Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 2, 2009

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:                      to                     

Commission File Number 001-31560

SEAGATE TECHNOLOGY

(Exact name of registrant as specified in its charter)

 

Cayman Islands   98-0355609

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

P.O. Box 309, Ugland House

Grand Cayman KY1-1104, Cayman Islands

(Address of Principal Executive Offices)

Telephone: (345) 949-8066

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x      No   ¨     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨      No   x     

As of February 3, 2009, 491,165,112 shares of the registrant’s common shares, par value $0.00001 per share, were issued and outstanding.

 

 

 


Table of Contents

INDEX

SEAGATE TECHNOLOGY

 

          PAGE NO.

PART I

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
  

Condensed Consolidated Balance Sheets — January 2, 2009 and June 27, 2008 (Unaudited)

   3
  

Condensed Consolidated Statements of Operations — Three and Six Months ended January 2,  2009 and December 28, 2007 (Unaudited)

   4
  

Condensed Consolidated Statements of Cash Flows — Six Months ended January 2, 2009 and December  28, 2007 (Unaudited)

   5
  

Condensed Consolidated Statement of Shareholders’ Equity — Six Months ended January  2, 2009 (Unaudited)

   6
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

   7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    54

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    77

Item 4.

   Controls and Procedures    79

PART II

   OTHER INFORMATION   

Item 1.

   Legal Proceedings    80

Item 1A.

   Risk Factors    80

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    98

Item 3.

   Defaults Upon Senior Securities    98

Item 4.

   Submission of Matters to a Vote of Securityholders    99

Item 5.

   Other Information    99

Item 6.

   Exhibits    100
  

SIGNATURES

   104

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

     January 2,
2009
    June 27,
2008 (a)
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,161     $ 990  

Short-term investments

     148       151  

Accounts receivable, net

     1,040       1,410  

Inventories

     796       945  

Deferred income taxes

     157       274  

Other current assets

     486       502  
                

Total Current Assets

     3,788       4,272  

Property, equipment and leasehold improvements, net

     2,510       2,464  

Goodwill

     31       2,352  

Other intangible assets, net

     78       111  

Deferred income taxes

     436       616  

Other assets, net

     217       305  
                

Total Assets

   $ 7,060     $ 10,120  
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Short-term borrowings

   $ 350     $ —    

Accounts payable

     1,370       1,652  

Accrued employee compensation

     156       440  

Accrued warranty

     212       226  

Accrued expenses

     586       599  

Accrued income taxes

     13       10  

Current portion of long-term debt

     320       360  
                

Total Current Liabilities

     3,007       3,287  

Long-term accrued warranty

     229       219  

Long-term accrued income taxes

     166       210  

Other non-current liabilities

     134       148  

Long-term debt, less current portion

     1,684       1,670  
                

Total Liabilities

     5,220       5,534  

Contingencies (See Note 11)

    

Shareholders’ equity:

    

Common shares and additional paid-in capital

     3,602       3,501  

Accumulated other comprehensive income (loss)

     (14 )     (16 )

Retained earnings (accumulated deficit)

     (1,748 )     1,101  
                

Total Shareholders’ Equity

     1,840       4,586  
                

Total Liabilities and Shareholders’ Equity

   $ 7,060     $ 10,120  
                

 

(a) The information in this column was derived from the Company’s audited Consolidated Balance Sheet as of June 27, 2008.

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

     For the Three Months
Ended
    For the Six Months
Ended
 
     January 2,
2009
    December 28,
2007
    January 2,
2009
    December 28,
2007
 

Revenue

   $ 2,270     $ 3,420     $ 5,302     $ 6,705  

Cost of revenue

     1,948       2,531       4,455       5,008  

Product development

     235       262       495       504  

Marketing and administrative

     142       167       290       319  

Amortization of intangibles

     14       13       28       27  

Restructuring and other, net

     78       27       101       32  

Impairment of goodwill and long-lived assets

     2,290       —         2,290       —    
                                

Total operating expenses

     4,707       3,000       7,659       5,890  
                                

Income (loss) from operations

     (2,437 )     420       (2,357 )     815  

Interest income

     5       19       12       35  

Interest expense

     (30 )     (34 )     (60 )     (66 )

Other, net

     (14 )     18       (27 )     14  
                                

Other income (expense), net

     (39 )     3       (75 )     (17 )
                                

Income (loss) before income taxes

     (2,476 )     423       (2,432 )     798  

Provision for (benefit from) income taxes

     316       20       300       40  
                                

Net income (loss)

   $ (2,792 )   $ 403     $ (2,732 )   $ 758  
                                

Net income (loss) per share:

        

Basic

   $ (5.73 )   $ 0.77     $ (5.62 )   $ 1.43  

Diluted

     (5.73 )     0.73       (5.62 )     1.37  

Number of shares used in per share calculations:

        

Basic

     487       526       486       529  

Diluted

     487       556       486       558  

Dividends declared per share

   $ 0.12     $ 0.10     $ 0.24     $ 0.20  

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TEC HNOLOGY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

     For the Six Months Ended  
     January 2,
2009
    December 28,
2007
 

OPERATING ACTIVITIES

    

Net income (loss)

   $ (2,732 )   $ 758  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     481       420  

Stock-based compensation

     53       58  

Impairment of goodwill and long-lived assets

     2,290       —    

Deferred income taxes

     305       12  

Other non-cash operating activities, net

     (13 )     (9 )

Changes in operating assets and liabilities:

    

Accounts receivable

     368       (249 )

Inventories

     149       (36 )

Accounts payable

     (282 )     475  

Accrued expenses, employee compensation and warranty

     (389 )     74  

Other assets and liabilities

     162       (25 )
                

Net cash provided by (used in) operating activities

     392       1,478  
                

INVESTING ACTIVITIES

    

Acquisition of property, equipment and leasehold improvements

     (494 )     (362 )

Proceeds from sale of fixed assets

     3       24  

Purchases of short-term investments

     (116 )     (383 )

Maturities and sales of short-term investments

     120       222  

Proceeds from sale of investment in equity securities

     11       —    

Acquisitions, net of cash acquired

     —         (78 )

Other investing activities, net

     1       17  
                

Net cash provided by (used in) investing activities

     (475 )     (560 )
                

FINANCING ACTIVITIES

    

Proceeds from short-term borrowings

     350       —    

Repayment of long-term debt

     (15 )     —    

Proceeds from exercise of employee stock options and employee stock purchase plan

     36       132  

Dividends to shareholders

     (117 )     (107 )

Repurchases of common shares

     —         (500 )

Other financing activities, net

     —         2  
                

Net cash provided by (used in) financing activities

     254       (473 )
                

Increase (decrease) in cash and cash equivalents

     171       445  

Cash and cash equivalents at the beginning of the period

     990       988  
                

Cash and cash equivalents at the end of the period

   $ 1,161     $ 1,433  
                

Supplemental Disclosure of Cash Flow Information

    

Cash paid for interest

   $ 58     $ 61  

Cash paid for income taxes, net of refunds

     5       19  

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TE CHNOLOGY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Six Months Ended January 2, 2009

(In millions)

(Unaudited)

 

     Number
of
Common
Shares
   Par
Value
of
Shares
   Additional
Paid-in
Capital
   Accumulated
Other

Comprehensive
Income (Loss)
    Retained
Earnings
(Accumulated
Deficit)
    Total  

Balance at June 27, 2008

   485    $ —      $  3,501    $ (16 )   $ 1,101     $ 4,586  

Comprehensive income (loss), net of tax:

               

Change in unrealized gain (loss) on marketable securities, net

   —        —        —        1       —         1  

Change in unrealized gain (loss) on cash flow hedges, net

   —        —        —        2       —         2  

Change in unrealized gain (loss) on auction rate securities, net

   —        —        —        (1 )     —         (1 )

Net income (loss)

   —        —        —        —         (2,732 )     (2,732 )
                     

Comprehensive income (loss)

                  (2,730 )

Issuance of common shares related to employee stock options and employee stock purchase plan

   3      —        36      —         —         36  

Fair value of beneficial conversion feature for convertible debt (See Note 3)

   —        —        12      —         —         12  

Dividends to shareholders

   —        —        —        —         (117 )     (117 )

Stock-based compensation

   —        —        53      —         —         53  
                                           

Balance at January 2, 2009

   488    $ —      $ 3,602    $ (14 )   $ (1,748 )   $ 1,840  
                                           

See notes to Condensed Consolidated Financial Statements.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Summary of Significant Accounting Policies

Nature of Operations  — Seagate Technology (“Seagate” or the “Company”) designs, manufactures, markets and sells hard disk drives. Hard disk drives, which are commonly referred to as disk drives or hard drives, are used as the primary medium for storing electronic information in systems ranging from desktop and notebook computers and consumer electronics devices to data centers delivering information over corporate networks and the Internet. The Company produces a broad range of disk drive products addressing enterprise applications, where its products are primarily used in enterprise servers, mainframes and workstations; desktop applications, where its products are used in desktop computers; mobile computing applications, where its products are used in notebook computers; and consumer electronics applications, where its products are used in a wide variety of digital video recorders (DVRs), gaming devices and other consumer electronic devices that require storage. The Company sells its disk drives primarily to major original equipment manufacturers (OEMs), distributors and retailers. The Company also sells its branded storage solutions under both the Seagate and Maxtor brands.

Basis of Presentation and Consolidation — The Condensed Consolidated Financial Statements include the accounts of the Company and all its wholly-owned subsidiaries, after elimination of intercompany transactions and balances. The Condensed Consolidated Financial Statements have been prepared by the Company and have not been audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments necessary to summarize fairly the consolidated financial position, results of operations, cash flows and shareholders’ equity for the periods presented. Such adjustments are of a normal recurring nature. The Company’s Consolidated Financial Statements for the fiscal year ended June 27, 2008 are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 13, 2008. The Company believes that the disclosures included in the unaudited Condensed Consolidated Financial Statements, when read in conjunction with its Consolidated Financial Statements as of June 27, 2008 and the notes thereto, are adequate to make the information presented not misleading.

The results of operations for the three and six months ended January 2, 2009 are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending July 3, 2009.

The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The three and six months ended January 2, 2009 consisted of 13 weeks and 27 weeks, respectively. The three and six months ended December 28, 2007 consisted of 13 weeks and 26 weeks, respectively. Fiscal year 2009 will be comprised of 53 weeks and will end on July 3, 2009.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

 

Critical Accounting Policies and Use of Estimates  — The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its Condensed Consolidated Financial Statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and results of operations, and require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, the Company’s most critical policies include: establishment of sales program accruals, establishment of warranty accruals, valuation of deferred tax assets, as well as the accounting for goodwill and intangible assets. The Company also has other key accounting policies and accounting estimates relating to uncollectible customer accounts, valuation of inventory, and valuation of share-based payments. The Company believes that these other accounting policies and accounting estimates either do not generally require it to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on the Company’s reported results of operations for a given period.

Since the Company’s fiscal year ended June 27, 2008, there have been no significant changes in its critical accounting policies and estimates. Please refer to the Critical Accounting Policies and Use of Estimates in the “Notes to the Consolidated Financial Statements” contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2008, as filed with the SEC on August 13, 2008, for a discussion of the Company’s critical accounting policies and estimates. As the Company incurred impairment charges relating to goodwill and long-lived assets, and charges related to deferred tax assets in the three months ended January 2, 2009, the disclosures below provide additional detail related to the policies applicable to the review and determination of the impairment of goodwill and other long-lived assets, and of deferred tax assets.

Impairment of Goodwill and Other Long-lived Assets  — The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). As required by SFAS No. 142, the Company tests goodwill of its reporting units for impairment annually during its fourth quarter or whenever events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Testing goodwill for impairment requires a two-step approach under SFAS No. 142. In determining the fair value of its reporting units in step one of its SFAS No. 142 impairment analysis, the Company uses one or both of these commonly accepted valuation methodologies: 1) the income approach, which is based on the present value of discounted cash flows and terminal value projected for the reporting unit, and 2) the market approach, which estimates fair value based on an appropriate valuation multiple of revenue or earnings derived from comparable companies, adjusted by an estimated control premium. The estimated control premium is based on reviewing observable transactions involving controlling interests in comparable companies. The discount rate that the Company uses in the income approach of valuation represents the weighted average cost of capital that the Company believes is reflective of the relevant risk associated with the projected cash flows. The Company may use a weighted average of the fair values determined separately using the income and market approaches if it determines that this will provide a more appropriate estimated fair value of the reporting units.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

 

To validate the reasonableness of the reporting unit fair values, the Company reconciles the aggregate fair values of the reporting units determined in step one (as described above) to the enterprise market capitalization to derive the implied control premium.

In performing the reconciliation the Company may, depending on the volatility of the market value of its stock price, use either the stock price on the valuation date or the average stock price over a range of dates around the valuation date. The Company compares the implied control premium to premiums paid in observable recent transactions of comparable companies to determine if the fair values of the reporting units estimated in step one are reasonable.

In accordance with the guidance in SFAS No. 142, the Company has determined that it has two reporting units to which goodwill is assignable: the Hard Disk Drive reporting unit and the Services reporting unit. Each of these reporting units constitutes a business and is the lowest level for which discrete financial information is available and is regularly reviewed by management. The acquired businesses underlying the Company’s goodwill are specific to either the Hard Disk Drive or the Services reporting units and the goodwill amounts are assigned as such. The Services reporting unit represents approximately 1% of the Company’s revenues and total assets.

If step one of the SFAS No. 142 analysis demonstrates that the fair value of either reporting unit is below the carrying value, the Company will proceed to step two of SFAS No. 142. If step two is necessary, the Company will estimate the fair values of all identifiable assets and liabilities of the reporting unit using the income, market or the replacement cost approaches, as appropriate. The excess of the fair value of the reporting unit over the fair values of the identified assets and liabilities is the implied fair value of goodwill. If the fair value of goodwill is lower than the carrying value of the goodwill, an impairment charge is recorded to reduce the carrying value to fair value.

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS No. 144) , the Company tests other long-lived assets, including property, equipment and leasehold improvements and other intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. The Company assesses the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using the same approaches indicated above for SFAS No. 142 step two and compare it to its carrying value. The excess of the carrying value over the fair value is allocated pro rata to derive the adjusted carrying value. The adjusted carrying value of each asset in the asset group is not reduced below its fair value.

See additional disclosure of these analyses in Note 7 to the Company’s Condensed Consolidated Financial Statements including the impairment charges recorded during the quarter.

The process of evaluating the potential impairment of goodwill or long-lived assets is subjective and requires significant judgment on matters such as, but not limited to, the reporting unit at which goodwill should be measured for impairment and the asset group to be tested for recoverability. The Company is also required to make estimates that may significantly impact the outcome of the analyses. Such estimates include, but are not limited to, future operating performance and cash flows, cost of capital, terminal values, control premiums and remaining economic lives of assets.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

 

Income Taxes – The deferred tax assets the Company records each period depend primarily on its ability to generate future taxable income in the United States and certain foreign jurisdictions. Each period, the Company evaluates the need for a valuation allowance on its deferred tax assets and, if necessary, adjusts the valuation allowance so that net deferred tax assets are recorded only to the extent the Company concludes it is more likely than not that these deferred tax assets will be realized. If the Company’s outlook for future taxable income changes significantly, its assessment of the need for a valuation allowance may also change. As a result of adverse changes in the Company’s outlook for its future U.S. taxable income, the Company completed a reassessment of its valuation allowance against U.S. deferred tax assets. As a result, in the three months ended January 2, 2009, the Company increased the valuation allowance against its deferred tax assets.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

1. Summary of Significant Accounting Policies (continued)

 

Net Income (Loss) Per Share

In accordance with the provisions of SFAS No. 128, Earnings per Share , the following table sets forth the computation of basic and diluted net income (loss) per share for the three and six months ended January 2, 2009 and December 28, 2007:

 

     For the Three Months Ended     For the Six Months Ended  

(Dollars in millions, except per share data)

   January 2,
2009
    December 28,
2007
    January 2,
2009
    December 28,
2007
 

Numerator:

        

Net income (loss)

   $ (2,792 )   $ 403     $ (2,732 )   $ 758  

Adjustment for interest expense on 6.8% Convertible Senior Notes due April 2010

     —         2       —         5  
                                

Net income (loss), adjusted

   $ (2,792 )   $ 405     $ (2,732 )   $ 763  
                                

Denominator:

        

Weighted-average common shares outstanding

     489       528       488       531  

Weighted-average nonvested shares

     (2 )     (2 )     (2 )     (2 )
                                

Total shares for purpose of calculating basic net income (loss) per share

     487       526       486       529  

Weighted-average effect of dilutive securities:

        

Nonvested shares

     —         —         —         —    

Dilution from employee stock options

     —         19       —         19  

2.375% Convertible Senior Notes due August 2012

     —         7       —         6  

6.8% Convertible Senior Notes due April 2010

     —         4       —         4  
                                

Dilutive potential common shares:

     —         30       —         29  
                                

Total shares for purpose of calculating diluted net income (loss) per share

     487       556       486       558  
                                

Net Income (loss) per share:

        

Basic net income (loss) per share

   $ (5.73 )   $ 0.77     $ (5.62 )   $ 1.43  
                                

Diluted net income (loss) per share

   $ (5.73 )   $ 0.73     $ (5.62 )   $ 1.37  
                                

The following potential common shares were excluded from the computation of diluted net income (loss) per share, as their effect would have been anti-dilutive:

 

     For the Three Months Ended    For the Six Months Ended

(in millions)

   January 2,
2009
   December 28,
2007
   January 2,
2009
   December 28,
2007

Stock options

   56    20    52    20

Nonvested shares

   3    —      2    —  

6.8% Convertible Senior Notes due April 2010

   4    —      4    —  

2.375% Convertible Senior Notes due August 2012

   —      —      —      —  

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2. Balance Sheet Information

 

Accounts Receivable

   January 2,
2009
    June 27,
2008
 
       (in millions)  

Accounts receivable

   $ 1,047     $ 1,416  

Allowance for doubtful accounts

     (7 )     (6 )
                
   $ 1,040     $ 1,410  
                

Inventories

   January 2,
2009
    June 27,
2008
 
     (in millions)  

Raw materials and components

   $ 274     $ 352  

Work-in-process

     93       111  

Finished goods

     429       482  
                
   $ 796     $ 945  
                

Other Current Assets

   January 2,
2009
    June 27,
2008
 
     (in millions)  

Vendor non-trade receivables

   $ 271     $ 348  

Other current assets

     215       154  
                
   $ 486     $ 502  
                

The Company has non-trade receivables from certain manufacturing vendors resulting from the sale of components to these vendors who manufacture and sell completed sub-assemblies back to the Company. The Company does not reflect the sale of these components in Revenue and does not recognize any profits on these sales. The costs of the completed sub-assemblies are included in inventory upon purchase from the vendors.

 

Property, Equipment and Leasehold Improvements, net

   January 2,
2009
    June 27,
2008
 
     (in millions)  

Property, equipment and leasehold improvements

   $ 6,303     $ 5,845  

Accumulated depreciation and amortization

     (3,793 )     (3,381 )
                
   $ 2,510     $ 2,464  
                

The accumulated depreciation and amortization as of January 2, 2009, included $44 million of accelerated depreciation charges recorded during the six months ended January 2, 2009, related to the closure of the Milpitas and the Pittsburgh facilities.

In the three months ended January 2, 2009, the Company tested its long-lived assets, including Property, equipment and leasehold improvements for recoverability pursuant to SFAS No. 144 as it was determined that an adverse change in its business climate had occurred during the quarter. The Company concluded from this assessment that the carrying value of Property, equipment, and leasehold improvements of its Hard Disk Drive reporting unit were recoverable, but those of the Services reporting unit were not. As a result of this test, the Company recorded a $3 million impairment charge related to the Property, equipment and leasehold improvements of the Services reporting unit. See Note 7 for further discussion.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2. Balance Sheet Information (continued)

 

Derivative Financial Instruments. The Company hedges portions of its forecasted expenditures denominated in foreign currencies with forward exchange contracts. As of January 2, 2009, the total notional value of the Company’s outstanding foreign currency forward exchange contracts was approximately $315 million comprised of approximately $199 million to purchase Thai baht, $76 million to purchase Singapore dollars, $6 million to purchase British pounds, $12 million to purchase Euros, $10 million to purchase Chinese yuan, $10 million to purchase Czech koruna, and $2 million to purchase Japanese yen. As of January 2, 2009, the fair value of the Company’s outstanding forward exchange contracts was a net liability of approximately $15 million. Net foreign currency transaction losses included in the determination of consolidated net income (loss) were approximately $1 million and $7 million for the three and six months ended January 2, 2009, respectively, and approximately $1 million and $6 million for the three and six months ended December 28, 2007, respectively.

 

3. Long-Term Debt, Convertible Notes and Credit Facilities

Long-Term Debt

$300 Million Aggregate Principal Amount of Floating Rate Senior Notes due October 2009 (the “2009 Notes”). During the three months ended October 3, 2008, the 2009 Notes became due within 12 months. As such, the balance was reclassified to Current portion of long-term debt.

Convertible Notes

$326 Million Aggregate Principal Amount of 2.375% Convertible Senior Notes due August 2012 (the “2.375% Notes”). As a result of its acquisition of Maxtor on May 19, 2006, the Company assumed the 2.375% Notes that require semi-annual interest payments payable on February 15 and August 15. The 2.375% Notes are convertible into common shares of Seagate Technology at a conversion rate of approximately 60.2074 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 immediately preceding fiscal quarter the common shares trade at a price in excess of 110% of the conversion price for 20 consecutive trading days. Upon conversion, the 2.375% Notes are subject to “net cash” settlement whereby the Company will deliver cash for the lesser of the principal amount of the notes being converted or the “conversion value” of the notes which is calculated by multiplying the conversion rate then in effect by the market price of the Company’s common shares at the time of conversion. To the extent that the conversion value exceeds the principal amount of the 2.375% Notes, the Company will, at its election, pay cash or issue common shares with a value equal to the value of such excess. If the 2.375% Notes are surrendered for conversion, the Company may direct the conversion agent to surrender those notes to a financial institution selected by the Company for exchange, in lieu of conversion, into a number of the Company’s common shares equal to the applicable conversion rate, plus cash for any fractional shares, or cash or a combination of cash and the Company’s common shares in lieu thereof.

During the three months ended October 3, 2008, the 2.375% Notes were convertible and were classified as Current portion of long-term debt on the Company’s Condensed Consolidated Balance Sheet at October 3, 2008. During the three and six month periods ended January 2, 2009, the Company’s shares traded below 110% of the conversion price for at least 20 consecutive trading days of the last 30 trading days of the quarter. As a result, the 2.375% Notes became nonconvertible effective October 4, 2008, and have been reclassified as Long-term debt on the Company’s Condensed Consolidated Balance Sheet as of January 2, 2009. In addition, the payment of dividends to holders of the Company’s common shares have in certain quarters resulted in upward adjustments to the conversion rate of the 2.375% Notes and this may continue in the future.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

3. Long-Term Debt, Convertible Notes and Credit Facilities (continued)

 

The Company evaluates the application of Emerging Issues Task Force (EITF) No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio , (EITF 98-5) and EITF No. 00-27, Application of EITF Issue No. 98-5 to Certain Convertible Instruments , (EITF 00-27), to its convertible notes on a quarterly basis. As of January 2, 2009, the Company concluded that the 2.375% Notes had a beneficial conversion feature. During the three months ended January 2, 2009, the Company recorded a debt discount of approximately $12 million to reflect the beneficial conversion feature of the convertible debt pursuant to EITF 00-27. In accordance with EITF 00-27, the Company evaluated the value of the beneficial conversion feature and recorded the debt discount as a reduction of the carrying amount of the 2.375% Notes and as an addition to additional paid-in capital.

The Company is amortizing the debt discount to interest expense over the term of the debt, using the effective interest method. Amortization of the debt discount for the three months ended January 2, 2009 was less than $1 million.

Credit Facilities

On December 10, 2008, the Company borrowed $350 million under its existing $500 million senior unsecured revolving credit facility (the “Revolving Credit Facility”) pursuant to the Credit Agreement dated November 22, 2005, as amended and restated on September 19, 2006, by and among Seagate, the lenders party thereto, and JPMorgan Chase Bank, National Association, as the administrative agent.

The Revolving Credit Facility bears interest per annum at a variable rate equal to LIBOR plus a margin of 75 basis points for the quarter ended January 2, 2009, which is subject to change depending on the Company’s credit rating. Borrowings under the Revolving Credit Facility are prepayable at any time prior to maturity without penalty, other than customary breakage costs for LIBOR–based loans.

The outstanding balance of the Revolving Credit Facility subsequent to the borrowing described above is approximately $393 million, including $350 million in outstanding loans and approximately $43 million in outstanding letters of credit. The remaining undrawn uncommitted amount of the Revolving Credit Facility after giving effect to the outstanding loan and letters of credit described above is approximately $107 million.

The credit agreement that governs the Company’s revolving credit facility contains covenants that must be satisfied in order to remain in compliance with the agreement. The credit agreement contains three financial covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. As of January 2, 2009, the Company is in compliance with these covenants.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value

On July 28, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements , (SFAS No. 157) for all financial assets and financial liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and enhances disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but applies to other accounting pronouncements that require or permit fair value measurements. The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated financial statements.

In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157 , which delays the effective date of SFAS No.157 for all non-financial assets and non-financial liabilities, except for items recognized or disclosed at fair value on a recurring basis. Accordingly, the Company will not apply the provisions of SFAS No. 157 to non-financial assets and non-financial liabilities until July 2009, the beginning of its next fiscal year.

Measurement of Fair Value

SFAS No. 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

SFAS No. 157 establishes a fair value hierarchy based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or

Level 3 – Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value (continued)

 

The adoption of SFAS No. 157 had no effect on the Company’s consolidated net loss for the three and six months ended January 2, 2009.

Items Measured at Fair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of January 2, 2009, consistent with the fair value hierarchy provisions of SFAS No. 157.

 

     Fair Value Measurements at Reporting Date Using

(Dollars in millions)

   Quoted
Prices in
Active
Markets for
Identical
Instruments

(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Total
Balance

Assets:

           

Money market funds

   $ 782    $ —      $ —      $ 782

Asset-backed securities

     —        5      —        5

Agency bonds

     —        25      —        25

Corporate bonds

     —        18      —        18

Commercial paper

     —        255      —        255

Municipal bonds

     —        16      —        16

U.S. Treasuries

     —        84      —        84
                           

Total Cash Equivalents and Marketable Securities

     782      403      —        1,185
                           

Auction Rate Securities

     —        —        27      27

Derivative Assets (1)

     —        2      —        2
                           

Total Assets

   $ 782    $ 405    $ 27    $ 1,214
                           

Liabilities:

           

Derivative Liabilities (2)

   $ —      $ 17    $ —      $ 17
                           

Total Liabilities

   $ —      $ 17    $ —      $ 17
                           

 

(1)

The fair value of Foreign currency forward exchange contracts is classified within Other assets, net in the Condensed Consolidated Balance Sheet as of January 2, 2009.

 

(2)

The fair value of Foreign currency forward exchange contracts is classified within Accrued expenses in the Condensed Consolidated Balance Sheet as of January 2, 2009.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value (continued)

 

Reported as:

 

       Fair Value Measurements at Reporting Date Using

(Dollars in millions)

   Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total
Balance

Assets:

           

Cash and cash equivalents

   $ 782    $ 255    $ —      $ 1,037

Short-term investments

     —        148      —        148

Other assets, net (1)

     —        2      27      29
                           

Total Assets

   $ 782    $ 405    $ 27    $ 1,214
                           

Liabilities:

           

Accrued expenses (2)

   $ —      $ 17    $ —      $ 17
                           

Total Liabilities

   $ —      $ 17    $ —      $ 17
                           

 

(1)

Amount represents the fair value of Foreign currency forward exchange contracts and the fair value of the auction rate securities as of January 2, 2009.

 

(2)

Amount represents the fair value of Foreign currency forward exchange contracts as of January 2, 2009.

Level 1 assets consist of money market funds for which quoted prices are available in an active market.

The Company classifies items in Level 2 if the financial asset or liability is valued using observable inputs. Level 2 assets include: asset-backed securities, agency bonds, corporate bonds, commercial paper, municipal bonds, and U.S. Treasuries. These debt investments are priced using observable inputs and valuation models which vary by asset class. The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents and marketable securities. For the cash equivalents and marketable securities in the Company’s portfolio, multiple pricing sources are generally available. The pricing service uses inputs from multiple industry standard data providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date. The Company corroborates the prices obtained from the pricing service against other independent sources and as of January 2, 2009 has not found it necessary to make any adjustments to the prices obtained.

The Company’s derivative financial instruments are also classified within Level 2. The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. The Company recognizes derivative financial instruments in its consolidated financial statements at fair value in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . The Company determines the fair value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date. The Company uses observable inputs including quoted prices in active markets for similar assets or liabilities.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value (continued)

 

The Company’s Level 3 assets consist of auction rate securities with a par value of approximately $31 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in the March 2008 quarter, these securities have continuously failed to settle at auction. As of January 2, 2009, the estimated fair value of these auction rate securities was $27 million. The Company believes that the impairment totaling $4 million is temporary given its ability and intent to hold these securities until recovery of the cost basis or maturity of these securities. As such, the impairment was recorded in Accumulated other comprehensive income (loss) and these securities were classified as long-term investments.

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three and six months ended January 2, 2009:

 

     Fair Value
Measurements Using
Significant Unobservable
Inputs

(Level 3)
 

(Dollars in millions)

   Auction Rate Securities  

Balance at October 3, 2008 and at June 27, 2008

   $ 28  

Unrealized gains (losses) (1)

     (1 )

Purchases, sales, issuances, settlements

     —    

Transfers in/(out) of Level 3

     —    
        

Balance at January 2, 2009

   $ 27  
        

 

(1)

Unrealized gains (losses) on available for sale securities are recorded as a separate component of other comprehensive income (loss) in Accumulated other comprehensive income (loss), which is a component of Shareholders’ Equity.

 

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Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4. Fair Value (continued)

 

Other Fair Value Disclosures

In accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments , the Company is required to disclose the fair value of its long-term debt at least annually or more frequently if the fair value has changed significantly.

The Company’s debt is carried at cost. The following table represents the fair value of the Company’s debt as of January 2, 2009:

Reported as:

 

     January 2, 2009     June 27, 2008  

(Dollars in millions)

   Carrying
Amount
    Estimated
Fair
Value
    Carrying
Amount
    Estimated
Fair
Value
 

Floating Rate Senior Notes due October 2009

   $ 300     $ 277     $ 300     $ 293  

6.375% Senior Notes due October 2011

     599       445       599       584  

6.8% Senior Notes due October 2016

     599       318       599       555  

6.8% Convertible Senior Notes due April 2010

     135       123       135       142  

5.75% Subordinated debentures due March 2012

     41       33       41       40  

2.375% Convertible Senior Notes due August 2012 (1)

     315       183       326       422  

LIBOR Based China Manufacturing Facility Loans

     15       15       30       30  

LIBOR Based Revolving Credit Facility

     350       350       —         —    
                                
   $ 2,354     $ 1,744     $ 2,030     $ 2,066  

Less current portion

     (670 )     (647 )     (360 )     (457 )
                                

Long-term debt, less current portion

   $ 1,684     $ 1,097     $ 1,670     $ 1,609  
                                

 

(1) Carrying amount of 2.375% Convertible Senior Notes due August 2012, net of debt discount as a result of the beneficial conversion feature. See Note 3, Long-Term Debt, Convertible Notes and Credit Facilities for further discussion.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5. Income Taxes

The Company is a foreign holding company incorporated in the Cayman Islands with foreign and U.S. subsidiaries that operate in multiple taxing jurisdictions. As a result, the Company’s worldwide operating income either is subject to varying rates of tax or is exempt from tax due to tax holidays or tax incentive programs applicable 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 2020.

The income tax provision for the three and six months ended January 2, 2009 includes a deferred tax charge of $271 million associated with increased valuation allowance recorded for U.S. federal and state deferred tax assets associated with reductions in the Company’s forecasted U.S. taxable income. The goodwill impairment charges recorded in the three and six months ended January 2, 2009 result in no tax benefits. The three months ending January 2, 2009 also includes approximately $34 million of tax expense that otherwise would have been recorded in subsequent quarters of fiscal 2009 absent a required change in the method for computing the Company’s annual effective tax rate. As of the close of the period ending January 2, 2009, the Company is forecasting losses in certain jurisdictions, including the U.S., for which tax benefits for the losses cannot be recognized. However, the Company is recording income tax expense related to operations in certain of these loss jurisdictions. Pursuant to the accounting guidance provided in FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods – an interpretation of APB Opinion No. 28 (FIN 18), paragraph 22a, the Company is now required to exclude these loss jurisdictions from its normal overall estimated annual effective rate calculation and determine a separately computed effective tax rate for each loss jurisdiction.

The income tax provision recorded for the three and six months ended January 2, 2009 differs from the provision (benefit) for income taxes that would be derived by applying a notional U.S. 35% rate to income (loss) before income taxes primarily due to the net effect of (i) goodwill impairment charges with no associated tax benefit, (ii) an increase in the Company’s valuation allowance for certain deferred tax assets, (iii) the tax benefit related to the aforementioned tax holidays and tax incentive programs, (iv) tax expense related to intercompany transactions, and (v) the effect of applying the provisions of FIN 18 as described above. The income tax provision recorded for the three and six months ended December 28, 2007 differed from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to income before income taxes primarily due to the net effect of (i) the tax benefit related to the aforementioned tax holidays and tax incentive programs, (ii) a decrease in the Company’s valuation allowance for U.S. deferred tax assets, and (iii) tax expense related to intercompany transactions.

Based on the Company’s foreign ownership structure, and subject to (i) potential future increases in the valuation allowance for deferred tax assets and (ii) limitations imposed by Internal Revenue Code Section 382 on usage of certain tax attributes, the Company anticipates that its effective tax rate in future periods will generally be less than the U.S. federal statutory rate. Dividend distributions received from the Company’s U.S. subsidiaries may be subject to U.S. withholding taxes when, and if distributed. Deferred tax liabilities have not been recorded on unremitted earnings of certain 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 Company’s foreign parent holding company.

