offs and write-downs in 1997 of certain intangible assets related to past acquisitions of software companies whose value had become permanently impaired and the resultant subsequent reduction in amortization expense, partially offset by additional amortization related to goodwill and intangibles arising from the Company's additional investment in Dragon Systems, Inc. ("Dragon") in September 1997. Of the $223 million charge for the write-off of in-process research and development, $214 million was a result of the August 1997 acquisition of Quinta and $7 million was a result of the June 1998 acquisition of Eastman Software Storage Management Group, Inc. ("ESSMG"). In April and June 1997, Seagate invested an aggregate of $20 million to acquire approximately ten percent (10%) of Quinta's stock. In August 1997, the Company completed the acquisition of Quinta. Pursuant to the purchase agreement with Quinta, the shareholders of Quinta, other than Seagate, received cash payments aggregating $230 million upon the closing of the acquisition and were eligible to receive additional cash payments aggregating $95 million upon the achievement of certain product development and early production milestones. Of the $95 million, $19 million was paid or accrued in fiscal 1998. In July 1998, the Company and Quinta amended the purchase agreement to eliminate the product development and early production milestones and provide that the former shareholders of Quinta will be eligible to receive the remaining $76 million and the $14 million that had been accrued but unpaid in fiscal 1998. In the first quarter of fiscal 1999, the Company expects to take a charge to operations for the remaining $76 million. See Acquisitions note to the consolidated financial statements. The Company intends to continue its expansion into software and other complementary data technology markets and therefore currently intends to pursue discussions with companies that fit with its strategy. As a result, the Company expects that it will continue to incur charges for in-process research and development as it acquires companies. In the quarters ended January 2, 1998 and April 3, 1998, the Company recorded restructuring charges aggregating $347 million. These charges reflect steps the Company is taking to align worldwide operations with current market conditions and to improve the productivity of its operations and the efficiency of its development efforts. The restructuring charges comprised $57 million for reduction of personnel due to closure or consolidation of certain operations, $78 million for closure of excess facilities, $148 million to write off or write down equipment whose value had become permanently impaired, intangibles and other assets, and $64 million for contract 5 cancellations and other expenses. These charges are comprised of cash and non- cash items of $144 million and $203 million, respectively. The net book value of equipment disposed of or to be disposed of as a result of implementation of the restructuring plan is $181 million. Valuation of these assets was based on estimated fair values. Amstrad PLC ("Amstrad") initiated a lawsuit against the Company in 1992 concerning the Company's sale of allegedly defective disc drives to Amstrad. On November 6, 1997, the Company and Amstrad settled all of the outstanding disputes. The settlement resulted in a $22 million reduction in 1998 against the $153 million charge recorded in 1997. The $22 million reduction and the $153 million charge are included in unusual items in the Consolidated Statements of Operations for 1998 and 1997, respectively. Net other income in 1998 decreased by $51 million, compared with 1997, primarily due to charges for mark-to-market adjustments in 1998 of $76 million on certain of the Company's foreign currency forward exchange contracts for the Thai baht and the Malaysian ringgit. Additionally there was an increase in interest expense due to higher average levels of long-term debt outstanding, partially offset by a decrease in the charge for minority interest as a result of lower income in the Company's majority-owned subsidiary in Shenzhen, China. The Company recorded a $174 million benefit from income taxes at an effective rate of 25% in 1998 compared with a $233 million provision for income taxes at an effective rate of 26% in 1997. The change in income taxes was primarily due to the loss from operations incurred in 1998. Excluding the acquisition of Quinta, certain non-recurring restructuring costs and the reversal of certain Amstrad litigation charges, the effective tax rate was approximately 28% in 1998. Excluding the Amstrad litigation charge, the effective tax rate was approximately 28% in 1997. While the Company expects the 1999 effective tax rate before unusual items to approximate 28%, the actual effective tax rate may vary from this rate if, for example, the Company incurs charges in connection with future acquisitions. The Company provided income taxes at the U.S. statutory rate of 35% in 1998 on substantially all of its earnings from foreign subsidiaries compared with approximately 66% of such earnings in 1997. A substantial portion of the Company's Far East manufacturing operations in Singapore, Thailand, Malaysia and China operate free of tax under various tax holidays which expire in whole or in part during fiscal years 1999 through 2005. The tax holidays had no impact on the net loss in 1998. The net impact of these tax holidays was to increase net income by approximately $71 million ($0.28 per share, diluted) in 1997. The Company received a statutory notice of deficiency dated June 27, 1997 from the Internal Revenue Service relative to taxable years 1991 through 1993 assessing potential deficiencies approximating $39 million plus interest and approximately $6 million of penalties. The Company petitioned the United States Tax Court on September 24, 1997 for a re-determination of the deficiencies. The Company believes that the outcome of this matter will not have a material adverse effect on its financial position or results of operations. The Company received a statutory notice of deficiency dated June 12, 1998 from the Internal Revenue Service relative to Conner's taxable years 1991 and 1992 assessing potential deficiencies approximating $11 million plus interest. The Company believes it has meritorious defenses to the Internal Revenue Service adjustments but has not yet determined the forum in which it will contest the proposed deficiencies. The Company believes that the outcome of this matter will not have a material adverse effect on its financial position or results of operations. 1997 VS 1996 Revenue in 1997 was 4% higher than that reported in 1996. The increase in revenue over the prior 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. Revenue decreased to $1.977 billion in the fourth quarter of 1997 from $2.502 billion in the third quarter of 1997 as a result of weakness in customer demand, primarily for the Company's higher performance products. The decreased sales adversely impacted the Company's gross margins and results of operations for the fourth quarter of 1997. The rigid disc drive industry in which the Company operates is characterized by declining unit sales prices over the life of a product. The increase in gross margin as a percentage of revenue over the prior year was primarily due to improvements in gross margins for the Company's desktop disc drive products, as well as a shift in mix to the Company's newer, higher capacity and higher performance disc drives, particularly those with capacities greater than 4 gigabytes, and a reduction in certain product costs, such as material, scrap and warranty costs per unit. These factors were partially offset by a continuing decline in the average unit sales prices of the Company's products as a result of competitive market conditions. Product development expenses increased by $39 million (9%) compared with 1996, primarily due to increases in salaries and related costs, materials and depreciation as well as increasing product development expenses related to the Company's software products and services. Marketing and administrative expenses increased by $7 million (1%) compared with 1996, primarily due to 6 increasing marketing and administrative expenses related to the Company's software products and services. These increases in expenses were substantially offset by cost savings in non-software activities resulting from the combination of the operations of the Company and Conner pursuant to the February 1996 merger of the two companies. These cost savings were primarily in the areas of salaries and related costs, outside services, advertising and promotion, legal expenses and allocated occupancy costs. Amortization of goodwill and other intangibles increased by $3 million (6%) compared with 1996, primarily due to the write-offs and write-downs of certain intangible assets related to past acquisitions of software companies whose value had become permanently impaired and a full year of amortization in 1997, as compared with a partial year in 1996, of certain intangible assets arising from acquisitions of software companies in 1996. The increase in amortization from 1996 was partially offset by write-offs, in 1996, of certain intangible assets related to past acquisitions of tape drive and software companies whose value had become permanently impaired. See Acquisitions note to consolidated financial statements. The $3 million charge for in-process research and development in 1997 was incurred in connection with additional amounts paid with respect to the June 1996 acquisition of Holistic Systems Ltd. During fiscal year 1996, the Company recorded restructuring charges totaling $242 million as a result of the merger with Conner. During 1997, the Company reversed $10 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. The reversal consisted of $5 million in severances and benefits, $4 million in excess facilities and $1 million in other expenses. Implementation of the restructure plan was substantially complete as of June 27, 1997. Partially offsetting the $10 million reversal was a $3 million charge for restructuring costs recorded by Seagate Software. Unusual items in 1997 consisted of a $153 million charge as a result of the judgment adverse to the Company in the Amstrad litigation and $13 million for compensation expense in connection with additional amounts paid with respect to the June 1996 acquisition of Holistic Systems Ltd. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -Results of Operations - 1998 vs 1997." Net other income decreased by $11 million compared with 1996, primarily due to an increase in the charge for minority interest as a result of higher income in the Company's majority-owned subsidiary in Shenzhen, China, an increase in amortization of premiums on foreign currency option contracts and mark-to-market losses on foreign currency forward exchange contracts partially offset by lower interest expense as a result of the redemption or conversion of the Company's 5%, 6.5% and 6.75% convertible subordinated debentures. The provision for income taxes increased by $115 million in 1997, primarily due to the increase in pretax earnings in 1997 partially offset by a decrease in the effective tax rate from 36% in 1996 to 26% in 1997. The higher effective tax rate in 1996 was primarily due to nondeductible charges associated with the merger with Conner and other acquisitions. Excluding the Amstrad litigation charge, the effective tax rate was approximately 28% in 1997. Excluding the restructuring costs, nonrecurring merger-related costs and the write-off of in- process research and development, the effective tax rate was approximately 30% in 1996. The Company provided income taxes at the U.S. statutory rate of 35% in 1997 on approximately 66% of its earnings from foreign subsidiaries compared with approximately 64% of such earnings in 1996. A substantial portion of the Company's Far East manufacturing operations in Singapore, Thailand, Malaysia and China operate free of tax under various tax holidays. The net impact of these tax holidays was to increase net income by approximately $71 million ($0.28 per share, diluted) in 1997 and approximately $50 million ($0.21 per share, diluted) in 1996. DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio and long- term debt obligations. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, the Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. The Company mitigates default risk by investing in only the safest and highest credit quality securities and by constantly positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer, guarantor or depository. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The Company has no cash flow exposure due to rate changes for long-term debt obligations. The Company primarily enters into debt obligations to support general corporate purposes including capital expenditures and working capital needs. 7 The table below presents principal (or notional) amounts and related weighted average interest rates by year of maturity for the Company's investment portfolio and debt obligations. All investments mature, by policy, in three years or less, except for certain types of investments that may mature in more than three years but whose weighted average maturity is three years or less.
