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FORM 10-K
SEAGATE TECHNOLOGY
(Annual Report)
Filed 8/27/2007 For Period Ending 6/29/2007
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 8/27/2007 For Period Ending 6/29/2007 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

  • Page 3
    ... as of December 29, 2006, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $4.9 billion based upon a closing price of $26.50 reported for such date by the New York Stock Exchange. The number of outstanding common shares of the registrant as...

  • Page 4
    DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be delivered to shareholders in connection with our 2007 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated herein by reference in Part III.

  • Page 5
    ... of the Registrant and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Certain Relationships, Related Transactions and Director Independence Principal Accountant Fees and Services 3 17 30 30 30 30 31 35...

  • Page 6
    ...systems ranging from desktop and notebook computers, and consumer electronics devices to data centers delivering information over corporate networks and the Internet. We produce a broad range of disc drive products addressing enterprise applications, where our products are used in enterprise servers...

  • Page 7
    ...as flash memory. Companies that make hardware storage solutions include disc drive manufacturers such as Seagate Technology, Western Digital, Samsung, Fujitsu Limited ("Fujitsu"), Hitachi Global Storage Technologies ("Hitachi") and Toshiba Corporation ("Toshiba"), magnetic tape storage manufacturers...

  • Page 8
    ...to redundant system startup or boot disc drives. In addition to the growth in mission critical enterprise storage, there has also been significant growth in the use of high capacity, enterprise class serial advanced technology architecture (SATA) products in business critical storage systems used by...

  • Page 9
    ... investments and apply them across a broad product portfolio and a wide variety of customers. Integrated manufacturers are companies that design and produce the critical components, including read/write heads and recording media, used in their disc drives. An integrated approach enables them to...

  • Page 10
    ...organization to rapidly achieve volume manufacturing and enhance our product quality and reliability. Manufacturing our disc drives is a complex process that begins with the production of individual components and ends with a fully assembled unit. We design, fabricate and/or assemble a number of the...

  • Page 11
    ... read/write heads, recording media and printed circuit boards. Our design and manufacturing operations are based on technology platforms that are used to produce various disc drive products that serve multiple disc drive applications and markets. As an example, our 3.5-inch ATA disc drive with...

  • Page 12
    ... has been characterized by continuous and significant advances in technology, which contributed to rapid product life cycles. We list below our main current product offerings. Enterprise Storage Cheetah SCSI/SAS/Fibre Channel Family. Our Cheetah 3.5-inch disc drives ships in 10,000 and 15,000 RPM...

  • Page 13
    ...inch disc drive designed for use in portable media players, global positioning systems (GPS), digital video camcorders and ultra-mobile PCs. Branded Solutions Our branded solutions business, which was expanded with the acquisition and integration of the retail and branded sales operations of Maxtor...

  • Page 14
    ... provide the distributors 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. We have significantly increased our sales of branded storage products to...

  • Page 15
    .... Our customer service organization maintains a global network of service points to process warranty returns and manage outsourced repair vendors. We generally warrant our products for periods ranging from one year to five years. Foreign sales are subject to foreign exchange controls and other...

  • Page 16
    ... alternative storage technologies, including flash storage technology. We have increased our focus on research and development and realigned our disc drive development process. This structured product process is designed to bring new products to market in a high volume environment and with quality...

  • Page 17
    ...patent applications will vary at any given time as part of our ongoing patent portfolio management activity. Due to the rapid technological change that characterizes the information storage industry, we believe that the improvement of existing products, reliance upon trade secret law, the protection...

  • Page 18
    ... President, and General Manager, Removable Storage Solutions from 1997 to 1998. Mr. Abbott has been Executive Vice President, Sales, Marketing and Customer Service since 2007. Prior to joining Seagate, he was Senior Vice President of Worldwide Sales for Symbol Technologies from 2002 to 2006; Group...

  • Page 19
    ..., Recording Heads and 2000. Prior to that he was Senior Vice President/General Manager, Recording Media Group, from 1997 to 2000; and Vice President, Engineering and CTO Media from 1996 to 1997. Media Operations age 51 Mr. Mosley has been Senior Vice President, Global Disc Storage Operations since...

