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FORM 10-K
SEAGATE TECHNOLOGY
(Annual Report)
Filed 9/11/2006 For Period Ending 6/30/2006
Address P.O. BOX 309GT, UGLAND HOUSE SOUTH CHURCH STREET,
GEORGE TOWN
GRAND CAYMAN, 00000
Telephone 345-949-8066
CIK 0001137789
Industry Computer Storage Devices
Sector Technology
Fiscal
Year 06/30

Table of contents

  • Page 1
    SEAGATE TECHNOLOGY FORM 10-K (Annual Report) Filed 9/11/2006 For Period Ending 6/30/2006 Address P.O. BOX 309GT, UGLAND HOUSE SOUTH CHURCH STREET, GEORGE TOWN GRAND CAYMAN, 00000 Telephone 345-949-8066 CIK Industry Sector Fiscal Year 0001137789 Computer Storage Devices Technology 06/30

  • Page 2
    ... OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2006 OR 32 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. 001-31560 SEAGATE TECHNOLOGY (Exact name of Registrant as...

  • Page 3

  • Page 4
    ... PART III Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accountant Fees and Services PART IV Exhibits, Financial Statement Schedules, and Reports on...

  • Page 5
    ... drives primarily to major original equipment manufacturers, or OEMs, and also market to distributors under our globally recognized brand name. For fiscal years 2006, 2005 and 2004, approximately 72%, 72% and 64%, respectively, of our disc drive revenue was from sales to OEMs, including customers...

  • Page 6
    ... processes whereby we are driving to replace Maxtor-designed disc drive products with Seagate-designed disc drive products. We expect this process to be substantially complete by the end of calendar year 2006. We foresee there to be a transitional period through the first six months of fiscal year...

  • Page 7
    ... are captive, producing disc drives for their own computer systems, or independent, producing disc drives as a stand-alone product. Integrated manufacturers are companies that design and produce the critical technologies, including read/write heads and recording media, used in their disc drives. An...

  • Page 8
    ... and from the disc; and product quality and reliability, commonly expressed in annualized return rates (ARR). Areal density is a measure of storage capacity per square inch on the recording surface of a disc. Current areal densities are sufficient to meet the requirements of most applications today...

  • Page 9
    ... first step in the manufacture of a disc drive itself is the assembly of the actuator arm, read/write heads, discs and spindle motor in a housing to form the head-disc assembly. The production of the head-disc assembly involves largely automated processes. Printed circuit boards are then matted to...

  • Page 10
    ..., with products shipping for revenue in the desktop, enterprise, mobile and branded solution markets during fiscal year 2006. We expect that by the end of fiscal year 2007, more than half of our disc drive unit shipments will be perpendicular recording technology based products. We offer more than...

  • Page 11
    ... technology. Consumer Electronics Storage Barracuda ATA/SATA Family, Momentus ATA and ST1 ATA/Compact Flash/USB . The Barracuda ATA/SATA families of 3.5-inch disc drives are used in digital video recorders, audio jukeboxes, home media centers, and home and industrial security systems. In June 2006...

  • Page 12
    ... with price protection with respect to their inventory of our disc drives at the time of a reduction by us in our selling price for the disc drives and also provide limited rights to return the product. The Company has significantly increased its sales to retail customers in the last two years and...

  • Page 13
    ... with manufacturers competing for a limited number of major customers. Some of the principal factors used by customers to differentiate among disc drive manufacturers are storage capacity; price per unit and price per gigabyte; storage/retrieval access times; data transfer rates; product quality and...

  • Page 14
    ... have established production facilities in China, Malaysia, Singapore and Thailand to achieve cost reductions. Product Life Cycles and Changing Technology . Historically, competition and changing customer preference and demand in the disc drive industry have shortened product life cycles and caused...

  • Page 15
    ... in negotiations with other major disc drive companies and component manufacturers with respect to ongoing patent cross-licenses. Backlog In view of customers' rights to cancel or defer orders with little or no penalty, we believe backlog in the disc drive industry is of limited indicative value in...

  • Page 16
    ... to the position of Chief Operating Officer, with responsibility for our disc drive manufacturing, recording media and head operations and product development. In June 2000, he was appointed to the position of President, and in November 2000, he became a member of our board of directors. In April...

  • Page 17
    ... and volume production activities for the worldwide operations relating to heads and media, which are located in the United States, Asia and Europe. Mr. Glembocki joined us in the February 1996 merger with Conner Peripherals. As Vice President of Engineering for our Recording Media Group, Mr...

  • Page 18
    ...with the SEC. Web Site Access . Our Internet web site address is www.seagate.com. We make available, free of charge at the "Investor Relations" portion of this web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or...

  • Page 19
    ... in the near term as we seek to transfer Maxtor's customers' purchases to Seagate-designed disc drive products; failure to effectively coordinate sales and marketing efforts to communicate the capabilities of the Company; revenue attrition in excess of anticipated levels; potential incompatibility...