During the three and six months ending January 2, 2009, there were three major U.S. tax law changes taken into account by the Company in computing its income tax provision for the period. On July 30, 2008, the Housing and Economic Recovery Act of 2008 was enacted. Under this law, companies can elect to accelerate a portion of their unused AMT and research tax credits in lieu of the 50-percent “bonus” depreciation enacted in February 2008. The Company has concluded that it qualifies for and will elect to accelerate approximately $9 million of R&D credit carryovers to fiscal years 2008 and 2009 of which approximately $8 million of tax benefit was recognized in the three months ending October 3, 2008.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5. Income Taxes (continued)

 

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed into law. Under this law, the R&D credit was retroactively extended through December 31, 2009 from December 31, 2007. This extension has no immediate impact on the Company’s tax provision for the period due to valuation allowances that were recorded for the U.S. deferred tax assets related to these additional credits. The California 2008-2009 Budget Bill (AB 1452), enacted on September 30, 2008, resulted in two temporary changes to the California income tax. First, the bill suspends the use of Net Operating Loss (NOL) carryovers for two years, fiscal years 2009 and 2010. Second, the bill limits the use of R&D credit carryovers to no more than 50% of the tax liability before credits. The Company concluded that the California legislative change resulted in no net increase in the Company’s income tax expense in the period.

As of January 2, 2009, the Company has recorded net deferred tax assets of $592 million. The realization of $546 million of these deferred tax assets is primarily dependent on the Company’s ability to generate sufficient U.S. and certain foreign taxable income in future periods. Although realization is not assured, the Company’s management believes that it is more likely than not that these deferred tax assets will be realized.

During the three months ending January 2, 2009, the Company’s unrecognized tax benefits excluding interest and penalties decreased by approximately $6 million to $353 million primarily due to (i) reductions associated with the expiration of certain statutes of limitation of $18 million, (ii) increases in current year unrecognized tax benefits of $15 million, and (iii) reductions from other activity, primarily foreign exchange gains, of $3 million. Approximately $18 million of reduction in unrecognized tax benefits during the period was recorded as reduction to goodwill.

During the six months ending January 2, 2009, the Company’s unrecognized tax benefits excluding interest and penalties decreased by approximately $21 million to $353 million primarily due to (i) reductions associated with audit activity of $6 million, (ii) reductions associated with the expiration of certain statutes of limitation of $23 million, (iii) increases in current year unrecognized tax benefits of $16 million, and (iv) reductions from other activity, primarily foreign exchange gains, of $8 million. Approximately $21 million of reduction in unrecognized tax benefits during the period was recorded as a reduction to goodwill.

The total unrecognized tax benefits that, if recognized, would impact the effective tax rate were $68 and $147 million as of June 27, 2008 and January 2, 2009, respectively, subject to certain future valuation allowance reversals.

During the 12 months beginning January 3, 2009, the Company expects to reduce its unrecognized tax benefits by approximately $7 million as a result of the expiration of certain statutes of limitation. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the resolution and/or timing of closure on open audits are highly uncertain as to when these events occur.

The Company files U.S. federal, U.S. state, and foreign tax returns. The Internal Revenue Service (IRS) is currently examining fiscal years 2005 through 2007. For state and foreign tax returns, the Company is generally no longer subject to tax examinations for years prior to fiscal year 2001. The statute of limitation for U.S. Federal returns is open for fiscal year 2005 and forward.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6. Restructuring and Exit Costs

The Company’s significant restructuring plans are described below. All restructuring charges are reported in Restructuring and other, net on the Condensed Consolidated Statement of Operations, unless otherwise noted.

January 2009 Plan – On January 11, 2009, the Company committed to a restructuring plan intended to realign its cost structure with the current macroeconomic business environment (the “January 2009 Plan”). The January 2009 Plan included reducing worldwide headcount by approximately 6%, or 3,000 employees, which is inclusive of an over 10% reduction of the U.S. workforce. The January 2009 Plan is expected to result in total restructuring charges of approximately $90 million and is expected to be largely complete by April 3, 2009. During the three months ended January 2, 2009, the Company accrued total restructuring charges of approximately $79 million related to estimated post employment benefits for the January 2009 Plan.

Pittsburgh Closure – On September 18, 2008, the Company announced the closure of its research facility in Pittsburgh, Pennsylvania, as part of the Company’s ongoing focus on cost efficiencies in all areas of its business (the “Pittsburgh Closure”). The Company plans to cease operations at this facility by the end of its third quarter of fiscal year 2009 and integrate certain activities into its other research and development facilities located within the United States. During the three months ended January 2, 2009, the Company recorded an adjustment of approximately $1 million to reduce previous estimates for post employment benefit costs related to the Pittsburgh Closure. Through January 2, 2009, the Company recorded approximately $2 million in restructuring charges for post employment benefit costs. In addition, as a result of the Pittsburgh Closure, the Company recorded approximately $14 million related to accelerated asset depreciation recorded as Product development on the Condensed Consolidated Statement of Operations. The Pittsburgh Closure is expected to result in total charges of approximately $46 million to $56 million.

Milpitas Closure – On July 9, 2008, the Company announced the proposed closure of its media manufacturing facility in Milpitas, California, as part of the Company’s ongoing focus on cost efficiencies in all areas of its business (the “Milpitas Closure”). The Company ceased production at this facility in September 2008 and expects all activities related to the closure to be completed by the second half of fiscal year 2009. During the three months ended January 2, 2009, the Company recorded approximately $2 million for various other exit costs. Through January 2, 2009, the Company recorded approximately $20 million of restructuring charges associated with post employment benefits, $2 million related to facility lease costs after operations ceased, and $2 million for various other exit costs. In addition, as a result of the Milpitas closure, the Company has recorded approximately $30 million related to accelerated asset depreciation recorded as Cost of revenue in the first two quarters of fiscal year 2009. The Company expects to record additional restructuring charges of approximately $6 million for the Milpitas Closure.

Limavady Closure – On October 29, 2007, the Company announced the closure of its substrate manufacturing facility in Limavady, Northern Ireland, as part of the Company’s ongoing focus on cost efficiencies in all areas of its business (the “Limavady Closure”). The Company ceased production at its Limavady facility during September 2008 and expects all activities related to this closure to be completed by the second half of fiscal year 2009. During the three months ended January 2, 2009, the Company recorded approximately $2 million in other exit costs, offset by a $5 million adjustment to the accrual established in December 2007 for grant repayments. Through January 2, 2009, the restructuring charges recorded in connection with the Limavady Closure were primarily related to employee termination benefits of $34 million and approximately $15 million related to other exit costs. Other exit costs included $13 million related to expected grant repayments. The Company expects to record additional restructuring charges of approximately $1 million by the end of fiscal year 2009.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6. Restructuring and Exit Costs (continued)

 

Maxtor – Pursuant to EITF 95-3, Recognition of Liabilities in Connection with a Business Combination (EITF 95-3), the Company recorded certain exit costs aggregating $246 million through fiscal year 2008. During the three months ended October 3, 2008, the Company recorded an additional $10 million to reflect the Company’s revised sub-lease expectations in connection with the exit of certain Maxtor facilities. The adjustment was included in Restructuring and other, net in its Statement of Operations. The remaining balance of $23 million as of January 2, 2009 is associated with the exit of certain facilities and payment of which is expected to continue through the end of fiscal year 2016.

The following table summarizes the Company’s restructuring activities for the six months ended January 2, 2009:

 

(Dollars in millions)

   Employee
Benefits
    Operating
Leases
    Other
Exit Costs
    Total  

January 2009 Plan

        

Accrual balances at June 27, 2008

   $ —       $ —       $ —       $ —    

Restructuring charges

     79       —         —         79  

Cash payments

     (2 )     —         —         (2 )

Adjustments

     —         —         —         —    
                                

Accrual balances at January 2, 2009

   $ 77     $ —       $ —       $ 77  
                                

Site Closures (1)

        

Accrual balances at June 27, 2008

   $ 48     $ —       $ 18     $ 66  

Restructuring charges

     8       2       4       14  

Cash payments

     (46 )     —         (4 )     (50 )

Adjustments

     (1 )     —         (5 )     (6 )
                                

Accrual balances at January 2, 2009

   $ 9     $ 2     $ 13     $ 24  
                                

Maxtor

        

Accrual balances at June 27, 2008

   $ —       $ 17     $ —       $ 17  

Restructuring charges

     —         —         —         —    

Cash payments

     —         (4 )     —         (4 )

Adjustments

     —         10       —         10  
                                

Accrual balances at January 2, 2009

   $ —       $ 23     $ —       $ 23  
                                

Other

        

Accrual balances at June 27, 2008

   $ 4     $ —       $ —       $ 4  

Restructuring charges

     1       3       —         4  

Cash payments

     (3 )     —         —         (3 )

Adjustments

     —         —         —         —    
                                

Accrual balances at January 2, 2009

   $ 2     $ 3     $ —       $ 5  
                                

Total for all plans

        

Accrual balances at June 27, 2008

   $ 52     $ 17     $ 18     $ 87  

Restructuring charges

     88       5       4       97  

Cash payments

     (51 )     (4 )     (4 )     (59 )

Adjustments

     (1 )     10       (5 )     4  
                                

Accrual balance at January 2, 2009

   $ 88     $ 28     $ 13     $ 129 (2)
                                

 

(1)

Site closures include the restructuring charges associated with the closure of the Pittsburgh, Milpitas and Limavady facilities.

 

(2)

Of the accrued restructuring balance of approximately $129 million at January 2, 2009, $111 million is included in Accrued expense and $18 million is included in Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheet.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. Impairment of Goodwill and Long-lived Assets

Goodwill

In accordance with SFAS No. 142, the Company tests goodwill for impairment on an annual basis and, if required, at an interim date should events occur or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying value.

During late November and December 2008, the Company observed a sharp deterioration in the general business environment and in all of its major markets. Several of the Company’s customers and other technology companies in the supply chain of its customers, as well as its competitors reduced their financial outlook and/or otherwise disclosed that they were experiencing very challenging market conditions with little visibility of a rebound. Another indicator of the rapidly declining market was the gap between Total Available Market (TAM) forecasted by industry analysts and the actual demand that materialized for the quarter. Prior to the start of the second fiscal quarter, the TAM was estimated to be approximately 156 million units. At about eight weeks into the quarter, the outlook for the TAM had decreased to be approximately 135 million units. After the close of the quarter, preliminary industry data indicated actual shipments for the December quarter were approximately 123 million units. In December 2008, in response to these adverse business indicators and the rapidly declining revenue trends experienced during its second quarter of fiscal 2009, the Company reduced its near-term and long-term financial projections. The Company determined that a significant adverse change in its business climate had occurred, and commenced an interim review of goodwill for impairment in accordance with SFAS No. 142.

In the interim review of goodwill for impairment, the Company followed the two-step method described in SFAS No. 142. In step one, the Company determined and compared the fair value of each of its Hard Disk Drive and Services reporting units with the carrying value of the respective reporting unit, including goodwill. Since the step one analysis indicated that the carrying values of both reporting units as of January 2, 2009 exceeded their respective fair values, the Company continued to step two of the analysis. Step two required estimating the fair values of all assets and liabilities (including unrecorded intangible assets) of each reporting unit. The fair value of each reporting unit was then allocated to the fair values of the identified assets and liabilities to determine the implied fair value of goodwill.

In determining the fair value of its reporting units in step one of the SFAS No. 142 analysis, the Company used a weighted average of: 1) the income approach, which is based on the aggregate of the present values of discounted cash flows projected for the reporting unit and of its estimated terminal value, and 2) the market approach, which estimates fair value based on appropriate valuation multiple(s) of revenue and/or earnings determined from comparable companies, adjusted by an estimated control premium (since observable equity values of comparable companies are typically values of minority holdings). In the market approach, the Company selected a control premium based on reviewing observable transactions involving controlling interests in comparable companies. In the income approach of valuation, the Company used projected cash flows based on its current long-term forecast and a discount rate that represents the weighted average cost of capital and that the Company believes is reflective of the relevant risk associated with the projected cash flows.

The Company believes that in a period of unusual market volatility and limited forecast visibility, a weighted average of the values derived separately from each of the income and market approaches affords a more reliable value than the exclusive use of either approach.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. Impairment of Goodwill and Long-lived Assets (continued)

 

SFAS No. 142 requires the use of market participant assumptions in estimating the fair values of the reporting unit and the assets and liabilities of the unit. Since Seagate is one of two publicly traded companies engaged principally in the manufacture and sale of disk drives and the Hard Disk Drive reporting unit comprised approximately 99% of the Company’s revenue, the Company used valuation multiples based on Seagate’s trading price as of January 2, 2009 (the valuation date) to determine the fair value of the Hard Disk Drive reporting unit under the market approach. For the Services reporting unit, the Company selected valuation multiples based on a range of multiples of comparable software and services companies.

To validate the reasonableness of the reporting unit fair values, the Company reconciled the aggregate fair values of the reporting units determined in step one (as described above) to the enterprise market capitalization to derive the implied control premium. Given the recent volatility in the capital markets, the Company’s average market capitalization over a range of 15 trading days extending before and after the valuation date was used in the reconciliation. The Company compared the implied control premium to premiums paid in observable recent transactions of comparable companies and determined that the fair values of the reporting units estimated in step one were reasonable.

In step two of the analysis, the Company primarily used the income approach (including the excess earnings and relief from royalty methods) in the valuation of its intangible assets except internal use software for which the cost approach was used. Warranty and deferred revenue liabilities were also valued using the income approach (based on estimated cost to fulfill obligations and a reasonable profit). The majority of buildings, machinery and equipment were primarily valued using the replacement cost method (adjusted for physical depreciation and obsolescence), though the market approach was considered where market data was available. Land was valued using the market approach and favorable or unfavorable leasehold interests were valued using the income approach. Public debt was valued at market prices.

Based on the interim review described above, in the three months ended January 2, 2009, the Company recorded impairment charges of $2.1 billion for the goodwill of the Hard Disk Drive reporting unit, representing 100% of its carrying value, and $150 million for the goodwill of the Services reporting unit reducing the carrying value to $31 million. These impairment charges were included in Impairment of goodwill and long-lived assets in the Condensed Consolidated Statement of Operations.

The changes in the carrying amount of goodwill by reporting units for the six months ended January 2, 2009, were as follows:

 

(Dollars in millions)

   Hard Disk
Drive
    Services     Total  

Balance at June 27, 2008

   $ 2,169     $ 183     $ 2,352  

Goodwill adjustments (1)

     (32 )     (2 )     (34 )

Impairment charges

     (2,137 )     (150 )     (2,287 )
                        

Balance at January 2, 2009

   $ —       $ 31     $ 31  
                        

 

(1)

Goodwill adjustments during the six months ended January 2, 2009 primarily consisted of a $24 million reduction in unrecognized tax benefits during the period, which was recorded as a reduction to goodwill.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. Impairment of Goodwill and Long-lived Assets (continued)

 

Long-lived Assets (Property, equipment, leasehold improvements, and other intangible assets)

In accordance with SFAS No. 144, the Company tests other long-lived assets, including property, equipment and leasehold improvements and other intangible assets, subject to amortization for recoverability whenever events or changes in circumstance indicate that their carrying value may not be recoverable. The Company assesses the recoverability of an asset group by determining whether the carrying value exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining useful life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group and compare it to its carrying value. The excess of the carrying value over the fair value is allocated pro rata to derive the adjusted carrying value. The adjusted carrying value of each asset in the asset group is not reduced below its fair value.

The Company determined that the adverse change in the business climate discussed under “Goodwill” above was also an indicator requiring the testing of its long-lived assets for recoverability and performed this test in the three months ended January 2, 2009. In accordance with the guidance in SFAS No. 144, the Company determined that the asset group to be tested for recoverability was at the reporting unit level as it was the lowest level at which cash flows were identifiable.

The Company tested the long-lived assets of both the Hard Disk Drive and Services reporting units for recoverability based on a comparison of the respective aggregate values of their undiscounted cash flows to the respective carrying values. The aggregate estimated cash flows expected to be generated from the use and disposition of the assets over the remaining economic life of the primary asset in each reporting unit was compared to the carrying value of the reporting unit to determine recoverability. The primary asset of the Hard Disk Drive reporting unit was determined to be its machinery and equipment; the primary asset of the Services reporting unit was determined to be its developed technology intangible. The results of the evaluation indicated that the carrying value of the Hard Disk Drive reporting unit was recoverable while that of the Services reporting unit was not.

Since the analysis indicated that the carrying value of the Services reporting unit was not recoverable, the Company estimated the fair values of the intangible assets and Property, equipment and leasehold improvements of this reporting unit. Fair values of the technology, customer relationships, trade names and non-compete agreements were estimated using various methods under the income approach, including the excess earnings method and the relief from royalty method, internal use software was valued using the cost approach. The fair values of the Property, equipment and leasehold improvements were based primarily on estimated replacement costs adjusted for physical deterioration and obsolescence. The Company recorded impairment charges of $3 million for the property and equipment and intangible assets of the Services reporting unit during the three and six months ended January 2, 2009. The Company recorded these impairment charges in Impairment of goodwill and long-lived assets in the Condensed Consolidated Statement of Operations. No impairment charge was recorded for the intangible assets or Property, equipment and leasehold improvements of the Hard Disk Drive reporting unit.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

7. Impairment of Goodwill and Long-lived Assets (continued)

 

As of the end of the quarter ended January 2, 2009, Other intangible assets consisted primarily of existing technology, customer relationships and trade names acquired in business combinations. Acquired intangibles are amortized on a straight-line basis over the respective estimated useful lives of the assets. The net carrying value of intangible assets as of January 2, 2009 and June 27, 2008 was approximately $78 million and $111 million, respectively. Accumulated amortization of intangibles was approximately $305 million and $273 million as of January 2, 2009 and June 27, 2008, respectively.

The carrying value of intangible assets as of January 2, 2009 is set forth in the following table:

 

     Gross
Carrying

Amount
   Accumulated
Amortization
    Net
Carrying

Amount
   Weighted Average
Remaining Useful
Life
     (in millions)    (in millions)     (in millions)    (in years)

Existing technology

   $ 181    $ (160 )   $ 21    2.2

Customer relationships

     156      (113 )     43    1.5

Trade names

     37      (23 )     14    1.5

Patents and licenses

     9      (9 )     —      —  
                          

Total acquired identifiable intangible assets

   $ 383    $ (305 )   $ 78    1.7
                          

In the three and six months ended January 2, 2009, amortization expense for other intangible assets was approximately $16 million and $33 million, respectively. In the three and six months ended December 28, 2007, amortization expense for other intangible assets was approximately $24 million and $48 million, respectively. Amortization 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 Condensed Consolidated Statements of Operations.

 

8. Stock-Based Compensation

Stock-Based Benefit Plans

The Company’s stock-based benefit plans have been established to promote the Company’s long-term growth and financial success by providing incentives to its employees, directors, and consultants through grants of share-based awards. The provisions of the Company’s stock-based benefit plans, which allow for the grant of various types of equity-based awards, are also intended to provide flexibility to maintain the Company’s competitive ability to attract, retain and motivate participants for the benefit of the Company and its shareholders.

Seagate Technology 2004 Stock Compensation Plan  — Under the Seagate Technology 2004 Stock Compensation plan a maximum of 63.5 million common shares has been made available for issuance. A maximum of 10 million of these shares can be awarded as nonvested shares or restricted share units. As of January 2, 2009, there were approximately 25.4 million shares available for issuance under the Seagate Technology 2004 Stock Compensation Plan, of which 6.7 million shares were available for issuance as nonvested shares or restricted share units.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

8. Stock-Based Compensation (continued)

 

The Company granted 45,000 and 191,820 nonvested shares during the three and six months ended January 2, 2009, respectively. The Company granted 26,159 and 1,081,655 restricted share units during the three and six months ended January 2, 2009, respectively. The Company also granted 316,500 and 4,977,691 non-qualified stock options during the three and six months ended January 2, 2009, respectively.

Stock Purchase Plan — On July 31, 2008, the Company issued approximately 2.5 million common shares under its Employee Stock Purchase Plan (“ESPP”), with a weighted-average purchase price of $12.72 per share. There were no shares issued under the Employee Stock Purchase Plan during the three months ended January 2, 2009 and December 28, 2007. As of January 2, 2009, there were approximately 6.4 million common shares available for issuance under the ESPP.

Determining Fair Value of Equity Awards

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. The fair value for nonvested shares and restricted share units is the share price on the grant date. The fair value for all equity awards is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period or the remaining service (vesting) period.

The fair value of the Company’s stock options, nonvested shares and restricted share units granted to employees for the three and six months ended January 2, 2009 and December 28, 2007, was estimated using the following weighted-average assumptions:

 

     For the Three Months Ended    For the Six Months Ended
     January 2,
2009
   December 28,
2007
   January 2,
2009
   December 28,
2007

Option Plan Shares

           

Expected term (in years)

   4.0    4.0    4.0    4.0

Volatility

   38%    36%    36 – 38%    36%

Expected dividend rate

   5.5 – 12.2%    1.5 – 1.6%    3.0 – 12.2%    1.5 – 1.7%

Risk-free interest rate

   1.7%    3.3%    1.7 – 3.0%    3.3 – 4.2%

Weighted-average fair value

   $1.18    $7.56    $3.13    $7.44

Nonvested Shares Weighted-average fair value

   $6.53    $26.47    $11.29    $26.47

Restricted Share Units Weighted-average fair value

   $6.13    —      $13.55    —  

ESPP Plan Shares

           

Expected term (in years)

   0.5    0.5    0.5    0.5

Volatility

   39%    31%    39%    31%

Expected dividend rate

   3.2%    1.7%    3.2%    1.7%

Risk-free interest rate

   2.0%    5.0%    2.0%    5.0%

Weighted-average fair value

   $3.59    $5.49    $3.59    $5.49

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

8. Stock-Based Compensation (continued)

 

Stock Compensation Expense

Stock Compensation Expense  — The Company recorded approximately $26 million and $53 million of stock-based compensation during the three and six months ended January 2, 2009, respectively. Of the $53 million recorded in the six months ended January 2, 2009, approximately $5 million related to stock options assumed and nonvested shares exchanged in the Maxtor acquisition. The Company recorded approximately $29 million and $58 million of stock-based compensation during the three and six months ended December 28, 2007. Of the $58 million recorded in the six months ended December 28, 2007, approximately $9 million related to stock options assumed and nonvested shares exchanged in the Maxtor acquisition. The Company has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

Excess Tax Benefits from Stock Options — In accordance with guidance in SFAS No. 123 (Revised 2004), Share-Based Payment , the cash flows resulting from excess tax benefits (tax benefits related to the excess of proceeds from employee exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. The Company did not recognize any excess tax benefits as a financing cash inflow during the three and six months ended January 2, 2009.

 

9. Guarantees

Indemnifications of Officers and Directors

The Company has entered into indemnification agreements with the members of its board of directors to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by the directors as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the directors are sued as a result of their service as members of the Company’s board of directors.

Intellectual Property Indemnification Obligations

The Company has entered into agreements with customers and suppliers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying Condensed Consolidated Financial Statements with respect to these indemnification obligations.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

9. Guarantees (continued)

 

Product Warranty

The Company estimates and accrues product warranty costs at the time revenue is recognized. The Company generally warrants its products for periods from one to three years. The Company uses estimated repair or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligations. In addition, estimated settlements for customer compensatory claims relating to product quality issues, if any, are accrued as warranty expense. Changes in the Company’s product warranty liability during the three and six months ended January 2, 2009 and December 28, 2007 were as follows:

 

     For the Three Months Ended     For the Six Months Ended  

(Dollars in millions)

   January 2,
2009
    December 28,
2007
    January 2,
2009
    December 28,
2007
 

Balance, beginning of period

   $ 445     $ 442     $ 445     $ 430  

Warranties issued

     61       67       136       127  

Repairs and replacements

     (56 )     (66 )     (125 )     (137 )

Changes in liability for pre-existing warranties, including expirations

     (9 )     14       (15 )     37  
                                

Balance, end of period

   $ 441     $ 457     $ 441     $ 457  
                                

 

10. Equity

Issuance of Common Shares

During the six months ended January 2, 2009, the Company issued approximately 0.8 million of its common shares from the exercise of stock options and approximately 2.5 million of its common shares related to the Company’s ESPP.

Repurchases of Equity Securities

The Company did not repurchase any of its common shares during the six months ended January 2, 2009. As of January 2, 2009, the Company had approximately $2.0 billion remaining under the authorized $2.5 billion February 2008 stock repurchase plan.

 

11. Contingencies

In accordance with SFAS No. 5, Accounting for Contingencies, the Company assessed the probability of an unfavorable outcome of all its material litigation, claims or assessments to determine whether a liability had been incurred and whether it is probable that one or more future events will occur confirming the fact of the loss. In the event that an unfavorable outcome is determined to be probable and the amount of the loss can be reasonably estimated, the Company established an accrual for the litigation, claim or assessment. Litigation is inherently uncertain and may result in adverse rulings or decisions. Additionally, the Company may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on its results of operations. Accordingly, actual results could differ materially.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11. Contingencies (continued)

 

Intellectual Property Litigation

Convolve, Inc. and Massachusetts Institute of Technology (“MIT”) v. Seagate Technology LLC, et al — Between 1998 and 1999, Convolve, Inc., a small privately held technology consulting firm founded by an MIT Ph.D., engaged in discussions with Seagate Technology, Inc. with respect to the potential license of technology that Convolve claimed to own. During that period, the parties entered into non-disclosure agreements. The Company declined Convolve’s offer of a license in late 1999. On July 13, 2000, Convolve and MIT filed suit against Compaq Computer Corporation and the Company in the U.S. District Court for the Southern District of New York, alleging infringement of U.S. Patent Nos. 4,9156,635, “Shaping Command Inputs to Minimize Unwanted Dynamics” (the “635 patent”) and U.S. Patent No. 5,638,267, “Method and Apparatus for Minimizing Unwanted Dynamics in a Physical System” (the ‘267 patent), misappropriation of trade secrets, breach of contract, tortious interference with contract and fraud relating to Convolve and MIT’s Input Shaping ® and Convolve’s Quick and Quiet™ technology. The plaintiffs claim their technology is incorporated in Seagate’s sound barrier technology, which was publicly announced on June 6, 2000. The complaint seeks injunctive relief, $800 million in compensatory damages and unspecified punitive damages.

The Company answered the complaint on August 2, 2000 and filed counterclaims for declaratory judgment that two Convolve/MIT patents are invalid and not infringed and that the Company owns any intellectual property based on the information that the Company disclosed to Convolve. The court denied plaintiffs’ motion for expedited discovery and ordered plaintiffs to identify their trade secrets to defendants before discovery could begin. Convolve served a trade secrets disclosure on August 4, 2000, and the Company filed a motion challenging the disclosure statement. On May 3, 2001, the court appointed a special master to review the trade secret issues. The special master resigned on June 5, 2001, and the court appointed another special master on July 26, 2001. After a hearing on its motion challenging the trade secrets disclosure on September 21, 2001, the special master issued a report and recommendation to the court that the trade secret list was insufficient.

Convolve revised the trade secret list, and the court entered an order on January 1, 2002, accepting the special master’s recommendation that this trade secret list was adequate. On November 6, 2001, the U.S. Patent and Trademark Office (USPTO) issued US Patent No. 6,314,473, “System for Removing Selected Unwanted Frequencies in Accordance with Altered Settings in a User Interface of a Data Storage Device.” ( the ‘473 patent”) to Convolve. Convolve filed an amended complaint on January 16, 2002, alleging defendants’ infringement of this patent, and the Company answered and filed counterclaims on February 8, 2002. On July 26, 2002, the Company filed a Rule 11 motion challenging the adequacy of plaintiffs’ pre-filing investigation on the first two patents alleged in the complaint and seeking dismissal of plaintiffs’ claims related to these patents and reimbursement of attorney’s fees. The court denied its motion on May 23, 2003. On May 6, 2003, the USPTO issued to Convolve U.S. Patent No. 6,560,658 B2, entitled “Data Storage Device with Quick and Quiet Modes.” Convolve indicated that it would seek leave of the court to add this patent to the lawsuit, but it never did so. This latest patent is a continuation of a patent currently in the lawsuit (U.S. Patent No. 6,314,473).

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11. Contingencies (continued)

 

The Company believes any claims that may relate to this continuation patent would be without merit, regardless of whether such claims were added to the ongoing litigation or asserted against it in a separate lawsuit. Judge John Martin, who was assigned this case, announced his retirement from the federal bench. The case was reassigned to Judge George B. Daniels. On October 14, 2003, the Special Master resigned from the case due to Convolve’s claim that he had a conflict of interest. Magistrate Judge James C. Francis IV was appointed to handle all discovery matters. Plaintiffs eventually dropped the ‘267 patent from the case. The claims construction hearing on ‘635 and ‘473 patents was held on March 30 and 31, 2004. On August 11, 2005, the court entered an order construing the patent claims. Both Seagate and Compaq moved for reconsideration of its claim construction in light of intervening new law in the Federal Circuit’s then-recent decision in Phillips v. AWH Corp., et al. , 415 F.3d 1303 (Fed. Cir. 2005). Convolve also moved for clarification. The court denied reconsideration without oral argument on December 7, 2005. The court later granted Convolve’s unopposed clarification motion. On March 29, 2006, the court granted Seagate’s summary judgment motion that Convolve’s fraud, tortious interference with contract, unfair competition and breach of confidence claims are preempted by the California Uniform Trade Secrets Act (CUTSA). The court also held that while Convolve’s claim for breach of the covenant of good faith and fair dealing is not preempted by the CUTSA, no tort damages are available. The court denied its motion for summary judgment on a trade secret issue without prejudice, finding there is an issue of fact that must be decided. Finally, the court entered an order on July 14, 2006, that Convolve has no evidence to prove its claims regarding 10 alleged trade secrets, precluding Convolve from proceeding at trial on those claims, and precluding Convolve from alleging violations of the 10 alleged trade secrets by either defendant prior to December 7, 2005, the date of the hearing.

At Seagate’s request, the USPTO determined that both patents in suit have substantial new issues of patentability and ordered re-examination of the patents. The court denied its motion to stay the case pending patent re-examination. On December 2, 2008, the USPTO issued a re-examination Certificate for the ‘473 patent in which nine of the claims asserted in this litigation were determined to be patentable as amended and three asserted claims were confirmed. Another re-examination proceeding for the ‘473 patent is pending and the Company is awaiting an initial office action. A final office action has issued in the ‘635 re-examination in which five asserted claims were confirmed as patentable and three asserted claims were finally rejected. The ‘635 patent expired on September 12, 2008. No specific trial date has been set in the litigation, although the court indicated that the parties should be ready for trial in January 2010. The Company believes the claims are without merit, and intend to defend against them vigorously.

Siemens, AG v. Seagate Technology — On August 23, 2006, Siemens, AG, a German corporation, filed a complaint against Seagate Technology in the U.S. District Court for the Central District of California alleging infringement of U.S. Patent No. 5,686,838 (the ‘838 patent) entitled “Magnetoresistive Sensor Having at Least a Layer System and a Plurality of Measuring Contacts Disposed Thereon, and a Method of Producing the Sensor.” The suit alleges that Seagate drives incorporating Giant Magnetic Resistance (GMR) sensors infringe the ‘838 patent. The complaint seeks damages in an unstated amount, an accounting, preliminary and permanent injunctions, prejudgment interest, enhanced damages for alleged willful infringement and attorney fees and costs. The lawsuit was served on Seagate on September 6, 2006. The Company served an answer to the complaint on November 27, 2006, denying all material allegations and asserting affirmative defenses. Siemens amended its complaint to add Tunnel Magnetic Resistance (TMR) sensors to the case. On May 9, 2008, the court entered summary judgment that TMR sensors are not covered by the ‘838 patent, thus eliminating TMR products from the case. On September 23, 2008, the court entered summary judgment that Seagate drives incorporating GMR sensors are covered by the ‘838 patent. Trial began on November 12, 2008, and a jury returned a verdict in favor of Seagate on December 23, 2008, finding the ‘838 patent invalid on grounds of both anticipation and obviousness.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11. Contingencies (continued)

 

StorMedia Texas LLC v. Comp USA, et al — On January 22, 2007, a lawsuit was filed against 11 defendants, alleging infringement of U.S. Patent No. 6,805,891 (the ‘891 patent), a media patent that is allegedly 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 disk drive companies were named, including Seagate Technology, Seagate Technology LLC, Hitachi, Fujitsu, Samsung, Toshiba and Western Digital, as well as retailers Comp USA, J&R Electronics and Tiger Direct. The Company served an answer to the complaint on April 13, 2007, denying all material allegations and asserting affirmative defenses. This case was resolved November 24, 2008, and dismissed with prejudice.

Siemens, AG v. Seagate Technology (Ireland) — On December 2, 2008, Siemens served Seagate Technology (Ireland) with a writ of summons alleging infringement of European Patent (UK) No. 0 674 769 (the EU ‘769 patent), which is the European counterpart to US Patent No. 5,686,838 upon which Siemens had sued Seagate Technology in the United States. The suit was filed in the High Court of Justice in Northern Ireland, Chancery Division. Siemens alleges that giant magnetoresistance (GMR), tunnel magnetoresistance (TMR), and tunnel giant magnetoresistance (TGMR) products designed and manufactured by Seagate Technology (Ireland) infringe the EU’769 patent. The Company believes the claims are without merit and intend to defend against them vigorously.

Magsil Corporation and Massachusetts Institute of Technology v. Seagate Technology, et al. — On December 12, 2008, Magsil Corporation and Massachusetts Institute of Technology filed a complaint in the US District Court for the District of Delaware against three Seagate entities, Maxtor Corporation, and twelve other hard disc drive and recording head manufacturing companies. The complaint alleges that unspecified hard disc drives and components thereof infringe two US patents: 5,629,922, entitled “Electron Tunneling Device Using Ferromagnetic Thin Films, “ and 5,835,314, entitled “Tunnel Junction Device For Storage and Switching of Signals.” The complaint seeks judgment of infringement, an injunction, damages in an unstated amount, interest, and costs. The Company is evaluating the complaint.

Qimonda AG v, LSI Corporation, et al. — On December 19, 2008, the US International Trade Commission (ITC) instituted an investigation under section 337 of the Tariff Act of 1930, as amended, at the request of complainant Qimonda AG, naming LSI Corporation and six Seagate Technology entities as respondents. The complaint alleges that LSI and Seagate import products into the US that infringe seven Qimonda patents relating to the design and manufacture of semiconductor integrated chips. The ITC set trial for June 1, 2009. The target date for completion of the investigation and, if a violation of the law is found, issuance of any remedy is February 16, 2010. The Company is evaluating the complaint.