Fair Value ---------- In millions 1999 2000 2001 2002 2003 Thereafter Total July 3, 1998 - -------------------------------------------------------------------------------------------------- Assets Cash equivalents Fixed rate $ 574 $ - $ - $ - $ - $ - $ 574 $ 572 Average interest rate 5.37% - - - - - 5.37% Short-term investments Fixed rate 285 304 369 - - - 958 961 Average interest rate 5.81% 6.25% 6.05% - - - 6.04% Variable rate 200 - - - - - 200 200 Average interest rate 5.62% - - - - - 5.62% Total investment securities 1,059 304 369 - - - 1,732* 1,732 Average interest rate 5.54% 6.25% 6.05% - - - 5.77% Long-Term Debt Fixed rate - - - - - 700 700 693 Average interest rate - - - - - 7.33% 7.33%
*Includes $2 million of unaccreted interest to be received at maturity. FOREIGN CURRENCY RISK The Company transacts business in various foreign countries. Its primary foreign currency cash flows are in emerging market countries in Asia and in certain European countries. During 1998 and 1997, the Company employed a foreign currency hedging program utilizing foreign currency forward exchange contracts and purchased currency options to hedge local currency cash flows for payroll, inventory, other operating expenditures and fixed asset purchases in Singapore, Thailand and Malaysia. Under this program, increases or decreases in the Company's local currency operating expenses and other cash outflows, as translated into U.S. dollars, are partially offset by realized gains and losses on the hedging instruments. The goal of this hedging program is to economically guarantee or lock in the exchange rates on the Company's foreign currency cash outflows rather than to eliminate the possibility of short-term earnings volatility. Based on uncertainty in the Southeast Asian foreign currency markets, the Company has temporarily suspended purchasing foreign currency forward exchange and option contracts for the Thai baht, Malaysian ringgit and Singapore dollar. The Company does not use foreign currency forward exchange contracts or purchased currency options for trading purposes. Under the Company's foreign currency hedging program, gains and losses related to qualified hedges of firm commitments and anticipated transactions are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. All other foreign currency hedge contracts are marked-to-market and unrealized gains and losses are included in current period net income. Because not all economic hedges qualify as accounting hedges, unrealized gains and losses may be recognized in income in advance of the actual foreign currency cash flows. This mismatch of accounting gains and losses and foreign currency cash flows was especially pronounced during the first and second quarters of fiscal 1998 as a result of the declines in value of the Thai baht and Malaysian ringgit, relative to the U.S. dollar. This mismatch resulted in a pre-tax charge of $76 million for the year ended July 3, 1998. The table below provides information as of June 27, 1997 about the Company's derivative financial instruments, comprised of foreign currency forward exchange contracts and purchased currency options. The information is provided in U.S. dollar equivalent amounts, as presented in the Company's financial statements. For foreign currency forward exchange contracts, the table presents the notional amounts (at the contract exchange rates) and the weighted average contractual foreign currency exchange rates. As of July 3, 1998, the Company had effectively closed out all of its foreign currency forward exchange contracts by purchasing offsetting contracts and the remaining foreign currency market risk from derivative financial instruments is not material. 8
June 27, 1997 ------------------------------------ Notional Average Estimated In millions, except average contract rate Amount Contract Rate Fair Value* - --------------------------------------------------------------------------------- Foreign currency forward exchange contracts: Malaysian ringgit $ 264 2.53 $ (1) Singapore dollar 284 1.39 (5) Thai baht 458 26.57 (5) ------ ---- $1,006 $(11) Purchased currency options: Malaysian ringgit $ 82 2.53 $ 1 Singapore dollar 244 1.39 1 ------ ---- $ 326 $ 2
*Equivalent to the unrealized net gain (loss) on existing contracts. OTHER For 1998, the net gain resulting from the remeasurement of foreign financial statements into U.S. dollars was $17 million. Such net gains (losses) did not have a significant effect on the results of operations for 1997 or 1996. The effect of inflation on operating results for 1998, 1997 and 1996 has been insignificant. The Company believes this is due to the absence of any significant inflation factors in the industry in which the Company participates. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997, and will be adopted by the Company for its fiscal year 1999. Adoption of this pronouncement is not expected to have a material impact on the Company's financial statements. Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting Standards No. 14 and changes the way public companies report segment information. This statement is effective for fiscal years beginning after December 15, 1997 and will be adopted by the Company for its fiscal year 1999. Adoption of this pronouncement is not expected to have a material impact on the Company's financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that derivatives be recognized in the balance sheet at fair value and specifies the accounting for changes in fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, and will be adopted by the Company for its fiscal year 2000. The Company is in the process of assessing the impact of this pronouncement on its financial statements. In the second quarter of 1998, the Company implemented Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the requirements of SFAS 128. The adoption of SFAS 128 did not have a material impact on the Company's earnings per share. In October 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an alternative to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APBO 25") and requires additional disclosures. Effective with the Company's fiscal year ended June 27, 1997, the Company has continued to account for its employee stock plans in accordance with the provisions of APBO 25 while providing the additional disclosures required by SFAS 123. Accordingly, SFAS 123 has no impact on the Company's financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES At July 3, 1998, the Company's cash, cash equivalents and short-term investments totaled $1.827 billion, a decrease of $456 million from the prior year-end balances. This decrease was primarily a result of expenditures of $709 million for property, equipment and leasehold improvements, the payment of $194 million in connection with 9 the acquisition of Quinta, net of cash acquired, the net payment of $123 million in connection with the adverse judgement in the Amstrad PLC litigation and the repurchase of approximately 4 million shares of the Company's common stock for $105 million, partially offset by net cash provided by operating activities. Until required for other purposes, the Company's cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase, while its short-term investments primarily consist of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. As of July 3, 1998, the Company had committed lines of credit of $61 million which can be used for standby letters of credit or bankers' guarantees. At July 3, 1998, these lines of credit were fully utilized. The Company made investments in property and equipment in 1998 totaling $698 million. This amount comprised $248 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 Northern Ireland; $231 million for manufacturing facilities and equipment for the recording head operations in the United States, Malaysia, Northern Ireland, the Philippines and Thailand; $190 million for expansion of the Company's thin-film media operations in California, Singapore, Northern Ireland and Mexico; and $29 million for other purposes. The Company presently anticipates investments of approximately $700 million in property and equipment in 1999. The Company plans to finance these investments from existing cash balances and future cash flows from operations. During the year ended July 3, 1998 the Company acquired approximately 4 million shares of its common stock for approximately $105 million. The repurchase of these shares was primarily in connection with a stock repurchase program announced in June 1997 in which up to $600 million of the Company's common stock was authorized to be acquired in the open market. During the year ended June 27, 1997, the Company issued senior debt securities totaling $700 million principal amount with interest rates ranging from 7.125% to 7.875% and maturities ranging from seven years to forty years. In April and June 1997, Seagate invested an aggregate of $20 million to acquire approximately ten percent (10%) of Quinta's stock. In August 1997, the Company completed the acquisition of Quinta. Pursuant to the purchase agreement with Quinta, the shareholders of Quinta, other than Seagate, received cash payments aggregating $230 million upon the closing of the acquisition and were eligible to receive additional cash payments aggregating $95 million upon the achievement of certain product development and early production milestones. Of the $95 million, $19 million was paid or accrued in fiscal 1998. In July 1998, the Company and Quinta amended the purchase agreement to eliminate the product development and early production milestones and provide that the former shareholders of Quinta will be eligible to receive the remaining $76 million and the $14 million that had been accrued but unpaid in fiscal 1998. The Company intends to continue its expansion into software and other complementary data technology markets and therefore currently intends to pursue discussions with companies that fit with its strategy. The Company plans to finance this expansion primarily through cash flows from operations and existing cash balances. The Company believes that its cash balances together with cash flows from operations and its borrowing capacity will be sufficient to meet its working capital needs for the foreseeable future. 10 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. 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, remains strong. Delays in the development, introduction and ramping of production of new products has in the past and may in the future significantly adversely impact operating results. 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 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. Many of these new drive products require increased storage capacity and more advanced technology. The increased difficulty and complexity associated with production of higher capacity disc drives increases the likelihood of reliability, quality or operability problems that could result in reduced bookings, increased manufacturing rework and scrap costs, increased service and warranty costs and a decline in the Company's competitive position. There is also significant demand in the personal computer market for computer systems costing less than $1000. The Company is positioning itself to participate in this market, however, there can be no assurance that the Company will be able to produce disc drives for this market at a cost low enough to yield gross margins comparable to those of its current overall product mix. 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 or interruptions in the production of 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, the Company's ability to attract and retain key technical employees, foreign currency exchange fluctuations (see "Disclosures about Market Risk - Foreign Currency Risk"), increased competition and general economic and industry fluctuations. For example, revenue decreased to $6.819 billion in fiscal 1998 from $8.940 billion in fiscal 1997 as a result of increased competition resulting in significant price decreases and continuing weakness in demand for the Company's disc drive products. 