  • Page 20
    ... financial reporting systems; and the loss of key employees. In addition, although we are currently transitioning Maxtor's sales to Seagate-designed disc drive products and expect this transition to be substantially completed by the end of calendar 2006, we cannot assure you that we will be...

  • Page 21
    ...a number of domestic and foreign companies, including other independent disc drive manufacturers and large captive manufacturers such as: Independent Captive Western Digital Corporation Cornice Inc. GS Magicstor Inc. Excelstor Fujitsu Limited Hitachi Global Storage Technologies Samsung Electronics...

  • Page 22
    ... in new computer operating system software and new gaming consoles; increased costs or adverse changes in availability of supplies, particularly with respect to precious metals and scarce alloys used in producing media for products using perpendicular recording technology; delays or problems in the...

  • Page 23
    ... of our unit volume will consist of products using perpendicular recording technology. Perpendicular recording technology poses various technological challenges including a complex integration of the recording head, the disc, recording channel, drive software and firmware as a system. To the extent...

  • Page 24
    ..., our sales are seasonal because of the capital budgeting and purchasing cycles of our end users. Because our working capital needs peak during periods in which we are increasing production in anticipation of orders that have not yet been received, our operating results will fluctuate seasonally...

  • Page 25
    ...single or a limited number of suppliers; the impact of changes in foreign currency exchange rates on the cost of producing our products and the effective price of our products to foreign consumers; and operational issues arising out of the increasingly automated nature of our manufacturing processes...

  • Page 26
    ... are based largely on price, terms and product availability. Sales volumes through this channel are also less predictable and subject to greater volatility than sales to our OEM customers. In the second half of fiscal year 2004, a number of disc drive manufacturers independently launched initiatives...

  • Page 27
    ...in areal density is increasing, a slowing rate of growth in areal density can limit the cost benefits of new products because it is technologically more difficult to reduce the number of read/write heads and discs in a particular drive. In addition, given the environment of intense price competition...

  • Page 28
    ... growth in new consumer electronics applications like digital video recorders and digital music players which are experiencing unexpected growth after the typically high demand holiday season. While this growth enabled us in fiscal year 2005, and to a lesser extent in fiscal year 2006, to offset the...

  • Page 29
    ... foreign countries, including manufacturing facilities, sales personnel and customer support operations. We have manufacturing facilities in China, Malaysia, Northern Ireland, Singapore and Thailand, in addition to those in the United States. A substantial portion of our desktop disc drive assembly...

  • Page 30
    ... date, asserted that, as of November 22, 2000, we no longer had a license to Read-Rite Corporation patented head technology and that our disc drive products infringe at least two Read-Rite Corporation patents. Read-Rite filed for bankruptcy on June 17, 2003, and Western Digital Corporation purchased...

  • Page 31
    ... Court for the Northern District of California on May 8, 2006, and we have decided not to appeal this decision. Because of the Read-Rite bankruptcy, Western Digital also does not have a right to a license to our patented head technology. In addition, neither Western Digital nor Seagate otherwise has...

  • Page 32
    ... number of our common shares in the future, the market price of our common shares could decline. The perception among investors that these sales may occur could produce the same effect. Any of Silver Lake Partners, Texas Pacific Group or August Capital can unilaterally require that we file...

  • Page 33
    ...is located in the Cayman Islands, while our U.S. executive offices are in Scotts Valley, California. Our principal manufacturing facilities are located in China, Malaysia, Northern Ireland, Singapore and Thailand and, in the United States, in California and Minnesota. Our principal disc drive design...

  • Page 34
    ...meeting, our shareholders voted on the following proposal, which was approved. Our shareholders cast their votes as follows: "To approve the issuance of Seagate common shares pursuant to the Agreement and Plan of Merger, dated December 20, 2005, by and among Seagate Technology, MD Merger Corporation...

  • Page 35
    ...prior fiscal year (provided that such consent is not required to declare and pay our regular quarterly dividend of up to $0.08 per share). In deciding whether or not to declare quarterly dividends, our directors will take into account such factors as general business conditions within the disc drive...

  • Page 36
    ... personal holding company for U.S. federal income tax purposes for our taxable years ended July 1, 2005 and July 2, 2004. Pursuant to the American Jobs Creation Act of 2004, foreign corporations will be excluded from the application of the personal holding company rules of the Internal Revenue Code...

  • Page 37
    ...repurchases during the quarter ended June 30, 2006 were as follows: Total Number of Shares Total Number of Shares Purchased Average Price Paid per Share Purchased Under Publicly Announced Plans or Programs (in millions) Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in...

  • Page 38
    ... our acquisition of Maxtor Corporation which include $38 million in integration and retention costs, net of related tax effects, $24 million in amortization of intangibles and $16 million in stock-based compensation charges related to Maxtor options assumed and nonvested shares exchanged. Year Ended...