Other Matters

The Company is involved in a number of other judicial and administrative proceedings incidental to its business, and the Company may be involved in various legal proceedings arising in the normal course of its business in the future. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on its financial position or results of operations.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Recently Issued Accounting Pronouncements

In November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 08-6, Equity Method Investment Accounting Considerations . EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company currently does not have any investments that are accounted for under the equity method. The pending adoption of EITF 08-6 is not expected to have an impact on its consolidated results of operations and financial condition.

In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, Accounting for Defensive Intangible Assets . EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact of the pending adoption of EITF 08-7 on its consolidated results of operations and financial condition.

In May 2008, the FASB issued FASB Staff Position (FSP), Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1), which may require the Company to recognize additional non cash interest expense related to its Convertible Senior Notes in its consolidated statements of operations. FSP APB No. 14-1 requires the issuer to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP APB No. 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. FSP APB No. 14-1 must be applied retrospectively to all periods presented pursuant to the guidance of SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154). The Company will adopt FSP APB No. 14-1 in its fiscal year 2010, and is currently evaluating the impact of the pending adoption on its consolidated results of operations and financial condition.

In April 2008, the FASB issued FSP FAS 142-3 , Determination of the Useful Life of Intangible Assets . FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets . FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact of the pending adoption of FSP FAS 142-3 on its fiscal year 2010 consolidated results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires disclosure of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. The Company is currently evaluating the impact of the pending adoption of SFAS No. 161 on the disclosures in its consolidated financial statements.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

12. Recently Issued Accounting Pronouncements (continued)

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS No. 141(R) will change the Company’s accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2010.

In September 2006, the FASB issued SFAS No. 157. In the first quarter of fiscal year 2009, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157) for all financial assets and financial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. The adoption of SFAS No. 157 did not have a significant impact on the Company’s consolidated financial statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance. See “Note 4. Fair Value” for further details on its fair value measurements.

In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP FAS 152-1) and FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 152-2). Collectively, the Staff Positions defer the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of SFAS No. 157. In addition, in October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, (FSP FAS 152-3) which clarified the application of how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. As described in Note 4, the Company has adopted SFAS No. 157 and the related FASB staff positions except for those items specifically deferred under FSP FAS 157-2. The Company is currently evaluating the impact of the full adoption of SFAS No. 157 on its consolidated results of operations and financial condition.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information

The Company has guaranteed obligations of Seagate Technology HDD Holdings (“HDD”) under senior notes totaling $1.5 billion comprised of $300 million aggregate principal amount of Floating Rate Senior Notes due October 2009 (the “2009 Notes”), $600 million aggregate principal amount of 6.375% Senior Notes due October 2011 (the “2011 Notes”) and $600 million aggregate principal amount of 6.8% Senior Notes due October 2016 (the “2016 Notes”, and together with the 2009 Notes and the 2011 Notes, the “Senior Notes”), on a full and unconditional basis. The following tables present parent guarantor, subsidiary issuer and combined non-guarantors Condensed Consolidating Balance Sheets of the Company and its subsidiaries at January 2, 2009 and June 27, 2008, the Condensed Consolidating Statements of Operations for the three and six months ended January 2, 2009 and December 28, 2007 and the Condensed Consolidating Statements of Cash Flows for the six months ended January 2, 2009 and December 28, 2007. The information classifies the Company’s subsidiaries into Seagate Technology-parent company guarantor, HDD-subsidiary issuer, and the Combined Non-Guarantors based upon the classification of those subsidiaries. Under each of these instruments, dividends paid by HDD or its restricted subsidiaries would constitute restricted payments and loans between the Company and HDD or its restricted subsidiaries would constitute affiliate transactions.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Balance Sheet

January 2, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
   Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ —      $ —      $ 1,161    $ —       $ 1,161

Short-term investments

     —        —        148      —         148

Accounts receivable, net

     —        —        1,040      —         1,040

Intercompany receivable

     —        —        87      (87 )     —  

Inventories

     —        —        796      —         796

Other current assets

     —        —        643      —         643
                                   

Total Current Assets

     —        —        3,875      (87 )     3,788

Property, equipment and leasehold improvements, net

     —        —        2,510      —         2,510

Goodwill

     —        —        31      —         31

Other intangible assets, net

     —        —        78      —         78

Equity investment in HDD

     5,103      —        —        (5,103 )     —  

Equity investments in Non-Guarantors

     —        3,349      249      (3,598 )     —  

Intercompany note receivable

     —        3,610      693      (4,303 )     —  

Other assets, net

     —        12      641      —         653
                                   

Total Assets

   $ 5,103    $ 6,971    $ 8,077    $ (13,091 )   $ 7,060
                                   

Short-term borrowings

   $ —      $ 350    $ —      $ —       $ 350

Accounts payable

     —        —        1,370      —         1,370

Intercompany payable

     —        —        87      (87 )     —  

Accrued employee compensation

     —        —        156      —         156

Accrued expenses

     —        20      778      —         798

Accrued income taxes

     —        —        13      —         13

Current portion of long-term debt

     —        300      20      —         320
                                   

Total Current Liabilities

     —        670      2,424      (87 )     3,007

Other non-current liabilities

     —        —        363      —         363

Intercompany note payable

     3,263      —        1,040      (4,303 )     —  

Long-term accrued income taxes

     —        —        166      —         166

Long-term debt, less current portion

     —        1,198      486      —         1,684

Liability for deficit of Maxtor

     —        —        651      (651 )     —  
                                   

Total Liabilities

     3,263      1,868      5,130      (5,041 )     5,220
                                   

Shareholders’ Equity

     1,840      5,103      2,947      (8,050 )     1,840
                                   

Total Liabilities and Shareholders’ Equity

   $ 5,103    $ 6,971    $ 8,077    $ (13,091 )   $ 7,060
                                   

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Balance Sheet

June 27, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
   Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated
     (In millions)

Cash and cash equivalents

   $ 3    $ —      $ 987    $ —       $ 990

Short-term investments

     —        —        151      —         151

Accounts receivable, net

     —        —        1,410      —         1,410

Intercompany receivable

     —        —        181      (181 )     —  

Inventories

     —        —        945      —         945

Other current assets

     —        —        776      —         776
                                   

Total Current Assets

     3      —        4,450      (181 )     4,272

Property, equipment and leasehold improvements, net

     —        —        2,464      —         2,464

Goodwill

     —        —        2,352      —         2,352

Other intangible assets, net

     —        —        111      —         111

Equity investment in HDD

     7,767      —        —        (7,767 )     —  

Equity investments in Non-Guarantors

     —        6,089      253      (6,342 )     —  

Intercompany note receivable

     —        3,183      652      (3,835 )     —  

Other assets, net

     —        14      907      —         921
                                   

Total Assets

   $ 7,770    $ 9,286    $ 11,189    $ (18,125 )   $ 10,120
                                   

Accounts payable

   $ —      $ —      $ 1,652    $ —       $ 1,652

Intercompany payable

     —        —        181      (181 )     —  

Accrued employee compensation

     —        —        440      —         440

Accrued expenses

     1      22      802      —         825

Accrued income taxes

     —        —        10      —         10

Current portion of long-term debt

     —        —        360      —         360
                                   

Total Current Liabilities

     1      22      3,445      (181 )     3,287

Other non-current liabilities

     —        —        577      —         577

Intercompany note payable

     3,183      —        652      (3,835 )     —  

Long-term debt, less current portion

     —        1,497      173      —         1,670

Liability for deficit of Maxtor

     —        —        636      (636 )     —  
                                   

Total Liabilities

     3,184      1,519      5,483      (4,652 )     5,534
                                   

Shareholders’ Equity

     4,586      7,767      5,706      (13,473 )     4,586
                                   

Total Liabilities and Shareholders’ Equity

   $ 7,770    $ 9,286    $ 11,189    $ (18,125 )   $ 10,120
                                   

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Operations

Three Months Ended January 2, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 2,270     $ —       $ 2,270  

Cost of revenue

     —         —         1,948       —         1,948  

Product development

     —         —         235       —         235  

Marketing and administrative

     —         —         142       —         142  

Amortization of intangibles

     —         —         14       —         14  

Restructuring and other, net

     —         —         78       —         78  

Impairment of goodwill and long-lived assets

     —         —         2,290       —         2,290  
                                        

Total operating expenses

     —         —         4,707       —         4,707  
                                        

Income (loss) from operations

     —         —         (2,437 )     —         (2,437 )

Interest income

     —         1       13       (9 )     5  

Interest expense

     —         (23 )     (16 )     9       (30 )

Equity in income (loss) of HDD

     (2,792 )     —         —         2,792       —    

Equity in income (loss) of Non-Guarantors

     —         (2,770 )     (50 )     2,820       —    

Other, net

     —         —         (14 )     —         (14 )
                                        

Other income (expense), net

     (2,792 )     (2,792 )     (67 )     5,612       (39 )
                                        

Income (loss) before income taxes

     (2,792 )     (2,792 )     (2,504 )     5,612       (2,476 )

Provision for (benefit from) income taxes

     —         —         316       —         316  
                                        

Net income (loss)

   $ (2,792 )   $ (2,792 )   $ (2,820 )   $ 5,612     $ (2,792 )
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Operations

Six Months Ended January 2, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 5,302     $ —       $ 5,302  

Cost of revenue

     —         —         4,455       —         4,455  

Product development

     —         —         495       —         495  

Marketing and administrative

     —         —         290       —         290  

Amortization of intangibles

     —         —         28       —         28  

Restructuring and other, net

     —         —         101       —         101  

Impairment of goodwill and long-lived assets

     —         —         2,290       —         2,290  
                                        

Total operating expenses

     —         —         7,659       —         7,659  
                                        

Income (loss) from operations

     —         —         (2,357 )     —         (2,357 )

Interest income

     —         1       28       (17 )     12  

Interest expense

     —         (46 )     (31 )     17       (60 )

Equity in income (loss) of HDD

     (2,732 )     —         —         2,732       —    

Equity in income (loss) of Non-Guarantors

     —         (2,687 )     (73 )     2,760       —    

Other, net

     —         —         (27 )     —         (27 )
                                        

Other income (expense), net

     (2,732 )     (2,732 )     (103 )     5,492       (75 )
                                        

Income (loss) before income taxes

     (2,732 )     (2,732 )     (2,460 )     5,492       (2,432 )

Provision for (benefit from) income taxes

     —         —         300       —         300  
                                        

Net income (loss)

   $ (2,732 )   $ (2,732 )   $ (2,760 )   $ 5,492     $ (2,732 )
                                        

 

40


Table of Contents

SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Cash Flows

Six Months Ended January 2, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income (loss)

   $ (2,732 )   $ (2,732 )   $ (2,760 )   $ 5,492     $ (2,732 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —         —         481       —         481  

Stock-based compensation

     —         —         53       —         53  

Impairment of goodwill and long-lived assets

     —         —         2,290       —         2,290  

Deferred income taxes

     —         —         305       —         305  

Equity in (income) loss of HDD

     2,732       —         —         (2,732 )     —    

Equity in (income) loss of Non-Guarantors

     —         2,687       73       (2,760 )     —    

Other non-cash operating activities, net

     —         2       (15 )     —         (13 )

Changes in operating assets and liabilities, net

     (2 )     —         10       —         8  
                                        

Net cash provided by (used in) operating activities

     (2 )     (43 )     437       —         392  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (494 )     —         (494 )

Purchase of short-term investments

     —         —         (116 )     —         (116 )

Maturities and sales of short-term investments

     —         —         120       —         120  

Other investing activities, net

     —         —         15       —         15  
                                        

Net cash provided by (used in) investing activities

     —         —         (475 )     —         (475 )

FINANCING ACTIVITIES

          

Proceeds from short-term borrowings

     —         350       —         —         350  

Repayment of long-term debt

     —         —         (15 )     —         (15 )

Loan from HDD to Parent

     80       (80 )     —         —         —    

Loan from HDD to Non-Guarantor

     —         (347 )     347       —         —    

Investment by HDD in Non-Guarantor

     —         (4 )     4       —         —    

Distribution from Non-Guarantor to HDD

     —         124       (124 )     —         —    

Proceeds from exercise of employee stock options and employee stock purchase plan

     36       —         —         —         36  

Dividends to shareholders

     (117 )     —         —         —         (117 )
                                        

Net cash provided by (used in) financing activities

     (1 )     43       212       —         254  
                                        

Increase (decrease) in cash and cash equivalents

     (3 )     —         174       —         171  

Cash and cash equivalents at the beginning of the period

     3       —         987       —         990  
                                        

Cash and cash equivalents at the end of the period

   $ —       $ —       $ 1,161     $ —       $ 1,161  
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Operations

Three Months Ended December 28, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —      $ —       $ 3,420     $ —       $ 3,420  

Cost of revenue

     —        —         2,531       —         2,531  

Product development

     —        —         262       —         262  

Marketing and administrative

     —        —         167       —         167  

Amortization of intangibles

     —        —         13       —         13  

Restructuring and other, net

     —        —         27       —         27  
                                       

Total operating expenses

     —        —         3,000       —         3,000  
                                       

Income (loss) from operations

     —        —         420       —         420  

Interest income

     —        —         29       (10 )     19  

Interest expense

     —        (23 )     (21 )     10       (34 )

Equity in income (loss) of HDD

     403      —         —         (403 )     —    

Equity in income (loss) of Non-Guarantors

     —        426       (18 )     (408 )     —    

Other, net

     —        —         18       —         18  
                                       

Other income (expense), net

     403      403       8       (811 )     3  
                                       

Income (loss) before income taxes

     403      403       428       (811 )     423  

Provision for (benefit from) income taxes

     —        —         20       —         20  
                                       

Net income (loss)

   $ 403    $ 403     $ 408     $ (811 )   $ 403  
                                       

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Operations

Six Months Ended December 28, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 6,705     $ —       $ 6,705  

Cost of revenue

     —         —         5,008       —         5,008  

Product development

     —         —         504       —         504  

Marketing and administrative

     1       —         318       —         319  

Amortization of intangibles

     —         —         27       —         27  

Restructuring and other, net

     —         —         32       —         32  
                                        

Total operating expenses

     1       —         5,889       —         5,890  
                                        

Income (loss) from operations

     (1 )     —         816       —         815  

Interest income

     —         —         55       (20 )     35  

Interest expense

     —         (47 )     (39 )     20       (66 )

Equity in income (loss) of HDD

     759       —         —         (759 )     —    

Equity in income (loss) of Non-Guarantors

     —         806       (45 )     (761 )     —    

Other, net

     —         —         14       —         14  
                                        

Other income (expense), net

     759       759       (15 )     (1,520 )     (17 )
                                        

Income (loss) before income taxes

     758       759       801       (1,520 )     798  

Provision for (benefit from) income taxes

     —         —         40       —         40  
                                        

Net income (loss)

   $ 758     $ 759     $ 761     $ (1,520 )   $ 758  
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Cash Flows

Six Months Ended December 28, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    HDD
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income (loss)

   $ 758     $ 759     $ 761     $ (1,520 )   $ 758  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —         —         420       —         420  

Stock-based compensation

     —         —         58       —         58  

Equity in (income) loss of HDD

     (759 )     —         —         759       —    

Equity in (income) loss of Non-Guarantors

     —         (806 )     45       761       —    

Other non-cash operating activities, net

     —         3       —         —         3  

Changes in operating assets and liabilities, net

     —         (3 )     242       —         239  
                                        

Net cash provided by (used in) operating activities

     (1 )     (47 )     1,526       —         1,478  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (362 )     —         (362 )

Purchase of short-term investments

     —         —         (383 )     —         (383 )

Maturities and sales of short-term investments

     —         —         222       —         222  

Acquisitions, net of cash and cash equivalents acquired

     —         —         (78 )     —         (78 )

Other investing activities, net

     —         —         41       —         41  
                                        

Net cash provided by (used in) investing activities

     —         —         (560 )     —         (560 )

FINANCING ACTIVITIES

          

Loan from HDD to Parent

     484       (484 )     —         —         —    

Investment by HDD in Non-Guarantor

     —         (2 )     2       —         —    

Distribution from Non-Guarantor to HDD

     —         533       (533 )     —         —    

Proceeds from exercise of employee stock options and employee stock purchase plan

     132       —         —         —         132  

Dividends to shareholders

     (107 )     —         —         —         (107 )

Repurchases of common shares

     (500 )     —         —         —         (500 )

Other financing activities, net

     —         —         2       —         2  
                                        

Net cash provided by (used in) financing activities

     9       47       (529 )     —         (473 )
                                        

Increase (decrease) in cash and cash equivalents

     8       —         437       —         445  

Cash and cash equivalents at the beginning of the period

     4       —         984       —         988  
                                        

Cash and cash equivalents at the end of the period

   $ 12     $ —       $ 1,421     $ —       $ 1,433  
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

On May 19, 2006, in connection with the acquisition of Maxtor, the Company, Maxtor and the trustee under the indenture for the 2.375% Notes and 6.8% Notes entered into a supplemental indenture pursuant to which such notes became convertible into the Company’s common shares. In addition, the Company agreed to fully and unconditionally guarantee the 2.375% Notes and 6.8% Notes on a senior unsecured basis. The Company’s obligations under its guarantee rank in right of payment with all of its existing and future senior unsecured indebtedness. The indenture does not contain any financial covenants and does not restrict Maxtor from paying dividends, incurring additional indebtedness or issuing or repurchasing its other securities. The following tables present parent guarantor, subsidiary issuer and combined non-guarantors Condensed Consolidating Balance Sheets of the Company and its subsidiaries at January 2, 2009 and June 27, 2008, the Condensed Consolidating Statements of Operations for the three and six months ended January 2, 2009 and December 28, 2007 and the Condensed Consolidating Statements of Cash Flows for the six months ended January 2, 2009 and December 28, 2007. The information classifies the Company’s subsidiaries into Seagate Technology-parent company guarantor, Maxtor-subsidiary issuer and the Combined Non-Guarantors based on the classification of those subsidiaries under the terms of the 2.375% Notes and 6.8% Notes.

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Balance Sheet

January 2, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ —      $ 3     $ 1,158    $ —       $ 1,161

Short-term investments

     —        —         148      —         148

Accounts receivable, net

     —        —         1,040      —         1,040

Intercompany receivable

     —        87       —        (87 )     —  

Inventories

     —        —         796      —         796

Other current assets

     —        54       589      —         643
                                    

Total Current Assets

     —        144       3,731      (87 )     3,788

Property, equipment and leasehold improvements, net

     —        3       2,507      —         2,510

Goodwill

     —        —         31      —         31

Other intangible assets, net

     —        —         78      —         78

Equity investments in Non-Guarantors

     5,103      249       3,349      (8,701 )     —  

Intercompany note receivable

     —        —         4,303      (4,303 )     —  

Other assets, net

     —        351       302      —         653
                                    

Total Assets

   $ 5,103    $ 747     $ 14,301    $ (13,091 )   $ 7,060
                                    

Short-term borrowings

   $ —      $ —       $ 350    $ —       $ 350

Accounts payable

     —        —         1,370      —         1,370

Intercompany payable

     —        —         87      (87 )     —  

Accrued employee compensation

     —        —         156      —         156

Accrued expenses

     —        27       771      —         798

Accrued income taxes

     —        6       7      —         13

Current portion of long-term debt

     —        5       315      —         320
                                    

Total Current Liabilities

     —        38       3,056      (87 )     3,007

Other non-current liabilities

     —        53       310      —         363

Intercompany note payable

     3,263      693       347      (4,303 )     —  

Long-term accrued income taxes

     —        128       38      —         166

Long-term debt, less current portion

     —        486       1,198      —         1,684

Liability for deficit of Maxtor

     —        —         651      (651 )     —  
                                    

Total Liabilities

     3,263      1,398       5,600      (5,041 )     5,220
                                    

Shareholders’ Equity (Deficit)

     1,840      (651 )     8,701      (8,050 )     1,840
                                    

Total Liabilities and Shareholders’ Equity

   $ 5,103    $ 747     $ 14,301    $ (13,091 )   $ 7,060
                                    

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Balance Sheet

June 27, 2008

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
   Eliminations     Seagate
Technology
Consolidated

Cash and cash equivalents

   $ 3    $ 1     $ 986    $ —       $ 990

Short-term investments

     —        —         151      —         151

Accounts receivable, net

     —        —         1,410      —         1,410

Intercompany receivable

     —        181       —        (181 )     —  

Inventories

     —        —         945      —         945

Other current assets

     —        —         776      —         776
                                    

Total Current Assets

     3      182       4,268      (181 )     4,272

Property, equipment and leasehold improvements, net

     —        4       2,460      —         2,464

Goodwill

     —        —         2,352      —         2,352

Other intangible assets, net

     —        —         111      —         111

Equity investments in Non-Guarantors

     7,767      253       6,089      (14,109 )     —  

Intercompany note receivable

     —        —         3,835      (3,835 )     —  

Other assets, net

     —        298       623      —         921
                                    

Total Assets

   $ 7,770    $ 737     $ 19,738    $ (18,125 )   $ 10,120
                                    

Accounts payable

   $ —      $ —       $ 1,652    $ —       $ 1,652

Intercompany payable

     —        —         181      (181 )     —  

Accrued employee compensation

     —        —         440      —         440

Accrued expenses

     1      29       795      —         825

Accrued income taxes

     —        6       4      —         10

Current portion of long-term debt

     —        330       30      —         360
                                    

Total Current Liabilities

     1      365       3,102      (181 )     3,287

Other non-current liabilities

     —        183       394      —         577

Intercompany note payable

     3,183      652       —        (3,835 )     —  

Long-term debt, less current portion

     —        173       1,497      —         1,670

Liability for deficit of Maxtor

     —        —         636      (636 )     —  
                                    

Total Liabilities

     3,184      1,373       5,629      (4,652 )     5,534
                                    

Shareholders’ Equity (Deficit)

     4,586      (636 )     14,109      (13,473 )     4,586
                                    

Total Liabilities and Shareholders’ Equity

   $ 7,770    $ 737     $ 19,738    $ (18,125 )   $ 10,120
                                    

 

47


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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Operations

Three Months Ended January 2, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 2,270     $ —       $ 2,270  

Cost of revenue

     —         —         1,948       —         1,948  

Product development

     —         —         235       —         235  

Marketing and administrative

     —         (5 )     147       —         142  

Amortization of intangibles

     —         —         14       —         14  

Restructuring and other, net

     —         —         78       —         78  

Impairment of goodwill and long-lived assets

     —         —         2,290       —         2,290  
                                        

Total operating expenses

     —         (5 )     4,712       —         4,707  
                                        

Income (loss) from operations

     —         5       (2,442 )     —         (2,437 )

Interest income

     —         —         14       (9 )     5  

Interest expense

     —         (15 )     (24 )     9       (30 )

Equity in income (loss) of Maxtor

     —         —         (30 )     30       —    

Equity in income (loss) of Non-Guarantors

     (2,792 )     (20 )     (2,770 )     5,582       —    

Other, net

     —         —         (14 )     —         (14 )
                                        

Other income (expense), net

     (2,792 )     (35 )     (2,824 )     5,612       (39 )
                                        

Income (loss) before income taxes

     (2,792 )     (30 )     (5,266 )     5,612       (2,476 )

Provision for (benefit from) income taxes

     —         —         316       —         316  
                                        

Net income (loss)

   $ (2,792 )   $ (30 )   $ (5,582 )   $ 5,612     $ (2,792 )
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Operations

Six Months Ended January 2, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ —       $ 5,302     $ —       $ 5,302  

Cost of revenue

     —         1       4,454       —         4,455  

Product development

     —         2       493       —         495  

Marketing and administrative

     —         (5 )     295       —         290  

Amortization of intangibles

     —         —         28       —         28  

Restructuring and other, net

     —         10       91       —         101  

Impairment of goodwill and long-lived assets

     —         —         2,290       —         2,290  
                                        

Total operating expenses

     —         8       7,651       —         7,659  
                                        

Income (loss) from operations

     —         (8 )     (2,349 )     —         (2,357 )

Interest income

     —         —         29       (17 )     12  

Interest expense

     —         (30 )     (47 )     17       (60 )

Equity in income (loss) of Maxtor

     —         —         (55 )     55       —    

Equity in income (loss) of Non-Guarantors

     (2,732 )     (18 )     (2,687 )     5,437       —    

Other, net

     —         —         (27 )     —         (27 )
                                        

Other income (expense), net

     (2,732 )     (48 )     (2,787 )     5,492       (75 )
                                        

Income (loss) before income taxes

     (2,732 )     (56 )     (5,136 )     5,492       (2,432 )

Provision for (benefit from) income taxes

     —         (1 )     301       —         300  
                                        

Net income (loss)

   $ (2,732 )   $ (55 )   $ (5,437 )   $ 5,492     $ (2,732 )
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Cash Flows

Six Months Ended January 2, 2009

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income (loss)

   $ (2,732 )   $ (55 )   $ (5,437 )   $ 5,492     $ (2,732 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —         1       480       —         481  

Stock-based compensation

     —         3       50       —         53  

Impairment of goodwill and long-lived assets

     —         —         2,290       —         2,290  

Deferred income taxes

     —         —         305       —         305  

Equity in (income) loss of Maxtor

     —         —         55       (55 )     —    

Equity in (income) loss of Non-Guarantors

     2,732       18       2,687       (5,437 )     —    

Other non-cash operating activities, net

     —         1       (14 )     —         (13 )

Changes in operating assets and liabilities, net

     (2 )     (14 )     24       —         8  
                                        

Net cash provided by (used in) operating activities

     (2 )     (46 )     440       —         392  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (494 )     —         (494 )

Purchase of short-term investments

     —         —         (116 )     —         (116 )

Maturities and sales of short-term investments

     —         —         120       —         120  

Other investing activities, net

     —         —         15       —         15  
                                        

Net cash provided by (used in) investing activities

     —         —         (475 )     —         (475 )

FINANCING ACTIVITIES

          

Proceeds from short-term borrowings

     —         —         350       —         350  

Repayment of long-term debt

     —         —         (15 )     —         (15 )

Loan from Non-Guarantor to Parent

     80       —         (80 )     —         —    

Loan from Non-Guarantor to Maxtor

     —         41       (41 )     —         —    

Distribution from Non-Guarantor to HDD

     —         —         (124 )     124       —    

Distribution to HDD from Non-Guarantor

     —         —         124       (124 )     —    

Distribution from Non-Guarantor to Maxtor

     —         7       (7 )     —         —    

Proceeds from exercise of employee stock options and employee stock purchase plan

     36       —         —         —         36  

Dividends to shareholders

     (117 )     —         —         —         (117 )
                                        

Net cash provided by (used in) financing activities

     (1 )     48       207       —         254  
                                        

Increase (decrease) in cash and cash equivalents

     (3 )     2       172       —         171  

Cash and cash equivalents at the beginning of the period

     3       1       986       —         990  
                                        

Cash and cash equivalents at the end of the period

   $ —       $ 3     $ 1,158     $ —       $ 1,161  
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Operations

Three Months Ended December 28, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
   Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —      $ 1     $ 3,419     $ —       $ 3,420  

Cost of revenue

     —        2       2,529       —         2,531  

Product development

     —        2       260       —         262  

Marketing and administrative

     —        1       166       —         167  

Amortization of intangibles

     —        —         13       —         13  

Restructuring and other, net

     —        —         27       —         27  
                                       

Total operating expenses

     —        5       2,995       —         3,000  
                                       

Income (loss) from operations

     —        (4 )     424       —         420  

Interest income

     —        —         29       (10 )     19  

Interest expense

     —        (17 )     (27 )     10       (34 )

Equity in income (loss) of Maxtor

     —        —         (20 )     20       —    

Equity in income (loss) of Non-Guarantors

     403      1       427       (831 )     —    

Other, net

     —        —         18       —         18  
                                       

Other income (expense), net

     403      (16 )     427       (811 )     3  
                                       

Income (loss) before income taxes

     403      (20 )     851       (811 )     423  

Provision for income taxes

     —        —         20       —         20  
                                       

Net income (loss)

   $ 403    $ (20 )   $ 831     $ (811 )   $ 403  
                                       

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Operations

Six Months Ended December 28, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

Revenue

   $ —       $ 8     $ 6,697     $ —       $ 6,705  

Cost of revenue

     —         10       4,998       —         5,008  

Product development

     —         5       499       —         504  

Marketing and administrative

     1       5       313       —         319  

Amortization of intangibles

     —         —         27       —         27  

Restructuring and other, net

     —         —         32       —         32  
                                        

Total operating expenses

     1       20       5,869       —         5,890  
                                        

Income (loss) from operations

     (1 )     (12 )     828       —         815  

Interest income

     —         —         55       (20 )     35  

Interest expense

     —         (34 )     (52 )     20       (66 )

Equity in income (loss) of Maxtor

     —         —         (46 )     46       —    

Equity in income (loss) of Non-Guarantors

     759       —         807       (1,566 )     —    

Other, net

     —         —         14       —         14  
                                        

Other income (expense), net

     759       (34 )     778       (1,520 )     (17 )
                                        

Income (loss) before income taxes

     758       (46 )     1,606       (1,520 )     798  

Provision for (benefit from) income taxes

     —         —         40       —         40  
                                        

Net income (loss)

   $ 758     $ (46 )   $ 1,566     $ (1,520 )   $ 758  
                                        

 

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SEAGATE TECHNOLOGY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Condensed Consolidating Financial Information (continued)

 

Consolidating Statement of Cash Flows

Six Months Ended December 28, 2007

(In millions)

 

     Seagate
Technology
Parent
Company
Guarantor
    Maxtor
Subsidiary
Issuer
    Combined
Non-
Guarantors
    Eliminations     Seagate
Technology
Consolidated
 

OPERATING ACTIVITIES

          

Net income (loss)

   $ 758     $ (46 )   $ 1,566     $ (1,520 )   $ 758  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Depreciation and amortization

     —         3       417       —         420  

Stock-based compensation

     —         8       50       —         58  

Equity in (income) loss of Maxtor

     —         —         46       (46 )     —    

Equity in (income) loss of Non-Guarantors

     (759 )     —         (807 )     1,566       —    

Other non-cash operating activities, net

     —         7       (4 )     —         3  

Changes in operating assets and liabilities, net

     —         (50 )     289       —         239  
                                        

Net cash provided by (used in) operating activities

     (1 )     (78 )     1,557       —         1,478  

INVESTING ACTIVITIES

          

Acquisition of property, equipment and leasehold improvements

     —         —         (362 )     —         (362 )

Purchase of short-term investments

     —         —         (383 )     —         (383 )

Maturities and sales of short-term investments

     —         —         222       —         222  

Acquisitions, net of cash and cash equivalents acquired

     —         —         (78 )     —         (78 )

Other investing activities, net

     —         —         41       —         41  
                                        

Net cash provided by (used in) investing activities

     —         —         (560 )     —         (560 )

FINANCING ACTIVITIES

          

Loan from Non-Guarantor to Parent

     484       —         (484 )     —         —    

Loan from Non-Guarantor to Maxtor

     —         66       (66 )     —         —    

Distribution from Non-Guarantor to HDD

     —         —         (533 )     533       —    

Distribution to HDD from Non-Guarantor

     —         —         533       (533 )     —    

Distribution from Non-Guarantor to Maxtor

     —         10       (10 )     —         —    

Proceeds from exercise of employee stock options and employee stock purchase plan

     132       —         —         —         132  

Dividends to shareholders

     (107 )     —         —         —         (107 )

Repurchases of common shares

     (500 )     —         —         —         (500 )

Other financing activities, net

     —         —         2       —         2  
                                        

Net cash provided by (used in) financing activities

     9       76       (558 )     —         (473 )
                                        

Increase (decrease) in cash and cash equivalents

     8       (2 )     439       —         445  

Cash and cash equivalents at the beginning of the period

     4       3       981       —         988  
                                        

Cash and cash equivalents at the end of the period

   $ 12     $ 1     $ 1,420     $ —       $ 1,433  
                                        

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of operations for our fiscal quarter ended January 2, 2009, herein referred to as “the December 2008 quarter.” Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “Seagate” and “our” refer to Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman Islands, together with its subsidiaries.

You should read this discussion in conjunction with financial information and related notes included elsewhere in this report. We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The quarter ended January 2, 2009 was 13 weeks, the quarter ended October 3, 2008 was 14 weeks, and the quarters ended June 27, 2008 and December 28, 2007 were both 13 weeks. Except as noted, references to any fiscal year mean the twelve-month period ending on the Friday closest to June 30 of that year.

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, statements about our plans, strategies and prospects and industry estimates for the fiscal quarter ending April 3, 2009 and beyond. These statements identify prospective information and include words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects” and similar expressions. These forward-looking statements are based on information available to us as of the date of this report. Current expectations, forecasts and assumptions involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated by these forward-looking statements. Such risks, uncertainties and other factors may be beyond our control. In particular, uncertainty in global economic conditions pose a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news. Such risks and uncertainties also include the impact of the variable demand and the aggressive pricing environment for disk drives, particularly in view of the current deterioration in business and economic conditions; dependence on our ability to successfully qualify, manufacture and sell our disk drive products in increasing volumes on a cost-effective basis and with acceptable quality, particularly our new disk drive products with lower cost structures; the impact of competitive product announcements and possible excess industry supply with respect to particular disk drive products; our ability to achieve projected cost savings in connection with our restructuring plans; and the factors listed in the “Risk Factors” section of Item 1A of Part II of this Quarterly Report on Form 10-Q, which we encourage you to carefully read. We also encourage you to read our Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission on August 13, 2008 as it contains information concerning risk, uncertainties and other factors that could cause results to differ materially from those projected in the forward-looking statements These forward-looking statements should not be relied upon as representing our views as of any subsequent date and we undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.

Our Company

We are the world’s leading provider of hard disk drives, based on revenue. We design, manufacture, market and sell hard disk drives. Hard disk drives, commonly referred to as disk drives or hard drives, are devices that store digitally encoded data on rapidly rotating platters or disks with magnetic surfaces. The performance attributes of disk drives, including their cost effectiveness and high storage capacities has resulted in disk drives being used as the primary medium for storing electronic data in systems ranging from desktop and notebook computers, and consumer electronics devices to data centers delivering electronic data over corporate networks and the Internet.