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 Litigation note to the consolidated financial statements. The Company has experienced and expects to continue to experience intense competition from a number of domestic and foreign companies. These companies include the other leading independent disc drive manufacturers as well as large integrated multinational manufacturers such as Fujitsu Limited, Hyundai Electronics America (Maxtor Corporation), International Business Machines Corporation, NEC Corporation, Samsung Electronics Co. Ltd. and Toshiba Corporation. Such competition could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. The cost, quality and availability of certain components, including heads, media, application specific integrated circuits, motors, printed circuit boards and custom semiconductors are critical to the successful production of disc drives. The Company's strategy of vertical integration has allowed it to internally manufacture many of the critical components used in its products. The Company also relies on independent suppliers for certain components used in its products. The Company has in the past experienced production delays when unable to obtain sufficient quantities of certain components. Any prolonged interruption or reduction in the supply of any key components could have a material adverse effect on the Company's business, operating results and financial condition. The Company has pursued a strategy of vertical integration of its manufacturing process in order to reduce costs, control quality and assure availability and quality of certain components. A strategy of vertical 11 integration entails a high level of fixed costs and requires a high volume of production and sales to be successful. During periods of decreased production, such as the Company is now experiencing, these high fixed costs have had, and could in the future have, a material adverse effect on the Company's operating results and financial condition. In addition, a strategy of vertical integration has in the past and could continue to delay the Company's ability to introduce products containing market-leading technology. The Company has significant offshore operations. Offshore operations are subject to certain inherent risks, including delays in transportation, changes in governmental policies, tariffs and import/export regulations, political unrest, fluctuations in currency exchange rates and geographic limitations on management controls and reporting. There can be no assurance that the inherent risks of offshore operations will not adversely affect the Company's business, operating results and financial condition in the future. In addition, because the Company's products are priced in U.S. dollars, the currency instability in the Asian financial markets may have the effect of making the Company's products more expensive to computer manufacturers and other users than those of other disc drive manufacturers whose products may be priced in one of the affected Asian currencies, and, therefore, those customers may reduce future purchases of the Company's disc drive products. The Company anticipates that the recent turmoil in Asian financial markets and the recent deterioration of the underlying economic conditions in certain Asian countries may have an impact on its sales to customers located in or whose end-user customers are located in those countries due to the impact of currency fluctuations on the relative price of the Company's products and restrictions on government spending imposed by the International Monetary Fund (the "IMF") on those countries receiving the IMF's assistance. In addition, customers in those countries may face reduced access to working capital to fund purchases of disc drive components or software, such as the Company's products, due to higher interest rates, reduced bank lending due to contractions in the money supply or the deterioration in the customer's or its bank's financial condition or the inability to access other financing. The Company has incorporated its software acquisitions into a single entity called Seagate Software and is offering employees of Seagate Software and selected employees of the Company an opportunity to acquire an equity interest in Seagate Software. The Company intends to continue its expansion into software and other complementary data technology businesses through internal growth as well as acquisitions. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired businesses and the potential loss of key employees or customers of the acquired businesses. 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. For example, the Company incurred a charge to operations in the first quarter of fiscal 1998 of approximately $216 million for the write-off of in-process research and development, $214 million of which was in connection with the acquisition of Quinta. The Company's operations are dependent on its ability to protect its computer equipment and the information stored in its databases against damage by fire, natural disaster, power loss, telecommunications failures, unauthorized intrusion and other catastrophic events. The Company believes it has taken prudent measures to reduce the risk of interruption in its operations. However, there can be no assurance that these measures are sufficient. Any damage or failure that causes interruptions in the Company's operations could have a material adverse effect on its business, results of operations and financial condition. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Company considers a product to be in "Year 2000 compliance" if the product's performance and functionality are unaffected by processing of dates prior to, during and after the year 2000, but only if all products (for example hardware, software and firmware) used with the product properly exchange accurate date data with it. The Company has a program to assess the capability of its products to determine whether or not they are in Year 2000 compliance. Although the Company believes its disc and tape drive products and certain of its software products are in Year 2000 compliance, the Company has determined that certain of its software products are not and will not be Year 2000 compliant, and is taking measures to inform its customers of that fact. To assist customers in evaluating their Year 2000 issues, Seagate Software has developed a list which indicates those products that are Year 2000 compliant as stand-alone products. The list is located on Seagate Software's World Wide Web page and is periodically updated when assessment of the Year 2000 compliance of additional products is completed. The incremental costs incurred to date related to these programs are immaterial. However, the assessment of whether a complete system will operate correctly depends on the BIOS capability and software design and integration, and for many end-users this will include BIOS and software and components provided by companies other than Seagate or Seagate Software. The Company does not believe it is legally responsible for costs incurred by customers related to ensuring such customers' or end-users' Year 2000 12 capability. Nevertheless, the Company is incurring various costs to provide customer support and customer satisfaction services regarding Year 2000 issues and anticipates that these expenditures will continue in fiscal 1999 and thereafter. In addition, the Company has contacted its major customers to determine whether their products into which the Company's products have been and will be integrated are Year 2000 compliant. The Company has received assurances of Year 2000 compliance from a number of those customers and the customers under existing contracts with the Company are under no contractual obligation to provide such information to the Company. The Company is taking steps with respect to new customer agreements to ensure that the customers' products and internal systems are Year 2000 compliant. As used herein, Year 2000 capable means, with respect to its disc drive and tape products, that when used properly and in conformity with the product information provided by the Company, the Company's product will accurately store, display, process, provide and/or receive data from, into and between the twentieth and twenty-first centuries, including leap year calculations, provided that all other technology used in combination with the Seagate disc drive or tape product properly exchanges date data with the Seagate product. The Company anticipates that substantial litigation may be brought against vendors, including the Company, of all component products of systems that are unable to properly manage data related to the Year 2000. The Company's agreements with customers typically contain provisions designed to limit the Company's liability for such claims. It is possible, however, that these measures will not provide protection from liability claims, as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Any such claims, with or without merit, could result in a material adverse affect on the Company's business, financial condition and results of operations, including increased warranty costs, customer satisfaction issues and potential lawsuits. The Company has initiated a comprehensive program to address Year 2000 readiness in its internal systems and with its customers and suppliers. The Company's program has been designed to address its most critical internal systems first and to gather information regarding the Year 2000 compliance of products supplied to it and into which the Company's products are integrated. Assessment and remediation are proceeding in tandem, and the Company intends to have its critical internal systems in Year 2000 compliance by July 3, 1999, the first day of the Company's fiscal year 2000. These activities are intended to encompass all major categories of systems in use by the Company, including manufacturing, engineering, sales, finance and human resources. The costs incurred to date related to these programs have not been material. The Company currently expects that the total cost of its Year 2000 readiness programs, excluding redeployed resources, will not exceed $10 million over the next fiscal year. The total cost estimate does not include potential costs related to any customer or other claims or the costs of internal software or hardware replaced in the normal course of business. The total cost estimate is based on the current assessment of the Company's Year 2000 readiness needs and is subject to change as the projects proceed. The Company is currently in the process of transitioning to new computer software for its financial, accounting, inventory control, order processing and other management information systems, and the Company is identifying Year 2000 dependencies in such systems and is implementing changes to such systems to make them Year 2000 compliant. The successful implementation of these new systems is crucial to the efficient operation of the Company's business. There can be no assurance that the Company will implement its new systems in an efficient and timely manner or that the new systems will be adequate to support the Company's operations. Problems with installation or initial operation of the new systems could cause substantial management difficulties in operations planning, financial reporting and management and thus could have a material adverse effect on the Company's business, financial condition and results of operations. The cost of bringing the Company's systems into Year 2000 compliance is not expected to have a material effect on the Company's financial condition or results of operations. The Company has also initiated formal communications with its significant suppliers and financial institutions to determine the extent to which the Company is vulnerable to those third parties' failure to remedy their own Year 2000 issue. To date the Company has contacted its significant suppliers and financial institutions and has received assurances of Year 2000 compliance from a number of those contacted. Most of the suppliers under existing contracts with the Company are under no contractual obligation to provide such information to the Company. The Company is taking steps with respect to new supplier agreements to ensure that the suppliers' products and internal systems are Year 2000 compliant. While the Company currently expects that the Year 2000 issue will not pose significant operational problems, delays in the implementation of new information systems, or a failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of its suppliers, customers and financial institutions could have material adverse consequences, including delays in the delivery or sale of products. Therefore, the Company is developing contingency plans for continuing operations in the event 13 such problems arise. The Company's stock price, like that of other technology companies, is subject to significant volatility. The announcement of new products, services or technological innovations or major restructurings by the Company or its competitors, quarterly variations in the Company's results of operations, changes in revenue or earnings estimates by the investment community and speculation in the press or investment community are among the factors affecting the Company's stock price. In addition, the stock price may be affected by general market conditions and domestic and international macroeconomic factors unrelated to the Company's performance. Because of the foregoing reasons, recent trends should not be considered reliable indicators of future stock prices or financial results. The Company is in the process of addressing the issues raised by the introduction of the Single European Currency ("Euro") as of January 1, 1999 and during the transition period through January 1, 2002. The Company expects that its internal systems that will be affected by the initial introduction of the Euro will be Euro capable by January 1, 1999, and does not expect the costs of system modifications to be material. The Company does not presently expect that introduction and use of the Euro will materially affect the Company's foreign exchange and hedging activities, or the Company's use of derivative instruments, or will result in any material increase in costs to the Company. While the Company will continue to evaluate the impact of the Euro introduction over time, based on currently available information, management does not believe that the introduction of the Euro currency will have a material adverse impact on the Company's financial condition or overall trends in results of operations. 14