  • Page 39
    Table of Contents Year Ended June 27, 2003 Includes a $10 million write-down in our investment in a private company and a $9 million net restructuring charge. Year Ended June 28, 2002 Includes a $179 million charge to record $32 million paid to participants in our deferred compensation plan and $147...

  • Page 40
    ... drives primarily to major original equipment manufacturers, or OEMs, and also market to distributors under our globally recognized brand name. For fiscal years 2006, 2005 and 2004, approximately 72%, 72% and 64%, respectively, of our disc drive revenue was from sales to OEMs, including customers...

  • Page 41
    ...up related media content. We estimate that in the most recent fiscal year industry shipments of disc drives to consumer electronics applications grew approximately 22% from the previous fiscal year. We believe technological advances have supported this trend in storage capacity per square inch, cost...

  • Page 42
    ..., which is necessary to achieve continued growth in areal density. Perpendicular recording technology poses various technological challenges including a complex integration of the recording head, the disc, recording channel, drive software and firmware as a system. At this time it is unclear...

  • Page 43
    ... drive revenue from the March 2006 to the June 2006 quarter. On May 19, 2006, we acquired Maxtor Corporation in a stock for stock transaction. Our fiscal year 2006 results include Maxtor's operating losses from May 19, 2006 through June 30, 2006 as well as purchase accounting and integration related...

  • Page 44
    ... merger (December 21, 2005) of $20.02 and including capitalized acquisition-related costs and the fair value of options assumed and nonvested shares exchanged, the transaction was valued for accounting purposes at approximately $2.0 billion. We also assumed all outstanding options to purchase Maxtor...

  • Page 45
    ... the historical consolidated statements of operations in dollars and as a percentage of revenue for the fiscal years indicated. Fiscal Years Ended June 30, 2006 July 1, 2005 (in millions) July 2, 2004 Revenue Cost of revenue Gross margin Product development Marketing and administrative Amortization...

  • Page 46
    ...of revenue from fiscal year 2005 was primarily due to higher overall unit shipments and an increase mix of new higher-margin products partially offset by higher costs associated with new product transitions, increased warranty cost and customer service inventory write-downs, stock-based compensation...

  • Page 47
    ...the Maxtor acquisition, an increasingly under-utilized manufacturing infrastructure required to build Maxtor-designed disc drive products, and purchase accounting charges, primarily stock-based compensation and amortization of existing technology, and integration, including retention, costs. Product...

  • Page 48
    ... not that the deferred tax assets associated with tax attributes subject to this IRC Section 382 limitation will not be realized, a valuation allowance has been provided. The Internal Revenue Service is currently examining our federal income tax returns for fiscal years ending in 2001 through 2004...

  • Page 49
    ...fiscal year ended July 2, 2004. We are a foreign holding company incorporated in the Cayman Islands with foreign and U.S. subsidiaries that operate in multiple taxing jurisdictions. As a result, our worldwide operating income is either subject to varying rates of tax or is exempt from tax due to tax...

  • Page 50
    ... our foreign parent holding company. On January 3, 2005, we underwent a change in ownership within the meaning of Section 382 of the Internal Revenue Code (IRC Sec. 382) due to the sale of common shares to the public by our then largest shareholder, New SAC. Based upon an independent valuation as of...

  • Page 51
    ... for manufacturing facilities and equipment for our recording head operations in the United States, the Far East and Northern Ireland; and $47 million for other capital additions. The $317 million increase in investment in property, equipment and leasehold improvements from fiscal year 2005 was...

  • Page 52
    ...of $35 million for fiscal year 2005 was primarily attributable to dividends of $122 million paid to our shareholders and principal payments on our senior secured credit facilities offset by $90 million in cash provided by employee stock option exercises and employee stock purchases. Net cash used in...

  • Page 53
    ... open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions or otherwise, or by any combination of such methods. The timing and actual number of shares repurchased will depend on a variety of factors including the share price, corporate and...

  • Page 54
    ... 30, 2006 have been summarized in the table below (in millions): Fiscal Year(s) 20082009 20102011 Thereafter Total 2007 Contractual Cash Obligations: Long term debt Capital expenditures Operating leases (1) Purchase obligations (2) Subtotal Commitments: Letters of credit or bank guarantees Total...

  • Page 55
    ... of operations. Establishment of Warranty Accruals. We estimate probable product warranty costs at the time revenue is recognized. We generally warrant our products for a period of one to five years. We use estimated repair or replacement costs and use statistical modeling to estimate product return...

  • Page 56
    ...options granted prior to the initial filing of our registration statement on Form S-1 in October 2002. As a result, we have included stock-based compensation costs in our results of operations for fiscal year 2006. See Note 3 of the Notes to Consolidated Financial Statements elsewhere in this report...

  • Page 57
    ... to support general corporate purposes including capital expenditures and working capital needs. We currently do not use interest rate derivatives to hedge our interest rate exposure. At June 30, 2006, the Company had $58 million in marketable securities that had been in a continuous unrealized...