  • Page 20
    ... growth of sales to distributors that serve producers of non-branded products in the personal storage sector. These customers generally have limited product qualification programs, which increases the number of competing products available to satisfy their demand. As a result, purchasing decisions...

  • Page 21
    ... will be adversely affected. In addition, in response to customer demand for high-quality, high-volume and low-cost disc drives, manufacturers of disc drives have had to develop large, in some cases global, production facilities with highly developed technological capabilities and internal controls...

  • Page 22
    ...of our recent revenue growth is derived from the sale of drives for small form factor drives for notebook and enterprise applications. We have experienced competition from other companies that produce alternative storage technologies like flash memory, where increased capacity, improving cost, lower...

  • Page 23
    ... of the recording head, the disc, recording channel and drive firmware as a system. If these perpendicular technology based products suffer unanticipated or atypical failures that were not anticipated in the design of those products, our service and warranty costs may materially increase which would...

  • Page 24
    ... 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. Dependence on Sales of Disc Drives in Consumer Electronics Applications...

  • Page 25
    ... purchase of Komag by Western Digital. In the past, we have experienced increased costs and production delays when we were unable to obtain the necessary equipment or sufficient quantities of some components and/or have been forced to pay higher prices or make volume purchase commitments or advance...

  • Page 26
    ... on sales to distributors, which may increase price erosion and the volatility of our sales. A substantial portion of our sales has been to distributors of desktop disc drive products. Product qualification programs in this distribution channel are limited, which increases the number of competing...

  • Page 27
    ... business, results of operations, financial condition and prospects. Impact of Technological Change - Increases in the areal density of disc drives may outpace customers' demand for storage capacity. The rate of increase in areal density, or storage capacity per square inch on a disc, may be greater...

  • Page 28
    ... our existing technologies and operations. Our ability to finance potential acquisitions will be limited by our high degree of leverage, the covenants contained in the indentures that govern our outstanding indebtedness, the credit agreement that governs our senior secured credit facilities and any...

  • Page 29
    ... raising additional financing on satisfactory terms to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements; and • covenants in our debt instruments limit our ability to pay dividends or...

  • Page 30
    ... the risk that we will be unable to service our debt or generate enough cash flow to fund our liquidity needs, could intensify. Restrictions Imposed by Debt Covenants - Restrictions imposed by our existing credit facility may limit our ability to finance future operations or capital needs or engage...

  • Page 31
    ... and duties, price controls, potential adverse tax consequences, increased costs, our customers' credit and access to capital and health-related risks. We have significant operations in foreign countries, including manufacturing facilities, sales personnel and customer support operations. We have...

  • Page 32
    ... managing our international manufacturing facilities, complying with local legal and regulatory requirements and protecting our intellectual property. We cannot assure you that we will continue to be found to be operating in compliance with applicable customs, currency exchange control regulations...

  • Page 33
    ... respect to the publicly traded securities of disc drive companies and technology companies generally. The price of our common shares is likely to be volatile in the future. In the past, following periods of decline in the market price of a company's securities, class action lawsuits have often been...

  • Page 34
    ... Company Manual. Market Information Our common shares have traded on the New York Stock Exchange under the symbol "STX" since December 11, 2002. Prior to that time there was no public market for our common shares. The high and low sales prices of our common shares, as reported by the New York Stock...

  • Page 35
    Table of Contents Performance Graph The performance graph below shows the cumulative total shareholder return on our common shares for the period starting on December 11, 2002, which was the initial trading date of the common shares, to June 29, 2007. This is compared with the cumulative total ...

  • Page 36
    ... will take into account such factors as general business conditions within the disc drive industry, our financial results, our capital requirements, contractual and legal restrictions on the payment of dividends by our subsidiaries to us or by us to our shareholders, the impact of paying dividends...