 

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We produce a broad range of disk drive products addressing enterprise applications, where our products are used in enterprise servers, mainframes and workstations; desktop applications, where our products are used in desktop computers; mobile computing applications, where our products are used in notebook computers; and consumer electronics applications, where our products are used in a wide variety of devices such as digital video recorders (DVRs) and other consumer electronic devices that require storage. We also sell our branded storage solutions under both the Seagate and Maxtor brands. In addition to manufacturing and selling disk drives, we provide data storage services for small- to medium-sized businesses, including online backup, data protection and recovery solutions.

We sell our disk drives primarily to major original equipment manufacturers (OEMs). We also sell to distributors and retailers under our globally recognized brand names. We have longstanding relationships with many of our OEM customers including Hewlett-Packard, Dell, EMC, Asustek Computer and Lenovo. We also have key relationships with major distributors, who sell our disk drive products to small OEMs, dealers, system integrators and retailers throughout most of the world. Substantially all of our revenue is denominated in U.S. dollars.

The following table summarizes our disk drive revenue by channel and by geography:

 

     Fiscal Quarters Ended  
   January 2,
2009
    October 3,
2008
    December 28,
2007
 

Revenues by Channel (%)

      

OEM

   67 %   66 %   67 %

Distributors

   26 %   27 %   26 %

Retailers

   7 %   7 %   7 %

Revenues by Geography (%)

      

North America

   27 %   27 %   29 %

Europe

   27 %   29 %   28 %

Far East

   46 %   44 %   43 %

For each of the fiscal quarters shown above, the only customers exceeding 10% of our revenue were Hewlett-Packard and Dell. We have master purchase agreements in place with Hewlett-Packard and Dell that are cancelable for convenience by either party upon written notice, and do not require either customer to purchase any minimum or other specified quantity of our products.

Industry Overview

Our industry is characterized by several trends that have a material impact on our strategic planning, financial condition and results of operations.

In the December 2008 quarter, the macroeconomic downturn combined with the rapid decline in demand as customers reduced their inventories to unprecedented low levels, had an adverse impact on the industry. The decline in demand resulted in a more aggressive pricing environment than is typical for a December quarter.

 

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Disk Drive Industry Consolidation

Due to the significant challenges posed by the need to continually innovate and improve manufacturing efficiency and the continued demands on capital and research and development investments required to do so, the disk drive industry has undergone significant consolidation as disk drive manufacturers and component manufacturers merged with other companies or exited the industry. Through such combinations, disk drive manufacturers have also become increasingly vertically integrated. The current deteriorating economic environment as well as the increasing technological challenges, associated levels of investment and competitive necessity of large-scale operations may drive future industry consolidation. Additionally, we may in the future face indirect competition from customers who from time to time evaluate whether to offer electronic data storage products that may compete with our products.

Price Erosion

Our industry has been characterized by continuous price declines for disk drive products with comparable capacity, performance and feature sets (“like-for-like products”). Price declines for like-for-like products (“price erosion”) is more pronounced during periods of:

 

   

economic contraction or industry consolidation in which competitors may use discounted pricing to attempt to maintain or gain market share;

 

   

few new product introductions when multiple competitors have comparable or alternative product offerings;

 

   

temporary imbalances between industry supply and demand; and

 

   

seasonally weaker demand, which may cause excess supply.

Disk drive manufacturers typically attempt to offset price erosion with an improved mix of disk drive products characterized by higher capacity, better performance and additional feature sets and/or product cost reductions.

We believe the industry experienced sharper than historically typical price erosion in both the September and December 2008 quarters. Although our visibility as to whether these levels of price erosion will continue is limited, a number of industry participants, including Seagate, are taking significant steps to reduce overall costs. To remain competitive, we believe it will be necessary for industry participants to continue to reduce prices as well as introduce new product offerings that utilize advanced technologies ahead of the competition in order to take advantage of potentially higher initial profit margins and reduced cost structures on these new products.

 

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Disk Drive Industry Demand Trends

The disk drive industry is sensitive to global macroeconomic conditions and is currently significantly impacted by the downturn in economic activity. In the December 2008 quarter, a sharp contraction in the disk drive customer supply chain contributed to the rapid decline in demand as customers reduced their inventory to unprecedented low levels as measured by weeks on hand. We believe the total available market for disk drives, in aggregate, declined approximately 19% sequentially and approximately 14% from the year-ago quarter. Additionally, we believe this economic downturn will continue through calendar 2009 and may even continue to negatively impact the disk drive industry in 2010. As the extent and length of the current macroeconomic environment is unknown, such uncertainty limits our visibility of industry demand.

Notwithstanding the current economic downturn, we believe, in the long term, that technological advances in storage technology and a proliferation of non-compute applications are increasingly driving the broad, global proliferation of digital content through the creation, sharing, aggregation, distribution, consumption and protection of all types of digital content. We believe that growth in digital content is being driven by increases in media-rich and user-generated content, the digitization of content previously stored in analog format and the duplication of content in multiple locations. As a result of these factors, the nature and amount of content being created will require increasingly higher storage capacity in order to store, manage, distribute, back up and use such content. Additionally, we expect the proliferation of consumer targeted digital content will create additional demand for storage by enterprises, including those that host, aggregate, distribute or share such content. We believe such trends will result in increased demands for higher capacity disk drive products.

We also believe that long-term demand for electronic data storage in the enterprise and traditional compute markets will be positively impacted as increasing legal and regulatory requirements and changes in the nature and amount of data being stored have necessitated additional storage.

The disk drive industry has recently seen the introduction of alternative data storage technologies that directly compete with hard disk drives. Solid state disk drives (SSDs), using NAND flash memory, are a potential alternative to disk drives in certain applications such as consumer handheld devices and portable external storage. While SSDs have better performance attributes in some applications compared to hard disk drives, SSDs are not currently cost competitive in most compute applications that utilize a 3.5-inch or 2.5-inch form factor hard drive. SSDs could become more competitive in the future in compute applications that require minimal storage capacity, such as netbooks, or in mission critical applications that require ultra fast, high volume transaction data processing. We believe that in the near-term, the traditional high-volume compute markets will continue to be best served by hard disk drives based on the industry’s ability to deliver reliable storage devices that are more cost effective than SSDs.

In the long term, we believe that the disk drive industry will also be impacted by the following trends:

 

   

Disk Drives for Mobile Compute.  Notwithstanding the recent decrease in demand for disk drive products resulting from the deterioration of the macroeconomic environment, the mobile compute market is growing faster than the market for desktop computers as price and performance continue to improve. Notebook systems are increasingly becoming the preference for both consumers and enterprises as the need for mobility increases and wireless adoption continues to advance.

SSDs could become more competitive in the future in compute applications which require minimal storage capacity such as netbooks, which are smaller, less powerful, less expensive, forms of mobile computers, and are slowly becoming a low-cost alternative to notebooks. We estimate that netbooks will comprise as much as 10 – 15% of the mobile market for the next few years, and that 80% of these devices will have disk drives installed initially, and may trend towards SSDs.

 

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We believe that the market for SSDs and other alternative technologies is still developing and because of the current high cost per gigabyte of these storage solutions, we do not expect these solutions to have a significant near-term impact on the overall demand for disk drives in the mobile compute market.

 

   

Disk Drives for Enterprise Storage.  The need to address the expansion in data storage management requirements has driven the demand for new hardware storage solutions for both mission critical and business critical enterprise storage.

Mission critical enterprise storage is defined by the use of high performance, high capacity disk drives for use in applications that are vital to the operation of enterprises. We expect the market for mission critical enterprise storage solutions to be driven by many enterprises continuing to move network traffic to dedicated storage area networks. Many enterprises are also moving away from the use of server-attached storage to network-attached storage and are consolidating data centers, aiming to increase speed and reliability within a smaller space, reducing network complexity and increasing energy savings, which has led to an increased demand for more energy efficient, smaller form factor disk drives. These solutions are comprised principally of high performance disk drives with sophisticated software and communications technologies.

SSD storage applications have been introduced as a potential alternative to redundant system startup or boot disk drives. In addition, enterprises are considering the use of SSDs in applications where rapid processing is required for high volume transaction data. The timing of the adoption of SSDs in these applications is currently unknown as enterprises weigh the cost benefits of mission critical enterprise disk drives relative to the perceived performance benefits of SSDs.

Business critical enterprise storage is an application in enterprise storage whereby enterprises are using higher capacity disk drives to store less frequently accessed, less time-critical, but capacity-intensive data. Business critical electronic data, which historically has been stored on tape or other backup and archival technologies, are now being stored on these high capacity disk drives because of recent decreases in cost per gigabyte. In the long term, however, we believe that this trend towards business critical systems that utilize high capacity enterprise class disk drives will, in addition to expanding the overall enterprise market, likely absorb some of the demand for disk drives used in traditional mission critical enterprise storage.

In addition to these long-term trends, the enterprise storage demand has and continues to be impacted by the current economic contraction and the related consolidation in the financial services industry which traditionally represents a significant portion of the market for enterprise disk drives.

 

   

Disk Drives for Branded Solutions . The proliferation of media-rich digital content creates consumer demand for storage to augment their current desktop or notebook disk drive capacities. Notwithstanding the current contraction in consumer spending, we believe consumers are increasingly using external branded storage solutions to backup and secure data in case of disaster or system failure.

 

   

Disk Drives for Desktop Computing.  The current economic downturn coupled with the continuing shift towards notebook computing has contributed to the substantial decline in demand for disk drives for desktop computing. We believe the contraction of the demand for disk drives for desktop computing will continue as consumers increasingly choose notebooks for their computing needs.

 

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Disk Drives for Consumer Electronics.  Disk drives in the consumer electronics (CE) markets are primarily used in gaming and high-capacity solutions, such as DVRs. These applications require more storage capability than can be provided in a cost-effective manner through alternative technologies such as flash memory, which is used in lower capacity CE applications. Notwithstanding the current contraction in consumer spending, we believe the demand for disk drives in CE will be driven in the long term by the increased amounts of high definition content that require larger amounts of storage capacity.

Product Life Cycles and Changing Technology

Our industry has been characterized by significant advances in technology, which have contributed to rapid product life cycles. As a result, success in our industry has been dependent to a large extent on the ability to be the first-to-market with new products, allowing those disk drive manufacturers who introduce new products first to sell those products at a premium until comparable products are introduced. Also, because our industry is characterized by continuous price erosion, the existence of rapid product life cycles has necessitated the need to quickly achieve product cost effectiveness. Changing technology also necessitates the need for on-going investments in research and development, which may be difficult to recover due to rapid product life cycles and economic declines. Further, there is a continued need to successfully execute product transitions and new product introductions, as factors such as quality, reliability and manufacturing yields become of increasing competitive importance.

Seasonality

The disk drive industry traditionally experiences seasonal variability in demand with higher levels of demand in the second half of the calendar year. This seasonality is driven by consumer spending in the back-to-school season from late summer to fall and the traditional holiday shopping season from fall to winter. In addition, corporate demand is typically higher during the second half of the calendar year when IT budget calendars provide for more spending.

The December 2008 quarter was a departure from the historical seasonal trend. The deterioration of the macroeconomic business environment contributed to a decline in industry demand during the December 2008 quarter, increasing volatility in all markets. While current uncertainty in global economic conditions makes it particularly difficult to predict disk drive demand, we believe demand in the March 2009 quarter will be seasonally lower compared to the December 2008 quarter.

Suppliers of Components and Capital Equipment

Due to industry consolidation, there are a limited number of independent suppliers of components, such as recording heads and media, available to disk drive manufacturers. As a result, vertically integrated disk drive manufacturers, who manufacture their own components, are less dependent on external component suppliers than less vertically integrated disk drive manufacturers. While we believe that there is more than adequate supply to meet currently identified industry demand, further consolidation, which may be accelerated by the current economic downturn, could limit the supply of components from independent suppliers in the long term. Drive manufacturers have substantially reduced their capital spending plans due to the downturn in demand. As a result, capital equipment manufacturers may be increasingly financially constrained and, therefore, may be less able to supply equipment when needed.

Industry Supply Balance

Historically, the industry has from time to time experienced periods of imbalances between supply and demand. To the extent that the disk drive industry builds capacity based on expectations of demand that do not materialize, price erosion may become more pronounced. Conversely, during periods where demand exceeds supply, price erosion is generally more benign. During the December 2008 quarter, price erosion was more pronounced as the industry anticipated higher demand that did not materialize.

 

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During the December 2008 quarter, the industry experienced a sharp contraction in the disk drive customer supply chain, which contributed to a rapid decline in demand as customers reduced their inventory to unprecedented low levels. This response to the softening demand within the December 2008 quarter is evidence that companies are taking steps to align their business with the lower demand stemming from the deteriorating macroeconomic business environment. As of the end of the December 2008 quarter, we believe the level of distribution inventory for desktop products, at less than four weeks, was lower than historical levels. As a result of the foregoing and in light of current levels of demand, we believe the disk drive industry entered the March 2009 quarter with excess capacity.

Seagate Overview

We are the world’s leading provider of hard disk drives, based on revenue. Our products address the enterprise, desktop, mobile computing, CE and branded solutions storage markets. The Seagate 3.5-inch and 2.5-inch disk drive units used in our branded storage products are reported in the desktop and mobile market information, respectively. We maintain a highly integrated approach to our business by designing and manufacturing a significant portion of the components we view as critical to our products, such as recording heads and media. We believe that control of these key technologies, combined with our platform design and manufacturing, is necessary to achieve product performance, time-to-market leadership and manufacturing flexibility, which will allow us to respond to customers and market opportunities. However, in a period of reduced demand, this strategy may result in a higher fixed cost per unit produced than our less-integrated competitors.

Operating Performance

In the December 2008 quarter, the macroeconomic downturn, which contributed to the rapid decline in demand as customers reduced their inventories to unprecedented low levels, had a significant impact on our operating performance. The decline in demand resulted in a more aggressive pricing environment than is typical for a December quarter.

 

   

Revenue —Revenue for the December 2008 quarter decreased approximately 25% from the immediately preceding quarter, primarily due to a 19% contraction of the total available market. This led to a 23% decrease in the number of disk drives shipped. Our unit demand was also negatively impacted by a modest decline in our market share. Price erosion was partially offset by a favorable product mix, as higher priced enterprise drives comprised a greater percentage of the units shipped.

Revenue for the December 2008 quarter decreased approximately 34% from the year-ago quarter, primarily due to the contraction of the total available market. This led to a 26% decrease in the number of disk drives shipped. Price declines in the December quarter were the most severe in the past 5 years, and were most prevalent in our 3.5-inch and 2.5-inch ATA products. Additionally, our revenue was negatively impacted by the continued transition of demand from 3.5-inch to 2.5-inch ATA products where we have meaningfully less market share. We believe this continued transition also contributed to our modest overall market share loss in the quarter. A favorable mix of products shipped within each market offset some of the revenue decline.

Revenue for the first half of fiscal year 2009 decreased approximately 21% from the year-ago period, primarily due to a 12% decrease in the number of disk drives shipped, and near double-digit price erosion during each of the first two quarters of fiscal year 2009.

 

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Our average sales price per unit (ASP) for our disk drive products was $60 for the December 2008 quarter, down from $62 and $68 in the immediately preceding and year-ago quarters respectively. Sequential and year-on-year price erosion was primarily driven by the sharp decline in unit demand. This decrease was partially offset by a favorable mix of products compared to the immediately preceding quarter as higher-priced enterprise drives comprised a greater percentage of the units shipped.

 

   

Enterprise— We believe we maintained our market leadership position in the enterprise market, shipping 4.3 million units, a decrease of 17% from both the immediately preceding and year-ago quarters. The decrease in the number of units shipped from both the immediately preceding and year-ago quarters was primarily attributable to lower market demand for mission critical enterprise disk drives. The decrease in unit demand and price erosion we experienced in these periods was partially offset by an improved product mix.

 

   

Mobile —In the December 2008 quarter, we shipped 7.6 million units, a decrease of 22% from the immediately preceding quarter driven primarily by lower market demand and loss of market share. We believe the share loss is attributable to time-to-market delays in prior quarters, which made us vulnerable to customers’ decisions to cut demand from the last supplier qualified as their overall demand dropped.

Unit shipments increased 19% from the year-ago quarter. The increase in unit shipments from the year-ago quarter was driven by what we believe to be a continuing trend of notebook computers increasingly becoming the preference for both consumers and enterprises as the need for mobility increases and wireless adoption continues to advance.

 

   

Desktop —In the December 2008 quarter, we shipped 21 million units, a decrease of 26% and 30% from the immediately preceding quarter and from the year-ago quarter, respectively. These decreases were primarily driven by lower consumer and enterprise spending as a result of the macroeconomic downturn and the continued shift in demand from desktop to notebook computers. The desktop market also experienced double-digit price erosion for each of the first two quarters of fiscal year 2009. In the global distribution channel, we exited the December 2008 quarter with distribution channel inventory for desktop products at an unusually low level of approximately three weeks.

 

   

Consumer —In the December 2008 quarter, we shipped a total of 3.9 million units, a decrease of 19% and 52% from the immediately preceding and year-ago quarters, respectively. Reduced consumer spending resulting from the macroeconomic downturn contributed to these decreases. In addition, our decision not to participate in the economically unattractive portions of the gaming market was a primary contributor of the decline in units shipped compared to the year-ago quarter.

Other factors affecting results of operations —In the December 2008 quarter, we determined that the negative impact of the current macroeconomic environment and the resulting decline in the demand for our products represented an adverse change in our business climate. These circumstances required us to undertake an evaluation of our goodwill and certain long-lived assets for impairment. As a result of this evaluation, non-cash impairment charges of $2.3 billion related to goodwill and long-lived assets were recorded in the December 2008 quarter.

A charge of $271 million, which reflects an unfavorable adjustment to the valuation allowance related to our deferred tax assets, was recorded as part of our tax provision in the December 2008 quarter.

For the quarter and the first half of fiscal year 2009, our results of operations were also affected by restructuring charges of approximately $94 million and $145 million, respectively. Included in the restructuring charges was accelerated depreciation relating to the closure of our Milpitas and Pittsburgh facilities amounting to $16 million and $44 million for the quarter and the first half of fiscal year 2009, respectively. The remaining restructuring charges of $78 million for the quarter and $101 million for the first half of fiscal year 2009 were comprised of severance and other exit costs.

 

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Seasonality

Historically, we have exhibited seasonally higher unit demand during the first half of each fiscal year, however, the December 2008 quarter was a departure from the historical seasonal trend. The deterioration of the macroeconomic environment contributed to a decline in demand during the December 2008 quarter, increasing volatility in all markets, and impacting forecast visibility. While current uncertainty in global economic conditions make it particularly difficult to predict disk drive demand, we believe demand in the March 2009 quarter will be seasonally lower compared to the December 2008 quarter.

Recording Heads and Media

We maintain a highly integrated approach to our business by designing and manufacturing a significant portion of the components we view as critical to our products, such as recording heads and media. As a result of the macroeconomic downturn, our manufacturing operations have experienced a sharp reduction in utilization levels, with a resulting increase in our unit costs for recording heads and media.

The extent of our use of externally sourced recording heads, media and aluminum substrates varies based on product mix, technology and our internal capacity levels. We purchase from third parties all of our glass substrates, which are used to manufacture our disk drives for mobile and small form factor CE products.

In the September 2008 quarter, we completed the closure of our recording media manufacturing facility in Milpitas, California and our substrate manufacturing facility in Limavady, Northern Ireland, as part of our ongoing focus on cost efficiencies in all areas of our business.

Suppliers of Components and Capital Equipment

Due to industry consolidation, there are a limited number of independent suppliers of components, such as recording heads and media, available to disk drive manufacturers from whom we purchase components. Consolidation among our suppliers, which may be accelerated by the current economic downturn, could further limit our sources of components from independent suppliers in the future. We and other disk drive manufacturers have substantially reduced our capital spending plans due to the downturn in demand. As a result, our capital equipment suppliers may be increasingly financially constrained and, therefore, may be less able to supply us equipment when needed.

Research and Development

In September 2008, as part of our restructuring efforts, we announced the proposed closure of our research facility in Pittsburgh, Pennsylvania. The research effort currently underway in Pittsburgh will be moved into existing facilities, primarily in Minnesota and California. We currently plan to cease operations at our Pittsburgh facility during our fourth quarter of fiscal year 2009 . We believe these restructuring efforts will not adversely impact our ability to deliver time-to-market products.

Capital Investments

In the December 2008 quarter, we made $214 million in capital investments. Capital investments will be reduced for the remainder of fiscal year 2009 as we believe our current capacity is adequate to support expected volume requirements for at least the next several quarters. Consequently, we expect

 

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capital investment in fiscal year 2009 to be approximately $650 million, a reduction of approximately $350 million from our capital outlook at the beginning of fiscal year 2009 and $100 million reduced from the capital outlook we provided last quarter. The capital investments for the remainder of the fiscal year 2009 will be primarily for technology advancements. Based on industry conditions, we expect capital investment in fiscal year 2010 to be below $500 million.

Restructuring and Other Cost Reduction Efforts

On January 11, 2009, we announced restructuring efforts intended to realign our cost structure with the current macroeconomic business environment. These efforts included reducing worldwide headcount by approximately 6%, or 3,000 employees, which is inclusive of an over 10% reduction in the U.S. workforce. We expect these efforts to result in total pre-tax restructuring charges of approximately $90 million, and to be largely completed by the end of the March 2009 quarter. The savings generated from these restructuring activities are expected to amount to approximately $130 million annually.

In connection with our overall cost reduction strategy, we have implemented salary reductions for most of our worldwide professional workforce. These salary reductions will begin to become effective in February 2009. The estimated savings generated from these salary reductions are expected to amount to approximately $80 million annually.

We will continue to evaluate and determine what further actions are necessary to properly align our cost structure with the current business environment.

 

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Results of Operations

We list in the tables below the historical Condensed Consolidated Statements of Operations in dollars and as a percentage of revenue for the periods indicated.

 

     For the Three Months Ended     For the Six Months Ended  
     January 2,
2009
    December 28,
2007
    January 2,
2009
    December 28,
2007
 
     (in millions)     (in millions)  

Revenue

   $ 2,270     $ 3,420     $ 5,302     $ 6,705  

Cost of revenue

     1,948       2,531       4,455       5,008  
                                

Gross margin

     322       889       847       1,697  
                                

Product development

     235       262       495       504  

Marketing and administrative

     142       167       290       319  

Amortization of intangibles

     14       13       28       27  

Impairment of goodwill and long-lived assets

     2,290       —         2,290       —    

Restructuring and other, net

     78       27       101       32  
                                

Income (loss) from operations

     (2,437 )     420       (2,357 )     815  

Other income (expense), net

     (39 )     3       (75 )     (17 )
                                

Income (loss) before income taxes

     (2,476 )     423       (2,432 )     798  

Provision for (benefit from) income taxes

     316       20       300       40  
                                

Net income (loss)

   $ (2,792 )   $ 403     $ (2,732 )   $ 758  
                                
     For the Three Months Ended     For the Six Months Ended  
     January 2,
2009
    December 28,
2007
    January 2,
2009
    December 28,
2007
 
     (as a percentage of revenue)     (as a percentage of revenue)  

Revenue

     100 %     100 %     100 %     100 %

Cost of revenue

     86       74       84       75  
                                

Gross margin

     14       26       16       25  
                                

Product development

     10       8       9       8  

Marketing and administrative

     6       5       5       5  

Amortization of intangibles

     1       —         1       —    

Impairment of goodwill and long-lived assets

     101       —         43       —    

Restructuring and other, net

     3       1       2       —    
                                

Income (loss) from operations

     (107 )     12       (44 )     12  

Other income (expense), net

     (2 )     —         (2 )     —    
                                

Income (loss) before income taxes

     (109 )     12       (46 )     12  

Provision for (benefit from)

income taxes

     14       —         (6 )     1  
                                

Net income (loss)

     (123 )%     12 %     (52 )%     11 %
                                

 

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Revenue

 

     For the Three Months Ended    For the Six Months Ended

(Dollars in millions)

   January 2,
2009
   October 3,
2008
   December 28,
2007
   January 2,
2009
   December 28,
2007

Revenue

   $ 2,270    $ 3,033    $ 3,420    $ 5,302    $ 6,705

Revenue for the December 2008 quarter decreased approximately 25% from the immediately preceding quarter, primarily due to a 19% contraction of the total available market, which led to a 23% decrease in the number of disk drives shipped. Our unit demand was also negatively impacted by a modest decline in our market share. Price erosion was partially offset by a favorable product mix, as higher priced enterprise drives comprised a greater percentage of the units shipped.

Revenue for the December 2008 quarter decreased approximately 34% from the year-ago quarter, primarily due to the contraction of the total available market, which led to a 26% decrease in the number of disk drives shipped. Price declines in the December quarter were the most severe in the past 5 years, and were most prevalent in our 3.5-inch and 2.5-inch ATA products. Additionally, our revenue was negatively impacted by the continued transition of demand from 3.5-inch to 2.5-inch ATA products where we have meaningfully less market share. We believe this continued transition also contributed to our modest overall market share loss in the quarter. A favorable mix of products shipped within each market offset some of the revenue decline.

Revenue for the first half of fiscal year 2009 decreased approximately 21% from the year-ago period, primarily due to a 12% decrease in the number of disk drives shipped, and near double-digit price erosion during each of the first two quarters of fiscal year 2009.

Our average sales price per unit (ASP) for our disk drive products was $60 for the December 2008 quarter, down from $62 and $68 in the immediately preceding and year-ago quarters respectively. Sequential and year-on-year price erosion was primarily driven by the sharp decline in unit demand. This decrease was partially offset by a favorable mix of products compared to the immediately preceding quarter as higher-priced enterprise drives comprised a greater percentage of the units shipped.

Unit shipments for our products in the quarter ended January 2, 2009 were as follows:

 

   

Enterprise —4.3 million, down from 5.2 million and 5.3 million units in the immediately preceding and year-ago quarters, respectively.

 

   

Mobile —7.6 million, down from 9.8 million and up from 6.4 million units in the immediately preceding and year-ago quarters, respectively.

 

   

Desktop —21.0 million, down from 28.2 million and 29.9 million units in the immediately preceding and year-ago quarters, respectively.

 

   

Consumer —3.9 million, down from 4.8 million and 8.1 million units in the immediately preceding and year-ago quarters, respectively.

We maintain various sales programs such as point-of-sale rebates, sales price adjustments and price protection, aimed at increasing customer demand. We exercise judgment in formulating the underlying estimates related to distributor and retail inventory levels, sales program participation and customer claims submittals in determining the provision for such programs. Sales programs recorded as contra revenue were approximately 15% of our gross revenue for the December 2008 quarter as compared to 12% and 8% in the immediately preceding and year-ago quarters, respectively. The increase in sales programs during the December 2008 quarter was due to the current competitive pricing environment.

 

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Cost of Revenue

 

     For the Three Months Ended     For the Six Months Ended  

(Dollars in millions)

   January 2,
2009
    October 3,
2008
    December 28,
2007
    January 2,
2009
    December 28,
2007
 

Cost of revenue

   $ 1,948     $ 2,508     $ 2,531     $ 4,455     $ 5,008  

Gross margin

   $ 322     $ 525     $ 889     $ 847     $ 1,697  

Gross margin percentage

     14 %     17 %     26 %     16 %     25 %

Cost of revenue for the December 2008 quarter decreased approximately 22% and 23% from the immediately preceding and year-ago quarters, respectively, due to a lower number of units shipped.

Gross margin as a percentage of revenue for the December quarter compressed in excess of 300 basis points compared with the immediately preceding quarter, reflecting a more competitive pricing environment and lower unit demand, which led to lower levels of fixed cost absorption. A higher cost structure related to older products also adversely impacted gross margin.

Gross margin as a percentage of revenue decreased from the year-ago quarter primarily due to price erosion, lower capacity utilization as we reduced build schedules significantly, and a higher cost structure on certain older products as we continue to transition to newer more cost efficient product platforms.

Cost of revenue for the first half of fiscal year 2009 decreased approximately 11% from the year-ago period due to a lower number of units shipped. Gross margin as a percentage of revenue decreased from the year-ago period primarily due to price erosion and lower capacity utilization.

Product Development Expense

 

     For the Three Months Ended    For the Six Months Ended

(Dollars in millions)

   January 2,
2009
   October 3,
2008
   December 28,
2007
   January 2,
2009
   December 28,
2007

Product development

   $ 235    $ 260    $ 262    $ 495    $ 504

Product development expense for the December 2008 quarter decreased approximately 10% from the immediately preceding quarter primarily due to a $13 million research grant and a decrease in payroll expense of approximately $14 million related to a 14-week September 2008 quarter and a company-wide furlough in the December 2008 quarter.

Product development expense for the December 2008 quarter decreased approximately 10% from the year-ago quarter primarily due to a $23 million decrease in variable performance-based compensation, $13 million due to a decline in the deferred compensation plan liabilities and a $13 million research grant. These decreases were partially offset by payroll expense related to annual wage increases and $14 million accelerated depreciation expense related to the closure of our Pittsburgh facility .

Product development expense for the first half of fiscal year 2009 remained relatively flat when compared to the corresponding year-ago period. Variable performance-based compensation decreased $50 million, other employee benefits decreased by $22 million due to a decline in the deferred compensation plan liabilities, and we received a $13 million research grant in the first half of fiscal year 2009 as opposed to a $5 million grant received in the corresponding year-ago period. These were substantially offset by increased payroll expense of approximately $36 million resulting from annual wage increases and a 14-week September 2008 quarter, an increase of approximately $14 million accelerated depreciation expense related to the closure of our Pittsburgh facility, and $20 million of incremental material and other program expenses related to increased product development activity.

 

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Marketing and Administrative Expense

 

     For the Three Months Ended    For the Six Months Ended

(Dollars in millions)

   January 2,
2009
   October 3,
2008
   December 28,
2007
   January 2,
2009
   December 28,
2007

Marketing and administrative

   $ 142    $ 148    $ 167    $ 290    $ 319

Marketing and administrative expense for the December 2008 quarter decreased approximately 4% from the immediately preceding quarter driven primarily by $18 million of reduced discretionary spending, a 14-week September 2008 quarter and a company-wide furlough in the December 2008 quarter. This was mostly offset by an increase of $10 million additional litigation expense and $7 million additional advertising in the December 2008 quarter.

Marketing and administrative expense for the December 2008 quarter decreased approximately 15% from the year-ago quarter, primarily due to decreases of $15 million in variable performance-based compensation, $9 million due to a decline in the deferred compensation plan liabilities, and $17 million of reduced discretionary spending in the December 2008 quarter. These were partially offset by increases of $8 million for advertising and $6 million in litigation expenses.

Marketing and administrative expense for the first half of fiscal year 2009 decreased by approximately 9% from the corresponding year-ago period. This was primarily due to decreases of $29 million in variable performance-based compensation and $16 million due to a decline in the deferred compensation plan liabilities. This was partially offset by $11 million additional legal expense due to increased litigation activity.

Amortization of Intangibles

 

     For the Three Months Ended    For the Six Months Ended

(Dollars in millions)

   January 2,
2009
   October 3,
2008
   December 28,
2007
   January 2,
2009
   December 28,
2007

Amortization of intangibles

   $ 14    $ 14    $ 13    $ 28    $ 27

Amortization of intangibles for the December 2008 quarter and the first half of fiscal year 2009 was flat when compared with the immediately preceding, year-ago quarter and first half of fiscal year 2008.

Impairment of Goodwill and Long-Lived Assets

     For the Three Months Ended    For the Six Months Ended

(Dollars in millions)

   January 2,
2009
   October 3,
2008
   December 28,
2007
   January 2,
2009
   December 28,
2007

Impairment of goodwill and long-lived assets

   $ 2,290    $  —      $  —      $ 2,290    $  —  

During the December 2008 quarter, we determined that a significant adverse change to our business climate had occurred, which required that we evaluate the carrying value of our goodwill and long-lived assets, principally intangible assets and property, equipment and leasehold improvements, for impairment. We made this determination as evidence of a sustained and sharp deterioration in the general business environment, and specifically, all of our major markets, was building rapidly through the quarter. Several of our customers and other technology companies in the supply chain of our customers, as well as our competitors, reduced their financial outlook and/or otherwise disclosed that they were experiencing very challenging market conditions with little visibility of a rebound.

 

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In addition, prior to the start of the December quarter, the Total Available Market (TAM) was estimated to be approximately 156 million. At about eight weeks into the quarter, the outlook for the TAM had decreased to be approximately 135 million units. After the close of the quarter, preliminary industry data indicated actual shipments for the December quarter were approximately 123 million units. In response to these adverse business indicators and the rapidly declining revenue trends experienced during our fiscal second quarter, we reduced our near-term and long-term financial projections. Consequently, we performed an analysis of goodwill for impairment, and of the recoverability and impairment of long-lived assets, in accordance with the guidance in Financial Accounting Standards Board (FASB) Statement (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), respectively. Based on these analyses, we recorded impairment charges of $2.3 billion for goodwill and $3 million for long-lived assets. See Critical Accounting Policies herein for further details.

Restructuring, net

 

     For the Three Months Ended    For the Six Months Ended

(Dollars in millions)

   January 2,
2009
   October 3,
2008
   December 28,
2007
   January 2,
2009
   December 28,
2007

Restructuring and other, net

   $ 78    $ 23    $ 27    $ 101    $ 32

The $78 million of restructuring charges recorded during the December 2008 quarter was primarily related to the workforce reduction announced in January 2009, as part of our overall efforts to realign our cost structure with the current macroeconomic business environment. The remaining $23 million recorded during the six months ended January 2, 2009 was primarily due to a $10 million adjustment related to revised sub-lease expectations for our Maxtor facilities closures and an additional $13 million related to other on-going restructuring activities.

Net Other Income (Expense)

 

     For the Three Months Ended    For the Six Months Ended  

(Dollars in millions)

   January 2,
2009
    October 3,
2008
    December 28,
2007
   January 2,
2009
    December 28,
2007
 

Other income (expense), net

   $ (39 )   $ (36 )   $ 3    $ (75 )   $ (17 )

The change in Net other expense from the immediately preceding quarter was primarily due to a $7 million gain on the sale of an equity investment during the September 2008 quarter and a $2 million decrease in interest income primarily driven by lower yields on cash, cash equivalents and short-term investments. Net other expense was partially offset by $5 million foreign currency remeasurement gain due to the impact of favorable exchange rates on our foreign-denominated liabilities.