  • Page 58
    ... retrospectively and record any ineffective portion of the hedging instruments in other income (expense) on the statement of operations. We did not have any net gains (losses) recognized in other income (expense) for cash flow hedges due to hedge ineffectiveness in fiscal years 2006, 2005 and 2004...

  • Page 59
    ..., net Other intangible assets Other assets, net Goodwill Total Assets LIABILITIES Accounts payable Accrued employee compensation Accrued restructuring Accrued expenses Accrued warranty Accrued income taxes Current portion of long-term debt Total Current Liabilities Accrued restructuring Accrued...

  • Page 60
    Table of Contents SEAGATE TECHNOLOGY CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) Fiscal Year Ended June 30, 2006 Fiscal Year Ended July 1, 2005 Fiscal Year Ended July 2, 2004 Revenue Cost of revenue Product development Marketing and administrative Amortization of ...

  • Page 61
    ... FINANCING ACTIVITIES Repayment of long-term debt Proceeds from exercise of employee stock options and employee stock purchase plan Dividends to shareholders Tax benefit from exercise of stock options Repurchases of common shares Net cash used in financing activities Increase (decrease) in cash and...

  • Page 62
    ... securities Unrealized loss on cash flow hedges Net income Comprehensive income Issuance of common shares related to employee stock options and employee stock purchase plan Dividends to shareholders Tax benefit from stock options Amortization of deferred stock compensation Balance at July 1, 2005...

  • Page 63
    ... sales returns by its distribution customers could have a material impact on the Company's financial condition and results of operations. The Company's warranty provision considers estimated product failure rates, trends and estimated repair or replacement costs. The Company uses a statistical model...

  • Page 64
    ...% of the outstanding common stock, stock options and nonvested stock of Maxtor Corporation ("Maxtor"). The consolidated financial statements include the results of operations of Maxtor subsequent to May 19, 2006. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks...

  • Page 65
    ...and notebook disc drives shipped through the distribution and retail channels are warranted for five years. A provision for estimated future costs relating to warranty returns is recorded when revenue is recognized and is included in cost of revenue. The Company offers extended warranties on certain...

  • Page 66
    ... for options granted prior to the Company's initial filing of its registration statement on Form S-1 in October 2002 for which the compensation cost was based on the intrinsic value method (see Note 3). Prior to July 2, 2005, the Company accounted for employee stock-based compensation using the...

  • Page 67
    ... for options granted prior to the initial filing of its registration statement on Form S-1 in October 2002 for which the compensation cost was based on the intrinsic value method. As a result, the Company has included stock-based compensation costs in its results of operations for fiscal year 2006...

  • Page 68
    ... tax return. This Interpretation is effective for fiscal years beginning after December 15, 2006 and will be adopted by the Company in the first quarter of fiscal year 2008. The Company is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations...

  • Page 69
    ... SEAGATE TECHNOLOGY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Sales and Distribution of Shares by New SAC New SAC, an exempted company incorporated with limited liability under the laws of the Cayman Islands, originally acquired the Company in November 2000 from Seagate Technology...

  • Page 70
    ... SEAGATE TECHNOLOGY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following is a summary of the fair value of available-for-sale securities at July 1, 2005 (in millions): Amortized Cost Unrealized Loss Fair Value US Government & Agency Corporate Bonds Auction Rate Securities Money...

  • Page 71
    Table of Contents SEAGATE TECHNOLOGY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) purposes. During fiscal years 2006, 2005 and 2004, the Company did not enter into any fair value hedges or hedges of net investments in foreign operations. In the fourth quarter of fiscal year 2004, the ...

  • Page 72
    ... allowance for doubtful accounts is as follows: Balance at Beginning of Period Additions, Charges to Costs, Reversals and Expenses Deductions (1) Assumed from Maxtor Balance at End of Period (in millions) Fiscal year ended June 30, 2006 Fiscal year ended July 1, 2005 Fiscal year ended July 2, 2004...

  • Page 73
    ... June 30, 2006, future minimum principal payments on long-term debt were as follows: Fiscal Year $ 400 135 49 326 60 - 970 (330) $ 640 $ 400 - - - - 340 740 (4) $ 736 2007 2008 2009 2010 2011 Thereafter $330 5 435 170 5 30 $975 Seagate Technology HDD Holdings ("HDD"), the Company's wholly-owned...

  • Page 74
    ... facility, which limits dividends to $200 million in any four consecutive quarters. The Company's declaration of dividends is also subject to Cayman Islands law and the discretion of its board of directors. As a result of its acquisition of Maxtor on May 19, 2006, the Company assumed the following...

  • Page 75
    Table of Contents SEAGATE TECHNOLOGY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) conversion rate of approximately 56.6503 shares per $1,000 principal amount of the notes, at the option of the holders, at any time during a fiscal quarter if, during the last 30 trading days of the ...

  • Page 76
    ... at retirement. Qualified employees may elect to make contributions to the 401(k) plan on a monthly basis. During fiscal years 2006, 2005 and 2004, the Company made contributions of $13 million, $13 million and $14 million, respectively. Stock-Based Benefit Plans Seagate Technology 2001 Share Option...