  • Page 37
    ... as follows: Total Number of Shares Purchased Under Publicly Announced Plans or Programs (In millions) Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (In millions) Total Number of Shares Purchased (In millions) Average Price Paid per Share Through 3 rd...

  • Page 38
    ... and retention costs, net of related tax effects, $150 million in amortization of acquired intangibles, $27 million in stock-based compensation charges related to Maxtor options assumed and nonvested shares exchanged and the settlement of $18 million in customer compensatory claims related to legacy...

  • Page 39
    ...systems ranging from desktop and notebook computers, and consumer electronics devices to data centers delivering information over corporate networks and the Internet. We produce a broad range of disc drive products addressing enterprise applications, where our products are used in enterprise servers...

  • Page 40
    ... directly utilize disc drives or indirectly drive the demand for additional disc drive storage to store, host or back up related digital content. • The need to address the expansion in data storage management requirements has increased the demand for new hardware storage solutions for both mission...

  • Page 41
    ...to redundant system startup or boot disc drives. In addition to the growth in mission critical enterprise storage, there has also been significant growth in the use of high capacity, enterprise class serial advanced technology architecture (SATA) products in business critical storage systems used by...

  • Page 42
    ...recording technology, companies will be required to maintain an increased inventory of these precious metals and scarce alloys. Industry Supply Balance Finally, to the extent that the disc drive industry builds product based on expectations of demand that do not materialize, the distribution channel...

  • Page 43
    ... 2006, mainly from an increase of 34% in the number of disc drives shipped as a result of the retention of a portion of Maxtor's market share, but also due to continued growth in digital content and the resulting increase in demand for storage and growth in the mobile market, coupled with customer...

  • Page 44
    ... for recording media that we produce internally varies from quarter to quarter. We are continuing to expand our media production facilities in Singapore, and have relocated certain of the acquired Maxtor media manufacturing equipment to Asia. We do not expect our new media facility in Singapore to...

  • Page 45
    Table of Contents Raw Materials We believe Seagate is leading the transition to perpendicular recording technology. We are currently shipping perpendicular technology based products for all four major markets, and during the June 2007 quarter, we shipped over 28 million disc drives that use ...

  • Page 46
    ... to distributors and retail customers which generally require higher program support than OEM sales and to a more aggressive pricing environment. Point-of-sale rebates, sales price adjustments and price protection accounted for a substantial portion of the increase in sales programs. Cost of Revenue...

  • Page 47
    ...retention costs of $54 million, stock-based compensation of $27 million, amortization of existing technology of $150 million, and an $18 million accrual for the settlement of customer compensatory claims associated with quality issues related to legacy Maxtor products shipped prior to the closing of...

  • Page 48
    ...potential future increases in our valuation allowance for deferred tax assets and (ii) limitations imposed by Internal Revenue Code Section 382 ("IRC Section 382") on usage of certain tax attributes (further described below), we anticipate that our effective tax rate in future periods will generally...

  • Page 49
    ... increased warranty cost and customer service inventory write-downs, stock-based compensation costs, price erosion, and in connection with the Maxtor acquisition, an increasingly under-utilized manufacturing infrastructure required to build Maxtor-designed disc drive products and purchase accounting...

  • Page 50
    ...of tax or is exempt from tax due to tax holidays or tax incentive programs we operate under in China, Malaysia, Singapore, Switzerland and Thailand. These tax holidays or incentives are scheduled to expire in whole or in part at various dates through 2015. Our provision for income taxes recorded for...

  • Page 51
    ...disc drive final assembly and test facilities in the United States and the Far East; • $418 million to upgrade the capabilities of our thin-film media operations in the United States, Singapore and Northern Ireland; • $240 million for manufacturing facilities and equipment for our recording head...

  • Page 52
    ...the ramp-up and production of Seagate-designed disc drive products to replace legacy Maxtor-designed products. For fiscal year 2008, we expect approximately $900 million in capital investment will be required to continue to proceed with our planned media and substrate capacity expansions in Asia and...

  • Page 53
    ... paid on or before August 17, 2007 to our common shareholders of record as of August 3, 2007. 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 industry, our financial results, our capital...