The change in Net other income from the year-ago quarter was primarily due to a gain of $15 million on the sale of fixed assets recognized in the year-ago quarter, a $14 million decrease in interest income as a result of lower yields on cash, cash equivalents and short-term investments and a $25 million decline in the value of deferred compensation plan assets. The corresponding gain or loss on deferred compensation plan liabilities is primarily reported in operating expenses. These increases in Net other expense were partially offset by a $7 million favorable change in foreign exchange remeasurement gain due to the impact of favorable exchange rates on our foreign-denominated liabilities.

The change in Net other expense from the year-ago six-months period was primarily due to a gain of $15 million on the sale of fixed assets recognized in the year-ago period, a $23 million decrease in interest income due primarily to lower yields on cash, cash equivalents and short-term investments, and a $44 million decline in the value of deferred compensation plan assets. The corresponding gain or loss on deferred compensation plan liabilities is primarily reported in operating expenses. These increases in Net other expense were partially offset by a $10 million favorable change foreign currency remeasurement gain due to the impact of favorable exchange rates on our foreign-denominated liabilities and a decrease of $6 million in interest expense.

 

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Income Taxes

 

     For the Three Months Ended    For the Six Months Ended

(Dollars in millions)

   January 2,
2009
   October 3,
2008
    December 28,
2007
   January 2,
2009
   December 28,
2007

Provision for (benefit from) income taxes

   $ 316    $ (16 )   $ 20    $ 300    $ 40

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 either is subject to varying rates of tax or is exempt from tax due to tax holidays or tax incentive programs applicable 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 2020.

Our income tax provision for the three and six months ended January 2, 2009 includes a deferred tax charge of $271 million associated with increased valuation allowance recorded for U.S. federal and state deferred tax assets associated with reductions in our forecasted U.S. taxable income. The goodwill impairment charges recorded in the three and six months ended January 2, 2009 result in no tax benefits. The three months ending January 2, 2009 also includes approximately $34 million of tax expense that otherwise would have been recorded in subsequent quarters of fiscal 2009 absent a required change in the method for computing our annual effective tax rate. As of the close of the period ending January 2, 2009, we are forecasting losses in certain jurisdictions, including the U.S., for which tax benefits for the losses cannot be recognized. However, we recorded income tax expense related to operations in certain of these loss jurisdictions. Pursuant to the accounting guidance provided in FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods – an interpretation of APB Opinion No. 28 (FIN 18), paragraph 22a, we were required to exclude these loss jurisdictions from our normal overall estimated annual effective rate calculation and determine a separately computed effective tax rate for each loss jurisdiction.

Our income tax provision recorded for the three and six months ended January 2, 2009 differs from the provision (benefit) for income taxes that would be derived by applying a notional U.S. 35% rate to income (loss) before income taxes primarily due to the net effect of (i) goodwill impairment charges with no associated tax benefit, (ii) an increase in our valuation allowance for certain deferred tax assets, (iii) the tax benefit related to the aforementioned tax holidays and tax incentive programs, (iv) tax expense related to intercompany transactions, and (v) the effect of applying the provisions of FIN 18 as described above. Our provision for income taxes recorded for the three and six months ended December 28, 2007 differed from the provision for income taxes that would be derived by applying a notional U.S. 35% rate to income before income taxes primarily due to the net effect of (i) the tax benefit related to the aforementioned tax holidays and tax incentive programs, (ii) a decrease in our valuation allowance for U.S. deferred tax assets, and (iii) tax expense related to intercompany transactions.

Based on our foreign ownership structure, and subject to (i) potential future increases in our valuation allowance for deferred tax assets and (ii) limitations imposed by Internal Revenue Code Section 382 on usage of certain tax attributes, we anticipate that our effective tax rate in future periods will generally be less than the U.S. federal statutory rate. Dividend distributions received from our U.S. subsidiaries may be subject to U.S. withholding taxes when, and if distributed. Deferred tax liabilities have not been recorded on unremitted earnings of certain foreign subsidiaries, as these earnings will not be subject to tax in the Cayman Islands or U.S. federal income tax if remitted to our foreign parent holding company.

During the three and six months ending January 2, 2009, there were three major U.S. tax law changes taken into account by us in computing our tax provision for the period. On July 30, 2008, the Housing and Economic Recovery Act of 2008 was enacted. Under this law, companies can elect to accelerate a portion of their unused AMT and research tax credits in lieu of the 50-percent “bonus” depreciation

 

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enacted in February 2008. We have concluded that we qualify for and will elect to accelerate approximately $9 million of R&D credit carryovers to fiscal years 2008 and 2009 of which approximately $8 million of tax benefit was recognized in the three months ending October 3, 2008. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed into law. Under this law, the R&D credit was retroactively extended through December 31, 2009 from December 31, 2007. This extension has no immediate impact on our tax provision for the period due to valuation allowances that were recorded for the U.S. deferred tax assets related to these additional credits. The California 2008-2009 Budget Bill (AB 1452), enacted on September 30, 2008, resulted in two temporary changes to the California income tax. First, the bill suspends the use of Net Operating Loss (NOL) carryovers for two years, our fiscal years 2009 and 2010. Second, the bill limits the use of R&D credit carryovers to no more than 50% of the tax liability before credits. We concluded that the California legislative change resulted in no net increase in our income tax expense in the period.

As of January 2, 2009 we have recorded net deferred tax assets of $592 million. The realization of $546 million of these deferred tax assets is primarily dependent on our ability to generate sufficient U.S. and certain foreign taxable income in future periods. Although realization is not assured, we believe that it is more likely than not that these deferred tax assets will be realized.

During the three months ending January 2, 2009, our unrecognized tax benefits excluding interest and penalties decreased by approximately $6 million to $353 million primarily due to (i) reductions associated with the expiration of certain statutes of limitation of $18 million, (ii) increases in current year unrecognized tax benefits of $15 million, and (iii) reductions from other activity, primarily foreign exchange gains, of $3 million. Approximately $18 million of reduction in unrecognized tax benefits during the period was recorded as a reduction to goodwill.

During the six months ending January 2, 2009, our unrecognized tax benefits excluding interest and penalties decreased by approximately $21 million to $353 million primarily due to (i) reductions associated with audit activity of $6 million, (ii) reductions associated with the expiration of certain statutes of limitation of $23 million, (iii) increases in current year unrecognized tax benefits of $16 million, and (iv) reductions from other activity, primarily foreign exchange gains, of $8 million. Approximately $21 million of reduction in unrecognized tax benefits during the period was recorded as a reduction to goodwill.

The total unrecognized tax benefits that, if recognized, would impact the effective tax rate were $68 and $147 million as of June 27, 2008 and January 2, 2009, respectively, subject to certain future valuation allowance reversals.

During the 12 months beginning January 3, 2009, we expect to reduce our unrecognized tax benefits by approximately $7 million as a result of the expiration of certain statutes of limitation. We do not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months. However, the resolution and/or timing of closure on open audits are highly uncertain as to when these events occur.

We file U.S. federal, U.S. state, and foreign tax returns. The Internal Revenue Service (IRS) is currently examining fiscal years 2005 through 2007. For state and foreign tax returns, we are generally no longer subject to tax examinations for years prior to fiscal year 2001. The statute of limitation for U.S. Federal returns is open for fiscal years 2005 and forward.

Liquidity and Capital Resources

The following is a discussion of our principal liquidity requirements and capital resources.

We had approximately $1.2 billion in cash and cash equivalents at January 2, 2009 representing a $171 million increase from the $990 million held at June 27, 2008. This increase in cash and cash equivalents was primarily due to cash provided by operating activities, borrowings of $350 million under our existing $500 million senior unsecured revolving credit facility (the “Revolving Credit Facility”), partially offset by capital expenditures and dividends paid to shareholders. In addition to the $1.2 billion in cash and cash equivalents, we had approximately $148 million in short-term investments as of January 2, 2009 compared with $151 million held on June 27, 2008.

 

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The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and by monitoring the counter-parties and underlying obligors closely.

We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any downgrades, losses or other significant deterioration in the fair value of our cash equivalents or short-term investments. As such, we do not believe the fair value of our short-term investments has significantly changed from the values reported as of January 2, 2009.

The following table summarizes the statements of cash flows for the periods indicated:

 

     For the Six Months Ended  

(Dollars in millions)

   January 2,
2009
    December 28,
2007
 

Net cash provided by (used in):

    

Operating Activities

   $ 392     $ 1,478  

Investing Activities

   $ (475 )   $ (560 )

Financing Activities

   $ 254     $ (473 )

Net increase in cash and cash equivalents

   $ 171     $ 445  

Cash Provided by Operating Activities

Cash provided by operating activities for the six months ended January 2, 2009 was approximately $392 million and included the effects of:

 

   

net loss adjusted for non-cash items including depreciation, amortization, stock-based compensation, impairment of goodwill and other long-lived assets (see Note 7, Item 1 of Notes to Condensed Consolidated Financial Statements (unaudited), and an unfavorable adjustment to the valuation allowance related to our deferred tax assets (see Note 5, Item 1 of Notes to Condensed Consolidated Financial Statements (unaudited));

 

   

a decrease of $77 million in vendor non-trade receivables, primarily as a result of a decrease in the volume of outsourced manufacturing of certain sub-assemblies due to reduced production levels (see Note 2, Item 1 of Notes to Condensed Consolidated Financial Statements (unaudited));

 

   

a decrease of $368 million in accounts receivable due to lower sales, particularly towards the end of the quarter;

 

   

a decrease of $149 million in inventories due to reduced production levels;

 

   

a decrease of $282 million in accounts payable, primarily as a result of decreased direct materials purchases; and

 

   

a decrease of $284 million in accrued employee compensation, primarily as a result of the payment of variable performance-based compensation in our first fiscal quarter of 2009.

Cash Used in Investing Activities

During the six months ended January 2, 2009, we used $475 million for net cash investing activities, which was primarily attributable to expenditures for property, equipment and leasehold improvements of approximately $494 million, partially offset by $11 million of proceeds from the sale of investment in equity securities. The investments in property, equipment and leasehold improvements primarily comprised of:

 

   

$77 million for manufacturing facilities and equipment related to our subassembly and disk drive final assembly and test facilities in the Far East;

 

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$120 million for upgrading and expansion of our recording media operations in Malaysia and Singapore;

 

   

$212 million for manufacturing facilities and equipment for our recording head operations in the United States, the Far East and Northern Ireland;

 

   

$45 million for facilities and equipment for alternative technologies in the United States; and

 

   

$40 million for research and development, information technology infrastructure and other facilities and equipment costs.

Investments for additional capacity will be reduced for the remainder of fiscal year 2009 as we believe our current capacity supports expected volume requirements for at least the next several quarters. Consequently, we expect capital investments in fiscal year 2009 to be approximately $650 million, a reduction of approximately $350 million from our capital outlook at the beginning of fiscal year 2009, and $100 million reduced from the capital outlook we provided last quarter. The capital investments for the remainder of fiscal year 2009 will be primarily for technology advancements. Based on current industry conditions, we expect capital investments in fiscal year 2010 to be below $500 million.

Cash Used in Financing Activities

Net cash provided by financing activities of $254 million for the six months ended January 2, 2009 was primarily attributable to proceeds received from short-term borrowings of $350 million and $36 million in cash from employee stock option exercises and employee stock purchases partially offset by the payment of approximately $117 million in dividends to our shareholders and debt repayment of long-term debt of $15 million.

Liquidity Sources, Cash Requirements and Commitments

Our principal liquidity requirements are primarily to meet our working capital, research and development, capital expenditure needs, and to service our debt. Based on our current business outlook, we believe that our sources of cash will be sufficient to fund our operations and meet our cash requirements for at least the next 12 months.

Our primary sources of liquidity as of January 2, 2009, consisted of: (1) approximately $1.3 billion in cash, cash equivalents, and short-term investments, (2) cash we expect to generate from operations and (3) a $500 million revolving credit facility of which approximately $107 million remains undrawn.

Our $500 million Revolving Credit Facility that matures in September 2011 is available for cash borrowings and for the issuance of letters of credit up to a sub-limit of $100 million. During the quarter ended January 2, 2009, we drew down $350 million under the Revolving Credit Facility in order to improve our financial flexibility as we continue to execute our business plans, including our restructuring efforts. In addition, we had $43 million of the $500 million Revolving Credit Facility utilized for outstanding letters of credit and bankers’ guarantees as of January 2, 2009, leaving $107 million undrawn, subject to compliance with financial covenants and other customary conditions to borrowing. The $350 million is due on June 10, 2009, but we have the option to redraw the borrowing as long as we are compliant with the covenants in the Revolving Credit Facility.

The credit agreement that governs our Revolving Credit Facility contains covenants that we must satisfy in order to remain in compliance with the agreement. If we are unable to remain in compliance with these covenants, we may be required to repay all of our then outstanding borrowings under the Revolving Credit Facility (currently $350 million) and in addition collateralize outstanding letters of credit (currently approximately $43 million) with cash deposits or other collateral. In that event, we believe we will be able to use our existing cash balances to repay the amounts outstanding and collateralize the outstanding letters of credit under the Revolving Credit Facility.

 

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The revolving credit agreement contains three financial covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. As of January 2, 2009, we are in compliance with all of these covenants. If business conditions do not improve, once our covenant compliance calculations include our June 2009 quarter results, we anticipate that we will need to re-negotiate our current Revolving Credit Facility, obtain waivers and/or raise additional funds in order to remain in compliance if, at that time, there are then outstanding borrowings or letters of credit.

In addition, we require substantial amounts of cash to fund scheduled payments of principal and interest on our indebtedness, future capital expenditures and any increased working capital requirements. Our $300 million Floating Rate Senior Notes are due October 1, 2009 and, as such, are included in the Current portion of long-term debt on our Condensed Consolidated Balance Sheet as of January 2, 2009. We are considering various financing options to manage the retirement and replacement of existing debt and associated obligations. Our ability to raise new financing and to comply with the terms of our current debt agreements will depend on our future operations, performance and cash flow and is subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. Our existing debt as well as our corporate rating was recently downgraded and this may impact our ability and cost of raising capital. As a result of these factors, we cannot assure that we will be able to obtain alternative financing on terms acceptable to us and our financial condition may be negatively impacted.

In addition, since the second half of fiscal year 2002 and through the December 2008 quarter, we have paid dividends to our shareholders. On November 21, 2008, we paid dividends aggregating approximately $58 million, or $0.12 per share, to our common shareholders of record as of November 7, 2008. On January 21, 2009, we declared a quarterly dividend of $0.03 per share that will be paid on or before February 20, 2009 to our common shareholders of record as of February 6, 2009. The dividend was reduced to conserve cash and enhance our balance sheet as we navigate through the current economic downturn. In deciding whether or not to declare quarterly dividends, our directors will take into account such factors as general business conditions within the disk 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 on our credit ratings and such other factors as our board of directors may deem relevant.

For our taxable year ended June 27, 2008, distributions on our common shares to U.S. shareholders during this period were considered to constitute dividend income for U.S. federal income tax purposes. Distributions to U.S. shareholders in fiscal year 2009 are anticipated to constitute dividend income for U.S. federal income tax purposes. Non-U.S. shareholders should consult with a tax advisor to determine appropriate tax treatment.

With respect to the closure of our Limavady, Milpitas and Pittsburgh facilities, as well as our recently announced workforce reductions, we expect to pay cash restructuring charges aggregating approximately $120 million in the next 12 months, with the majority expected to be paid out in the March 2009 quarter. Of these cash restructuring charges we expect approximately $90 million in severance costs and approximately $30 million in other exit costs, primarily comprised of grant repayments and contract cancellations.

 

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Contractual Obligations and Commitments

Our contractual cash obligations and commitments as of January 2, 2009 have been summarized in the table below:

 

          Fiscal Year(s)
     Total    2009    2010-
2011
   2012-
2013
   Thereafter
     (in millions)

Contractual Cash Obligations:

              

Debt(1)

   $ 2,372    $ 370    $ 446    $ 956    $ 600

Interest payments on debt

     511      64      190      114      143

Capital expenditures

     89      30      59      —        —  

Operating leases(2)

     274      22      83      59      110

Purchase obligations(3)

     3,515      1,979      1,536      —        —  
                                  

Subtotal

     6,761      2,465      2,314      1,129      853

Commitments:

              

Letters of credit or bank guarantees

     54      46      8      —        —  
                                  

Total

   $ 6,815    $ 2,511    $ 2,322    $ 1,129    $ 853
                                  

 

(1) Included in debt for fiscal year 2013 is the principal amount of $326 million related to our 2.375% Notes which is payable upon the conversion of the 2.375% Notes. For the September 2008 quarter, the 2.375% Notes were convertible and were classified as Current portion of long-term debt on our Condensed Consolidated Balance Sheet at October 3, 2008. During the September 2008 quarter and continuing into the December 2008 quarter, our shares traded below 110% of the conversion price for the 2.375% Notes for at least 20 consecutive trading days of the last 30 trading days of each quarter. As a result, the 2.375% Notes became nonconvertible effective October 4, 2008, and have been reclassified as Long-term debt on our Condensed Consolidated Balance Sheet at January 2, 2009. Includes short-term borrowings of $350 million due June 10, 2009.

 

(2) Includes total future minimum rent expense under non-cancelable leases for both occupied and abandoned facilities (rent expense is shown net of sublease income).

 

(3) Purchase obligations are defined as contractual obligations for purchase of goods or services, which are enforceable and legally binding on us, and that specify all significant terms.

As of January 2, 2009, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling $166 million, none of which is expected to be paid within 12 months. We are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur.

Off-Balance Sheet Arrangements

As of January 2, 2009, we did not have any material off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.

Since our fiscal year ended June 27, 2008, there have been no significant changes in our critical accounting policies and estimates. Please refer to the Critical Accounting Policies in Item 7. “Management’s Discussion and Analysis” contained in Part II, of our Annual Report on Form 10-K for the fiscal year ended June 27, 2008, as filed with the SEC on August 13, 2008, for a discussion

 

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of our critical accounting policies and estimates. As we incurred impairment charges relating to goodwill and long-lived assets, and charges related to deferred tax assets in the three months ended January 2, 2009, the disclosures below provide additional detail related to the policies applicable to the review and determination of the impairment of goodwill and other long-lived assets, and of deferred tax assets.

Impairment of Goodwill, and Other Long-lived Assets  — We account for goodwill in accordance with SFAS No. 142. As required by SFAS No. 142, we test goodwill of our reporting units annually during our fourth quarter or whenever events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We test other long-lived assets, including property, equipment and leasehold improvements and other intangible assets subject to amortization, for recoverability whenever events or changes in circumstance indicate that their carrying value may not be recoverable, in accordance with SFAS No. 144.

Testing goodwill for impairment requires a two-step approach under SFAS No. 142. In determining the fair value of our reporting units in step one of its SFAS No. 142 impairment analysis, we use one or both of these commonly accepted valuation methodologies: 1) the income approach, which is based on the present value of discounted cash flows and terminal value projected for the reporting unit, and 2) the market approach, which estimates fair value based on appropriate valuation multiples of revenue or earnings derived from comparable companies, adjusted by an estimated control premium. The estimated control premium is based on reviewing observable transactions involving controlling interests in comparable companies. The discount rate that we use in the income approach of valuation represents the weighted average cost of capital that we believe is reflective of the relevant risk associated with the projected cash flows. We may use a weighted average of the fair values determined separately using the income and market approaches if we determine that this will provide a more appropriate estimated fair value of the reporting units.

To validate the reasonableness of the reporting unit fair values, we reconcile the aggregate fair values of the reporting units determined in step one (as described above) to the enterprise market capitalization to derive the implied control premium. We compare the implied control premium to premiums paid in observable recent transactions of comparable companies to determine if the fair values of the reporting units estimated in step one are reasonable.

In accordance with the guidance in SFAS No. 142, we have determined that we have two reporting units to which goodwill is assignable: the Hard Disk Drive reporting unit and the Services reporting unit. Each of these reporting units constitutes a business and is the lowest level for which discrete financial information is available and is regularly reviewed by management. The acquired businesses underlying our goodwill are specific to either the Hard Disk Drive or the Services reporting units and the goodwill amounts are assigned as such. The Services reporting unit represents approximately 1% of our revenues and total assets.

If step one of the SFAS No. 142 analysis demonstrates that the fair value of either reporting unit is below the carrying value, we will proceed to step two of SFAS No. 142. If step two is necessary, we will estimate the fair values of all identifiable assets and liabilities of the reporting unit using the income, market or replacement cost approaches as appropriate. The excess of the fair value of the reporting unit over the fair values of the identified assets and liabilities is the implied fair value of goodwill. If the fair value of goodwill is lower than the carrying value of the goodwill, an impairment charge is recorded to reduce the carrying value to fair value.

 

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In accordance with SFAS No. 144 , we test other long-lived assets, including property, equipment and leasehold improvements and other intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying value s of those assets of those assets may not be recoverable. We assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using the same approaches indicated above for SFAS No. 142 step two and compare it to its carrying value. The excess of the carrying value over the fair value is allocated pro rata to derive the adjusted carrying value. The adjusted carrying value of each asset in the asset group is not reduced below its fair value.

The process of evaluating the potential impairment of goodwill or long-lived assets is subjective and requires us to make significant judgments at many points during the analysis. In estimating the fair value of the reporting units for the goodwill impairment analysis, we make estimates and judgments about the future cash flows of a reporting unit from a market participant perspective. During a period of reduced market visibility and increased uncertainty such as the current environment, the difficulty of estimating future cash flows is increased. This also applies to the estimation of cash flows expected to be generated from an asset or asset group tested for recoverability under SFAS No. 144. We exercise significant judgment in determining, among other things: the appropriate discount rate to be used in discounting the projected cash flows and terminal value in the income approach of valuation, the appropriate comparables for arriving at valuation multiples and the appropriate control premiums to apply in the market approach of valuation, remaining economic lives of certain assets, or obsolescence adjustments in applying the replacement cost approach.

In performing the reconciliation of aggregate fair values of reporting units to our enterprise market capitalization, we exercise judgment in determining whether a single stock price at the valuation date or an average of the stock prices over a reasonable range of dates around the valuation date is appropriate. Given the recent volatility in the capital markets, we decided that for the January 2 interim review, it was appropriate to use the average market capitalization over a range of 15 days extending before and after the valuation date.

Income Taxes – The deferred tax assets we record each period depend primarily on our ability to generate future taxable income in the United States and certain foreign jurisdictions. Each period, we evaluate the need for a valuation allowance on our deferred tax assets and, if necessary, adjust the valuation allowance so that net deferred tax assets are recorded only to the extent we conclude it is more likely than not that these deferred tax assets will be realized. If our outlook for future taxable income changes significantly, our assessment of the need for a valuation allowance may also change. As a result of adverse changes in the outlook for our future U.S. taxable income, we completed a reassessment of our valuation allowance against U.S. deferred tax assets. As a result, in the December 2008 quarter, we increased the valuation allowance against our deferred tax assets.

Recent Accounting Pronouncements

See Note 12, Item 1 of Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSUR ES ABOUT MARKET RISK

We have exposure to market risks due to the volatility of interest rates and foreign currency exchange rates. A portion of these risks are hedged, but fluctuations could impact our results of operations, financial position and cash flows. Additionally, we have exposure to downgrades in the credit ratings of our counterparties as well as exposure related to our credit rating changes.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and debt. At January 2, 2009, we had no marketable securities that had been in a continuous unrealized loss position for a period greater than 12 months and determined no investments were other-than-temporarily impaired. We currently do not use derivative financial instruments in our investment portfolio.

We have exposure to counterparty credit downgrades as well as changes to our own credit rating. We have credit risk related to our accounts receivable balances, our foreign currency forward exchange contracts and our fixed income portfolio. The investment portfolio is diversified and structured to minimize credit risk. Additionally, we monitor and limit our credit exposure for both our accounts receivable balances and our foreign currency forward exchange contracts by performing ongoing credit evaluations. As of January 2, 2009, our total net mark-to-market exposure related to our foreign currency forward exchange contracts was $15 million. Changes in our corporate issuer credit ratings have minimal impact on our financial results.

As of January 2, 2009, we held auction rate securities with a par value of approximately $31 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in the March 2008 quarter, these securities have continuously failed to settle at auction. As of January 2, 2009, the estimated fair value of these auction rate securities was $27 million. We believe that the impairments totaling $4 million are temporary given our ability and intent to hold these securities until liquidity returns to this market or until maturity of these securities. As such, the impairment was recorded in other comprehensive income and these securities were classified as long-term investments.

We have both fixed and variable rate 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 due to issued debt.

 

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The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio and debt obligations as of January 2, 2009. All investments mature in three years or less. Included in long-term debt for fiscal year 2013 is the principal amount of $326 million related to our 2.375% Notes which is payable upon the conversion of the 2.375% Notes. For the September 2008 quarter, the 2.375% Notes were convertible and were classified as Current portion of long-term debt on our Condensed Consolidated Balance Sheet at October 3, 2008. During the September 2008 quarter and continuing into the December 2008 quarter, our shares traded below 110% of the conversion price for the 2.375% Notes for at least 20 consecutive trading days of the last 30 trading days of each quarter. As a result, the 2.375% Notes became nonconvertible effective October 4, 2008, and have been reclassified as Long-term debt on our Condensed Consolidated Balance Sheet at January 2, 2009. Unless the Notes become convertible earlier, the 2.375% Notes mature in August 2012.

 

Fiscal Years Ended

   2009     2010     2011     2012     2013     Thereafter     Total     Fair Value
January 2,
2009
     (in millions, except percentages)

Assets

                

Cash equivalents:

                

Fixed rate

   $ 1,071     $ —       $ —       $ —       $ —       $ —       $ 1,071     $ 1,072

Average interest rate

     1.00 %               1.00 %  

Short-term investments:

                

Fixed rate

   $ 64     $ 52     $ 27     $ 2     $ —       $ —       $ 145     $ 148

Average interest rate

     4.36 %     4.64 %     4.64 %     5.00 %         4.52 %  

Long-term investments:

                

Variable rate

   $ —       $ —       $ —       $ —       $ —       $ 31     $ 31     $ 27

Average interest rate

               2.22 %     2.22 %  

Total investment securities

   $ 1,135     $ 52     $ 27     $ 2     $ —       $ 31     $ 1,247     $ 1,247

Average interest rate

     1.19 %     4.64 %     4.64 %     5.00 %       2.22 %     1.44 %  

Long-Term Debt

                

Fixed rate

   $ 5     $ 141     $ 5     $ 630     $ 326     $ 600     $ 1,707     $ 1,102

Average interest rate

     5.75 %     6.76 %     5.75 %     6.35 %     2.38 %     6.80 %     5.78 %  

Variable rate

   $ 365     $ 300             $ 665     $ 642

Average interest rate

     3.45 %     2.28 %             2.92 %  

Foreign Currency Exchange Risk . We monitor our foreign currency exposures regularly to ensure the effectiveness of our foreign currency hedge positions. We recognize all of our derivative financial instruments, principally foreign currency forward contracts, on the balance sheet as either assets or liabilities and these derivative financial instruments are carried at fair value.

We may enter into foreign currency forward contracts to manage exposure related to certain foreign currency commitments, certain foreign currency denominated balance sheet positions and anticipated foreign currency denominated expenditures. Our policy prohibits us from entering into derivative financial instruments for speculative or trading purposes. During the six months ended January 2, 2009 and fiscal years 2008 and 2007 we did not enter into any hedges of net investments in foreign operations.

We transact business in various foreign countries. Our primary foreign currency 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 expenses denominated in foreign currencies with forward exchange contracts. When the U.S. dollar weakens significantly against the foreign currencies, the increase in the value of the future foreign currency expenditure is offset by gains in the value of the forward contracts designated as hedges. Conversely, as the U.S. dollar strengthens, the decrease in value of the future foreign currency cash flows is offset by losses in the value of the forward contracts. These forward foreign exchange contracts, carried at fair value, may have maturities of up to 12 months.

 

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For derivative instruments designated as cash flow hedges, we initially record the effective portion of the gain or loss on the derivative in Other comprehensive income, and the ineffective portion is reported in earnings. Amounts in Other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings.

We also hedge a portion of our foreign currency denominated balance sheet positions with foreign currency forward contracts to reduce the risk that our earnings will be adversely affected by changes in currency exchange rates. The changes in fair value of these hedges are recognized in earnings in the same period as the gains and losses from the remeasurement of the assets and liabilities. These foreign currency forward contracts are not designated as hedging instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

We evaluate hedging effectiveness prospectively and 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 during the three and six months periods ended January 2, 2009 and the corresponding year-ago periods, nor did we discontinue any cash flow hedges for a probable forecasted transaction that would not occur in these periods.

As of January 2, 2009, our notional fair values of foreign currency forward contracts totaled $315 million. We manage the notional amount of contracts entered into with any one counterparty, and we maintain limits on maximum tenor of contracts based on the credit rating of the financial institutions.

The table below provides information as of January 2, 2009 about our derivative financial instruments, comprised of foreign currency forward contracts. The table is provided in U.S. dollar equivalent amounts and presents the notional amounts (at the contract exchange rates) and the weighted average contractual foreign currency exchange rates.

 

(In millions, except average contract rate)

   Notional
Amount
   Average
Contract
Rate
   Estimated
Fair
Value (1)
 

Foreign currency forward exchange contracts:

        

British pound

   $ 6    1.91    $ (1 )

Euro

     12    1.28      1  

Singapore dollar

     76    1.36      (5 )

Thai baht

     199    33.07      (11 )

Chinese yuan

     10    6.86      —    

Japanese yen

     2    103.16      —    

Czech koruna

     10    20.41      1  
                  

Total

   $ 315       $ (15 )
                  

 

(1) Equivalent to the unrealized net gain (loss) on existing contracts.

 

ITEM 4. CONTROLS AND PROCEDUR ES

An evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our chief executive officer and chief financial officer, concluded that, as of January 2, 2009, our disclosure controls and procedures were effective. During the quarter ended January 2, 2009, there were no changes in our internal control over financial reporting that materially affected, or were reasonably likely to materially affect our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

ITEM 1. LEGAL PR OCEEDINGS

For a discussion of legal proceedings, see Note 11, Item 1, of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

 

ITEM 1A. RISK FACT ORS

Risks Related to Our Business

Current Macroeconomic Conditions- The recent downturn in the macroeconomic environment has, and may continue to, negatively impact our results of operations.

The recent disruption in global macroeconomic conditions has had a significant impact on the disk drive industry as a whole and the results of our operations. Due to the uncertainty about current macroeconomic conditions, our customers may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material adverse effect on the demand for our products. Other factors that could influence demand include conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.

In addition, the capital and credit markets have been experiencing extreme volatility and disruption. The possibility that financial institutions may consolidate or go out of business has resulted in a tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including the insolvency of key suppliers resulting in product delays and the inability of customers to obtain credit to finance purchases of our products.

Competition—Our industry is highly competitive and our products have experienced and will continue to experience significant price erosion and market share variability.

The disk drive industry is intensely competitive and vendors typically experience substantial price erosion over the life of a product. Our competitors have historically offered existing products at lower prices as part of a strategy to gain or retain market share and customers, and we expect these practices to continue. We will need to continually reduce our prices to retain our market share, which could adversely affect our results of operations.

We believe this basic industry condition of continuing price erosion and market share variability will continue, as our competitors engage in aggressive pricing actions targeted to encourage shifting of customer demand. The pricing environment in the second fiscal quarter of 2009 was more aggressive than initially expected, and pricing continues to erode at rates in excess of historical trends and demand decreased significantly. We expect continuous price erosion and reduced demand for fiscal year 2009. In addition, the recent deterioration in business and economic conditions may exacerbate price erosion and market variability as competitors lower prices to compensate for lower demand.

 

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Our ability to offset the effect of price erosion through new product introductions at higher average prices is diminished to the extent competitors introduce products into particular markets ahead of our similar, competing products. This risk is particularly pronounced in markets where we have meaningfully lower market share, as is the case in the market for 2.5-inch ATA products. Our ability to offset the effect of price erosion is also diminished during times when product life cycles for particular products are extended, allowing competitors more time to enter the market. The growth of sales to distributors that serve producers of non-branded products in the personal storage sector may also contribute to increased price erosion. 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 for these customers are based largely on price and terms. Any increase in our average price erosion would have an adverse effect on our results of operations.

Additionally, a significant portion of our success in the past has been a result of increasing our market share at the expense of our competitors, particularly in small form factor enterprise markets. Market share for our products can be negatively affected by our customers’ diversifying their sources of supply as our competitors enter the market for particular products, as well as by our ability to ramp volume production of new product offerings. When our competitors successfully introduce product offerings, which are competitive with our recently introduced products, our customers may quickly diversify their sources of supply. Any significant decline in our market share in any of our principal market applications would adversely affect our results of operations.

Principal Competitors—We compete with both independent manufacturers, whose primary focus is producing technologically advanced disk drives, and captive manufacturers, who do not depend solely on sales of disk drives to maintain their profitability.

We have experienced and expect to continue to experience intense competition from a number of domestic and foreign companies, including other independent disk drive manufacturers and large captive manufacturers such as:

 

Independent Manufacturers

  

Captive Manufacturers

Western Digital Corporation

   Fujitsu Limited
   Hitachi Global Storage Technologies
   Samsung Electronics Incorporated
   Toshiba Corporation

The term “independent” in this context refers to manufacturers that primarily produce disk drives as a stand-alone product, and the term “captive” refers to disk drive manufacturers who themselves or through affiliated entities produce complete computer or other systems that contain disk drives or other electronic data storage products. Captive manufacturers are formidable competitors because they have the ability to determine pricing for complete systems without regard to the margins on individual components. As components other than disk drives generally contribute a greater portion of the operating margin on a complete computer system than do disk drives, captive manufacturers do not necessarily need to realize a profit on the disk drives included in a complete computer system and, as a result, may be willing to sell disk drives to third parties at very low margins. Captive manufacturers are also formidable competitors because they have more substantial resources than we do. Samsung and Hitachi (together with affiliated entities) also sell other products to our customers, including critical components like flash memory, ASICs and flat panel displays, and may be willing to sell their disk drives at a lower margin to advance their overall business strategy. This may improve their ability to compete with us. To the extent we are not successful competing with captive or independent disk drive manufacturers, our results of operations will be adversely affected.