  • Page 77
    ... of the acquisition of Maxtor, the Company assumed all outstanding options under Maxtor's (Quantum HDD) Merger Plan. As of June 30, 2006, options granted under this plan were completely vested and exercisable. Stock Purchase Plan -The Company established an Employee Stock Purchase Plan ("ESPP") in...

  • Page 78
    ...during the fiscal year ended 2006 includes: (a) compensation cost based on the intrinsic value method for options granted prior to the Company's initial filing of its registration statement on Form S-1 in October 2002, (b) compensation cost for all unvested stock-based awards as of July 2, 2005 that...

  • Page 79
    ...the Company's stock options granted to employees or assumed from Maxtor for the fiscal years ended 2006, 2005 and 2004 were estimated using the following weighted-average assumptions: Fiscal Years Ended 2006 2005 2004 Seagate Option Plans Shares Expected term (in years) Volatility Expected dividend...

  • Page 80
    ... $267 million, respectively, determined as of the date of option exercise. At June 30, 2006, the total compensation cost related to options granted to employees under the Company's stock option plans (excluding options assumed in the Maxtor acquisition) but not yet recognized was approximately $169...

  • Page 81
    ... 14.28 $ 24.95 $ 21.84 $ 20.65 At June 30, 2006, the total compensation cost related to nonvested shares granted to employees under the Company's stock option plans (excluding nonvested shares exchanged in the Maxtor acquisition) but not yet recognized was approximately $9 million, net of estimated...

  • Page 82
    ...expenses on the accompanying balance sheets. As a result of the Maxtor acquisition, the Company has acquired a deferred compensation plan for the benefit of eligible employees, which is designed to permit certain discretionary employer contributions, in excess of the tax limits applicable to the 401...

  • Page 83
    ... operating expenses of approximately $14 million in its first quarter of fiscal year 2005 related to this reduction in benefit obligation. Other than the $14 million reduction in the accrued benefit obligation, the components of net periodic benefit cost associated with the Company's post-retirement...

  • Page 84
    ...-(Continued) Deferred tax expense of $33 million for fiscal year 2006 related to the recording of a valuation allowance against deferred tax assets of Seagate that were considered to be no longer realizable as a result of the Maxtor acquisition and Seagate filing U.S. tax returns with Maxtor...

  • Page 85
    ... 382 limitations will not be realized, a valuation allowance has been provided. The applicable statutory rate in the Cayman Islands was zero for the Company for fiscal years ended June 30, 2006, July 1, 2005 and July 2, 2004. For purposes of the reconciliation between the provision for (benefit from...

  • Page 86
    ... these earnings will not be subject to tax in the Cayman Islands or U.S. federal income tax if remitted to the foreign parent holding company. The Internal Revenue Service is currently examining federal income tax returns of certain of the Company's U.S. subsidiaries for fiscal years ending in 2001...

  • Page 87
    ... than amounts originally estimated and approximately $5 million relating to the sale in the first quarter of fiscal year 2005 of a surplus building previously impaired in the fiscal year 2000 restructuring. During fiscal year 2004, the Company recorded $59 million in restructuring charges. Of the...

  • Page 88
    ... capital leases, equity investments and other non-current assets as recorded by the Company's operations in each area. The following table summarizes the Company's operations by geographic area: Fiscal Years Ended June 30, 2006 July 1, 2005 (in millions) July 2, 2004 Revenue from external customers...

  • Page 89
    ... 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 June 30, 2006 (lease payments are shown net of sublease income): Fiscal Years Ending Operating Leases...

  • Page 90
    Table of Contents SEAGATE TECHNOLOGY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) of fiscal years 2006, 2005 and 2004 was $6 million. The Company subleases a portion of its facilities that it considers to be in excess of current requirements. Total future lease income to be recognized for ...

  • Page 91
    ... alleged that two of our personal storage disc drive products infringe Chinese patent number ZL94111461.9, which prevents the corruption of systems data stored on disc drives. The suit, which sought to stop us from manufacturing the two products and claimed immaterial monetary damages, was dismissed...

  • Page 92
    ... against them vigorously. Read-Rite Corporation -In order to clarify our rights under a Patent Cross-License Agreement between Seagate Technology, Inc. and Read-Rite Corporation, we filed a declaratory judgment action on May 7, 2003 in the Superior Court of California, County of Santa Clara, seeking...

  • Page 93
    ... SEAGATE TECHNOLOGY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Licensing, GmbH, a German corporation, for infringement of a number of patents that relate to hard disk drives. Papst's complaint against Quantum and MKE was filed on July 30, 1998, and Papst's complaint against Maxtor...

  • Page 94
    ... drive technology advances and accelerate delivery of a wide range of differentiated products and cost-effective solutions to a growing base of customers. Under the terms of the Merger Agreement, each share of Maxtor common stock was exchanged for 0.37 of the Company's common shares. The Company...