  • Page 54
    ... financing. Additional funds may not be available on terms favorable to us or at all. We will require substantial amounts of cash to fund scheduled payments of principal and interest on our indebtedness, future capital expenditures, any increased working capital requirements and share repurchases...

  • Page 55
    ... the distribution channel, these programs typically involve rebates related to a distributor's level of sales, order size, advertising or point of sale activity and price protection adjustments. For OEM sales, rebates are typically based on an OEM customer's volume of purchases from Seagate or other...

  • Page 56
    ... to five years. Our warranty provision considers estimated product failure rates and trends (including the timing of product returns during the warranty periods), estimated repair or replacement costs and estimated costs for customer compensatory claims related to product quality issues, if any. We...

  • Page 57
    ... interim periods within those fiscal years. We are currently evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated results of operations and financial condition. In June 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes...

  • Page 58
    ... debt obligations. We enter into debt obligations 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 29, 2007, we had $23 million in marketable securities that...

  • Page 59
    ...cash flows are in countries where we have a manufacturing presence. We have established a foreign currency hedging program to protect against the increase in value of foreign currency cash flows resulting from operating and capital expenditures over the next year. We hedge portions of our forecasted...

  • Page 60
    ... SUPPLEMENTARY DATA SEAGATE TECHNOLOGY CONSOLIDATED BALANCE SHEETS June 29, June 30, 2007 2006 (In millions, except share and per share data) ASSETS Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Deferred income taxes Other current assets Total Current Assets...

  • Page 61
    Table of Contents SEAGATE TECHNOLOGY CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Fiscal Fiscal Year Ended Year Ended Year Ended June 29, June 30, July 1, 2007 2006 2005 (In millions, except per share data) Revenue Cost of revenue Product development Marketing and administrative Amortization of ...

  • Page 62
    ... 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 in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash...

  • Page 63
    ...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 Stock-based compensation Balance at July 1, 2005 Comprehensive income, net of tax: Change in unrealized gain (loss) on...

  • Page 64
    ... also provides data storage services through EVault, Inc. ("EVault"), which it acquired in fiscal year 2007. The Company also sells storage products containing its disc drives under the Seagate Technology ("Seagate") and Maxtor Corporation ("Maxtor") brands. Critical Accounting Policies and Use of...

  • Page 65
    ... Company's warranty provision considers estimated product failure rates and trends (including the timing of product returns during the warranty periods), estimated repair or replacement costs and estimated costs for customer compensatory claims related to product quality issues, if any. The Company...

  • Page 66
    ... 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 products that customers may purchase. Deferred revenue in relation to extended warranties has not been material to date. Shipping...

  • Page 67
    ... to general and administrative expense. In September 2006, the Company recorded an additional $40 million allowance for doubtful accounts due to the inherent uncertainties following the termination of its distributor relationships with eSys Technologies Pte. Ltd. and its affiliated entities ("eSys...

  • Page 68
    ... Concentration - Certain of the raw materials and components used by the Company in the manufacture of its products are available from a limited number of suppliers. Shortages could occur in these essential materials and components due to an interruption of supply or increased demand in the industry...

  • Page 69
    ..., and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its consolidated results of operations and financial condition. In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty...

  • Page 70
    ... 2006 2005 (In millions, except per share data) Numerator Net income Denominator Weighted-average common shares outstanding Weighted-average nonvested shares Denominator for basic calculation Weighted-average effect of dilutive securities: Weighted-average nonvested shares Employee stock options...

  • Page 71
    ... is a summary of the fair value of available-for-sale securities at June 30, 2006 (in millions): Amortized Cost Unrealized Loss Fair Value US Government & Agency Asset Backed Securities Corporate Bonds Municipal Bonds Auction Rate Securities Commercial Paper Bank time deposits Money Market Total...

  • Page 72
    ... the same period during which the hedged forecasted transaction affects earnings. The gain or loss on a derivative instrument not qualifying for hedge accounting is recognized currently in earnings. The Company may enter into foreign currency forward exchange contracts to manage exposure related to...