CONSOLIDATED BALANCE SHEETS July 3, June 27, In millions, except share data 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 666 $1,047 Short-term investments 1,161 1,236 Accounts receivable, net 799 1,041 Inventories 508 808 Deferred income taxes 243 254 Other current assets 238 166 ------ ------ Total Current Assets 3,615 4,552 ------ ------ Property, equipment and leasehold improvements, net 1,669 1,787 Goodwill and other intangibles, net 169 199 Other assets 192 185 ------ ------ Total Assets $5,645 $6,723 ====== ====== Liabilities Accounts payable $ 577 $ 863 Accrued employee compensation 175 200 Accrued expenses 405 505 Accrued warranty 197 198 Accrued income taxes 20 69 Current portion of long-term debt 1 1 ------ ------ Total Current Liabilities 1,375 1,836 ------ ------ Deferred income taxes 435 479 Accrued warranty 161 191 Other liabilities 33 39 Long-term debt, less current portion 704 702 ------ ------ Total Liabilities 2,708 3,247 ------ ------ Commitments and Contingencies Stockholders' Equity Preferred stock, $.01 par value--1,000,000 shares authorized; none issued or outstanding - - Common stock, $.01 par value--600,000,000 shares authorized; shares issued--251,890,019 in 1998 and 1997 3 3 Additional paid-in capital 1,929 1,903 Retained earnings 1,299 1,947 Deferred compensation (55) (57) Treasury common stock at cost; 7,132,867 shares in 1998 and 7,341,645 shares in 1997 (238) (319) Foreign currency translation adjustment (1) (1) ------ ------ Total Stockholders' Equity 2,937 3,476 ------ ------ Total Liabilities and Stockholders' Equity $5,645 $6,723 ====== ======
See notes to consolidated financial statements. 15 CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended July 3, June 27, June 28, In millions, except per share data 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Revenue $6,819 $8,940 $8,588 Cost of sales 5,830 6,918 7,007 Product development 585 459 420 Marketing and administrative 502 493 486 Amortization of goodwill and other intangibles 40 50 47 In-process research and development 223 3 99 Restructuring 347 (7) 242 Unusual items (22) 166 - ------ ------ ------ Total Operating Expenses 7,505 8,082 8,301 ------ ------ ------ Income (Loss) from Operations (686) 858 287 Interest income 98 92 94 Interest expense (51) (35) (56) Other, net (65) (24) 6 ------ ------ ------ Other Income (Expense), net (18) 33 44 Income (loss) before income taxes (704) 891 331 Benefit (provision) for income taxes 174 (233) (118) ------ ------ ------ Net Income (Loss) $ (530) $ 658 $ 213 ====== ====== ====== Net income (loss) per share: Basic $(2.17) $ 2.82 $ 1.07 Diluted (2.17) 2.62 .97 Number of shares used in per share computations: Basic 243.6 233.6 199.7 Diluted 243.6 257.9 236.1
See notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended July 3, June 27, June 28, In millions 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ (530) $ 658 $ 213 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 664 607 417 Deferred income tax (33) 96 (85) In-process research and development 223 3 99 Non-cash portion of restructuring charge 203 - - Amstrad litigation charge - 153 - Other, net 41 79 92 Changes in operating assets and liabilities: Accounts receivable 242 30 (58) Inventories 213 (84) (259) Accounts payable (278) 169 (16) Accrued expenses, employee compensation and warranty (262) (63) 85 Accrued income taxes (37) 72 (16) Other assets and liabilities 54 160 158 ------- ------- ------- Net cash provided by operating activities 500 1,880 630 Investing Activities Acquisition of property, equipment and leasehold improvements, net (709) (941) (965) Purchases of short-term investments (4,810) (4,473) (3,025) Maturities and sales of short-term investments 4,889 3,907 3,131 Acquisitions of businesses, net of cash acquired (204) - (111) Equity investments (27) (44) (11) Other, net 13 19 38 ------- ------- ------- Net cash used in investing activities (848) (1,532) (943) Financing Activities Issuance of long-term debt - 699 - Repayment of long-term debt (1) (8) (16) Sale of common stock 67 84 97 Purchase of treasury stock (105) (582) (124) ------- ------- ------- Net cash provided by (used in) financing activities (39) 193 (43) Effect of exchange rate changes on cash and cash equivalents 6 2 1 ------- ------- ------- Increase (decrease) in cash and cash equivalents (381) 543 (355) Elimination of Conner's net cash activity for the duplicated six months ended December 31, 1995 - (32) Cash and cash equivalents at the beginning of the year 1,047 504 891 ------- ------- ------- Cash and cash equivalents at the end of the year $ 666 $ 1,047 $ 504 ======= ======= =======
See notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended Foreign July 3, 1998, June 27, Common Stock Additional Treasury Currency 1997, and June 28, 1996 ------------ Paid-In Retained Deferred Common Translation In millions Shares Amount Capital Earnings Compensation Stock Adjustment Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 194 $2 $686 $1,274 $(3) $(22) $(1) $1,936 Purchase of treasury stock at cost (124) (124) Sale of stock 7 77 (20) 40 97 Acquisition of Arcada minority interest 2 85 85 Issuance of restricted stock, net of cancellations 2 59 (59) - Amortization of deferred compensation 4 4 Income tax benefit from stock options exercised 47 47 Conversion of debentures to common stock 9 200 (39) 106 267 Unrealized loss on marketable securities (1) (1) Net income 213 213 Elimination of Conner activity for the duplicated six months ended December 31, 1995 (1) (21) (37) (58) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at June 28, 1996 213 2 1,133 1,390 (58) - (1) 2,466 Purchase of treasury stock at cost (582) (582) Sale of stock 4 42 (71) 113 84 Issuance of restricted stock, net of cancellations 7 (7) (7) 7 - Amortization of deferred compensation 8 8 Income tax benefit from stock options exercised 52 52 Conversion of debentures to common stock 35 1 669 (24) 143 789 Unrealized gain on marketable securities 1 1 Net income 658 658 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at June 27, 1997 252 3 1,903 1,947 (57) (319) (1) 3,476 Purchase of treasury stock at cost (105) (105) Sale of stock (99) 166 67 Issuance of restricted stock, net of cancellations 6 (20) (6) 20 - Amortization of deferred compensation 8 8 Income tax benefit from stock options exercised 12 12 Unrealized gain on marketable securities 1 1 Other stock-based compensation 8 8 Net loss (530) (530) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at July 3, 1998 252 $ 3 $ 1,929 $ 1,299 $ (55) $ (238) $ (1) $ 2,937 ====================================================================================================================================
See notes to consolidated financial statements. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Seagate Technology, Inc. (the "Company") operates in a single industry segment by designing, manufacturing and marketing products for storage, retrieval and management of data on computer and data communications systems. These products include disc drives and disc drive components, tape drives and software. The Company sells its products to original equipment manufacturers for inclusion in their computer systems or subsystems, and to distributors, resellers, dealers and retailers. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. The actual results with regard to warranty expenditures could have a material unfavorable impact on the Company if the actual rate of unit failure or the cost to repair a unit is greater than what the Company has used in estimating the warranty expense accrual. The actual results with regard to restructuring charges could have a material unfavorable impact on the Company if the actual expenditures to implement the restructuring plan are greater than what the Company estimated when establishing the restructuring accrual. Given the volatility of the markets in which the Company participates, the Company makes adjustments to the value of inventory based on estimates of potentially excess and obsolete inventory after considering forecasted demand and forecasted average selling prices. However, forecasts are subject to revisions, cancellations, and rescheduling. Actual demand will inevitably differ from such anticipated demand, and such differences may have a material effect on the financial statements. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries after eliminations. Total outstanding minority interests are not material for any period presented. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998 ended on July 3, 1998, fiscal 1997 ended on June 27, 1997 and fiscal 1996 ended on June 28, 1996. Fiscal year 1998 comprised 53 weeks and fiscal years 1997 and 1996 each comprised 52 weeks. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted. Certain amounts in prior year financial statements and notes thereto have been reclassified to conform to current year presentation. FOREIGN CURRENCY TRANSLATION The U.S. dollar is the functional currency for most of the Company's foreign operations. Gains and losses on the translation into U.S. dollars of amounts denominated in foreign currencies are included in net income for those operations whose functional currency is the U.S. dollar and as a separate component of stockholders' equity for those operations whose functional currency is the local currency. DERIVATIVE FINANCIAL INSTRUMENTS The Company may enter into foreign currency forward exchange and option contracts to manage exposure related to certain foreign currency commitments, certain foreign currency denominated balance sheet positions and anticipated foreign currency denominated expenditures. The Company does not enter into derivative financial instruments for trading purposes. Foreign currency forward exchange contracts designated and effective as hedges of firm commitments and option contracts designated and effective as hedges of firm commitments or anticipated transactions are treated as hedges for accounting purposes. Gains and losses related to qualified accounting hedges of firm commitments or anticipated transactions are deferred and are recognized in income or as adjustments to the carrying amounts when the hedged transaction occurs. All other foreign currency forward exchange contracts are marked-to-market and unrealized gains and losses are included in current period net income as a component of other income (expense). Premiums on foreign currency option contracts used to hedge firm commitments and anticipated transactions are amortized on a straight-line basis over the life of the contract. Forward points on foreign currency forward exchange contracts which qualify as hedges of firm commitments are recognized in income as adjustments to the carrying amount when the hedged transaction occurs. The Company may, from time to time, adjust its foreign currency hedging position by taking out additional contracts or by terminating or offsetting existing foreign currency forward exchange and option contracts. These adjustments may result from changes in the Company's underlying foreign currency exposures or from fundamental shifts in the economics of particular exchange rates, as occurred in the first and second quarters of fiscal 1998 with respect to the Thai baht, Malaysian ringgit and Singapore dollar. For foreign currency forward exchange and option 19 contracts qualifying as accounting hedges, gains or losses on terminated contracts and offsetting contracts are deferred and are recognized in income as adjustments to the carrying amount of the hedged item in the period the hedged transaction occurs. For foreign currency forward exchange and option contracts not qualifying as accounting hedges, gains and losses on terminated contracts, or on contracts that are offset, are recognized in income in the period of contract termination or offset. REVENUE RECOGNITION AND PRODUCT WARRANTY Revenue from sales of products is generally recognized upon shipment to customers. The Company warrants its products against defects in design, materials and workmanship generally for three to five years depending upon the capacity category of the disc drive, with the higher capacity products being warranted for the longer periods. A provision for estimated future costs relating to warranty expense is recorded when products are shipped. INVENTORY Inventories are valued at the lower of standard cost (which approximates actual cost using the first-in, first-out method) or market. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS Land, equipment, buildings and leasehold improvements are stated at cost. Equipment and buildings are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated life of the asset or the remaining term of the lease. ADVERTISING EXPENSE The cost of advertising is expensed as incurred. Advertising costs were $68 million, $41 million and $34 million in 1998, 1997 and 1996, respectively. STOCK-BASED COMPENSATION The Company accounts for employee stock-based compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APBO 25") and related interpretations. Pro forma net income and net income per share are disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and are included in the Stock-Based Benefit Plans - Pro Forma Information note to the consolidated financial statements. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997 and will be adopted by the Company for its fiscal 1999. Adoption of this pronouncement is not expected to have a material impact on the Company's financial statements. Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 replaces Statement of Financial Accounting Standards No. 14 and changes the way public companies report segment information. SFAS 131 is effective for fiscal years beginning after December 15, 1997 and will be adopted by the Company for its fiscal 1999 which commenced July 4, 1998. Adoption of this pronouncement is not expected to have a material impact on the Company's financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that derivatives be recognized in the balance sheet at fair value and specifies the accounting for changes in fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and will be adopted by the Company for its fiscal year 2000. The Company is in the process of assessing the impact of this pronouncement on its financial statements. NET INCOME PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the SFAS 128 requirements. The adoption of SFAS 128 did not have a material impact on the Company's earnings per share. For the periods in which the Company had net income, basic net income per share was based on the weighted average number of shares of common stock outstanding during the period. For the same periods diluted net income per share further included the effect of stock options outstanding during the period and assumed the conversion of the Company's convertible subordinated debentures for the period of time such debentures were outstanding. For the period in which the Company had a net loss, the net loss per share was computed using only the weighted average number of shares of common stock outstanding during the period. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid 20 investments with a remaining maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. The Company's short-term investments primarily comprise readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. The Company has classified its entire investment portfolio as available- for-sale. Available-for-sale securities are classified as cash equivalents or short-term investments and are stated at fair value with unrealized gains and losses included in stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses are included in other income (expense). The cost of securities sold is based on the specific identification method. CONCENTRATION OF CREDIT RISK The Company's customer base for disc drive products is concentrated with a small number of systems manufacturers and distributors. Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable, cash equivalents and short-term investments. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The allowance for noncollection of accounts receivable is based upon the expected collectibility of all accounts receivable. The Company places its cash equivalents and short-term investments in investment grade, short-term debt instruments and limits the amount of credit exposure to any one commercial issuer. FINANCIAL INSTRUMENTS The following is a summary of available-for-sale securities at July 3, 1998 and June 27, 1997:
Fair Value ------------------------------- In millions July 3, 1998 June 27, 1997 - ------------------------------------------------------------------------------ Money market mutual funds $ 71 $ 182 U.S. government and agency obligations 398 364 Repurchase agreements 81 150 Auction rate preferred stock 167 227 Municipal bonds 102 78 Corporate securities 612 731 Other 301 417 ------ ------ $1,732 $2,149 ====== ====== Included in short-term investments $1,161 $1,236 Included in cash and cash equivalents 571 913 ------ ------ $1,732 $2,149 ====== ======
The fair value of all available-for-sale securities approximates amortized cost. Gross realized and unrealized gains and losses on the sale of available- for-sale securities were not material for each of the three years in the period ended July 3, 1998. The fair value of the Company's investment in debt securities, by contractual maturity, is as follows: 21 In millions July 3, 1998 June 27, 1997 - ------------------------------------------------------------------------------ Due in less than 1 year $ 771 $1,529 Due in 1 to 3 years 723 211 ------ ------ $1,494 $1,740 ====== ====== FAIR VALUE DISCLOSURES The carrying value of cash and cash equivalents approximates fair value. The fair values of short-term investments, notes, debentures (see Long-Term Debt and Lines of Credit footnote) and foreign currency forward exchange and option contracts are estimated based on quoted market prices. The carrying values and fair values of the Company's financial instruments are as follows:
In millions July 3, 1998 June 27, 1997 - -------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value - -------------------------------------------------------------------------------- Cash and cash equivalents $ 666 $ 666 $1,047 $1,047 Short-term investments 1,161 1,161 1,236 1,236 7.125% senior notes, due 2004 (200) (199) (200) (200) 7.37% senior notes, due 2007 (200) (198) (200) (201) 7.45% senior debentures, due 2037 (200) (198) (200) (202) 7.875% senior debentures, due 2017 (100) (98) (100) (100) Italian Lira debentures, 14.65% to 15.25% (1) (1) (1) (1) Foreign currency forward exchange and option contracts (18) (18) (2) (10)
DERIVATIVE FINANCIAL INSTRUMENTS The Company may enter into foreign currency forward exchange and option contracts to manage exposure related to certain foreign currency commitments, certain foreign currency denominated balance sheet positions and anticipated foreign currency denominated expenditures. The Company does not enter into derivative financial instruments for trading purposes. Based on uncertainty in the Southeast Asian foreign currency markets, beginning in the second quarter of 1998 the Company has temporarily suspended its hedging program. At July 3, 1998, the Company had effectively closed out all of its foreign currency forward exchange contracts by purchasing offsetting contracts and the remaining foreign currency market risk from derivative financial instruments is not material. ACCOUNTS RECEIVABLE Accounts receivable are summarized below: In millions 1998 1997 - ----------------------------------------------------------------------------- Accounts receivable $ 853 $1,101 Less allowance for noncollection (54) (60) ----- ------ $ 799 $1,041 ===== ====== 22 INVENTORIES Inventories are summarized below: In millions 1998 1997 - ----------------------------------------------------------------------- Components $ 172 $ 359 Work-in-process 87 134 Finished goods 249 315 ----- ----- $ 508 $ 808 ===== ===== PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consisted of the following:
Estimated In millions Useful Life 1998 1997 - -------------------------------------------------------------------------------------------------------- Land $ 33 $ 15 Equipment 1-1/2 - 4 years 2,187 1,919 Building and leasehold improvements Life of lease - 30 years 854 763 Construction in progress 168 362 ------- ------- 3,242 3,059 Less accumulated depreciation and amortization (1,573) (1,272) ------- ------- $ 1,669 $ 1,787 ======= =======
Equipment and leasehold improvements include assets under capitalized leases. Amortization of leasehold improvements is included in depreciation expense. Depreciation expense was $549 million, $451 million and $330 million in 1998, 1997 and 1996, respectively. GOODWILL AND OTHER INTANGIBLES Goodwill represents the excess of the purchase price of acquired companies over the estimated fair value of the tangible and specifically identified intangible net assets acquired. In accordance with SFAS 121, the carrying value of these intangibles and related goodwill is reviewed if the facts and circumstances suggest that they may be permanently impaired. If this review indicates these assets' carrying value will not be recoverable, as determined based on the undiscounted net cash flows of the entity acquired over the remaining amortization period, the Company's carrying value is reduced to its estimated fair value (generally based on an estimate of discounted future net cash flows). Goodwill and other intangibles are being amortized on a straight- line basis over periods ranging from two to fifteen years. Accumulated amortization was $201 million and $161 million as of July 3, 1998 and June 27, 1997, respectively. LONG-TERM DEBT AND LINES OF CREDIT Long-term debt consisted of the following:
In millions 1998 1997 - ------------------------------------------------------------------------------------------------------------------ 7.125% senior notes, due 2004 $ 200 $ 200 7.37% senior notes, due 2007 200 200 7.45% senior debentures, due 2037 200 200 7.875% senior debentures, due 2017 100 100 Italian Lira debentures, 14.65% to 15.25% notes and loans due through 1999 1 1 Capitalized lease obligations with interest at 14% to 19.25% collateralized by certain manufacturing equipment and buildings 4 2 ----- ----- 705 703 Less current portion 1 1 ----- ----- $ 704 $ 702 ===== =====
23 At July 3, 1998, future minimum principal payments on long-term debt and capitalized lease obligations were as follows:
In millions - -------------------------------------------------------------------------- 1999 $ 1 2000 1 2001 - 2002 1 2003 1 After 2003 701 ---- $705 ====
During 1996 and 1997, the Company called for redemption all its 6.5%, 6.75%, 5% and 6.75% Convertible Subordinated Debentures due 2002, 2001, 2003 and 2012, respectively. Approximately $1.054 billion principal amount of the debentures were converted to approximately 50.8 million shares of the Company's common stock and approximately $2 million principal amount of the debentures were redeemed. None of the 5% debentures were redeemed. The Company's 7.125% senior notes due 2004, 7.37% senior notes due 2007 and 7.875% senior debentures due 2017 are redeemable at the option of the Company at any time, at a redemption price equal to the greater of (I) 100% of their principal amount plus accrued interest or (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption at a discount rate (the "discount rate") as set forth in the indenture governing the notes and debentures plus 10 basis points. The Company's 7.45% senior debentures due 2037 are redeemable at the option of the Company at any time, at a redemption price equal to the greater of (i) 100% of their principal amount plus accrued interest, (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption at the discount rate plus 10 basis points, calculated as if the principal amount were payable in full on March 1, 2009, or (iii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption at the discount rate plus 10 basis points. In addition, the Company's 7.45% senior debentures due 2037 will be redeemable on March 1, 2009, at the option of the holders thereof, at 100% of their principal amount, together with interest payable to the date of redemption. The Company's 7.125% senior notes due 2004, 7.37% senior notes due 2007 and 7.875% senior debentures due 2017 will not be redeemable at the option of the holders thereof prior to maturity. These securities were issued in February 1997 in an offering registered under the Securities Act of 1933, as amended. As of July 3, 1998, the Company had committed lines of credit of $61 million which can be used for standby letters of credit or bankers' guarantees. These lines of credit were fully utilized at July 3, 1998. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share.