In response to customer demand for high-quality, high-volume and low-cost disk drives, manufacturers of disk drives have had to develop large, in some cases global, production facilities with highly developed technological capabilities and internal controls. The development of these large production facilities combined with industry consolidation can further increase the intensity of competition.

 

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We face indirect competition from present and potential customers who evaluate from time to time whether to manufacture their own disk drives or other electronic data storage products.

We have also experienced competition from other companies that produce alternative storage technologies like flash memory, where increased capacity, improving cost, lower power consumption and performance ruggedness have resulted in competition with our lower capacity, smaller form factor disk drives in handheld applications. While this competition has traditionally been in the markets for handheld consumer electronics applications, these competitors have recently announced solid state drives, (SSDs) for notebook and enterprise compute applications. Some of these companies, like Samsung, also sell disk drives. Certain customers for both notebook and enterprise compute applications have indicated an interest in investigating SSDs as alternatives to hard drives in certain applications.

Volatility of Quarterly Results—Our quarterly results of operations fluctuate, sometimes significantly, from period to period, and this may cause our share price to decline.

In the past, our quarterly revenue and results of operations have fluctuated, sometimes significantly, from period to period. These fluctuations, which we expect to continue, may be occasioned by a variety of factors, including:

 

   

current uncertainty in global economic conditions may pose a risk to the overall economy as consumers and businesses may defer purchases in response to the global liquidity crisis, negative financial news, and the failure of several large financial institutions;

 

   

adverse changes in the level of economic activity in the United States and other major regions in which we do business, as economic activity continued to deteriorate during the second quarter of our fiscal year 2009;

 

   

competitive pressures resulting in lower selling prices by our competitors targeted to encourage shifting of customer demand;

 

   

delays or problems in our introduction of new products, particularly new disk drives with lower cost structures, the inability to achieve high production yields, or delays in customer qualification or initial product quality issues;

 

   

changes in purchasing patterns by our distributor customers;

 

   

increased costs or adverse changes in availability of supplies of raw materials or components, especially in light of recent consolidation among component suppliers, building inflationary pressure, and the relative volatility of the U.S. dollar as compared to other currencies;

 

   

the impact of corporate restructuring activities that we have and may continue to engage in;

 

   

changes in the demand for the computer systems, storage subsystems and consumer electronics that contain our disk drives, due to seasonality, economic conditions and other factors;

 

   

changes in purchases from period to period by our primary customers, particularly as our competitors are able to introduce and produce in volume competing disk drive solutions or alternative storage technology solutions, such as flash memory or SSDs;

 

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shifting trends in customer demand which, when combined with overproduction of particular products, particularly when the industry is served by multiple suppliers, results in supply/demand imbalances;

 

   

our high proportion of fixed costs, including research and development expenses; and

 

   

announcements of new products, services or technological innovations by us or our competitors.

As a result, we believe that quarter-to-quarter comparisons of our revenue and results of operations may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance. Our results of operations in one or more future quarters may fail to meet the expectations of investment research analysts or investors, which could cause an immediate and significant decline in the trading price of our common shares.

New Product Offerings—Market acceptance of new product introductions cannot be accurately predicted, and our results of operations will suffer if there is less demand for our new products than is anticipated.

We are continually developing new products with the goal that we will be able to introduce technologically advanced and lower cost disk drives into the marketplace ahead of our competitors.

The success of our new product introductions is dependent on a number of factors, including market acceptance, our ability to manage the risks associated with product transitions, the effective management of inventory levels in line with anticipated product demand and the risk that our new products will have quality problems or other defects in the early stages of introduction that were not anticipated in the design of those products. Accordingly, we cannot accurately determine the ultimate effect that our new products will have on our results of operations.

In addition, the success of our new product introductions is dependent upon our ability to qualify as a primary source of supply with our OEM customers. In order for our products to be considered by our customers for qualification, we must be among the leaders in time-to-market with those new products. Once a product is accepted for qualification testing, any failure or delay in the qualification process or a requirement that we requalify can result in our losing sales to that customer until new products are introduced. The limited number of high-volume OEMs magnifies the effect of missing a product qualification opportunity. These risks are further magnified because we expect competitive pressures to result in declining sales and declining gross margins on our current generation products. We cannot assure that we will be among the leaders in time-to-market with new products or that we will be able to successfully qualify new products with our customers in the future. If we cannot successfully deliver competitive products, then our future results of operations may be adversely affected.

Smaller Form Factor Disk Drives—If we do not continue to successfully market smaller form factor disk drives, our business may suffer.

The disk drive industry is experiencing significant increases in sales of smaller form factor disk drives for an expanding number of applications, in particular notebook computers and consumer electronics devices, but also in personal computers and enterprise storage applications. Our future success will depend on our ability to develop and introduce such small form factor drives at desired price and capacity points faster than our competitors.

We have experienced competition from other companies that produce alternative storage technologies like solid state or flash memory, where increased capacity, improving cost, lower power consumption and performance ruggedness have resulted in flash memory largely replacing disk drives in handheld applications. We believe that the demand for disk drives to store or back up related media content from such handheld devices, however, continues to grow. While this competition has traditionally been limited to the markets for handheld consumer electronics applications, these competitors have announced SSDs for netbook, notebook and enterprise compute applications.

 

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If we do not suitably adapt our product offerings to successfully introduce additional smaller form factor disk drives or alternative storage products based on flash storage technology, or if our competitors are successful in achieving customer acceptance of SSD products for netbook, notebook, and enterprise compute applications, then our customers may decrease the amounts of our products that they purchase, which would adversely affect our results of operations.

Seasonality—Because we experience seasonality in the sales of our products, our results of operations will generally be adversely impacted during the second half of our fiscal year.

Sales of computer systems, storage subsystems and consumer electronics tend to be seasonal, and therefore we expect to continue to experience seasonality in our business as we respond to variations in our customers’ demand for disk drives. In particular, we anticipate that sales of our products will continue to be lower during the second half of our fiscal year. In the mobile compute, desktop compute and consumer electronics market applications of our business, this seasonality is partially attributable to the historical trend in our results derived from our customers’ increased sales of personal computers and consumer electronics during the back-to-school and winter holiday season. In the enterprise sector of our business, our sales are seasonal because of the capital budgeting and purchasing cycles of our end users, which was not as pronounced in the December 2008 quarter due to prevailing economic conditions. Since our working capital needs peak during periods in which we are increasing production in anticipation of orders that have not yet been received, our results of operations will fluctuate seasonally even if the forecasted demand for our products proves accurate. Furthermore, it is difficult for us to evaluate the degree to which this seasonality may affect our business in future periods because of the rate and unpredictability of product transitions and new product introductions, particularly in the consumer electronics market, as well as macro-economic conditions.

Difficulty in Predicting Quarterly Demand—If we fail to predict demand accurately for our products in any quarter, we may not be able to recapture the cost of our investments.

The disk drive industry operates on quarterly purchasing cycles, with much of the order flow in any given quarter coming at the end of that quarter. Our manufacturing process requires us to make significant product-specific investments in inventory in each quarter for that quarter’s production. Since we typically receive the bulk of our orders late in a quarter after we have made our investments, there is a risk that our orders will not be sufficient to allow us to recapture the costs of our investment before the products resulting from that investment have become obsolete. We cannot assure you that we will be able to accurately predict demand in the future.

Another factor that may negatively affect our ability to recapture costs of investments in future quarters is the current uncertain condition of the global economy. The current uncertainty in economic and political conditions in many of our markets may have an effect on demand for our products and render budgeting and forecasting difficult. The difficulty in forecasting demand increases the difficulty in anticipating our inventory requirements, which may cause us to over-produce finished goods, resulting in inventory write-offs, or under-produce finished goods, affecting our ability to meet customer requirements. Additionally, the risk of inventory write-offs could increase if we were to continue to hold higher inventory levels. We cannot be certain that we will be able to recover the costs associated with increased inventory.

Other factors that may negatively impact our ability to recapture the cost of investments in any given quarter include:

 

   

the impact of variable demand and an aggressive pricing environment for disk drives;

 

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the impact of competitive product announcements and possible excess industry supply both with respect to particular disk drive products and with respect to competing alternative storage technology solutions such as SSDs in notebook and enterprise compute applications;

 

   

our inability to reduce our fixed costs to match sales in any quarter because of our vertical manufacturing strategy, which means that we make more capital investments than we would if we were not vertically integrated;

 

   

dependence on our ability to successfully qualify, manufacture and sell in increasing volumes on a cost-effective basis and with acceptable quality our disk drive products, particularly the new disk drive products with lower cost structures;

 

   

variations in the cost of components for our products, especially in view of the U.S. dollar’s relative volatility as compared to other currencies;

 

   

uncertainty in the amount of purchases from our distributor customers who from time to time constitute a large portion of our total sales;

 

   

our product mix and the related margins of the various products;

 

   

accelerated reduction in the price of our disk drives due to technological advances and/or an oversupply of disk drives in the market, a condition that is exacerbated when the industry is served by multiple suppliers and shifting trends in demand which can create supply and demand imbalances;

 

   

manufacturing delays or interruptions, particularly at our major manufacturing facilities in China, Malaysia, Singapore or Thailand;

 

   

limited access to components that we obtain from a 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.

Importance of Time-to-Market—Our results of operations may depend on our being among the first-to-market and achieving sufficient production volume with our new products.

To achieve consistent success with our OEM customers, it is important that we be an early provider of new types of disk drives featuring leading, high-quality technology and lower per gigabyte storage cost. Historically, our results of operations have substantially depended upon our ability to be among the first-to-market with new product offerings. Our market share and results of operations in the future may be adversely affected if we fail to:

 

   

consistently maintain our time-to-market performance with our new products;

 

   

produce these products in sufficient volume;

 

   

qualify these products with key customers on a timely basis by meeting our customers’ performance and quality specifications; or

 

   

achieve acceptable manufacturing yields, quality and costs with these products.

 

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If delivery of our products is delayed, our OEM customers may use our competitors’ products to meet their production requirements. If the delay of our products causes delivery of those OEMs’ computer systems into which our products are integrated to be delayed, consumers and businesses may purchase comparable products from the OEMs’ competitors.

Moreover, we face the related risk that consumers and businesses may wait to make their purchases if they want to buy a new product that has been shipped or announced but not yet released. If this were to occur, we may be unable to sell our existing inventory of products that may be less efficient and cost effective compared to new products. As a result, even if we are among the first-to-market with a given product, subsequent introductions or announcements by our competitors of new products could cause us to lose revenue and not achieve a positive return on our investment in existing products and inventory.

Dependence on Sales of Disk Drives in Consumer Electronics Applications—Our sales of disk drives for consumer electronics applications, which have contributed significant revenues to our results, can experience significant volatility due to seasonal and other factors, which could materially adversely impact our future results of operations.

Our sales of disk drives for consumer electronics applications have contributed significant revenues to our results for the past several years. However, consumer spending on consumer electronics has, and may continue to, deteriorate significantly in many countries and regions, including the United States, due to the poor global economic conditions. For example, factors that could influence the levels of consumer spending on consumer electronic products include volatility in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and services and on our financial condition and results of operations.

In addition, the demand for consumer electronics products can be even more volatile and unpredictable than the demand for compute products. In some cases, our products manufactured for consumer electronics applications are uniquely configured for a single customer’s application, which creates a risk of exposure if the anticipated volumes are not realized. This potential for unpredictable volatility is increased by the possibility of competing alternative storage technologies like flash memory meeting the customers’ cost and capacity metrics, resulting in a rapid shift in demand from our products and disk drive technology, generally, to alternative storage technologies. Unpredictable fluctuations in demand for our products or rapid shifts in demand from our products to alternative storage technologies in new consumer electronics applications could materially adversely impact our future results of operations.

Dependence on Sales of Disk Drives Directly to Consumers Through Retail Outlets—Our sales of disk drives directly to consumers through retail outlets can experience significant volatility due to seasonal and other factors, which could materially adversely impact our future results of operations.

We believe that industry demand for storage products in the long-term is increasing due to the proliferation of media-rich digital content in consumer applications and is fuelling increased consumer demand for storage. This has led to the expansion of solutions such as external storage products to provide additional storage capacity and to secure data in case of disaster or system failure, or to provide independent storage solutions for multiple users in home or small business environments. However, consumer spending on such retail sales of our branded solutions has deteriorated in some markets and may continue to do so if the poor global economic conditions continue. For example, factors that could influence the levels of consumer spending on such retail sales of our branded solutions include volatility in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and services and on our financial condition and results of operations.

 

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In addition, such retail sales of our branded solutions traditionally experience seasonal variability in demand with higher levels of demand in the first half of our fiscal year driven by consumer spending in the back-to-school season from late summer to fall and the traditional holiday shopping season from fall to winter. Additionally, our ability to reach such consumers depends on our maintaining effective working relationships with major retailers and distributors. Failure to anticipate consumer demand for our branded solutions as well as an inability to maintain effective working relationships with retail and online distributors may adversely impact our future results of operations.

Dependence on Distributors—We are dependent on sales to distributors and retailers, which may increase price erosion and the volatility of our sales.

In addition to our own sales force, a substantial portion of our sales has been to distributors of desktop disk drive products. Certain of our distributors may also market other products that compete with our products. Product qualification programs in this distribution channel are limited, which increases the number of competing products that are available to satisfy demand, particularly in times of lengthening product cycles. As a result, purchasing decisions in this channel 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 addition, the recent deterioration in business and economic conditions may exacerbate price erosion and volatility as distributors lower prices to compensate for lower demand and higher inventory levels. Our distributors ability to access credit for purposes of funding their operations may also affect purchases of our products by their customers.

To the extent that distributors reduce their purchases of our products or prices decline significantly in the distribution channel, the distributors experience financial difficulties, and to the extent that our distributor relationships are terminated, our revenues and results of operations would be adversely affected.

Dependence on Supply of Components, Equipment, and Raw Materials—If we experience shortages or delays in the receipt of critical components, equipment or raw materials necessary to manufacture our products, we may suffer lower operating margins, production delays and other material adverse effects.

The cost, quality and availability of components, certain equipment and raw materials used to manufacture disk drives and key components like recording media and heads are critical to our success. The equipment we use to manufacture our products and components is frequently custom made and comes from a few suppliers and the lead times required to obtain manufacturing equipment can be significant. Particularly important components for disk drives include read/write heads, aluminum or glass substrates for recording media, ASICs, spindle motors, printed circuit boards and suspension assemblies. We rely on sole suppliers or a limited number of suppliers for some of these components, including media, aluminum and glass substrates that we do not manufacture, recording media and heads, ASICs, spindle motors, printed circuit boards and suspension assemblies. If our vendors for these components are unable to meet our requirements, we could experience a shortage in supply, which would adversely affect our results of operations.

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 deposits for some components, equipment or raw materials that were in short supply in the industry in general.

Consolidation among component manufacturers may result in some component manufacturers exiting the industry or not making sufficient investments in research to develop new components.

 

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If there is a shortage of, or delay in supplying us with, critical components, equipment or raw materials, then:

 

   

it is likely that our suppliers would raise their prices and, if we could not pass these price increases to our customers, our operating margin would decline;

 

   

we might have to reengineer some products, which would likely cause production and shipment delays, make the reengineered products more costly and provide us with a lower rate of return on these products;

 

   

we would likely have to allocate the components we receive to certain of our products and ship less of others, which could reduce our revenues and could cause us to lose sales to customers who could purchase more of their required products from manufacturers that either did not experience these shortages or delays or that made different allocations; and

 

   

we might be late in shipping products, causing potential customers to make purchases from our competitors, thus causing our revenue and operating margin to decline.

We cannot assure you that we will be able to obtain critical components in a timely and economic manner.

Perpendicular Recording Technology—Products based on perpendicular technology require increased quantities of precious metals and scarce alloys like platinum and ruthenium, which increase the risks of higher costs and production delays that could adversely impact our results of operations.

Perpendicular recording technology requires recording media with more layers, which requires the use of more precious metals and scarce alloys like platinum and ruthenium to create such layers. These precious metals and scarce alloys could become increasingly expensive and, at times, difficult to acquire. Accordingly, we will be exposed to the increased risk that higher costs or reduced availability of these precious metals and scarce alloys could adversely impact our results of operations.

Importance of Controlling Operating Costs—If we do not control our operating expenses, we will not be able to compete effectively in our industry.

Our strategy involves, to a substantial degree, increasing revenue and product volume while at the same time controlling operating expenses. If we do not control our operating expenses, our ability to compete in the marketplace may be impaired. In the past, activities to reduce operating costs have included closures and transfers of facilities, significant personnel reductions and efforts to increase automation. Moreover, the reduction of personnel and closure of facilities may adversely affect our ability to manufacture our products in required volumes to meet customer demand and may result in other disruptions that affect our products and customer service. In addition, the transfer of manufacturing capacity of a product to a different facility frequently requires qualification of the new facility by some of our OEM customers. We cannot assure you that these activities and transfers will be implemented on a cost-effective basis without delays or disruption in our production and without adversely affecting our customer relationships and results of operations.

 

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Industry Demand— Poor global economic conditions and changes in demand for computer systems and storage subsystems have caused and may cause in the future a decline in demand for our products.

Our disk drives are components in computers, computer systems, storage subsystems and consumer electronics devices. The demand for these products has been volatile. During times of poor global economic conditions, such as those that currently prevail, consumer spending tends to decline and retail demand for personal computers and consumer electronics devices tends to decrease, as does enterprise demand for computer systems and storage subsystems. Moreover, unexpected slowdowns in demand for computer systems, storage subsystems or consumer electronic devices generally cause sharp declines in demand for disk drive products. The decline in consumer spending could have a material adverse effect on demand for our products and services and on our financial condition and results of operations.

Additional causes of declines in demand for our products in the past have included announcements or introductions of major new operating systems or semiconductor improvements or changes in consumer preferences, such as the shift from desktop to notebook computers. We believe these announcements and introductions have from time to time caused consumers to defer their purchases and made inventory obsolete. Whenever an oversupply of disk drives causes participants in our industry to have higher than anticipated inventory levels, we experience even more intense price competition from other disk drive manufacturers than usual.

Impairment Charges – We may be required to take additional impairment charges for goodwill or other long-lived assets.

We are required to assess goodwill annually for impairment, or on an interim basis whenever events occur or circumstances change, such as an adverse change in business climate or a decline in the overall industry, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We are also required to test long-lived assets, including acquired intangible assets and property, equipment and leasehold improvements, for recoverability and impairment whenever there are indicators of impairment, such as an adverse change in business climate.

In the December 2008 quarter, we determined that the negative impact of the current macroeconomic environment and the resulting decline in the demand for our products represented an adverse change in our business climate. Those circumstances required us to undertake an evaluation of our goodwill and long-lived assets for impairment. Based on these analyses, we recorded impairment charges of $2.3 billion for goodwill and $3 million for long-lived assets.

At January 2, 2009, we have $31 million of goodwill and $2.6 billion of long-lived assets. As part of our long-term strategy, we may pursue future acquisitions of other companies or assets which could potentially increase our goodwill and long-lived assets. Further adverse changes in business conditions could materially impact our estimates of future operations and result in additional impairment charges to these assets. If our goodwill or long-lived assets were to become further impaired, our results of operations could be materially and adversely affected.

Dependence on Key Customers—We may be adversely affected by the loss of, or reduced, delayed or cancelled purchases by, one or more of our larger customers.

Some of our key customers, including Hewlett-Packard, Dell, Mitac, EMC, and Asustek, account for a large portion of our disk drive revenue. While we have longstanding relationships with many of our customers, if any of our key customers were to significantly reduce their purchases from us, our results of operations would be adversely affected. While sales to major customers may vary from period to period, a major customer that permanently discontinues or significantly reduces its relationship with us could be difficult to replace. In line with industry practice, new customers usually require that we pass a lengthy and rigorous qualification process at the customer’s cost. Accordingly, it may be difficult or costly for us to attract new major customers. Additionally, mergers, acquisitions, consolidations or other significant

 

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transactions involving our customers generally entail risks to our business. If a significant transaction involving any of our key customers results in the loss of or reduction in purchases by these key customers, it could have a materially adverse effect on our business, results of operations, financial condition and prospects.

Impact of Technological Change—Increases in the areal density of disk drives may outpace customers’ demand for storage capacity.

The rate of increase in areal density, or storage capacity per square inch on a disk, may be greater than the increase in our customers’ demand for aggregate storage capacity, particularly in certain market applications like commercial desktop compute. As a result, our customers’ storage capacity needs may be satisfied with lower priced, low capacity disk drives. These factors could decrease our sales, especially when combined with continued price erosion, which could adversely affect our results of operations.

Changes in Electronic Data Storage Products—Future changes in the nature of electronic data storage products may reduce demand for traditional disk drive products.

We expect that in the future, new personal computing devices and products will be developed, some of which, such as Internet appliances or “netbooks,” may not contain a disk drive. While we are investing development resources in designing disk drives for new applications, it is too early to assess the impact of these new applications on future demand for disk drive products. Products such as netbooks, which use alternative technologies, such as flash memory, optical storage and other storage technologies are becoming increasingly common and could become a significant source of competition to particular applications of our products, which could adversely affect our results of operations.

New Product Development and Technological Change—If we do not develop products in time to keep pace with technological changes, our results of operations will be adversely affected.

Our customers have demanded new generations of disk drive products as advances in computer hardware and software have created the need for improved storage products, with features such as increased storage capacity, improved performance and reliability and lower cost. We, and our competitors, have developed improved products, and we will need to continue to do so in the future. Such product development requires significant investments in research and development. We cannot assure you that we will be able to successfully complete the design or introduction of new products in a timely manner, that we will be able to manufacture new products in sufficient volumes with acceptable manufacturing yields, that we will be able to successfully market these new products or that these products will perform to specifications on a long-term basis. In addition, the impact of slowing areal density growth may adversely impact our ability to be successful.

When we develop new products with higher capacity and more advanced technology, our results of operations may decline because the increased difficulty and complexity associated with producing these products increases the likelihood of reliability, quality or operability problems. If our products suffer increases in failures, are of low quality or are not reliable, customers may reduce their purchases of our products and our manufacturing rework and scrap costs and service and warranty costs may increase. In addition, a decline in the reliability of our products may make us less competitive as compared with other disk drive manufacturers or competing technologies.

 

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Substantial Leverage—Our substantial leverage may place us at a competitive disadvantage in our industry.

We are leveraged and have significant debt service obligations. Our significant debt and debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. For example, our high level of debt presents the following risks:

 

   

we are required to use a substantial portion of our cash flow from operations to pay principal and interest on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, acquisitions, investments and strategic alliances and other general corporate requirements;

 

   

our substantial leverage increases our vulnerability to economic downturns and adverse competitive and industry conditions and could place us at a competitive disadvantage compared to those of our competitors that are less leveraged;

 

   

our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies;

 

   

our level of debt may restrict us from 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 make other restricted payments and investments.

In addition, because a substantial portion of our debt bears interest at floating rates, an increase in interest rates has an immediate effect on our interest expense on our variable rate debt. If the extreme volatility in interest rates observed during the September 2008 and December 2008 quarters continues, or if interest rates increase, our cash flow and our ability to service our debt may be adversely affected.

In the event that we need to refinance all or a portion of our outstanding debt as it matures, we may not be able to obtain terms as favorable as the terms of our existing debt or refinance our existing debt at all. If prevailing interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to the refinanced debt would increase. Furthermore, if any rating agency made changes to our credit rating or outlook, our debt and equity securities could be negatively affected, which could adversely affect our financial condition and results of operations.

Significant Debt Service Requirements—Servicing our debt requires a significant amount of cash and our ability to generate cash may be affected by factors beyond our control.

Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness or to fund our other liquidity needs, including working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements.

Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that:

 

   

our business will generate sufficient cash flow from operations;

 

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we will continue to realize the cost savings, revenue growth and operating improvements that resulted from the execution of our long-term strategic plan; or

 

   

future sources of funding will be available to us in amounts sufficient to enable us to fund our liquidity needs.

If we cannot fund our liquidity needs, we will have to take actions such as reducing or delaying capital expenditures, product development efforts, strategic acquisitions, investments and alliances, selling assets, restructuring or refinancing our debt, or seeking additional equity capital. We cannot assure that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. In addition, if we incur additional debt above the levels now in effect, the risks associated with our substantial leverage, including 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 in other business activities that may be in our interest.

Our existing credit facility imposes, and the terms of any future debt may impose, operating and other restrictions on us. Our existing credit facility may also limit, among other things, our ability to:

 

   

pay dividends or make distributions in respect of our shares;

 

   

redeem or repurchase shares;

 

   

make investments or other restricted payments;

 

   

sell assets;

 

   

issue or sell shares of restricted subsidiaries;

 

   

enter into transactions with affiliates;

 

   

create liens; and

 

   

effect a consolidation or merger.

These covenants are subject to a number of important qualifications and exceptions, including exceptions that permit us to make significant dividends.

Our credit facility also requires us to maintain compliance with specified financial ratios. Specifically, our credit agreement contains three financial ratio covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. Our ability to comply with these ratios may be affected by events beyond our control. Although we are expecting to be in compliance with these covenants through the end of our next fiscal quarter, if business conditions remain weak, as early as the end of our June 2009 quarter we may need to repay the outstanding Revolving Credit Facility balance and collateralize the outstanding letters of credit, re-negotiate these covenants, obtain waivers and/or raise additional funds in order to remain in compliance . We may not be able to re-negotiate these covenants, obtain waivers or raise additional funds in order to remain in compliance.

 

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A breach of any of the covenants described above or our inability to comply with the required financial ratios could result in a default under our credit facility. If a condition of default occurs, the Administrative Agent of the credit facility may elect to declare all of our outstanding obligations under the credit facility, together with accrued interest and other fees, to be immediately due and payable. If our outstanding indebtedness were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that debt and any potential future indebtedness, which would cause the market price of our common shares to decline significantly.

In addition, some of the agreements governing our other debt instruments contain cross-default provisions that may be triggered by a default under our credit facility. In the event that we default under our credit facility, there could be an event of default under cross-default provisions for the applicable debt instrument. As a result, all outstanding obligations under certain of our debt instruments may become immediately due and payable. If such acceleration were to occur, we may not have adequate funds to satisfy all of our outstanding obligations.

Volatile Public Markets—The price of our common shares may be volatile and could decline significantly.

The stock market in general, and the market for technology stocks in particular, has recently experienced volatility that has often been unrelated to the operating performance of companies. If these market or industry-based fluctuations continue, the trading price of our common shares could decline significantly independent of our actual operating performance, and you could lose all or a substantial part of your investment. The market price of our common shares could fluctuate significantly in response to several factors, including among others:

 

   

general uncertainty in stock market conditions occasioned by the global liquidity crisis, negative financial news, and the failure of several large financial institutions;

 

   

actual or anticipated variations in our results of operations;

 

   

announcements of innovations, new products or significant price reductions by us or our competitors, including those competitors who offer alternative storage technology solutions;

 

   

our failure to meet the performance estimates of investment research analysts;

 

   

the timing of announcements by us or our competitors of significant contracts or acquisitions;

 

   

general stock market conditions;

 

   

the occurrence of major catastrophic events;

 

   

changes in financial estimates by investment research analysts; and

 

   

the sale of our common shares held by certain equity investors or members of management.

Risks Associated with Future Strategic Alliances, Joint Ventures or Investments—We may not be able to identify suitable strategic alliances, acquisitions, joint ventures or investment opportunities, or successfully acquire and integrate companies that provide complementary products or technologies.

Our growth strategy may involve pursuing strategic alliances with, making acquisitions of, forming joint ventures with or making investments in other companies that are complementary to our business. There is substantial competition for attractive strategic alliance, acquisition, joint venture and investment candidates. Accordingly, we may not be able to identify suitable acquisition, joint venture, investment or strategic partnership candidates. Even if we can identify them, we cannot assure you that we will be able to partner with, acquire or invest in suitable candidates, or integrate acquired technologies or operations successfully into our existing technologies and operations. Moreover, our ability to finance potential strategic alliances, acquisitions, joint ventures or investments 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 agreements governing any other debt we may incur.

 

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If we are successful in forming strategic alliances or acquiring, forming joint ventures or making investments in other companies, any of these transactions may have an adverse effect on our results of operations, particularly while the operations of an acquired business are being integrated. It is also likely that integration of acquired companies would lead to the loss of key employees from those companies or the loss of customers of those companies. In addition, the integration of any acquired companies would require substantial attention from our senior management, which may limit the amount of time available to be devoted to our day-to-day operations or to the execution of our strategy. Growth by strategic alliance, acquisition, joint venture or investment involves an even higher degree of risk to the extent we combine new product offerings and enter new markets in which we have limited experience, and no assurance can be given that acquisitions of entities with new or alternative business models will be successfully integrated or achieve their stated objectives.

Furthermore, the expansion of our business involves the risk that we might not manage our growth effectively, that we would incur additional debt to finance these acquisitions or investments, that we may have impairment of goodwill or acquired intangible assets associated with these acquisitions and that we would incur substantial charges relating to the write-off of in-process research and development, similar to that which we incurred in connection with several of our prior acquisitions. Each of these items could have a material adverse effect on our financial condition and results of operations.

In addition, we could issue additional common shares in connection with future strategic alliances, acquisitions, joint ventures or investments. Issuing shares in connection with such transactions would have the effect of diluting your ownership percentage of the common shares and could cause the price of our common shares to decline.

Risk of Intellectual Property Litigation—Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

We cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of others. We may not be aware of currently filed patent applications that relate to our products or technology. If patents are later issued on these applications, we may be liable for infringement. We may be subject to legal proceedings and claims, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us, or our customers, in connection with their use of our products.

We are currently subject to lawsuits involving intellectual property claims which could cause us to incur significant additional costs or prevent us from selling our products, and which could adversely affect our results of operations and financial condition: actions brought in the United States by Convolve, Inc. and the Massachusetts Institute of Technology; Magsil Corporation and the Massachusetts Institute of Technology; and Qimonda AG; and an action brought in Northern Ireland by Siemens AG.

Intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business. In addition, intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot assure you that we will be successful in defending ourselves against intellectual property claims. Moreover, patent litigation has increased due to the current uncertainty of the law and the increasing competition and overlap of product functionality in the field. If we were to discover that our products infringe the intellectual property rights of others, we would need to obtain licenses from these

 

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parties or substantially reengineer our products in order to avoid infringement. We might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to reengineer our products successfully. Moreover, if we are sued for patent infringement and lose the suit, we could be required to pay substantial damages and/or be enjoined from using or selling the infringing products or technology. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products, which could adversely affect our results of operations and financial condition. See Part I, Item 1, Note 11 of Notes to Condensed Consolidated Financial Statements of this quarterly report on Form 10-Q for a description of pending intellectual property proceedings.

Dependence on Key Personnel—The loss of some key executive officers and employees could negatively impact our business prospects.

Our future performance depends to a significant degree upon the continued service of key members of management as well as marketing, sales and product development personnel. The loss of one or more of our key personnel may have a material adverse effect on our business, results of operations and financial condition. We believe our future success will also depend in large part upon our ability to attract, retain and further motivate highly skilled management, marketing, sales and product development personnel. We have experienced intense competition for personnel, and we cannot assure you that we will be able to retain our key employees or that we will be successful in attracting, assimilating and retaining personnel in the future.

System Failures—System failures caused by events beyond our control could adversely affect computer equipment and electronic data on which our operations depend.

Our operations are dependent upon our ability to protect our computer equipment and the electronic data stored in our databases from damage by, among other things, earthquake, fire, natural disaster, power loss, telecommunications failures, unauthorized intrusion and other catastrophic events. As our operations become more automated and increasingly interdependent, our exposure to the risks posed by these types of events will increase. While we continue to improve our disaster recovery processes, system failures and other interruptions in our operations could have a material adverse effect on our business, results of operations and financial condition.

Economic Risks Associated with International Operations—Our international operations subject us to risks related to currency exchange fluctuations, longer payment cycles for sales in foreign countries, seasonality and disruptions in foreign markets, tariffs 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 manufacturing facilities in China, Malaysia, Northern Ireland, Singapore and Thailand, in addition to those in the United States. A substantial portion of our desktop disk drive assembly occurs in our facility in China.

Our international operations are subject to economic risks inherent in doing business in foreign countries, including the following:

 

   

Disruptions in Foreign Markets.  Disruptions in financial markets and the deterioration of the underlying economic conditions in the past in some countries, including those in Asia, have had an impact on our sales to customers located in, or whose end-user customers are located in, these countries.

 

   

Fluctuations in Currency Exchange Rates.  Prices for our products are denominated predominately in U.S. dollars, even when sold to customers that are located outside the United States. Currency instability in Asia and other geographic markets may make our products more expensive than products sold by other manufacturers that are priced in the local currency.

 

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Moreover, many of the costs associated with our operations located outside the United States are denominated in local currencies. As a consequence, the increased strength of local currencies against the U.S. dollar in countries where we have foreign operations would result in higher effective operating costs and, potentially, reduced earnings. From time to time, fluctuations in foreign exchange rates have negatively affected our operations and profitability and there can be no assurance that these fluctuations will not adversely affect our operations and profitability in the future.

 

   

Longer Payment Cycles.  Our customers outside of the United States are often allowed longer time periods for payment than our U.S. customers. This increases the risk of nonpayment due to the possibility that the financial condition of particular customers may worsen during the course of the payment period.

 

   

Seasonality.  Seasonal reductions in the business activities of our customers during the summer months, particularly in Europe, typically result in lower earnings during those periods.

 

   

Tariffs, Duties, Limitations on Trade and Price Controls.  Our international operations are affected by limitations on imports, currency exchange control regulations, transfer pricing regulations, price controls and other restraints on trade. In addition, the governments of many countries, including China, Malaysia, Singapore and Thailand, in which we have significant operating assets, have exercised and continue to exercise significant influence over many aspects of their domestic economies and international trade.

 

   

Potential Adverse Tax Consequences.  Our international operations create a risk of potential adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries.

 

   

Increased Costs.  The shipping and transportation costs associated with our international operations are typically higher than those associated with our U.S. operations, resulting in decreased operating margins in some foreign countries.

 

   

Credit and Access to Capital Risks.  Our international customers could have reduced access to working capital due to higher interest rates, reduced bank lending resulting from contractions in the money supply or the deterioration in the customer’s or its bank’s financial condition, or the inability to access other financing.