  • Page 95
    ...2005) of $20.02 and including capitalized acquisition-related costs and the fair value of options assumed and nonvested shares exchanged, the transaction was valued for accounting purposes at approximately $2.0 billion. The Company also assumed all outstanding options to purchase Maxtor common stock...

  • Page 96
    ... includes, but is not limited to, changes in the timing and actual number of employees terminated and the location of these employees, the period it takes to vacate and successfully market owned and leased facilities and the selling prices or sublet rental rates secured, the net resale values...

  • Page 97
    ... as a combination of Maxtor's processes, patents, and trade secrets developed through years of experience in design and development of their products. Existing technology was valued using the Excess Earnings Method under the Income Approach. This approach reflects the present value of projected cash...

  • Page 98
    ... to present value to arrive at the fair value allocated to this intangible. Trade names are amortized to Operating Expenses over the estimated useful life of four years. In-Process Research and Development As of the date of the acquisition, all development activities at Maxtor were discontinued...

  • Page 99
    ... summarizes the Company's exit activities in connection with the Maxtor acquisition for fiscal year ended June 30, 2006: Severance and Benefits Excess Facilities Contract Cancellations Total (in millions) Accrued exit costs, May 19, 2006 Cash payments Accrued exit costs, June 30, 2006 $ $ 117...

  • Page 100
    ... of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to be a projection of future results. The unaudited pro forma financial information for the fiscal year ended June 30, 2006 combines the Company...

  • Page 101
    ... goodwill may be impaired. The Company did not record any impairment of goodwill during the fiscal year ended June 30, 2006. Other Intangible Assets Other intangible assets consist primarily of existing technology, customer relationships and trade names acquired in business combinations. Acquired...

  • Page 102
    ... or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligation. Changes in the Company's product warranty liability during the fiscal years ended June 30, 2006 and July 1, 2005 were as follows: Fiscal Year Ended June 30, 2006 (in...

  • Page 103
    ... fiscal year 2006, and these allocations were not material for fiscal years 2005 and 2004. Xiotech Corporation and Certance were affiliates of Seagate Technology. The Company recorded revenue from Xiotech of $1 million and $7 million in fiscal years 2006 and 2005, respectively, and recorded revenue...

  • Page 104
    ... constitute affiliate transactions. From the date of acquisition (May 19, 2006) through June 30, 2006, Maxtor was a wholly owned direct subsidiary of Seagate Technology. The accompanying condensed consolidating financial information reflects the corporate legal structure of Seagate Technology, HDD...

  • Page 105
    ... FINANCIAL STATEMENTS-(Continued) Consolidating Balance Sheet June 30, 2006 (in millions) Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Cash and cash equivalents Short-term investments Accounts receivable, net...

  • Page 106
    ... FINANCIAL STATEMENTS-(Continued) Consolidating Balance Sheet July 1, 2005 (in millions) Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Cash and cash equivalents Short-term investments Accounts receivable, net...

  • Page 107
    ...) Consolidating Statement of Operations Fiscal Year Ended June 30, 2006 (in millions) Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative...

  • Page 108
    ... shares for employee stock plans Loan from HDD to Parent Loan from HDD to Non-Guarantor Loan repayment from Non-Guarantor to HDD Loan from Non-Guarantor to HDD Distribution from HDD to Parent Investment by Parent in Non-Guarantor Dividends to shareholders Tax benefit from exercise of stock options...

  • Page 109
    ...) Consolidating Statement of Operations Fiscal Year Ended July 1, 2005 (in millions) Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative...

  • Page 110
    ... of Cash Flows Fiscal Year Ended July 1, 2005 (in millions) Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Net Income Adjustments to reconcile net income to net cash from operating activities: Depreciation and...

  • Page 111
    ...) Consolidating Statement of Operations Fiscal Year Ended July 2, 2004 (in millions) Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative...

  • Page 112
    ... of Cash Flows Fiscal Year Ended July 2, 2004 (in millions) Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Net Income Adjustments to reconcile net income to net cash from operating activities: Depreciation and...

  • Page 113
    ... balance sheets of the Company and its subsidiaries at June 30, 2006, and the condensed consolidating results of operations and cash flows for the period from May 19, 2006 to June 30, 2006. The information classifies the Company's subsidiaries into Seagate Technology-parent company guarantor, Maxtor...

  • Page 114
    111

  • Page 115
    ...) Consolidating Statement of Operations Fiscal Year Ended June 30, 2006 (in millions) Seagate Technology Parent Company Guarantor Maxtor Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative...

  • Page 116
    ... Year Ended June 30, 2006 (in millions) Seagate Technology Parent Company Guarantor Maxtor Subsidiary Issuer Combined NonGuarantors Eliminations Seagate Technology Consolidated Net Income Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Stock...