For the years ended July 3, June 27, June 28, In millions, except per share data 1998 1997 1996 - --------------------------------------------------------------------------------------------- Basic Net Income (Loss) Per Share Computation - --------------------------------------------- Numerator: Net income (loss) $ (530) $658 $213 ------ ---- ---- Denominator: Weighted average number of common shares outstanding during the period 243.6 233.6 199.7 ----- ----- ----- Basic net income (loss) per share $(2.17) $2.82 $1.07 ====== ===== =====
24 Diluted Net Income (Loss) Per Share Computation - ----------------------------------------------- Numerator: Net income (loss) $(530) $ 658 $ 213 Add convertible subordinated debentures interest, net of income tax effect - 17 16 ------ ------ ------ Total $(530) $ 675 $ 229 ------ ------ ------ Denominator: Weighted average number of common shares outstanding during the period 243.6 233.6 199.7 Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) - 7.4 7.2 Incremental common shares attributable to conversion of convertible subordinated debentures - 16.9 29.2 ------ ------ ------ Total 243.6 257.9 236.1 ------ ------ ------ Diluted net income (loss) per share $(2.17) $ 2.62 $ 0.97 ====== ====== ======
Incremental common shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) of 4,080,000 for the year ended July 3, 1998, were not included in the diluted net income per share computation because the effect would be antidilutive due to the net loss incurred during that period. EMPLOYEE PROFIT SHARING AND EXECUTIVE BONUS PLANS The Company allocates a certain percentage of adjusted quarterly pretax profits to its Employee Profit Sharing Plan which is currently distributed to employees, excluding officers, employed for the full quarter. The Company also allocates a certain percentage of adjusted quarterly pretax profits to its Executive Bonus Plan. Distributions to corporate officers under this plan are subject to the discretion of the Board of Directors. Charges to operations for distributions to employees and/or corporate officers under these Plans during 1998, 1997 and 1996 were $3 million, $115 million and $73 million, respectively. TAX-DEFERRED SAVINGS PLAN The Company has a tax-deferred savings plan, the Seagate Technology, Inc. Savings and Investment Plan ("the 40l(k) plan"), for the benefit of qualified employees. The 40l(k) plan is designed to provide employees with an accumulation of funds at retirement. Qualified employees may elect to make contributions to the 401(k) plan on a monthly basis. The Company may make annual contributions to the 401(k) plan at the discretion of the Board of Directors. No material contributions were made by the Company for each of the three years in the period ended July 3, 1998. 25 STOCK-BASED BENEFIT PLANS STOCK OPTION PLANS Options granted under the Company's stock option plans are granted at fair market value, expire ten years from the date of the grant and generally vest in four equal annual installments, commencing one year from the date of the grant. Following is a summary of stock option activity for the three years ended July 3, 1998:
Options Outstanding -------------------------------------- Number Weighted Average Shares in millions of Shares Exercise Price - ------------------------------------------------------------------------------------ Balance June 30, 1995 21.4 $11.45 Granted 11.1 22.30 Exercised (6.2) 8.71 Canceled (3.3) 14.27 Elimination of Conner activity for the duplicated six months ended December 31, 1995 .7 14.13 ----- Balance June 28, 1996 23.7 16.91 Granted 6.0 36.31 Exercised (5.2) 12.15 Canceled (2.5) 20.42 ----- Balance June 27, 1997 22.0 22.92 Granted 18.3 27.10 Exercised (2.4) 13.34 Canceled (11.9) 32.62 ----- Balance July 3, 1998 26.0 $22.30 =====
In fiscal 1998, the Company offered to all optionees below the level of Senior Vice President, who held options with an exercise price higher than the prevailing fair market value of the Company's common stock the right to exchange their options for new options exercisable at such fair market value. In connection with this transaction, 8.4 million options were exchanged. The number of options shown as granted and canceled in the above table reflects this exchange of options. Such options had a weighted average exercise price before repricing of $34.20 and the new options were granted at a weighted average price of $24.45. Options available for grant were 13.6 million at July 3, 1998; 5.1 million at June 27, 1997; and 9.0 million at June 28, 1996. On October 30, 1997, the stockholders approved an amendment to the 1991 Incentive Stock Option Plan to increase the number of shares of common stock reserved for issuance thereunder by 15 million. At July 3, 1998, options to purchase 10.0 million shares of common stock were exercisable. The following table summarizes information about options outstanding at July 3, 1998. (Shares in millions.) 26
Outstanding Options Exercisable Options ----------------------------------------------------------- -------------------------------- Weighted Average Number Contractual Life Weighted Average Number Weighted Range of exercise prices of Shares (in years) Exercise Price of Shares Exercise Price - --------------------------------------------------------------------------------------- -------------------------------- $ .00 - $11.06 3.2 4.93 $ 7.98 3.1 $ 8.05 $11.12 - $21.56 4.3 6.60 15.50 2.5 14.27 $21.62 - $28.25 15.5 8.60 24.52 3.4 24.32 $28.50 - $51.75 3.0 8.09 35.86 1.0 33.83 ---- ---- ------ ---- ------ $ .00 - $51.75 26.0 7.76 $22.30 10.0 $17.70
EXECUTIVE STOCK PLAN The Company has an Executive Stock Plan under which senior executives of the Company are granted the right to purchase shares of the Company's common stock at $.01 per share. The difference between the fair market value of the shares on the measurement date and the exercise price is recorded as deferred compensation and is charged to operations over the vesting period of five or ten years. In November 1995, the Company's Board of Directors granted 1,604,000 shares under the plan, subject to stockholder approval of certain amendments to the plan. These amendments included the addition of 2,000,000 shares to be issued under the plan. In February 1996, such stockholder approval was obtained. Subsequently in May 1996, an additional 416,500 shares were granted under the plan. In 1997, 249,500 shares were granted and 85,000 shares were repurchased under the terms of the plan. In 1998, 453,500 shares were granted and 253,867 shares were repurchased under the terms of the plan. At July 3, 1998, 115,367 shares were available for future grants. In addition, the Company has a Restricted Stock Plan which also has a deferred compensation component. Under this plan the deferred compensation is amortized over a period of seven years. There are two employees remaining in the plan and no shares are available for future grant. The aggregate amount charged to operations for amortization of deferred compensation under both plans was $8 million, $8 million and $4 million in 1998, 1997 and 1996, respectively. STOCK PURCHASE PLAN The Company also maintains an Employee Stock Purchase Plan. A total of 13,600,000 shares of common stock have been authorized for issuance under the Purchase Plan. The Purchase Plan permits eligible employees who have completed thirty days of employment prior to the inception of the offering period to purchase common stock through payroll deductions generally at the lower of 85% of the fair market value of the common stock at the beginning or at the end of each six-month offering period. Under the plan, 1,348,000; 1,054,000; and 1,129,000 shares of common stock were issued in 1998, 1997 and 1996, respectively. Common stock reserved for future issuance under the Company's Employee Stock Purchase Plan aggregated 1,426,000 shares at July 3, 1998. In July 1998, the Board of Directors approved an amendment to the Employee Stock Purchase Plan to increase the number of shares of common stock reserved for issuance thereunder by 6 million, subject to stockholder approval at the 1998 Annual Meeting of Stockholders. PRO FORMA INFORMATION The Company has elected to follow APBO 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APBO 25, the Company generally recognized no compensation expense with respect to such options. Pro forma information regarding net income and earnings per share is required by SFAS 123 for stock options granted after June 30, 1995 as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value of the Company's stock options was estimated using a Black- Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options granted to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options granted to employees. The fair value of the Company's stock options granted to employees was estimated assuming no expected dividends and the following weighted average assumptions: 27
Stock Option Employee Stock Plan Shares Purchase Plan Shares ____________________ ____________________ 1998 1997 1996 1998 1997 1996 _________________________________________________________________________________ Expected life (in years) 3.2 3.5 3.5 .6 .5 .5 Risk-free interest rate 5.5% 6.2% 5.6% 5.5% 5.4% 5.4% Volatility .45 .45 .45 .63 .46 .46
The weighted average fair value of stock options granted under the Company's Stock Option Plans was $10.05, $14.57 and $9.45 per share in 1998, 1997 and 1996, respectively. The weighted average fair value of shares granted under the Company's Employee Stock Purchase Plan was $12.03, $8.89 and $6.00 per share in 1998, 1997 and 1996, respectively. The weighted average purchase price of shares granted under the Company's Employee Stock Purchase Plan was $26.99, $27.95 and $23.46 per share in 1998, 1997 and 1996, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period (for stock options) and the six month purchase period for stock purchases under the Stock Purchase Plan. The Company's pro forma information follows:
In millions, except per share data 1998 1997 1996 - --------------------------------------------------------------------------------------------- Pro forma net income (loss) $ (600) $ 610 $ 195 Pro forma basic net income (loss) per share (2.46) 2.64 0.98 Pro forma diluted net income (loss) per share (2.46) 2.45 0.90
The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS 123 is applicable only to options granted subsequent to June 30, 1995, the pro forma effect will not be fully reflected until 1999. INCOME TAXES The provision for (benefit from) income taxes consisted of the following:
In millions 1998 1997 1996 _________________________________________________________________________________________ Current Tax Expense (Benefit) Federal $(157) $122 $168 State - 6 28 Foreign 16 9 7 ----- ---- ---- 141 137 203 ----- ---- ---- Deferred Tax Expense (Benefit) Federal (19) 65 (76) State (20) 14 (9) Foreign 6 17 - ----- ---- ---- (33) 96 (85) ----- ---- ---- Provision for (Benefit from) Income Taxes $(174) $233 $118 ===== ==== ====
The income tax benefit related to the exercise of stock options reduces taxes currently payable and is credited to additional paid-in capital. Such amounts approximated $12 million, $52 million, and $47 million for 1998, 1997 and 1996, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax assets and liabilities were as follows: 28
In millions July 3, 1998 June 27, 1997 ______________________________________________________________________________________ DEFERRED TAX ASSETS Accrued warranty $151 $166 Inventory valuation accounts 38 33 Receivable reserves 29 29 Accrued compensation and benefits 27 36 Depreciation 37 23 Restructuring reserves 25 12 Other reserves and accruals 40 47 Acquisition related items 36 29 Net operating loss and tax credit carryforwards 87 31 Other assets 9 9 ----- ----- Total Deferred Tax Assets 479 415 Valuation allowance (82) (57) ----- ----- Net Deferred Tax Assets 397 358 ----- ----- DEFERRED TAX LIABILITIES Unremitted income of foreign subsidiaries (549) (561) Acquisition related items (19) (20) Other liabilities (21) (2) ----- ----- Total Deferred Tax Liabilities (589) (583) ----- ----- Net Deferred Tax Liabilities $(192) $(225) ===== ===== AS REPORTED ON THE BALANCE SHEET Deferred Income Tax Assets $243 $254 Deferred Income Tax Liabilities (435) (479) ----- ----- Net Deferred Tax Liability $(192) $(225) ===== =====
The valuation allowance has been provided for deferred tax assets related to certain foreign net operating loss carryforwards, foreign tax credit carryforwards and future tax benefits associated with the acquisition of certain software companies. The valuation allowance increased by $25 million, $20 million and $15 million in 1998, 1997 and 1996, respectively. The Company, as of July 3, 1998, has domestic, foreign and state net operating loss carryforwards of approximately $36 million, $47 million and $500 million, respectively, expiring in 1999 through 2013 if not used to offset future taxable income. The Company, as of July 3, 1998, also has tax credit carryforwards of approximately $36 million expiring in 2000 through 2013 if not used to offset future tax liabilities. The differences between the provision for (benefit from) income taxes at the U.S. statutory rate and the effective rate are summarized as follows:
In millions 1998 1997 1996 _____________________________________________________________________________________________________ Provision (benefit) at U.S. statutory rate $(246) $312 $116 State income tax provision (benefit), net (15) 19 10 Benefit from net earnings of foreign subsidiaries considered to be permanently invested in non-U.S. operations - (97) (59) Write-off of in-process research and development 75 - 30 Restructuring - - 18 Valuation reserve 25 19 15 Other individually immaterial items (13) (20) (12) ----- ---- ---- Provision for (benefit from) income taxes $(174) $233 $118 ===== ==== ====
A substantial portion of the Company's Far East manufacturing operations in Singapore, Thailand, China and Malaysia operate free of tax under various tax holidays which expire in whole or in part during fiscal years 1999 29 through 2005. Certain tax holidays may be extended if specific conditions are met. The tax holidays had no impact on the net loss in 1998. The net impact of these tax holidays was to increase net income by approximately $71 million ($0.28 per share, diluted) in 1997 and approximately $50 million ($0.21 per share, diluted) in 1996. Cumulative undistributed earnings of the Company's Far East subsidiaries for which no income taxes have been provided aggregated approximately $1.439 billion at July 3, 1998. These earnings are considered to be permanently invested in non-U.S. operations. Additional federal and state taxes of approximately $518 million would have to be provided if these earnings were repatriated to the U.S. The Company received a statutory notice of deficiency dated June 27, 1997 from the Internal Revenue Service relative to taxable years 1991 through 1993 assessing potential deficiencies approximating $39 million plus interest and approximately $6 million of penalties. The Company petitioned the United States Tax Court on September 24, 1997 for a re-determination of the deficiencies. The Company believes that the outcome of this matter will not have a material adverse effect on its financial position or results of operations. The Company received a statutory notice of deficiency dated June 12, 1998 from the Internal Revenue Service relative to Conner's taxable years 1991 and 1992 assessing potential deficiencies approximating $11 million plus interest. The Company believes it has meritorious defenses to the Internal Revenue Service adjustments but has not yet determined the forum in which it will contest the proposed deficiencies. The Company believes that the likely outcome of this matter will not have a material adverse effect on its financial position or results of operations. Certain of the Company's foreign and state tax returns for various fiscal years are under examination by taxing authorities. The Company believes that adequate amounts of tax have been provided for any final assessments which may result from these examinations. 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 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: For the year ended In millions June 28, 1996 - ----------------------------------------------------------- Revenue: Prior to December 30, 1995: Seagate $3,016 Conner 1,464 Combined results after December 29, 1995 4,108 ------ $8,588 ====== Net Income: Prior to December 30, 1995: Seagate $ 232 Conner 37 Combined results after December 29, 1995 (56) ------ $ 213 ====== The combined net loss after December 29, 1995 (see table above) of $56 million includes a $168 million restructuring charge, net of related tax effect, as a result of the merger with Conner and an $89 million write-off of in-process research and development, net of related tax effect, incurred in connection with the acquisitions of software companies. 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 period presented. 30 ACQUISITIONS In June 1998, the Company acquired Eastman Software Storage Management Group, Inc., a subsidiary of Eastman Kodak Company, the developer of storage migration software technology for distributed networks, for $10 million. As a result of the acquisition, the Company incurred a one-time write-off of in- process research and development of $7 million. In April and June 1997, the Company invested an aggregate of $20 million to acquire approximately ten percent (10%) of the outstanding stock of Quinta Corporation ("Quinta"), a developer of ultra-high capacity disc drive technologies, including a new optically-assisted Winchester (OAW) technology. In August 1997, the Company completed the acquisition of Quinta. Pursuant to the purchase agreement with Quinta, the shareholders of Quinta, other than Seagate, received cash payments aggregating $230 million upon the closing of the acquisition and were eligible to receive additional cash payments aggregating $95 million upon the achievement of certain product development and early production milestones. Of the $95 million, $19 million was paid or accrued in fiscal 1998. In July 1998, the Company and Quinta amended the purchase agreement to eliminate the product development and early production milestones and provide that the former shareholders of Quinta will be eligible to receive the remaining $76 million and the $14 million that had been accrued but unpaid in fiscal 1998. In the first quarter of fiscal 1999, the Company expects to take a charge to operations for the remaining $76 million. As a result of this acquisition, the Company incurred a one-time write-off of in-process research and development of approximately $214 million. Intangibles arising from the acquisition of Quinta are being amortized on a straight-line basis over two years. This acquisition was accounted for as a purchase and, accordingly, the results of operations of Quinta have been included in the Company's consolidated financial statements from the date of acquisition. In connection with the merger with Conner, on February 16, 1996, the Company acquired the minority interest in Arcada Holdings, Inc. ("Arcada"), formerly a majority-owned subsidiary of Conner. Seagate acquired the minority interest in Arcada by exchanging 2,553,340 shares of Seagate common stock and options to purchase 1,813,936 shares of Arcada common stock (equivalent to approximately $85 million, net of the exercise proceeds of the options acquired, based on a market value of $20.37 per share of Seagate common stock) for all the outstanding common stock and options to purchase common stock of Arcada. Arcada developed, marketed and supported data protection and storage management software products that operate across multiple desktop and client/server environments. This acquisition was accounted for as a purchase and, accordingly, the results of operations of the minority interest have been included in the consolidated financial statements from the date of acquisition of such minority interest. Goodwill and other intangibles arising from the acquisition are being amortized on a straight-line basis over periods ranging from two to seven years. As a result of the acquisition, the Company incurred a one-time write-off of in-process research and development of $44 million. During the year ended June 28, 1996, the Company acquired Sytron Corporation, a storage management software company; OnDemand Software, Inc. and Calypso Software Systems, Inc., both network management software companies; Holistic Systems Ltd. ("Holistic"), an information management software company; and Stormex, S.A. de C.V., a media substrate manufacturer. These acquisitions were accounted for as purchases and, accordingly, the results of operations of the acquired businesses have been included in the consolidated financial statements from the date of acquisition. The total cost of all businesses acquired for cash in 1996 was $131 million, $20 million of which was paid subsequent to 1996. Goodwill and other intangibles arising from the acquisitions are being amortized on a straight-line basis over periods ranging from one to seven years. As a result of the 1996 acquisitions, the Company incurred one-time write-offs of in-process research and development totaling $99 million. As a result of the payments out of escrow in fiscal year 1997 to former stockholders of Holistic, the Company incurred one-time write-offs of compensation expense and in-process research and development of $13 million and $3 million, respectively. The compensation expense is included in unusual items on the consolidated statement of operations. The operations of the acquired companies prior to the date of acquisition were not material to the Company's revenue or net income. In 1998, the Company increased its investment in Dragon Systems, a maker of voice recognition software, by $18 million. Goodwill arising from the equity investment in Dragon Systems is being amortized on a straight-line basis over seven years. In 1996, the Company increased its investment in SanDisk Corporation, a flash memory manufacturer, by $10 million. Goodwill arising from the equity investment in SanDisk Corporation is being amortized on a straight- line basis over seven years. RESTRUCTURING In the quarters ended January 2, 1998 and April 3, 1998, the Company recorded restructuring charges aggregating $347 million. These charges reflect steps the Company is taking to align worldwide operations with 31 current market conditions and to improve the productivity of its operations and the efficiency of its development efforts. The restructuring charges comprised $57 million for reduction of personnel due to closure or consolidation of certain operations, $78 million for closure of excess facilities, $148 million to write off or write down equipment, intangibles and other assets whose value had become permanently impaired, and $64 million for contract cancellations and other expenses. The net book value of equipment disposed of or to be disposed of as a result of implementation of the restructuring plan is $181 million. Valuation of these assets was based on estimated fair values. In connection with this restructuring the Company currently expects a workforce reduction of approximately 15,000 employees. Of the 15,000 employees, 8,144 are involuntary terminations of regular, full-time employees, 1,528 are contract laborers, primarily engaged through temporary employment agencies, and the remainder represent attrition. Approximately 14,100 of the 15,000 employees, including 7,959 of the 8,144 involuntary terminations of regular, full-time employees, had been terminated as of July 3, 1998. The Company anticipates that the implementation of the restructuring plan will be substantially complete by the end of December 1998. The following table summarizes the Company's restructuring activity for the year ended July 3, 1998:
CONTRACT EQUIPMENT, CANCELLATIONS SEVERANCES EXCESS INTANGIBLES AND OTHER IN MILLIONS AND BENEFITS FACILITIES AND OTHER ASSETS EXPENSES TOTAL - ------------------------------------------------------------------------------------------------------- Restructuring charges $ 57 $ 78 $ 148 $ 64 $ 347 Cash charges (48) (3) - (49) (100) Non-cash charges - (55) (148) - (203) ---- ---- ----- ---- ----- Reserve balances, July 3, 1998 $ 9 $ 20 $ - $ 15 $ 44 ==== ==== ===== ==== =====
In 1996, the Company recorded restructuring charges totaling $242 million as a result of the merger with Conner. During the first quarter of 1997, the Company reversed $10 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. As of July 3, 1998, the implementation of such restructuring plan was substantially complete. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in a single industry segment by designing, manufacturing and marketing products for storage, retrieval and management of data on computer and data communications systems. These products include disc drives and disc drive components, tape drives and software. The following tables summarize the Company's operations in different geographic areas:
Adjustments Year Ended July 3, 1998 United Far and In millions States East Eliminations Consolidated ----------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $3,643 $3,176 $ - $6,819 Transfers between geographic areas 1,425 6,302 (7,727) - ------ ------ ------- ------ Total revenue $5,068 $9,478 $(7,727) $6,819 ====== ====== ======= ====== Income (loss) from operations $ (721) $ 35 $ - $ (686) Other income (expense), net (57) 39 - (18) ------ ------ ------- ------ Income (loss) before income taxes $ (778) $ 74 $ - $ (704) ====== ====== ======= ====== Identifiable assets $2,337 $3,308 $ - $5,645 ====== ====== ======= ======