  • Page 73
    ... eSys was the largest distributor of Seagate products (including Maxtor products) for the fiscal year ended June 30, 2006, representing approximately 5% the Company's revenues. The Company recorded $40 million of allowance for doubtful accounts in the three months ended September 29, 2006 due to the...

  • Page 74
    Table of Contents SEAGATE TECHNOLOGY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Activity in the allowance for doubtful accounts is as follows: Balance at Beginning of Period Charges to Operations Assumed from Maxtor Balance at End of Period Deductions(1) (In millions) Fiscal year ...

  • Page 75
    ... Facility Loans 8.0% Senior Notes due May 2009 Less current portion Long-term debt, less current portion $ 300 599 598 135 45 326 60 - 2,063 (330) $ 1,733 $ - - - 135 49 326 60 400 970 (330) $ 640 In September 2006, Seagate Technology HDD Holdings ("HDD"), the Company's wholly-owned direct...

  • Page 76
    ... acquisition of Maxtor on May 19, 2006, the Company assumed the 6.8% Notes. The 6.8% Notes require semi-annual interest payments payable on April 30 and October 30. The 6.8% Notes are convertible into common shares of Seagate Technology at a conversion rate of approximately 30.1733 shares per $1,000...

  • Page 77
    ... date, the Company had utilized $47 million for outstanding letters of credit and bankers' guarantees as of June 29, 2007, leaving $453 million for additional borrowings. The credit agreement governing the revolving credit facility includes limitations on the ability of the Company to pay dividends...

  • Page 78
    ... the Company's board of directors adopted the Seagate Technology 2001 Share Option Plan (the "2001 Plan"). Under the terms of the 2001 Plan, eligible employees, directors, and consultants can be awarded options to purchase common shares of the Company under vesting terms to be determined at the date...

  • Page 79
    ... Company established an Employee Stock Purchase Plan ("ESPP") in December 2002. At that time, a total of 20 million common shares had been authorized for issuance under the ESPP. On October 26, 2006, the Company's shareholders approved an amendment to the ESPP to increase the number of common shares...

  • Page 80
    ... 25, Accounting for Stock Issued to Employees ("APBO No. 25"), and related Interpretations, as permitted by FASB No. 123, Accounting for Stock-Based Compensation , ("SFAS No. 123"). The Company generally did not recognize stock-based compensation cost in its statement of operations for periods prior...

  • Page 81
    ... weighted-average assumptions: 2007 Fiscal Years Ended 2006 2005 Options under Seagate Plans Expected term (in years) Volatility Expected dividend Risk-free interest rate Estimated annual forfeitures Weighted-average fair value Options under Maxtor Plans Expected term (in years) Volatility Expected...

  • Page 82
    ... flows. The Company did not recognize any cash flows from excess tax benefits during fiscal year 2007. The Company recorded approximately $44 million of excess tax benefits as a financing cash inflow during fiscal year 2006. Stock Option Activity The Company issues new common shares upon exercise of...

  • Page 83
    ...99 20.71 20.65 At June 29, 2007, 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 $11 million, net of estimated forfeitures of...

  • Page 84
    ...for the benefit of eligible employees. This plan is designed to permit certain discretionary employer contributions, in excess of the tax limits applicable to the 401(k) plan and to permit employee deferrals in excess of certain tax limits. Company assets earmarked to pay benefits under the plan are...

  • Page 85
    ...recorded to Additional Paid-In Capital associated with stock option deductions. Current tax expense of $44 million and $15 million for fiscal years 2006 and 2005, respectively, was associated with stock option deductions, the tax benefits of which were recorded directly to Additional Paid-In Capital...

  • Page 86
    ... 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: June 29, June 30, 2007 2006 (In millions) Deferred Tax Assets Accrued warranty Inventory valuation accounts Receivable...