  • Page 117
    ...our acquisition of Maxtor Corporation which include $38 million in integration and retention costs, net of related tax effects, $24 million in amortization of intangibles and $16 million in stock-based compensation charges related to Maxtor options assumed and nonvested shares exchanged. Fiscal Year...

  • Page 118
    ...unqualified opinion thereon. As discussed in Note 3 to the Notes to Consolidated Financial Statements, under the heading Compensation-Adoption of SFAS 123(R), in fiscal 2006 Seagate Technology changed its method of accounting for stock-based compensation. /s/ E RNST & Y OUNG LLP San Jose, California...

  • Page 119
    ... with the standards of the Public Company Accounting Oversight Board (United States), the 2006 consolidated financial statements of Seagate Technology and our report dated September 7, 2006 expressed an unqualified opinion thereon. /s/ E RNST & Y OUNG LLP San Jose, California September 7, 2006 116

  • Page 120
    ... have excluded from our evaluation, the internal control over financial reporting of Maxtor Corporation and subsidiaries, which we acquired on May 19, 2006 and is included in the fiscal year 2006 consolidated financial statements of Seagate Technology and constituted $4.1 billion and $2.0 billion of...

  • Page 121
    ... and accounting officers. This Code of Business Conduct and Ethics is posted on our Website. The Internet address for our Website is www.seagate.com , and the Code of Business Conduct and Ethics may be found from our main Web page by clicking first on "News + Info" and then on "Investor Relations...

  • Page 122
    ... to Stock Purchase Agreement, Agreement and Plan of Merger and Reorganization, and Indemnification Agreement, and Consent, dated as of August 29, 2000, by and among Suez Acquisition Company (Cayman) Limited, Seagate Technology, Inc., Seagate Software Holdings, Inc., VERITAS Software Corporation and...

  • Page 123
    ... to Stock Purchase Agreement, Agreement and Plan of Merger and Reorganization, and Indemnification Agreement, and Consent, dated as of October 18, 2000, by and among Suez Acquisition Company (Cayman) Limited, Seagate Technology, Inc., Seagate Software Holdings, Inc., VERITAS Software Corporation and...

  • Page 124
    ...4.4 Shareholders Agreement by and among Seagate Technology Holdings, New SAC, Silver Lake Technology Investors Cayman, L.P., Silver Lake Investors Cayman, L.P., Silver Lake Partners Cayman, L.P., SAC Investments, L.P., August Capital III, L.P., J.P. Morgan Partners, L.L.C., GS Capital Partners III...

  • Page 125
    ...filed with the SEC on May 16, 2002) Management Participation Agreement, dated as of March 29, 2000, by and among Seagate Technology, Inc., Suez Acquisition Company (Cayman) Limited...-88388) filed with the SEC on May 16, 2002) Seagate Technology HDD Holdings Deferred Compensation Plan (incorporated by...

  • Page 126
    ... Shareholders Agreement, dated as of November 22, 2000, by and among New SAC, Silver Lake Technology Investors Cayman, L.P., Silver Lake Investors Cayman, L.P., Silver Lake Partners Cayman, L.P., SAC Investments, L.P., August Capital III, L.P., Chase Equity Associates, L.P., GS Capital Partners III...

  • Page 127
    ...Plan Form of Option Agreement (For Non-Officer Employees) (incorporated by reference to Exhibit 10.27 to the registrant's quarterly report on Form 10-Q (reg. no. 001-31560) filed with the SEC on October 29, 2004) Summary description of Seagate Technology's compensation policy for independent members...

  • Page 128
    ...Maxtor Corporation, Citigroup Global Markets Inc., Merrill Lynch, Pierce Fenner & Smith Incorporated and Goldman Sachs and Co., dated August 15, 2005 (incorporated by reference to Exhibit 10.5 to the registrant's current report on Form 8-K filed with the SEC on May 25, 2006) Code of Business Conduct...

  • Page 129
    ... of the U.S. Securities and Exchange Commission thereunder in connection with the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2006 (the "Annual Report"), including specifically, but without limiting the generality of the foregoing, power and authority to sign the name...

  • Page 130
    ... of Contents Signature Title Date / S / W ILLIAM W. B RADLEY (William W. Bradley) Director September 8, 2006 / S / J AMES A. D AVIDSON (James A. Davidson) Director September 8, 2006 / S / G LENN H. H UTCHINS (Glenn H. Hutchins) Director September 8, 2006 / S / D ONALD E. K IERNAN (Donald...

  • Page 131
    ... common control with) the Company. Solely with respect to the granting of any Incentive Stock Options, Affiliate means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code...

  • Page 132
    ...Plan. 2.7. "Common Stock" means the common shares of the Company. 2.8. "Company" means Seagate Technology, a limited company domiciled in the Cayman Islands. 2.9. "Consultant" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services...

  • Page 133
    ... the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted), or if no sale of stock shall have been reported on...

  • Page 134
    ...within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an...