32
Adjustments Year Ended June 27, 1997 United Far and In millions States East Eliminations Consolidated ----------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $5,216 $ 3,724 $ - $8,940 Transfers between geographic areas 1,398 6,463 (7,861) - ------ ------- --------- ------ Total revenue $6,614 $10,187 $ (7,861) $8,940 ====== ======= ========= ====== Income from operations $44 $814 $ - $858 Other income (expense), net (3) 36 - 33 ------ ------- --------- ------ Income before income taxes $ 41 $ 850 $ - $ 891 ====== ======= ========= ====== Identifiable assets $3,050 $ 3,673 $ - $6,723 ====== ======= ========= ====== Adjustments Year Ended June 28, 1996 United Far and In millions States East Eliminations Consolidated ----------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $5,888 $2,700 $ - $8,588 Transfers between geographic areas 1,272 6,248 (7,520) - ------ ------ ------- ------ Total revenue $7,160 $8,948 $(7,520) $8,588 ====== ====== ======= ====== Income (loss) from operations $ (77) $ 364 $ - $ 287 Other income (expense), net - 44 - 44 ------ ------ ------- ------ Income (loss) before income taxes $ (77) $ 408 $ - $ 331 ====== ====== ======= ====== Identifiable assets $2,311 $2,929 $ - $5,240 ====== ====== ======= ======
Sales and transfers between geographic areas are accounted for at prices which, in general, provide a profit after coverage of all manufacturing costs. Income from operations is revenue less operating expenses. The identifiable assets by geographic area are those assets used in the Company's operations in each area. The Company's European operations include sales offices and distribution warehouses. The sales offices and distribution warehouses do not qualify as revenue-producing operations in accordance with Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise" ("SFAS 14") and thus do not qualify to be disclosed as a separate geographic area. The distribution warehouses merely facilitate sales for the Singapore and Thailand manufacturing operations and are thus included in the Far East geographic area in the tables above. Other European operations that do qualify as revenue-producing operations do not meet the materiality criteria of SFAS 14 and thus are not disclosed as a separate geographic area. In 1998 and 1997, Compaq Computer Corporation accounted for more than 10% of consolidated revenue 33 for a total of $873 million and $995 million, respectively. No customer accounted for 10% or more of consolidated revenue in 1996. Net foreign currency transaction losses included in the determination of net income (loss) were $252 million, $2 million and $8 million for 1998, 1997, and 1996, respectively. 34 LITIGATION 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 was 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. On October 24, 1997 the Court entered a Final Judgment against Rodime and in favor of Seagate. Rodime has appealed the final judgment. The appeal before the Court of Appeals for the Federal Circuit will be heard in September 1998. The Company intends to vigorously defend itself in the appeal brought by Rodime. 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 was also granted by the PTO. The District Court stayed the action pending the outcome of the Reexaminations. Both patents have completed reexamination and the stay of the action has been lifted. Mr. White's lawyers filed a motion seeking a preliminary injunction to stop the sale of certain of the Company's products. The Court denied the motion on July 1, 1997. On April 27, 1998, the Court entered an order establishing a construction of the claims in Mr. White's patents which is broader than the construction which the Company advocated, and on June 25, 1998, the Court denied reconsideration of the April 27 order. The Court has set a February 1999 trial date. It is the opinion of the Company's patent counsel that the Company's products do not infringe any valid or enforceable claims of the patents involved in the suit. The Company intends to vigorously defend itself against any and all charges of infringement of these patents. On December 16, 1996, a patent infringement action was filed against the Company by an individual, Virgle 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 relate to sputtered magnetic thin-film recording discs for computers and their manufacture. The Company answered the complaint denying infringement, alleging that the patents are invalid and unenforceable, and counterclaiming for declaratory judgment that a fourth Hedgcoth patent, No. 4,894,133, is invalid, unenforceable and not infringed. Additionally, on July 1, 1997, Mr. Hedgcoth filed a patent infringement action against the Company in the same Court for alleged infringement of a fifth patent, U.S. Patent No. 5,262,970, issued May 6, 1997. It is the opinion of the Company's patent counsel that the Company's products do not infringe any valid or enforceable claims of the patents in the two actions, and that the claims of the patents in the two actions are invalid or unenforceable. The Company intends to vigorously defend itself against any and all charges of infringement of Mr. Hedgcoth's patents. Papst Licensing, GmbH, has given the Company notice that it believes certain former Conner Peripherals, Inc. ("Conner") disc drives infringe several of its patents covering the use of spindle motors in disc drives. It is the opinion of the Company's patent counsel that the former Conner disc drives do not infringe any claims of the patents and that the asserted claims of the patents are invalid. The Company also believes that subsequent to the merger with Conner, the Company's earlier paid-up license under Papst's patents extinguishes any ongoing liability. The Company also believes it enjoys the benefit of a license under Papst's patents since Papst Licensing had granted a license to motor vendors of Conner. 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. OTHER MATTERS The Company is involved in a number of other judicial and administrative proceedings incidental to its business. Although occasional adverse decisions (or settlements) may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the Company's financial position or results of operations. 35 COMMITMENTS LEASES The Company leases certain property, facilities and equipment under noncancelable lease agreements. Land and facility leases expire at various dates through 2082 and contain various provisions for rental adjustments including, in certain cases, a provision based on increases in the Consumer Price Index. All of the leases require the Company to pay property taxes, insurance and normal maintenance costs. Future minimum lease payments for operating leases with initial or remaining terms of one year or more were as follows at July 3, 1998: Operating In millions Leases ------------------------------------------------------------------- 1999 $ 58 2000 44 2001 27 2002 30 2003 19 After 2003 133 ----- $ 311 ===== Total rent expense for all land, facility and equipment operating leases was approximately $58 million, $51 million and $45 million for 1998, 1997 and 1996, respectively. CAPITAL EXPENDITURES The Company's commitments for construction of manufacturing facilities and equipment approximated $173 million at July 3, 1998. SUPPLEMENTAL CASH FLOW INFORMATION In millions 1998 1997 1996 ________________________________________________________________________________ Cash Transactions: Cash paid for interest $ 52 $ 26 $ 64 Cash paid for income taxes, net of refunds (1) 59 208 Non-Cash Transactions: Conversion of debentures $ - $ 788 $ 266 36 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Seagate Technology, Inc. We have audited the accompanying consolidated balance sheets of Seagate Technology, Inc. as of July 3, 1998 and June 27, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 3, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Seagate Technology, Inc. at July 3, 1998 and June 27, 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 3, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California July 14, 1998, except for the second paragraph of the Acquisitions note, as to which the date is July 31, 1998 and the first and second paragraphs of the Patent Litigation note, as to which the date is August 17, 1998. 37 EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SEAGATE TECHNOLOGY, INC. SUBSIDIARIES OF THE REGISTRANT
STATE OR OTHER JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION - ------------------ ------------- Seagate Technology S.A. France Seagate Technology GmbH Germany Seagate Technology S.r.l. Italy Seagate Technology AB Sweden Nippon Seagate Inc. Japan Seagate Technology Taiwan Ltd. Taiwan Seagate Technology Korea Limited Korea Seagate Technology Australia Pty. Limited Australia Seagate Foreign Sales Corporation Virgin Islands Seagate Microelectronics Limited Scotland Seagate Technology (Hong Kong) Limited Hong Kong Seagate Distribution (UK) Limited Scotland Seagate Singapore Distribution Pte. Ltd. Singapore Quinta Corporation California Seagate Storage Networking, Inc. Delaware Seagate Technology SAN/NAS Delaware Seagate Technology International Cayman Islands, BWI Seagate Technology (Ireland) Cayman Islands, BWI Seagate Technology (Ireland Holdings) Cayman Islands, BWI Penang Seagate Industries (M) Sdn. Bhd. Malaysia Seagate Technology Asia Holdings Cayman Islands, BWI Senai Seagate Industries (M) Sdn. Bhd. Malaysia P.T. Seagate Technology Indonesia Seagate Technology (Thailand) Limited Thailand Seagate Technology China Holding Company Cayman Islands, BWI Seagate Technology Shenzhen Co. Ltd. China Seagate Technology International (Wuxi) Co. Ltd. China Perai Seagate Storage Products Sdn. Bhd. Malaysia Seagate Technology Finance Limited Cayman Islands, BWI Seagate Technology Media Mexico S.A. de C.V. Mexico Seagate Technology Media (Ireland) Cayman Islands, BWI Seagate Technology (Philippines) Cayman Islands, BWI Seagate Technology International Holdings Cayman Islands, BWI Seagate Software Information Management Group (Canada), Inc. Canada Seagate Technology Investments, Inc. Delaware Seagate Software, Inc. Delaware Seagate Software Network & Storage Management Group, Inc Delaware Seagate Software Pty. Limited Australia Seagate Software S.A. France Seagate Software Limited United Kingdom Seagate Software GmbH Germany Seagate Software Information Management Group Ltd. United Kingdom Seagate Software Information Management Group AB Sweden Seagate Software Information Management Group BV Holland Seagate Software (Hong Kong) Limited Hong Kong Nippon Seagate Software KK. Japan Seagate Software Information Management Group GmbH Germany Seagate Software Information Pte. Ltd. Singapore Seagate Software Information Management Group (US), Inc. Colorado Seagate Software International Holdings Ltd. Cayman Islands, BWI Seagate Software GmbH Switzerland Seagate Software Storage Management Group, Inc. Delaware
EX-23.1 9 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10- K) of Seagate Technology, Inc. of our report dated July 14, 1998, except for the second paragraph of the Acquisitions note, as to which the date is July 31, 1998, and the first and second paragraphs of the Patent Litigation note, as to which the date is August 17, 1998, included in the 1998 Annual Report to Stockholders of Seagate Technology, Inc. Our audits also included the financial statement schedule of Seagate Technology, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-43911, 33-50973, 33-39916, 33-56215, 33-34793, 33- 64339, 333-00697, 333-01059, 333-40005), pertaining to the 1991 Incentive Stock Option Plan, the Employee Stock Purchase Plan, the Executive Stock Option Plan of Seagate Technology, Inc., the 1992 Conner Peripherals, Inc. Restricted Stock Plan and the Arcada Holdings, Inc. Stock Option Plan, and in the related prospectus, of our report dated July 14, 1998, except for the second paragraph of the Acquisitions note, as to which the date is July 31, 1998, and the first and second paragraphs of the Patent Litigation note, as to which the date is August 17, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Seagate Technology, Inc. Ernst & Young LLP San Jose, California August 18, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED BALANCE SHEET AS OF JULY 3, 1998 AND THE CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED JULY 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-03-1998 JUN-28-1997 JUL-03-1998 666,041 1,160,511 852,837 54,130 508,133 3,614,584 3,242,042 1,573,321 5,644,597 1,374,998 703,410 0 0 2,519 2,933,950 5,644,597 6,818,524 6,818,524 5,830,305 5,830,305 1,172,811 0 51,157 (704,032) (174,469) (529,563) 0 0 0 (529,563) (2.17) (2.17)
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