  • Page 87
    ... Paid-in Capital upon recognition. As a result of the Maxtor acquisition, Maxtor underwent a change in ownership within the meaning of Section 382 of the Internal Revenue Code (IRC Sec. 382) on May 19, 2006. In general, IRC Section 382 places annual limitations on the use of certain tax attributes...

  • Page 88
    ... been recorded on unremitted earnings of certain other foreign subsidiaries, as 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...

  • Page 89
    ... of Operations. The Company expects these restructuring activities to be completed by June 27, 2008. Additionally, the Company reversed $4 million of restructuring accruals relating to the sale of a surplus building impaired in a prior restructuring. During fiscal year 2006, the Company recorded...

  • Page 90
    .... The Company's manufacturing operations are based on technology platforms that are used to produce various disc drive products that serve multiple disc drive applications and markets. The Company's main technology platforms are primarily focused around areal density of media and read/write head...

  • Page 91
    ... 1, 2007 2006 2005 (In millions) Revenue from external customers(1): United States The Netherlands Singapore Other Consolidated Long-lived assets: United States Singapore Thailand China Other Consolidated (1) Revenue is attributed to countries based on the shipping location. 7. Equity Share Capital...

  • Page 92
    ... number of shares at future dates. The Company entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price ("VWAP") of its common shares. The Company's policy to date has been to enter into such transactions only...

  • Page 93
    ... year 2006 was completed and there is no outstanding authority for further shares to be purchased under that program. 8. Commitments Leases - The Company leases certain property, facilities and equipment under non-cancelable lease agreements. Land and facility leases expire at various dates through...

  • Page 94
    ..., Convolve and MIT filed suit against Compaq Computer Corporation and us in the U.S. District Court for the Southern District of New York, alleging patent infringement, misappropriation of trade secrets, breach of contract, tortious interference with contract and fraud relating to Convolve and MIT...

  • Page 95
    ... 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 96
    ... owned by StorMedia Texas LLC. The suit was filed in U.S. District Court for the Eastern District of Texas, Marshall Division. All major hard disc drive companies are named, including Seagate Technology, Seagate Technology LLC, Hitachi, Fujitsu, Samsung, Toshiba, and Western Digital, as well as...

  • Page 97
    ... better 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 Company's common shares. The Company...

  • Page 98
    ... technology relates to Maxtor's products across all of their product lines that have reached technological feasibility as well 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...

  • Page 99
    ..., the Company has accrued certain exit costs aggregating $247 million, of which $108 million relates to employee severance, $45 million relates to the planned exit of leased or owned excess facilities and $94 million relates to the cancellation or settlement of contractual obligations that will not...

  • Page 100
    ... estimated service (vesting) periods of the underlying stock options or nonvested shares. Pro Forma Financial Information The unaudited financial information in the table below summarizes the combined results of operations of the Company and the results of Maxtor prior to the Merger, on a pro forma...

  • Page 101
    ...cash transaction valued at approximately $186 million, which included approximately $2 million in estimated acquisition-related expenses. EVault provides data storage services for small to medium size businesses, including online backup, data protection and recovery solutions. The purchase price has...

  • Page 102
    ... of the existing technology intangible is charged to Cost of revenue while the amortization of the other intangible assets is included in Operating expenses in the Consolidated Statements of Operations. During the year ended June 29, 2007, the Company recorded a write-off of in-process research and...

  • Page 103
    ... for a period of one to five years. The Company uses estimated repair or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligation. In addition, estimated settlements for customer compensatory claims relating product quality issues...

  • Page 104
    ..., 2006. Purchases and sales to other affiliated companies were not material for any of the periods presented. Certain members of our board of directors are also on the boards of directors of Microsoft Corporation, Flextronics International Ltd. and United Parcel Service, Inc. The Company sells disc...

  • Page 105
    ... 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 balance sheet as of June 30, 2006 reflects the corporate legal structure of Seagate Technology, HDD...

  • Page 106
    ...Balance Sheet June 29, 2007 Seagate Technology Parent HDD Combined Seagate Company Subsidiary NonTechnology Guarantor Issuer Guarantors Eliminations Consolidated (In millions) Cash and cash equivalents Short-term investments Accounts receivable, net Intercompany receivable Inventories Other current...