  • Page 135
    ... to the provisions of Section 8.4 of the Plan. 2.31. "Plan" means this 2004 Stock Compensation Plan of Seagate Technology. 2.32. "Restricted Stock Bonus" means a grant of shares of the Company's Common Stock not requiring a Participant to pay any amount of monetary consideration, and subject to...

  • Page 136
    ... Plan relating to adjustments upon changes in Common Stock, the maximum aggregate number of shares of Common Stock that may be issued pursuant to Stock Awards shall not exceed twenty seven million five hundred thousand (27,500,000) shares, provided that each Stock Award granted will reduce the share...

  • Page 137
    ... (5) years from the date of grant. 5.3. Annual Section 162(m) Limitation . Subject to the provisions of Section 13 of the Plan relating to adjustments upon changes in the shares of Common Stock, no Employee shall be eligible to be granted Incentive Stock Options, Nonstatutory Stock Options or Stock...

  • Page 138
    ... as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise...

  • Page 139
    ... Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to...

  • Page 140
    ...the Plan, the number of shares of Common Stock covered by such stock option shall be equal to twenty five thousand (25,000) shares ("Annual Grant"). The date of grant of an Annual Grant is the date on which the Director is re-elected to serve on the Board. The exercise price of an Annual Grant shall...

  • Page 141
    ... criteria or Continuous Service. Shares of Common Stock acquired under the Restricted Stock Purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) Termination of Participant...

  • Page 142
    ... extent applicable, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). An election to defer such delivery shall be irrevocable and shall be made in writing on a form acceptable to the Company. The election form shall be filed prior to the vesting date of such Restricted Stock...

  • Page 143
    ... schedule to be determined by the Board. (iii) Termination of Participant's Continuous Service . In the event a Participant's Continuous Service terminates, the Company shall reacquire any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination...

  • Page 144
    ... schedule to be determined by the Board. (iii) Termination of Participant's Continuous Service . In the event a Participant's Continuous Service terminates, the Company shall reacquire any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination...

  • Page 145
    ... Options, the Board shall obtain the approval of the shareholders of the Company to the extent required by any New York Stock Exchange, Nasdaq or other securities exchange listing requirements, or applicable law. 11.2. Shares subject to an Option canceled under this Section 11 shall continue...

  • Page 146
    ... of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan may be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan or to grants of Full-Value Stock Awards...

  • Page 147
    ... the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted...

  • Page 148
    ... the date the Plan is adopted by the Board. No Stock Awards may be granted under the Plan prior to the time that the shareholders have approved the Plan. The approval or disapproval of the Plan by the shareholders of the Company shall have no effect on any other equity compensation plan, program...

  • Page 149
    ...BY SEAGATE, THE NUMBER OF SHARES OF THE INITIAL GRANT SHALL BE DETERMINED BY THE EXISTING MEMBERS OF THE BOARD, BUT SHALL NOT EXCEED 100,000 SHARES. ANNUAL REFRESHMENT GRANT EACH YEAR THEREAFTER, UPON RE-ELECTION TO THE BOARD, OF AN OPTION FOR 25,000 SHARES OF ST STOCK AT FMV AS OF THE DATE OF GRANT...

  • Page 150
    ... $10,000 PER YEAR, PAYABLE IN FOUR EQUAL INSTALLMENTS OF $2,500 PAYABLE ON THE FIRST DAY OF EACH CALENDAR QUARTER, TO EACH BOARD MEMBER SERVING AS A MEMBER OF THE NOMINATING AND CORPORATE GOVERNANCE COMMITTEE REIMBURSEMENT FOR BOARD MEETING TRAVEL EXPENSES AUDIT COMMITTEE MEMBERS: DONALD E. KIERNAN...

  • Page 151
    ... Storage Products Sdn. Bhd. Seagate Technology International (Wuxi) Co. Ltd. Seagate Technology (Thailand) Limited Seagate Technology (Malaysia) Holding Company Senai Seagate Industries (M) Sdn. Bhd. Seagate Technology (Ireland) Springtown Northern Ireland Branch Seagate Technology Media (Ireland...

  • Page 152
    ... Maxtor Luxembourg S.Ã r.l. Maxtor Peripherals (S) Pte Ltd Maxtor International S.Ã r.l. India Liaison Office Moscow Representative Office Singapore Branch United Arab Emirates Branch Maxtor Ireland Limited Maxtor International Manufacturing S.Ã r.l. Maxtor Technology (Suzhou) Co. Ltd. California...

  • Page 153
    ... of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Seagate Technology, included in this Annual Report (Form 10-K) for the year ended June 30, 2006. /s/ Ernst & Young LLP San Jose, California September 7, 2006

  • Page 154
    ... ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 8, 2006 /s/ W ILLIAM D. W ATKINS...

  • Page 155
    ...'s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 8, 2006 /s/ C HARLES C. P OPE...

  • Page 156
    ... of the Annual Report of Seagate Technology (the "Company") on Form 10-K for the fiscal year ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"). In connection with the Report we, William D. Watkins, Chief Executive Officer of the Company, and...