Political Risks Associated with International Operations—Our international operations subject us to risks related to political unrest and terrorism.

We have manufacturing facilities in parts of the world that periodically experience political unrest, with Thailand being a recent example. This could disrupt our ability to manufacture important components as well as cause interruptions and/or delays in our ability to ship components to other locations for continued manufacture and assembly. Any such delays or interruptions could result in delays in our ability to fill orders and have an adverse effect on our results of operations and financial condition. U.S. and international responses to the ongoing hostilities in Afghanistan and Iraq and the risk of terrorist attacks or hostilities elsewhere in the world could exacerbate these risks.

Legal and Operational Risks Associated with International Operations—Our international operations subject us to risks related to staffing and management, legal and regulatory requirements and the protection of intellectual property.

Operating outside of the United States creates difficulties associated with staffing and 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, transfer pricing regulations or any other laws or regulations to which we may be subject. We also cannot assure you that these laws will not be modified.

 

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SOX 404 Compliance—While we believe that we currently have adequate internal control procedures in place, we are still exposed to future risks of non-compliance and will continue to incur costs associated with Section 404 of the Sarbanes-Oxley Act of 2002.

We have completed the evaluation of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Although our assessment, testing, and evaluation resulted in our conclusion that as of June 27, 2008, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in future periods. If our internal controls are ineffective in future periods, our financial results or the market price of our shares could be adversely affected. We will incur additional expenses and commitment of management’s time in connection with further evaluations.

Failure to Pay Quarterly Dividends—Our failure to pay quarterly dividends to our common shareholders could cause the market price of our common shares to decline significantly.

On January 21, 2009, we declared a quarterly dividend of $0.03 per share that will be paid on or before February 20, 2009 to our common shareholders of record as of February 6, 2009.

Our ability to pay quarterly dividends will be subject to, among other things, general business conditions within the disk drive industry, our financial results, the impact of paying dividends on our credit ratings and legal and contractual restrictions on the payment of dividends by our subsidiaries to us or by us to our common shareholders, including restrictions imposed by the credit agreement governing our revolving credit facility. Any reduction or discontinuation of quarterly dividends could cause the market price of our common shares to decline significantly. Our payment of dividends to holders of our common shares may in certain future quarters result in upward adjustments to the conversion rate of the 2.375% Convertible Senior Notes due August 2012. Moreover, in the event our payment of quarterly dividends is reduced or discontinued, our failure or inability to resume paying dividends at historical levels could result in a persistently low market valuation of our common shares.

Potential Governmental Action—Governmental action against companies located in offshore jurisdictions may lead to a reduction in the demand for our common shares.

Recent federal and state legislation has been proposed, and additional legislation may be proposed in the future which, if enacted, could have an adverse tax impact on either Seagate or our shareholders. For example, the eligibility for favorable tax treatment of taxable distributions paid to U.S. shareholders of Seagate as qualified dividends could be eliminated.

Securities Litigation—Significant fluctuations in the market price of our common shares could result in securities class action claims against us.

Significant price and value fluctuations have occurred with respect to the publicly traded securities of disk 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 pursued against that company. If similar litigation were pursued against us, it could result in substantial costs and a diversion of management’s attention and resources, which could materially adversely affect our results of operations, financial condition and liquidity.

 

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Current Global Credit and Financial Market Conditions—Current global credit and financial market conditions could negatively impact the value of our current portfolio of cash equivalents, short-term investments or auction rate securities and our ability to meet our financing objectives.

Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. Our investment policy has as its principal objectives the preservation of principal and maintenance of liquidity. We mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and by monitoring the counter-parties and underlying obligors closely.

As of January 2, 2009, we held auction rate securities with a par value of $31 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in the March 2008 quarter, these securities failed to settle at auction and have continued to fail through the quarter ended January 2, 2009. As of January 2, 2009, the estimated fair value of these auction rate securities was $27 million. We believe that the impairments totaling $4 million are temporary given our ability and intent to hold these securities until liquidity returns to this market or until maturity of the securities.

While as of the date of this filing, we are not aware of any other downgrades, losses, failed auctions or other significant deterioration in the fair value of our cash equivalents or short-term investments since January 2, 2009, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents, short-term investments or auction rate securities or our ability to meet our financing objectives.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

We did not sell any securities during the six months ended January 2, 2009 that were not registered under the Securities Act of 1933, as amended.

Repurchases of Equity Securities

We did not repurchase any of our common shares during the six months ended January 2, 2009. As of January 2, 2009, we had approximately $2.0 billion available to repurchase our common shares under the February 2008 stock repurchase plan.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

Our 2008 Annual Meeting of Shareholders was held on October 30, 2008. The following is a brief description of each matter voted upon at the meeting and a statement of the number of votes cast for or against and the number of abstentions with respect to each matter.

 

  1) The shareholders elected the following directors to serve for the ensuing year or until their successors are elected:

 

       For    Against    Abstain

William D. Watkins

   421,118,186    5,025,651    4,439,125

Stephen J. Luczo

   397,297,455    32,857,728    427,779

Frank J. Biondi

   424,089,188    6,036,402    457,372

William W. Bradley

   425,551,146    4,509,270    522,546

Donald E. Kiernan

   425,677,598    4,433,279    472,086

David F. Marquardt

   425,155,562    4,966,775    460,625

Lydia M. Marshall

   408,952,290    20,918,501    712,171

C.S. Park

   351,461,819    76,353,083    768,053

Gregorio Reyes

   422,782,661    7,333,253    467,048

John W Thompson

   420,588,437    9,541,768    452,757

 

2)      The shareholders approved the Seagate Technology Executive Officer Performance Bonus Plan.

       For    Against    Abstain
   401,969,622    28,133,446    479,894

 

3)      The shareholders ratified the appointment of Ernst & Young LLP to serve as independent registered accounting firm of Seagate Technology for the fiscal year ending July 3, 2009.

       For    Against    Abstain
   428,083,647    2,272,362    226,952

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

Exhibit No.

 

Exhibit Description

   Incorporated by Reference    Filed
Herewith
     Form    File No.    Exhibit    Filing
Date
  
2.1   Stock Purchase Agreement, dated as of March 29, 2000, by and among Suez Acquisition Company (Cayman) Limited, Seagate Technology, Inc. and Seagate Software Holdings, Inc.    S-4    333-88388    2.1    05/16/02   
2.2   Agreement and Plan of Merger and Reorganization, dated as of March 29, 2000, by and among VERITAS Software Corporation, Victory Merger Sub, Inc. and Seagate Technology, Inc.    S-4    333-88388    2.2    05/16/02   
2.3   Indemnification Agreement, dated as of March 29, 2000, by and among VERITAS Software Corporation, Seagate Technology, Inc. and Suez Acquisition Company (Cayman) Limited    S-4    333-88388    2.3    05/16/02   
2.4   Joinder Agreement to the Indemnification Agreement, dated as of November 22, 2000, by and among VERITAS Software Corporation, Seagate Technology, Inc. and the SAC Indemnitors listed therein    S-4    333-88388    2.4    05/16/02   
2.5   Consolidated Amendment 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 Victory Merger Sub, Inc.    S-4    333-88388    2.5    05/16/02   
2.6   Consolidated Amendment No. 2 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 Victory Merger Sub, Inc.    S-4    333-88388    2.6    05/16/02   
2.7   Agreement and Plan of Merger, dated as of December 20, 2005, by and among Seagate Technology, MD Merger Corporation and Maxtor Corporation    8-K    001-31560    2.1    12/22/05   

 

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Table of Contents

Exhibit No.

 

Exhibit Description

   Incorporated by Reference    Filed
Herewith
     Form    File No.    Exhibit   Filing
Date
  
3.1   Third Amended and Restated Memorandum of Association of Seagate Technology (formerly known as Seagate Technology Holdings)    10-Q    001-31560    3.1   10/29/04   
3.2   Third Amended and Restated Articles of Association of Seagate Technology (formerly known as Seagate Technology Holdings)    10-Q    001-31560    3.2   10/29/04   
4.1   Specimen Common Share Certificate    S-1/A    333-100513    4.4   11/08/02   
4.2   Indenture dated September 20, 2006 among Seagate Technology, Seagate Technology HDD Holdings and U.S. Bank National Association    8-K    001-31560    4.1   09/21/06   
4.3   Forms of Global Note for the Floating Rate Senior Notes due 2009, Senior Notes due 2011 and Senior Notes due 2016 of Seagate Technology HDD Holdings issued pursuant to the Indenture    8-K    001-31560    4.1   09/21/06   
10.1(a)+   Form of Employment Agreement by and between Seagate Technology (US) Holdings, Inc. and the Executive listed therein    S-4    333-88388    10.2(a)   05/16/02   
10.1(b)+   Employment Agreement, dated as of February 2, 2001, by and between Seagate Technology (US) Holdings, Inc. and William D. Watkins    S-4    333-88388    10.2(c)   05/16/02   
10.2(a)     New SAC 2000 Restricted Share Plan    S-4    333-88388    10.7(a)   05/16/02   
10.2(b)     Form of New SAC 2000 Restricted Share Plan    S-4    333-88388    10.7(b)   05/16/02   
10.3+       Seagate Technology Holdings 2001 Share Option Plan    S-4    333-88388    10.9   05/16/02   
10.4         Management Shareholders Agreement, dated as of November 22, 2000, by and among New SAC and the Management Shareholders listed therein    S-4    333-88388    10.11   05/16/02   
10.5+       Form of Indemnification Agreement between Seagate Technology Holdings and the director or officer named therein    S-4/A    333-88388    10.17   07/05/02   
10.6+       Seagate Technology Executive Officer Performance Bonus Plan    10-Q    001-31560    10.6   10/30/08   
10.7+       Form of Amended 2004 Stock Compensation Plan    10-K    001-31560    10.8   08/13/08   

 

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Table of Contents

Exhibit No.

 

Exhibit Description

   Incorporated by Reference    Filed
Herewith
     Form    File No.    Exhibit    Filing
Date
  
10.8+         Seagate Technology 2004 Stock Compensation Plan Form of Option Agreement (For Outside Directors)    10-Q    001-31560    10.25    10/29/04   
10.9+         Seagate Technology 2004 Stock Compensation Plan Form of Option Agreement (For Officers and Non-Officer employees)    S-8    333-128654    99.3    09/28/05   
10.10+       Seagate Technology 2004 Stock Compensation Plan Form of Restricted Stock Bonus Agreement    10-K    001-31560    10.11    08/13/08   
10.11+       Seagate Technology 2004 Stock Compensation Plan Form of Restricted Stock Unit Agreement    10-Q    001-31560    10.11    10/30/08   
10.12+       Summary description of Seagate Technology’s compensation policy for non-management members of the board of directors                X
10.13*       Indenture between Maxtor Corporation and U.S. Bank National Association, dated as of August 15, 2005    10-Q    001-16447    4.1    11/04/05   
10.14         First Supplemental Indenture, dated as of May 19, 2006, among Seagate Technology, Maxtor Corporation and U.S. Bank National Association, amending and supplementing the Indenture dated as of August 15, 2005    8-K    001-31560    10.2    05/25/06   
10.15†       Indenture between Maxtor Corporation and U.S. Bank National Association, dated as of May 7, 2003    10-Q    001-16447    4.1    05/13/03   
10.16         First Supplemental Indenture, dated as of May 19, 2006, among Seagate Technology, Maxtor Corporation and U.S. Bank National Association, amending and supplementing the Indenture dated as of May 7, 2003    8-K    001-31560    10.4    05/25/06   
10.17+       Seagate Technology 2004 Stock Compensation Plan Form of Performance Share Bonus Agreement (includes Compensation Recovery Policy)                X
10.18+       Separation and Release Agreement by and between David A. Wickersham and Seagate US LLC and Seagate Technology                X
10.18(a)+   Restricted Covenants Agreement by and between David A. Wickersham and Seagate US LLC and Seagate Technology (contained in Exhibit 10.18 as Exhibit A)                X

 

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Table of Contents

Exhibit No.

 

Exhibit Description

   Incorporated by Reference    Filed
Herewith
     Form    File No.    Exhibit    Filing
Date
  
10.19+       Separation and Release Agreement by and between William D. Watkins and Seagate (US) Holdings, Inc. and Seagate Technology                X
10.19(a)+   Restricted Covenants Agreement by and between William D. Watkins and Seagate (US) Holdings, Inc. and Seagate Technology (contained in Exhibit 10.19 as Exhibit A)                X
10.20+       Offer Letter, dated as of January 29, 2009, by and between Seagate Technology and Stephen J. Luczo                X
10.21+       Seagate Technology 2004 Stock Compensation Plan Form of Option Agreement (includes Compensation Recovery Policy)                X
10.22+       Seagate Technology 2004 Stock Compensation Plan Form of Restricted Stock Bonus Agreement (includes Compensation Recovery Policy)                X
10.23+       Seagate Technology 2004 Stock Compensation Plan Form of Restricted Stock Unit Agreement (includes Compensation Recovery Policy)                X
10.24+       Offer Letter, dated as of November 6, 2008, by and between Seagate Technology and Charles C. Pope                X
10.25+       Summary of Compensation Arrangements for Patrick J. O’Malley                X
10.26+       Summary of Compensation Arrangements for Brian S. Dexheimer                X
10.27+       Summary of Compensation Arrangements for Robert Whitmore                X
14.1           Code of Business Conduct and Ethics    10-K    001-31560    14.1    08/13/08   
31.1           Certification of the Chief Executive Officer pursuant to rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
31.2           Certification of the Chief Financial Officer pursuant to rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
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                X

 

+ Management contract or compensatory plan or arrangement

 

* Incorporated by reference to Maxtor Corp’s quarterly report on Form 10-Q (001-16447) filed with the SEC on 11/4/2005.

 

Incorporated by reference to Maxtor Corp’s quarterly report on Form 10-Q (001-16447) filed with the SEC on 05/13/03.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SEAGATE TECHNOLOGY
DATE: February 10, 2009     BY:   /s/ Stephen J. Luczo
      Stephen J. Luczo
      Chairman, President and Chief Executive Officer
      (Principal Executive Officer)
DATE: February 10, 2009     BY:   /s/ Patrick J. O’Malley
      Patrick J. O’Malley
     

Executive Vice President, Finance

and Chief Financial Officer

      (Principal Financial Officer)

 

104

EXHIBIT 10.12

Seagate Technology (the “Company”)

Non-Management Board Member Compensation

as amended by the Board of Directors on January 29, 2009,

with an effective date of January 29, 2009

Director Stock Grants

 

   

Each newly appointed or elected non-management director will receive an initial stock option grant to purchase 55,000 shares with an exercise price equal to fair market value as of the date of the grant, plus an initial grant of 15,000 restricted shares. The grant date for these awards shall be the date of the director’s election or appointment. The fair market value per common share shall be determined under the terms of the Seagate Technology 2004 Stock Compensation Plan. Each restricted share grant will carry a four-year vesting schedule (measured from the vesting measurement date for the calendar year in which the grant is made), 25% cliff per year on each anniversary of the vesting measurement date. Each stock option grant will carry a four-year vesting schedule (measured from the vesting measurement date for the calendar year in which the grant is made), vesting as to 25% of the shares on the first anniversary of the vesting measurement date, with monthly vesting thereafter for the remaining shares to complete vesting in the subsequent three years. For non-incumbent director nominees, the vesting measurement date shall be either the grant date or an earlier date in the same calendar month as the grant date based on the anticipated schedule of the Annual General Meeting of Shareholders (the “AGM”) for the next four years following the grant date and intended to occur shortly before the AGM. (Until the time that the vesting measurement date is adjusted either by the Board of Directors or the Compensation Committee, the vesting measurement date for all such grants to non-incumbent director nominees will be October 15 of the year in which the grant occurs.) For appointed directors, the vesting measurement date shall be the date of commencement of Board service, which shall generally be the date of the Board meeting at which the director is appointed. However, if the new director was, prior to commencement of Board service, an officer or member of the board of directors of an entity the stock, assets and/or business of which has been acquired by Seagate, the number of shares of the initial grant shall be determined by the existing members of the Board, but shall not exceed the grant of 55,000 option shares and a grant of 15,000 restricted shares.

 

   

Each year at the AGM, each incumbent non-management director with a minimum of six (6) months tenure as of the date of the AGM who is re-elected to the Board shall automatically receive a stock option grant to purchase 10,000 shares of the Company’s common stock with an exercise price equal to fair market value as of the date of the grant, plus a grant of 5,000 restricted shares. The grant date for these awards shall be the date of the AGM. Each restricted share grant will carry a four-year vesting schedule (measured from the vesting measurement date for the calendar year in which the grant is made), 25% cliff per year on each anniversary of the vesting measurement date. Each stock option grant will carry a four-year vesting schedule (measured from the vesting measurement date for the calendar year in which the grant is made), vesting as to 25% of the shares on the first anniversary of the vesting measurement date, with monthly vesting thereafter for the remaining shares to complete vesting in the subsequent three years. The vesting measurement date shall be either the grant date or an earlier date in the same calendar month as the grant date based on the anticipated schedule of the AGM for the next four years following the grant date and intended to occur shortly before the AGM. (Until the time that the vesting measurement date is adjusted either by the Board of Directors or the Compensation Committee, the vesting measurement date for all such grants will be October 15 of the year in which the grant occurs.)


Cash Compensation . All annual cash retainers shall be payable to the directors in four equal installments to directors in good standing at the date of each regular quarterly board meeting.

Board Service Compensation

 

   

Each board member shall receive an annual cash retainer of $42,500.

Lead Independent Director Compensation

 

   

The Lead Independent Director shall receive an additional annual cash retainer of $12,750.

Committee Service Compensation

Audit Committee

 

   

The Chair of the Audit Committee shall receive an additional annual cash retainer of $42,500.

 

   

Each member of the Audit Committee shall receive an additional annual cash retainer of $21,250.

Compensation Committee

 

   

The Chair of the Compensation Committee shall receive an additional annual cash retainer of $17,000.

 

   

Each member of the Compensation Committee shall receive an additional annual cash retainer of $8,500.

Nominating and Corporate Governance Committee

 

   

The Chair of the Nominating and Corporate Governance Committee shall receive an additional annual cash retainer of $17,000.

 

   

Each member of the Nominating and Corporate Governance Committee shall receive an additional annual cash retainer of $8,500.

Strategic and Financial Transactions Committee

 

   

The Chair of the Strategic and Financial Transactions Committee shall receive an additional annual cash retainer of $17,000.

 

   

Each member of the Strategic and Financial Transactions Committee shall receive an additional annual cash retainer of $8,500.

Travel Expense Reimbursements

 

   

Directors shall be reimbursed for all reasonable expenses related to traveling to Board meetings.

EXHIBIT 10.17

SEAGATE TECHNOLOGY

2004 STOCK COMPENSATION PLAN

PERFORMANCE SHARE BONUS AGREEMENT

(with acknowledgement of Compensation Recovery Policy)

Seagate Technology (the “Company”) has awarded you shares of Common Stock of the Company, pursuant to the provisions of the Company’s 2004 Stock Compensation Plan (the “Plan”), the Performance Share Bonus Grant Notice (including any attachments thereto, “Grant Notice”) and this Performance Share Bonus Agreement (including any attachments hereto, “Agreement”) (collectively, the “Award”). Defined terms not explicitly defined in this Agreement or the Notice but defined in the Plan shall have the same definitions as in the Plan.

The details of your Award are as follows:

1. G RANT OF P ERFORMANCE S HARES . You are entitled to the aggregate number of shares of Common Stock (the “Performance Shares”) specified in your Grant Notice pursuant to the terms and conditions of this Agreement. You agree to execute three (3) copies of the Assignment Separate From Certificate (with date and number of shares blank) in the form attached to the Grant Notice as Attachment III and one (1) copy of the Joint Escrow Instructions in the form attached to the Grant Notice as Attachment IV and to deliver the same to the Company, along with the certificate or certificates evidencing the Performance Shares, for use by the Escrow Agent pursuant to the terms of the Joint Escrow Instructions (as further described in Section 2(d) below). Notwithstanding anything herein to the contrary, your Award is subject to and contingent upon the approval of the Company’s shareholders at the Company’s 2007 annual general meeting of shareholders of certain amendments to the Plan as previously approved by the Committee (subject to shareholder approval) and to be presented to shareholders at such meeting. If the Company’s shareholders do not approve the amendments to the Plan presented to shareholders at the Company’s 2007 annual general meeting of shareholders, this Award will be forfeited in its entirety at that time and be of no further force or effect.

2. V ESTING  & C OMPANY S R EPURCHASE R IGHT .

(a) Subject to the limitations contained herein, the Performance Shares will vest as provided in Schedule A to the Grant Notice, provided that, except as set forth in Schedule A to the Grant Notice, vesting will cease upon the termination of your Continuous Service with the Company and its Subsidiaries and Affiliates (“Termination”). Notwithstanding anything to the contrary, the vesting of the Performance Shares shall be conditioned upon your making adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the release of the Performance Shares from the Company’s Repurchase Right (as defined in Section 2(b) below) or at the time a Section 83(b) election (as described in further detail below) is made, whether by withholding (whether authorized pursuant to Section 8(b) of this Agreement or otherwise), direct payment to the Company, the triggering of the automatic sale provisions of Section 8(d) of this Agreement, or otherwise. In addition, if on any date on which the Performance Shares would otherwise vest you would be in violation of Rule 10b-5 promulgated under the Exchange Act if you were to sell any of the Performance Shares on that


date, the vesting of those Performance Shares shall be delayed until the first date on which you would no longer be in violation of Rule 10b-5, unless, prior to the commencement of any trading blackout or closed window period in effect on the scheduled vesting date, you established an effective Rule 10b5-1 trading plan that provides for the sale of a sufficient number of the Performance Shares scheduled to vest on such vesting date to fund the payment of any tax withholding obligations imposed in connection with the vesting of the Performance Shares, which trading plan remains in effect on the applicable vesting date.

(b) The Company shall, simultaneously with your voluntary or involuntary Termination for any reason (including death or Disability), automatically reacquire without payment of any consideration by the Company all of the Performance Shares that have not yet vested in accordance with the Grant Notice (after taking into account any accelerated vesting as a result of such Termination) (the “Repurchase Right”) on the date of your Termination (the “Termination Date”) and any and all accrued but unpaid dividends paid or payable with respect to Performance Shares that have not yet vested as of the Termination Date automatically shall be forfeited to the Company without payment of any consideration by the Company, and neither you nor any of your successors, heirs, assigns, or personal representatives shall thereafter have any further rights or interests in such Performance Shares, certificates or dividends.

(c) Immediately following the 7th anniversary of the Vesting Commencement Date the Company shall automatically reacquire without payment of any consideration by the Company all of the Performance Shares that have not yet vested on or prior to the 7th anniversary of the Vesting Commencement Date in accordance with the Grant Notice, and any and all accrued but unpaid dividends paid or payable with respect to such Performance Shares automatically shall be forfeited to the Company without payment of any consideration by the Company, and neither you nor any of your successors, heirs, assigns, or personal representatives shall thereafter have any further rights or interests in such Performance Shares, certificates or dividends.

(d) The shares issued under your Award and any dividends paid thereon shall be held in escrow pursuant to the terms of the Joint Escrow Instructions attached to the Grant Notice as Attachment IV.

(e) Subject to the provisions of your Award, you shall exercise all rights and privileges of a shareholder of the Company with respect to the Performance Shares deposited in escrow. You shall be deemed to be the holder of the Performance Shares for purposes of receiving any dividends that may be paid with respect to such Performance Shares and for purposes of exercising any voting rights relating to such Performance Shares, even if some or all of such Performance Shares have not yet vested and been released from the Company’s Repurchase Right.

(f) If, from time to time, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of your Award, then in such event any and all new, substituted or additional securities or property to which you are entitled by reason of your ownership of the Performance Shares acquired under your Award shall be immediately subject to the Repurchase Right with the same force and effect as the Performance Shares subject to the Repurchase Right immediately before such event.

 

2


(g) If at any time during the term of the Repurchase Right, there occurs a Change of Control, then: (i) if there will be no successor to the Company, the Company shall apply its Repurchase Right as to all or any portion of the shares then subject to the Repurchase Right set forth above to the same extent as if your Termination had occurred on the date preceding the date of consummation of said event or transaction, or (ii) if there will be a successor to the Company, the Company shall assign its Repurchase Right to any successor of the Company, and the Repurchase Right shall apply in the event of your Termination with such successor on the same basis as set forth above in Section 2(b). In that case, references herein to the “Company” shall be deemed to refer to such successor. In addition, such successor may elect at the time of the assignment to purchase all, but not less than all, of the unvested Performance Shares held by you at the then current Fair Market Value of the Company’s Common Stock (or the security into which such Common Stock has been converted), and the Repurchase Right shall thereupon immediately lapse as to all such shares.

3. N UMBER OF S HARES . The number of Performance Shares subject to your Award may be adjusted from time to time for changes in capitalization, as provided in Article XIII of the Plan.

4. S EAGATE T ECHNOLOGY C OMPENSATION R ECOVERY FOR F RAUD OR M ISCONDUCT P OLICY . The Participant hereby acknowledges and agrees that the Participant and the award evidenced by this Agreement are subject to the Seagate Technology Compensation Recovery for Fraud and Misconduct Policy as in effect from time to time, a current copy of which is attached hereto as Exhibit A. To the extent the Participant is subject to the policy, the terms and conditions of the policy are hereby incorporated by reference into this Agreement.

5. S ECURITIES L AW C OMPLIANCE . You will not be issued any shares under your Award unless the shares are either (a) then registered under the Securities Act or (b) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations governing the Award, and you will not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations.

6. R ESTRICTIVE L EGENDS . The shares issued under your Award shall be endorsed with appropriate legends determined by the Company.

7. T RANSFERABILITY . The Performance Shares that remain subject to the Company’s Repurchase Right may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant without the prior written consent of the Company and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.

8. A WARD NOT A S ERVICE C ONTRACT . Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or on the part of the Company or an Affiliate to continue your employment. In addition, nothing in your Award shall obligate the Company or an Affiliate, their respective shareholders, boards of directors, Officers or Employees to continue any relationship that you might have as an Employee, Director or Consultant for the Company or an Affiliate.

 

3


9. T AX C ONSEQUENCES . Set forth below is a brief summary as of the Grant Date of certain United States federal income tax consequences of the award of Performance Shares. THIS SUMMARY DOES NOT ADDRESS EMPLOYMENT, SPECIFIC STATE, LOCAL OR FOREIGN TAX CONSEQUENCES THAT MAY BE APPLICABLE TO YOU. YOU UNDERSTAND THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.

(a) Unless you make a Section 83(b) election as described below, you shall recognize ordinary income at the time or times the restrictions lapse with respect to the Performance Shares that have been released from the Repurchase Right in an amount equal to the the fair market value of such shares on each such date and the Company shall be required to collect all the applicable withholding taxes with respect to such income.

(b) At the time your Award is made, or at any time thereafter as requested by the Company, you hereby authorize, to the fullest extent not prohibited by applicable law, withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your Award. However, no such withholding shall be made unless the net proceeds from the automatic sale, if permitted, of certain Performance Shares as set forth in Section 8(d) below are not sufficient to satisfy such withholding obligations.

(c) Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no obligation to issue a certificate for such Performance Shares or release such Performance Shares from any escrow provided for herein.

(d) In the event that (a) you are not subject to the requirements of Section 16 of the Securities Exchange Act of 1934, as amended, on a date that the Repurchase Right lapses with respect to some or all of the Performance Shares (“Lapse Date”) and (b) you have not made a Section 83(b) Election or taken similar action under other applicable law such that you incur a tax liability on such Lapse Date, then the Escrow Agent determined under Section 2(d) above shall sell forty percent (40%) of those shares of Performance Shares with respect to which the Repurchase Right shall have lapsed on the Lapse Date and a Section 83(b) Election was not made or similar action was not taken. The net proceeds from such sale shall be remitted to the relevant tax authorities by the Escrow Agent for your benefit in the amounts directed by the Company and any remaining net proceeds, if any, shall be delivered to you.

10. S ECTION  83(b) E LECTION . You hereby acknowledge that you have been informed that, with respect to the grant of Performance Shares, you may file an election with the Internal Revenue Service, within 30 days of the Grant Date, electing pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to be taxed currently on the fair market value of the Performance Shares on the Grant Date (“Section 83(b) Election”).

YOU ACKNOWLEDGE THAT IF YOU CHOOSE TO FILE AN ELECTION UNDER SECTION 83(b) OF THE CODE, IT IS YOUR SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY SUCH SECTION 83(b) ELECTION, EVEN IF YOU REQUEST THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON YOUR BEHALF.

 

4


BY SIGNING THIS AGREEMENT, YOU REPRESENT THAT YOU HAVE REVIEWED WITH YOUR OWN TAX ADVISORS THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND THAT YOU ARE RELYING SOLELY ON SUCH ADVISORS AND NOT ON ANY STATEMENTS OR REPRESENTATIONS OF THE COMPANY OR ANY OF ITS AGENTS. YOU UNDERSTAND AND AGREE THAT YOU (AND NOT THE COMPANY) SHALL BE RESPONSIBLE FOR ANY TAX LIABILITY THAT MAY ARISE AS A RESULT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

11. N OTICES . Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.

12. M ISCELLANEOUS .

(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns.

(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.

13. G OVERNING P LAN D OCUMENT . Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control.

 

5


EXHIBIT A

SEAGATE TECHNOLOGY COMPENSATION RECOVERY FOR FRAUD OR MISCONDUCT

POLICY

Effective January 29, 2009

The Seagate Technology Compensation Recovery for Fraud or Misconduct Policy is intended to support accurate disclosure by recovering compensation paid to an executive covered by this policy where such compensation was based on incorrectly reported financial results due to the fraud or willful misconduct of the executive who received such compensation.

Employees Covered :

“Executive” is defined as U.S. employees of Seagate Technology or one of its subsidiaries (the “Company”) at the Senior Vice President level or above and any other officers subject to Section 16 of the Securities Exchange Act of 1934, as amended.

Compensation Covered :

The repayment and other obligations of an Executive described in this policy apply to any bonus paid, stock grant issued (whether or not vested) and/or vested during the covered period, or stock option exercised during the covered period, defined as the period commencing with the later of the effective date of this policy or the date that is four years prior to beginning of the fiscal year in which a restatement is announced and ending on the date recovery is sought pursuant to this policy; provided, however, that in no event shall this policy apply to any stock or option award granted before the effective date of this policy.

Fraud or Misconduct:

For the purposes of this policy, “Fraud” or “Misconduct” shall mean any of the following events that are significant contributing factors to a restatement of the Company’s financial results, as determined pursuant to “Determination of Fraud or Misconduct”, below: (A) embezzlement or theft by the Executive, (B) the commission of any act or acts on the Executive’s part resulting in the conviction (or plea of guilty or nolo contendere) of such Executive of a felony under the laws of the United States or any state (or equivalent law of any jurisdiction outside of the United States), (C) Executive’s willful malfeasance or willful misconduct in connection with Executive’s financial reporting obligations for the Company, or (D) Executive’s other misrepresentation, act, or omission which is materially injurious to the Company’s financial reporting obligations.

Recovery Event:

A recovery event occurs when:

 

   

The Company issues a restatement of financial results, and

 

   

The independent members of the Board of Directors determine in good faith that the Fraud or Misconduct of an Executive covered by this policy was a significant contributing factor to such restatement, and

 

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During the covered period, (i) some or all of a bonus previously paid or performance-based stock grant that vested prior to such restatement, in either case, having a value of at least $100,000, would not have been paid or become vested, as applicable, based upon the restated financial results, (ii) the Executive exercised one or more stock options, sold the Company’s common shares acquired upon such exercises and in the aggregate realized proceeds of at least $100,000 or (iii) the Executive sold the Company’s common shares attributable to one or more non-performance-based stock grants and in the aggregate realized proceeds of at least $100,000.

Determination of Fraud or Misconduct :

The determination of whether an Executive’s Fraud or Misconduct was a significant contributing factor to the Company’s restatement of financial results shall only be made by the affirmative vote of a majority of all of the independent members of the Board at an in-person meeting of the independent members of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive, with or without legal counsel, is given an opportunity to be heard at such meeting). Any determination by the Board pursuant to this policy shall be subject to the Executive’s right to review by an arbitrator pursuant to procedures set forth in the Seagate Executive Severance and Change of Control Plan, a copy of which is attached hereto.

Repayment Obligation :

Upon receiving from the Company the revised calculations and determination of the independent members of the Board of Directors setting forth the amount of a previously paid bonus or bonuses that would not have been paid and/or a performance-based stock grant or grants that would not have vested, in all cases based upon the restated financial results, and/or the proceeds of sales of shares acquired upon the exercise of stock options or following the vesting of any non-performance-based stock grants, the affected Executive will be required to deliver, within 30 days of such written notification of the amount due, to the Company an amount in equal to: (i) the bonus payments that would not have been made during the covered period had the restated financial results been used to determine such bonus awards; (ii) with respect to a performance-based stock grant that was issued and/or vested during the covered period, an amount in cash or equivalent value in the Company’s common shares (or a combination of the two) equal to the net proceeds realized by the Executive upon the issuance and, if applicable, subsequent sale of any stock that would not have been issued or vested based upon the restated financial results; (iii) with respect to any stock option that was exercised during the covered period, an amount in cash equal to the net proceeds realized by the Executive upon the sale during the covered period of some or all of the stock acquired upon the exercise of such stock option; and (iv) with respect to the sale of shares following the vesting of any non-performance-based stock grant, an amount in cash determined by the independent members of the Board of Directors to be attributable to the Executive’s Fraud or Misconduct. The Executive shall also immediately comply with any instructions delivered by the Company with respect to any of the Company’s common shares that have not yet been sold or otherwise disposed of and would not have been issued or vested based upon the restated financial results. For this purpose, “net proceeds” shall be net of any brokerage commissions and amounts paid to the Company to satisfy the aggregate exercise price and/or tax withholding obligations paid in respect of the award. With respect to amounts to be paid in cash, the form of payment may be a certified cashier check, money transfer, or other method as approved by the Board of Directors.

Other Terms :

The Company shall be able to enforce the repayment obligation described in this policy by all legal means available, including, without limitation, by withholding such amount from other sums owed to the affected Executive.