  • Page 107
    ... - (Continued) Consolidating Balance Sheet June 30, 2006 Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations (In millions) Seagate Technology Consolidated Cash and cash equivalents Short-term investments Accounts receivable, net Intercompany...

  • Page 108
    ...) Consolidating Statement of Operations Fiscal Year Ended June 29, 2007 Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations (In millions) Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative...

  • Page 109
    ... and employee stock purchase plan Dividends to shareholders Repurchases of common shares and payments made under prepaid forward agreements Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period...

  • Page 110
    ...) Consolidating Statement of Operations Fiscal Year Ended June 30, 2006 Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations (In millions) Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative...

  • Page 111
    ... 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 Repurchases of common shares Net cash provided by (used in) financing activities Increase (decrease) in cash...

  • Page 112
    ...2005 Seagate Technology Parent Company Guarantor HDD Subsidiary Issuer Combined NonGuarantors Eliminations (In millions) Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative Restructuring Total operating expenses Income from operations Interest...

  • Page 113
    ... debt Issuance of common shares for employee stock plans Loan from HDD to Non-Guarantor Loan repayment from Non-Guarantor to HDD Distribution from HDD to Parent Investment by Parent in HDD Dividends to shareholders Net cash provided by (used in) financing activities Increase (decrease) in cash and...

  • Page 114
    ... Notes. 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 balance sheet as of June 30, 2006 reflects the corporate legal structure of Seagate Technology, HDD, and the Combined...

  • Page 115
    ... - (Continued) Consolidating Balance Sheet June 29, 2007 Seagate Technology Parent Maxtor Combined Seagate Company Subsidiary NonTechnology Guarantor Issuer Guarantors Eliminations Consolidated (In millions) Cash and cash equivalents Short-term investments Accounts receivable, net Intercompany...

  • Page 116
    ... - (Continued) Consolidating Balance Sheet June 30, 2006 Seagate Technology Parent Company Guarantor Maxtor Subsidiary Issuer Combined NonGuarantors Eliminations (In millions) Seagate Technology Consolidated Cash and cash equivalents Short-term investments Accounts receivable, net Intercompany...

  • Page 117
    ...) Consolidating Statement of Operations Fiscal Year Ended June 29, 2007 Seagate Technology Parent Company Guarantor Maxtor Subsidiary Issuer Combined NonGuarantors Eliminations (In millions) Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative...

  • Page 118
    ... by Non-Guarantor in Maxtor Proceeds from exercise of employee stock options and employee stock purchase plan Dividends to shareholders Repurchases of common shares and payments made under prepaid forward agreements Net cash provided by (used in) financing activities Increase (decrease) in cash and...

  • Page 119
    ...) Consolidating Statement of Operations Fiscal Year Ended June 30, 2006 Seagate Technology Parent Company Guarantor Maxtor Subsidiary Issuer Combined NonGuarantors Eliminations (In millions) Seagate Technology Consolidated Revenue Cost of revenue Product development Marketing and administrative...

  • Page 120
    ... Non-Guarantor to Parent Loan from HDD to Non-Guarantor Distribution from HDD to Parent Investment by Parent in Non-Guarantor Dividends to shareholders Tax benefit from exercise of stock options Repurchases of common shares Net cash provided by (used in) financing activities Increase (decrease) in...

  • Page 121
    ... 2007 include a $40 million increase in the provision for doubtful accounts related to the termination of the Company's distributor relationship with eSys and its related affiliated entities, approximately $24 million of stock-based compensation, Maxtor's operating losses and related charges to the...

  • Page 122
    ... approximately $17 million of stock-based compensation expense, Maxtor's operating losses from May 19, 2006 through June 30, 2006 and related charges related to the Company's acquisition of Maxtor, which include $38 million in integration and retention costs, net of related tax effects, $24 million...

  • Page 123
    ...30, 2006 and July 1, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Seagate Technology's internal control over financial reporting as...

  • Page 124
    ... with the standards of the Public Company Accounting Oversight Board (United States), the 2007 consolidated financial statements of Seagate Technology and our report dated August 21, 2007 expressed an unqualified opinion thereon. /S/ ERNST & YOUNG LLP San Jose, California August 21, 2007 121

  • Page 125
    ... over financial reporting. Limitations on the Effectiveness of Controls Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no...

  • Page 126
    .... 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," next on "Corporate Governance" and then on "Code of Business Conduct and Ethics." We intend...

  • Page 127
    ... 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 128
    ...100513) filed with the SEC on November 8, 2002) 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...

  • Page 129
    ...) filed with the SEC on May 16, 2002) Disc Drive Research and Development Cost Sharing Agreement, dated as of June 29, 1996, by and among Seagate Technology, Inc., Seagate Technology International, Seagate Technology (Ireland), Seagate Technology (Clonmel), Seagate Technology International (Wuxi...

  • Page 130
    ... Seagate Technology's compensation policy for independent members of the board of directors (incorporated by reference to Exhibit 10.1 to the registrant's current report on Form 8-K filed with the SEC on November 1, 2006) Indenture between Maxtor Corporation and U.S. Bank National Association, dated...

  • Page 131
    ...-Oxley Act of 2002 32.1* Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * + (b) (c) Filed herewith. Management contract or compensatory plan or arrangement. See Item 15...

  • Page 132
    ..., but without limiting the generality of the foregoing, power and authority to sign the name of the registrant and the name of the undersigned, individually and in his capacity as a director or officer of the registrant, to the Annual Report as filed with the U.S. Securities and Exchange Commission...

  • Page 133
    Table of Contents Signature Title Date /s/ William W. Bradley (William W. Bradley) /s/ James A. Davidson (James A. Davidson) /s/ Donald E. Kiernan (Donald E. Kiernan) /s/ David F. Marquardt (David F. Marquardt) /s/ Lydia M. Marshall (Lydia M. Marshall) /s/ C.S. Park (Dr. C.S. Park) /s/ Gregorio ...

  • Page 134
    ... 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 135
    ...) filed with the SEC on November 8, 2002) 4.2 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...

  • Page 136
    ...Summary description of Seagate Technology's compensation policy for independent members of the board of directors (incorporated by reference to Exhibit 10.1 to the registrant's current report on Form 8-K filed with the SEC on November 1, 2006) 10.15 Indenture between Maxtor Corporation and U.S. Bank...

  • Page 137
    ... (incorporated by reference to Exhibit 10.3 to the registrant's current report on Form 8-K filed with the SEC on May 25, 2006) 10.18 First Supplemental Indenture, dated as of May 19, 2006, among Seagate Technology, Maxtor Corporation and U.S. Bank National Association, amending and supplementing the...

  • Page 138

  • Page 139
    ...Ltd. Maxtor Realty Corporation Old SDI-Sub Maxtor Global Ltd. Maxtor (Gibraltar) Limited Maxtor Luxembourg S.Ã r.l. Maxtor Peripherals (S) Pte Ltd Maxtor International S.Ã r.l. India Liaison Office Singapore Branch Maxtor Ireland Limited Maxtor International Manufacturing S.Ã r.l. Seagate Technology...

  • Page 140
    Senai Seagate Industries (M) Sdn. Bhd. Seagate Technology (Marlow) Limited Cork Office Seagate Technology Media (Ireland) Limavady Northern Ireland Branch Seagate Technology (Thailand) Limited Malaysia United Kingdom Ireland Cayman Ireland Thailand

  • Page 141

  • Page 142
    ...management's assessment 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 29, 2007. /s/ Ernst & Young LLP San Jose, California...

  • Page 143

  • Page 144
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant'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...

  • Page 145

  • Page 146
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant'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...

  • Page 147

  • Page 148
    ... of the Annual Report of Seagate Technology (the "Company") on Form 10-K for the fiscal year ended June 29, 2007, 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...