 

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EXHIBIT 10.18

SEPARATION and RELEASE AGREEMENT

This Separation and Release Agreement (this “Agreement”) is made by and between David A. Wickersham (“Executive”) and Seagate US LLC and Seagate Technology (collectively, “Seagate”). Executive and Seagate are called the “Parties” in this Agreement.

Recitals

A. Executive has served as President and Chief Operating Officer of Seagate Technology and an employee of Seagate US LLC.

B. Executive’s employment with Seagate terminated on January 12, 2009, and the Parties have agreed to resolve all outstanding issues pertaining to Executive’s employment in accordance with the terms and conditions of this Agreement, and the Restrictive Covenants Agreement (the “Covenants Agreement”) attached hereto as Exhibit “A.”

C. Executive has had 21 days in which to consider and execute this Agreement, and is advised to consult an attorney about it. Executive acknowledges that once he executes this Agreement, he will have an additional 7 days in which to revoke his execution. Executive’s written notice of revocation shall be delivered to Kenneth M. Massaroni either in person or mailed by certified mail, return receipt requested, and addressed to:

Kenneth M. Massaroni

Senior Vice President and General Counsel

Seagate Technology

920 Disc Drive

Scotts Valley, California 95066

If Executive does not timely revoke his execution of this Agreement, then the eighth day following the date of his execution will be the “Effective Date” of this Agreement.

D. By executing this Agreement, Executive represents that he understands the terms and effect of this Agreement and enters into it knowingly and voluntarily.


Based on these recitals, the Parties agree as follows:

Terms

1. Upon his execution of this Agreement, Executive will tender a letter to Kenneth M. Massaroni, Seagate’s General Counsel, confirming his resignation as President and Chief Operating Officer of Seagate Technology effective January 12, 2009 (the “Resignation Date”). Executive’s resignation letter shall be in the form attached hereto as Exhibit “B.” Executive will also, as requested, tender his resignation from all officer or director positions that he may hold with Seagate Technology or any of its subsidiaries and affiliates, with the effective dates of these resignations to be as designated by Seagate; Executive agrees that he will cooperate with Seagate in facilitating preparation of and signing any documentation that may reasonably be required in connection with formalizing such officer or director resignations.

2. Effective January 16, 2009 Executive will begin a 12 month period as a consultant to Seagate, which period (the “Consultant Period”) will last from January 16, 2009 to January 16, 2010. During the Consultant Period, Executive will perform only those services or work on special projects that may be requested of him by the Seagate Technology Board of Directors, its designee, or Seagate’s Chief Executive Officer and performed in accordance with the mutual agreement and convenience of Seagate and Executive.

Seagate will pay Executive $375 per hour for his consulting services during the Consultant Period, subject to any applicable withholdings. Executive will invoice Seagate and will be paid for his consulting services on a monthly basis. Executive acknowledges his status as an independent contractor during the Consultant Period, and agrees that except as may otherwise be provided in this Agreement he shall not be entitled to any other benefits, compensation, or programs available to employees of Seagate or its related companies during the Consultant Period Seagate will reimburse Executive for all reasonable, approved out-of-pocket expenses incurred in providing consulting services, including reasonable travel expenses directly incurred in connection with providing these services.

3. For a period of five years following the Resignation Date, Executive will comply, at Seagate’s sole cost, with any reasonable request by Seagate or its attorneys to assist and/or cooperate in connection with any pending or future claim, negotiation, litigation, investigation, administrative proceeding or other dispute involving Seagate or any of its affiliates. Seagate will reimburse Executive for all reasonable, approved out-of-pocket expenses incurred in providing such assistance, including reasonable travel expenses directly incurred in connection with such assistance and/or cooperation.

4. Executive acknowledges that he has had access to highly sensitive Seagate confidential, proprietary and/or trade secret information, and agrees he shall not, either before the Resignation Date or thereafter, disclose to any person or entity any Seagate confidential, proprietary and/or trade secret information, whether directly or indirectly, or use such information in any way except in the course of providing services for the Company, as authorized in writing by the Company, or as required to be disclosed by applicable law. Executive acknowledges and agrees that his duties and obligations under the Seagate At-Will Employment, Confidential Information, and Invention Assignment Agreement shall remain in full force and effect and that he will adhere to them.

 

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Executive acknowledges that he may not disclose to any person or entity any Seagate confidential, proprietary and/or trade secret information, whether directly or indirectly, after termination of his employment except in the course of providing services for the Company, as authorized in writing by the Company, or as required to be disclosed by applicable law. Executive further acknowledges that such information includes, but is not limited to, formulae, customer lists, patterns, devices, inventions, processes, compilations of information, files, records, documents, drawings, specifications, and equipment

5. Executive acknowledges and affirms that he has returned to Seagate, or will return to Seagate on the Effective Date: (i) all documents, records, procedures, books, notebooks and other documentation in any form whatsoever, including but not limited to written, audio, video or electronic, containing any information pertaining to Seagate, including any and all copies of such documentation then in Executive’s possession or control, regardless of whether such documentation was prepared or compiled by Executive, Seagate, other employees of Seagate or any of their respective representatives, agents or independent contractors; and (ii) all equipment or tangible personal property entrusted to Executive by Seagate.

6. Executive represents and hereby reaffirms that he has disclosed to Seagate any information in his possession concerning any conduct involving Seagate or any of its affiliates, that Executive has any reason to be believe may be unlawful or may violate Seagate policies in any material respect.

7. Seagate will provide the following compensation and benefits to Executive as consideration for his execution of this Agreement and compliance with the terms and conditions hereof and of the Covenants Agreement:

 

  a. Seagate shall provide Executive, within 15 business days after the later to occur of the Resignation Date or Effective Date, a lump-sum payment of $462,321, subject to applicable tax withholdings and deductions. Seagate will not contest any claim Executive makes for public unemployment compensation.

 

  b. Seagate shall provide Executive, within 15 business days of January 16, 2010, a lump-sum payment of $746,679, subject to applicable tax withholdings and deductions. Seagate’s payment of this amount shall be conditioned and contingent upon Executive’s full compliance, between the Resignation Date and January 16, 2010, with all terms and conditions of both this Agreement and the Covenants Agreement.

 

  c.

Seagate has granted Executive various equity-based awards (the “Equity Awards”) under the Seagate Technology 2004 Stock Compensation Plan (the “2004 Plan”) and the Seagate Technology 2001 Share Option Plan ("2001 Plan"). All of the Equity Awards granted to Executive that remained unvested as of the Resignation Date were cancelled effective that same date. Executive’s period in which to exercise any vested Equity Award granted in

 

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the form of an option will be limited to three months from the Resignation Date and shall be subject to all terms and conditions set forth in the 2004 Plan or 2001 Plan, as applicable, and the specific option agreement evidencing such Equity Award. Executive's Equity Awards granted in a form other than options shall be subject to all terms and conditions set forth in the 2004 Plan and the applicable award agreements evidencing such Equity Awards.

 

  d. During the twelve month period following the Resignation Date, Seagate will arrange for Executive to receive outplacement assistance from Right Management Consultants.

 

  e. Executive’s Seagate-provided health insurance benefits coverage will cease on January 31, 2009; however, Executive will be given the opportunity to elect to continue, at his own expense, his Seagate health insurance coverage pursuant to COBRA. Further, Seagate will, within 15 business days following the later to occur of the Resignation Date or Effective Date, provide Executive with a lump-sum payment of $27,679, subject to applicable withholdings, which amount is intended to help defray Executive’s anticipated costs of obtaining continued health insurance coverage pursuant to COBRA.

7. Executive, on behalf of himself, his heirs, executors, administrators, successors, and assigns, fully and forever releases and discharges Seagate, its current, former and future parents, subsidiaries, affiliated companies, related entities, employee benefit plans, and their fiduciaries, predecessors, successors, officers, directors, members, managers, shareholders, agents, employees and assigns (each a “Released Party”) from any and all claims, causes of action, and liabilities up through the date of his execution of this Agreement. The claims subject to this release include, but are not limited to, those relating to his employment with Seagate and/or any predecessor to Seagate and the termination of such employment. All such claims (including related attorneys’ fees and costs) are barred without regard to whether those claims are based on any alleged breach of a duty arising in statute, contract, or tort. This expressly includes waiver and release of any rights and claims arising under any and all laws, rules, regulations, and ordinances, including, but not limited to: Title VII of the Civil Rights Act of 1964; the Older Workers Benefit Protection Act; the Americans With Disabilities Act; the Age Discrimination in Employment Act; the Fair Labor Standards Act; the National Labor Relations Act; the Family and Medical Leave Act; the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); the Workers’ Adjustment and Retraining Notification Act; Sarbanes-Oxley Act; the Equal Pay Act of 1963; the California Fair Employment and Housing Act, and any similar law of any other state or governmental entity.

This release does not extend to, and has no effect upon, (i) any benefits that have accrued, and to which Executive may have become vested, under any employee benefit plan within the meaning of ERISA sponsored by the Company, (ii) reimbursement of travel or other business expenses incurred by Executive in the ordinary course of business and consistent with past practice and Seagate's policies and prior to the Resignation Date, (iii) any rights that (but for this release) Executive has to be indemnified (and advanced

 

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expenses) arising under applicable law, the articles of incorporation or bylaws or similar constituent documents of Seagate, any indemnification agreement between Executive and Seagate, or any directors’ and officers’ liability insurance policy of Seagate or its affiliates; and (iv) Executive’s rights to the payments and benefits specified in Paragraph 6 of this Agreement and enforcement of any other obligation of Seagate to Executive under this Agreement. Executive acknowledges that his receipt of the payment and benefits described in Paragraph 6 of this Agreement will fully satisfy all obligations owed to him by Seagate in connection with his termination, whether as described in the Seagate Technology Executive Officer Severance and Change in Control Plan, this Agreement, or otherwise.

Executive acknowledges that nothing in this release shall prohibit him from exercising legal rights that are, as a matter of law, not subject to waiver such as: (a) his rights under applicable workers’ compensation laws; (b) his right, if any, to seek unemployment benefits; and (c) his right to file a charge with the Equal Opportunity Commission (EEOC) challenging the validity of his waiver of claims under the ADEA.

8. Executive waives any rights under Section 1542 of the Civil Code of the State of California. Section 1542 states:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which, if known to him or her, must have materially affected his or her settlement with the debtor .”

9. Executive agrees that he will not file or cause to be filed any action, complaint, suit, claim, charge or motion with any governmental agency, court or tribunal relating to any claim within the scope of the general release set forth in Paragraph 7. Executive represents and warrants that he has not, with respect to any transaction or state of facts existing prior to the date hereof, filed any action, complaint, suit, claim, charge or motion against any Released Party with any governmental agency, court or tribunal. Executive represents and warrants that he has not assigned any claim released herein, or authorized any other person to assert any such claim on his behalf. Executive agrees that he will not voluntarily assist any person in bringing or pursuing, or preparing to bring or pursue, any action, complaint, suit, claim, charge or motion against Seagate or any of its affiliates or any Released Party, except as may be specifically required pursuant to a subpoena or to the extent compelled to do so by law, and in such event, shall notify Seagate in writing in the same manner as set forth in Recital C above as soon as such circumstances come to the attention of Executive.

10. The Parties agree that they will not, in any forum or fashion, disparage or otherwise make any comment that casts a negative light on the other.

11. All taxes that are required by law to be paid by Executive in connection with this Agreement will be his sole responsibility and Executive agrees that Seagate will have no responsibility whatsoever with respect to these taxes, except as to legally required reporting and withholding obligations.

 

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12. This Agreement and the documents it references constitute the entire agreement between the Parties with respect to the matters covered and supersede all prior and contemporaneous agreements, representations, and understandings of the parties with respect to such matters, including but not limited to any previously-existing contract, agreement, understanding, or policy relating to separation or severance pay in the event of termination of employment, with the sole exception of the Covenants Agreement as referenced in Recital B and all attachments thereto. Parole evidence will be inadmissible to show agreement by and between the parties to any term or condition contrary to or in addition to the terms and conditions contained in this Agreement.

13. This Agreement can be amended, modified or terminated only by a writing executed by both Executive and an authorized representative of Seagate.

14. This Agreement is made, and will be construed, under California law, without regard to any provisions thereof regarding conflicts of laws. The parties further agree that the state or federal courts of California shall be the exclusive and only courts with jurisdiction to hear and decide any claim, dispute or proceeding arising from or related to this Agreement, and that venue shall be proper only in these courts.

15. If any provision of this Agreement is held to be void, voidable, unlawful, or unenforceable, the remaining portions of this Agreement will continue in full force and effect, except that if Executive’s release of claims set forth in Paragraphs 7 and 8 are held to be invalid or unenforceable then at its option Seagate may declare the Agreement null and void and recover from Executive the value of compensation provided to him under Paragraph 6 above.

16. The Parties understand that each party is responsible for bearing his or its own costs and attorneys’ fees incurred in connection with the preparation of this Agreement and the Covenants Agreement.

17. Executive represents and acknowledges that in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by Seagate or any of Seagate’s agents, representatives or attorneys with regard to the subject matter, basis or effect of this Agreement or the Covenants Agreement or otherwise.

18. This Agreement may be executed in counterpart originals with each counterpart to be treated the same as a single original. The Parties agree that this Agreement may be executed using facsimile signatures and that such signatures shall be deemed to be valid as original signatures. Executive, by his signature below, states that he has read this Agreement in its entirety, fully understands its terms and its binding effect on him, and signs this Agreement voluntarily and of his own free will.

19. The intent of the Parties is that payments and benefits under this Agreement comply with Section 409A of the Internal Revenue Code of 1986, as amended and the regulations and other guidance promulgated thereunder and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith.

 

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PLEASE READ CAREFULLY. THIS SEPARATION AGREEMENT AND GENERAL RELEASE OF CLAIMS INCLUDES A RELEASE OF ALL KNOWN OR UNKNOWN CLAIMS. THE PARTIES HAVE READ THIS RELEASE, UNDERSTAND AND ACCEPT EACH OF ITS TERMS, AND AGREE TO BE FULLY BOUND HEREUNDER.

Dated:                  , 2009.

 

 

David A. Wickersham
Seagate US LLC
Seagate Technology

Dated:                  , 2009.

 

By:  

 

  Kenneth M. Massaroni
  Senior Vice President and General Counsel

 

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EXHIBIT A

RESTRICTIVE COVENANTS AGREEMENT

THIS RESTRICTIVE COVENANTS AGREEMENT (this “Agreement”) is being executed and delivered as of                  , 2009 by David A. Wickersham (“Executive”) in favor and for the benefit of SEAGATE TECHNOLOGY (together with its subsidiaries and affiliates, the “Company”). Executive and the Company are called the “Parties” to this Agreement.

RECITALS

WHEREAS, the Company is engaged in the business of the design, manufacturing, marketing and selling of hard disc drives;

WHEREAS, Executive has served as a key employee, executive, and manager of the Company in his capacity as President and Chief Operating Officer, and had access to and knowledge of Company trade secrets and confidential information;

WHEREAS, Executive’s employment with the Company terminated effective January 12, 2009 (the “Resignation Date”), and the Parties subsequently entered into that certain Separation and Release Agreement (the “Release Agreement”) dated as of                  , 2009 and this Agreement.

WHEREAS, the covenants provided herein are material, significant and essential to the Company’s designation of Executive as eligible to receive benefits in accordance with the terms of the Release Agreement, and good and valuable consideration under the Release Agreement has been and will be transferred from the Company to Executive in exchange for such covenants.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing recitals, the terms and provisions of this Agreement, and the Release Agreement, the receipt and sufficiency of such consideration being hereby acknowledged by the parties hereto, the parties hereto agree as follows:

1. Non-Competition . During the period from the Resignation Date until July 16, 2010 (the “Severance Period”), Executive will not directly or indirectly:

(a) engage in any business that competes with the business of the Company (including, without limitation, any businesses that the Company has specific plans to conduct in the future and as to which Executive is aware of such planning) in any geographical area within 100 miles of any geographical area in which the Company conducts such business (a “Competitive Business”);

 

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(b) enter the employ of, or render any services to, any person or entity (or any division of any person or entity) who or which engages in a Competitive Business;

(c) acquire a financial interest in, or otherwise become actively involved with, any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or

(d) interfere with, or attempt to interfere with, business relationships (whether formed before, on or after the date of this Agreement) between the Company and customers, clients, suppliers, partners, members or investors of the Company.

It is understood and agreed that the geographic limitation set forth in Section 1(a) above shall be construed without regard to the physical location of Executive, but instead with regard to the location or locations of the Competitive Business. Notwithstanding anything to the contrary in this Agreement, Executive may, directly or indirectly own, solely as a passive investment, securities of any person engaged in the business of the Company that are actively traded on a public securities market (including the OTCBB and similar over-the-counter market) if Executive (i) is not a controlling person of, or a member of a group which controls, such person and (ii) does not, directly or indirectly, own 5% or more of any class of such actively traded securities of such person.

2. Non-Solicitation of Clients . During the Severance Period, Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly solicit or assist in soliciting in competition with the Company, the business of any client or prospective client:

(a) with whom Executive had personal contact or dealings on behalf of the Company during the one year period preceding Executive’s Resignation Date;

(b) with whom employees reporting to Executive have had personal contact or dealings on behalf of the Company during the one year immediately preceding Executive’s Resignation Date; or

(c) for whom Executive had direct or indirect responsibility during the one year immediately preceding Executive’s Resignation Date.

3. Non-Solicitation of Employees . During the Severance Period, Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:

(a) solicit or encourage any employee of the Company to leave the employment of the Company; or

(b) encourage to cease to work with the Company any consultant then under contract with the Company.

 

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4. Confidentiality . During the term of Executive’s employment with the Company, Executive had access to and became acquainted with the Company’s confidential and proprietary information, including but not limited to, information or plans regarding the Company’s customer relationships, personnel, sales, marketing and financial operations and methods, trade secrets, formulas, devices, secret inventions, processes and other compilations of information, records and specifications (collectively, “Proprietary Information”). Executive shall not disclose any of the Company’s Proprietary Information, directly or indirectly, or use it in any way except in the course of performing services for the Company, as authorized in writing by the Company or as required to be disclosed by applicable law. Notwithstanding the foregoing, Proprietary Information shall not include information that is or becomes generally public knowledge other than as a result of a breach of this Section 4 or any other obligation that Executive has to protect the confidentiality of the Proprietary Information of the Company.

5. Severance Benefits . Benefits payable to Executive pursuant to the Release Agreement will terminate immediately if Executive, at any time, violates any terms of this Agreement, the Release Agreement or the Seagate At-Will Employment, Confidential Information, and Invention Assignment Agreement.

6. Scope . It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Agreement to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against the Executive, for which injunctive relief or another remedy to the Company provided for under this Agreement is unavailable, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained in this Agreement or other provisions of the Release Agreement. Such determinations shall not limit the Company’s ability to cease providing payments or benefits under the Release Agreement, if applicable, unless a court of competent jurisdiction has expressly declared that action to be unlawful.

7. Injunctive Relief and Other Remedies . Executive and the Company (a) intend that the provisions of Sections 1-4 be and become valid and enforceable, (b) acknowledge and agree that the provisions of Section 1-4 are reasonable and necessary to protect the legitimate interests of the business of the Company and (c) agree that the violation of any provisions of Section 1-4 might result in irreparable injury to the Company, the exact amount of which would be difficult to ascertain and the remedies at law for which may not be reasonable or adequate compensation to the Company for such a violation. Executive agrees that if he violates or threatens to violate any provisions of Section 3 or 4 of this Agreement, in addition to any other remedy which may be available at law or in equity, including, but not limited to, the cessation of any payments or benefits to be provided to Executive pursuant to the Release Agreement, the Company shall be

 

10


entitled to seek specific performance and injunctive relief, and without the necessity of proving actual damages. In addition, in the event of a violation or threatened violation by Executive of any provisions of Section 1-4 of this Agreement, the Severance Period will be tolled until such violation or threatened violation has been duly cured. Executive and the Company agree that the cessation of payments under the Release Agreement and/or the filing of a lawsuit for damages shall be the Company’s sole and exclusive remedies of any breach by the Executive of any of the restrictive covenants set forth in Sections 1 or 2 of this Agreement.

8. Amendment; Waiver; Beneficiary; Termination . This Agreement may be amended or waived only by a written instrument signed by each of the parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any third person (other than the Company, its affiliates and their respective successors, which parties are hereby expressly made third party beneficiaries of this Agreement) any rights or remedies under or by reason of this Agreement. This Agreement may be terminated only upon the written agreement of all of the parties hereto. No waiver of any provision of this Agreement shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

9. Complete Understanding . This Agreement (together with the other agreements between the parties hereto expressly referenced herein) constitutes the full and complete understanding and agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements with respect to the subject matter hereof .

10. Governing Law . This Agreement shall be governed and construed in accordance with the laws of the State of California, without reference to conflict of laws. The parties further agree that the state or federal courts of California shall be the exclusive and only courts with jurisdiction to hear and decide any claim, dispute or proceeding arising from or related to this Agreement, and that venue shall be proper only in these courts.

11. Non-Transfer . Executive understands and agrees that he is unable to assign, sell, delegate, transfer or otherwise dispose of any part or whole of his duties under this Agreement and accordingly represents and warrants that he has not and will not assign, sell, delegate, transfer or otherwise dispose of any part or whole of his duties under this Agreement.

12. Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. The Parties agree that this Agreement may be executed using facsimile signatures and that such signatures shall be deemed to be as valid as original signatures.

[ signature page follows ]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

 

EXECUTIVE:

 

David A. Wickersham
SEAGATE US LLC
SEAGATE TECHNOLOGY
By:  

 

  Kenneth M. Massaroni
  Senior Vice President and General Counsel

 

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EXHIBIT B

Kenneth M. Massaroni

Senior Vice President and General Counsel

Seagate Technology

920 Disc Drive

Scotts Valley, California 95066

Re: Notice of Resignation

Dear Mr. Massaroni:

This letter serves to confirm my resignation as President and Chief Operating Officer of Seagate Technology and an employee of Seagate US LLC effective January 12, 2009.

 

Sincerely,

 

David A. Wickersham

 

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EXHIBIT 10.19

SEPARATION and RELEASE AGREEMENT

This Separation and Release Agreement (this “Agreement”) is made by and between William D. Watkins (“Executive”) and Seagate Technology (US) Holdings, Inc. and Seagate Technology, a limited company domiciled in the Cayman Islands (collectively, “Seagate”). Executive and Seagate are called the “Parties” in this Agreement.

Recitals

A.    Executive has served as Chief Executive Officer of Seagate Technology and an employee of Seagate Technology (US) Holdings, Inc. Effective January 12, 2009, Seagate Technology terminated Executive’s role as its Chief Executive Officer and informed Executive that his employment by Seagate would be involuntarily terminated.

B.    Executive’s employment with Seagate terminated on February 4, 2009, and the Parties have agreed to resolve all outstanding issues pertaining to Executive’s service with Seagate in accordance with the terms and conditions of this Agreement, the Seagate Technology Executive Officer Severance and Change in Control (CIC) Plan (the “Plan”), and the Restrictive Covenants Agreement (the “Covenants Agreement”) attached hereto as Exhibit “A” (collectively, “Applicable Agreements”). This Agreement shall be deemed controlling to the extent its terms vary from those of the Plan, but as to matters not addressed by this Agreement, the Plan governs the benefits payable to Executive under this Agreement.

C.    Executive has had 21 days in which to consider and execute this Agreement, and is advised to consult an attorney about it. Executive acknowledges that once he executes this Agreement, he will have an additional 7 days in which to revoke his execution. Executive’s written notice of revocation shall be delivered to Kenneth M. Massaroni either in person or mailed by certified mail, return receipt requested, and addressed to:

Kenneth M. Massaroni

Senior Vice President and General Counsel

Seagate Technology

920 Disc Drive

Scotts Valley, California 95066

If Executive does not timely revoke his execution of this Agreement, then the eighth day following the later to occur of: (i) his date of his execution of this Agreement and all Exhibits providing for Executive’s signature; or (ii) approval of the Agreement by the Compensation Committee of the Seagate Technology Board of Directors (the “Compensation Committee”) will be the “Effective Date” of this Agreement; this Agreement will not become effective unless approved by the Compensation Committee.


D.    By executing this Agreement, Executive represents that he understands the terms and effect of this Agreement and enters into it knowingly and voluntarily.

Based on these recitals, the Parties agree as follows:

Terms

1.    Upon his execution of this Agreement, Executive will tender a letter to Kenneth M. Massaroni, Seagate’s General Counsel, confirming his termination of employment with Seagate effective February 4, 2009 (the “Termination Date”); this letter shall be in the form attached hereto as Exhibit “B.” Executive will also tender a letter to Stephen J. Luczo, Chairman of the Board of Directors of Seagate Technology, confirming his resignation from Seagate Technology’s Board of Directors (“Board”) effective on the Termination Date; this resignation letter shall be in the form attached hereto as Exhibit “C”. Executive will also, as requested, tender his resignation from all officer or director or other positions that he may hold with Seagate Technology or any of its subsidiaries and affiliates or otherwise at the request or for the benefit of Seagate Technology, with the effective dates of these resignations to be as designated by Seagate; Executive agrees that he will cooperate with Seagate in facilitating preparation of and signing any documentation that may reasonably be required in connection with formalizing such resignations. No later than the business day following the Resignation Date, Seagate will deliver to Executive his payroll check for employment through the Termination Date, subject to applicable tax withholdings and deductions, which payment Executive is entitled to receive for his service to Seagate through the Resignation Date and without entering into this Agreement.

2.    Effective February 9, 2009 Executive will begin a period as a consultant to Seagate, which period (the “Consultant Period”) will last from February 9, 2009 to December 2, 2009, but the Consultant Period may be terminated at any time after May 11, 2009, and for any reason or no reason after this date by Executive giving at least 5 business days’ notice to Seagate. During the Consultant Period, Executive will perform for Seagate only those services or work on special projects that may be requested of him by the Board, its designee, or Seagate Technology’s Chief Executive Officer (“CEO”) and performed in accordance with the mutual agreement and convenience of Seagate and Executive.

Seagate will pay Executive $500 per hour for his consulting services during the Consultant Period, subject to any applicable withholdings. Executive will invoice Seagate and will be paid for his consulting services on a monthly basis. Executive acknowledges that he will not be an employee of Seagate during the Consultant Period, and agrees that except as may otherwise be provided in this Agreement he shall not be entitled to any other benefits, compensation, or programs available to employees of Seagate or its related companies during the Consultant Period. Seagate will reimburse Executive for all reasonable, approved out-of-pocket expenses incurred in providing consulting services, including reasonable travel expenses directly incurred in connection with providing these services. To assist Executive in performance of his consulting services during the Consultant Period, Seagate will, until June 30, 2009


provide Executive with administrative support services on a reasonable, as-requested basis, either through his most recent Seagate administrative assistant or such other administrative assistant as Seagate may designate for these duties.

3.    For a period of five years following the Termination Date, Executive will comply, at Seagate’s sole cost, with any reasonable request by Seagate or its attorneys to assist and/or cooperate in connection with any pending or future claim, negotiation, litigation, investigation, administrative proceeding or other dispute involving Seagate or any of its affiliates. Seagate will reimburse Executive for all reasonable, approved out-of-pocket expenses incurred in providing such assistance, including reasonable travel and lodging expenses directly incurred in connection with such assistance and/or cooperation. Executive acknowledges and agrees that he will not be paid for any time spent in consultation on legal matters as required pursuant to this paragraph, including but not limited to any time required of him in connection with litigation wherein he is named as co-defendant of Seagate or any of its subsidiaries or affiliates.

4.    Executive acknowledges that he has had access to highly sensitive Seagate confidential, proprietary and/or trade secret information, and agrees he shall not, either before the Termination Date or thereafter, disclose to any person or entity any Seagate confidential, proprietary and/or trade secret information, whether directly or indirectly, or use such information in any way except in the course of providing services for the Company, as authorized in writing by the Company, or as required to be disclosed by applicable law. Executive acknowledges and agrees that his duties and obligations under the Seagate At-Will Employment, Confidential Information, and Invention Assignment Agreement (other than the paragraph thereof entitled “Arbitration,” which is hereby deleted from such agreement and shall be of no further force or effect) shall remain in full force and effect and that he will adhere to them. Executive acknowledges that he may not disclose to any person or entity any Seagate confidential, proprietary and/or trade secret information, whether directly or indirectly, after termination of his employment except in the course of providing services for the Company, as authorized in writing by the Company, or as required to be disclosed by applicable law. Executive further acknowledges that such information includes, but is not limited to, formulae, customer lists, patterns, devices, inventions, processes, compilations of information, files, records, documents, drawings, specifications, and equipment.

5.    Executive acknowledges and affirms that he has returned to Seagate, or will return to Seagate on the Effective Date: (i) all documents, records, procedures, books, notebooks and other documentation in any form whatsoever, including but not limited to written, audio, video or electronic, containing any information pertaining to Seagate, including any and all copies of such documentation then in Executive’s possession or control, regardless of whether such documentation was prepared or compiled by Executive, Seagate, other employees of Seagate or any of their respective representatives, agents or independent contractors; and (ii) all equipment or tangible personal property entrusted to Executive by Seagate.

Executive further acknowledges that he will use his reasonable best efforts to fully disclose to the CEO any and all pending matters relating to Seagate and regarding


which only he may possess full or specialized knowledge or familiarity. Executive acknowledges and agrees that he will, as part of the consultancy described in Paragraph 2, meet as soon as possible with the CEO and such other Seagate personnel as the CEO may designate in order to discuss and help ensure full disclosure of details pertaining to such matters.

6.    Seagate will provide the following compensation and benefits to Executive (or, in the event of Executive’s death, to Executive’s surviving spouse or, if she is not surviving, Executive’s estate) as consideration for his execution of this Agreement and compliance with the terms and conditions hereof and of the Covenants Agreement:

 

  a. Seagate shall provide Executive, within 10 business days after the later to occur of the Termination Date or Effective Date, a lump-sum payment of $2,500,004, subject to applicable tax withholdings and deductions. Seagate will not contest any claim Executive makes for public unemployment compensation.

 

  b. Seagate shall provide Executive, within 10 business days after December 2, 2009, a lump-sum payment of $2,500,004, subject to applicable tax withholdings and deductions. Seagate’s payment of this amount shall be conditioned and contingent upon Executive’s full compliance, between the Termination Date and December 2, 2009, with all terms and conditions of both this Agreement and the Covenants Agreement. If a Change in Control (as defined in the Plan) shall be effected during the six month period following the Termination Date, then Seagate shall provide Executive (or his spouse, in the event of Executive’s death) within 10 business days after December 2, 2009, an additional lump-sum payment of $2,500,004, subject to applicable tax withholdings and deductions, which amount represents the additional amount of cash severance benefits Executive shall be entitled to receive under the Plan upon a Termination Event (as defined in the Plan) occurring during a Change in Control Period (as defined in the Plan). Seagate’s payment of this additional amount following a Change in Control shall be conditioned upon Executive’s full compliance, between the Termination Date and December 2, 2009, with all terms and conditions of both this Agreement and the Covenants Agreement. Further, this payment, as with other payments and benefits described in this Paragraph 6, shall be subject to adjustment for tax purposes as described in Section 8 of the Plan.

 

  c.

Seagate has granted Executive various equity-based awards (the “Equity Awards”) under the Seagate Technology 2004 Stock Compensation Plan (the “2004 Plan”) and the Seagate Technology 2001 Share Option Plan (“2001 Plan”). All of the Equity Awards granted to Executive that remained unvested as of the Termination Date shall be cancelled effective that same date, subject to the last sentence of this clause c. Executive’s period in which to exercise any vested Equity Award granted in the form of an option will (subject to the last sentence of this clause c.) be limited to three months from the Termination


 

Date and shall be subject to all terms and conditions set forth in the 2004 Plan or 2001 Plan, as applicable, and the specific option agreement evidencing such Equity Award. Executive’s Equity Awards granted in a form other than options shall be subject to all terms and conditions set forth in the 2004 Plan and the applicable award agreements evidencing such Equity Awards. Notwithstanding any of the foregoing in this clause c., all of such Equity Awards remaining unvested as of the Termination Date shall remain outstanding solely for the limited purpose of determining whether or not a Change in Control (as defined in the Plan) occurs during the six month period following the Termination Date and in the event that a Change in Control does occur within that period, then such Equity Awards shall be considered fully vested and exercisable in accordance with the Plan.

 

  d. During the twelve month period following the Termination Date, Seagate will arrange for Executive to receive outplacement assistance from Right Management Consultants.

 

  e. Executive’s Seagate-provided health, vision, and dental insurance benefits coverage will cease on February 28, 2009; however, Executive will be given the opportunity to elect to continue, at his own expense, his Seagate health, vision and dental insurance coverage pursuant to COBRA. Further, Seagate will, within 10 business days after the later to occur of the Termination Date or Effective Date, provide Executive with a lump-sum payment of $29,944, subject to applicable withholdings, which amount is intended to help defray Executive’s anticipated costs of obtaining continued health, vision, and dental insurance coverage pursuant to COBRA. If a Change in Control (as defined in the Plan) occurs during the six month period following the Termination Date, then Seagate shall provide Executive (or his spouse, in the event of Executive’s death) within 10 business days of December 2, 2009, an additional lump-sum payment of $9,981, subject to applicable tax withholdings and deductions, representing an additional amount also intended to help defray Executive’s anticipated costs of obtaining continued health, vision and dental insurance pursuant to COBRA. Seagate’s payment of this additional amount following a Change in Control shall be conditioned upon Executive’s full compliance, between the Termination Date and December 2, 2009, with all terms and conditions of both this Agreement and the Covenants Agreement. Further, this payment, as with other payments and benefits described in this Paragraph 6, shall be subject to adjustment for tax purposes as described in Section 8 of the Plan.

 

  f. Executive will, until June 30, 2009, be eligible to undergo a physical examination (the “Executive Physical”) at the Mayo Clinic in Rochester, MN, pursuant to the terms of Seagate’s Executive Compensation and Benefits Policy, under which Seagate will bear the entire cost of the Executive Physical for Executive. Seagate will not cover the cost of any medical treatment undergone by Executive based upon a diagnosis made during the Executive Physical or subsequent medical testing. Seagate will reimburse Executive for reasonable travel and lodging expenses for Executive incurred in connection with the Executive Physical.


  g. Seagate will, until June 30, 2009, assist Executive with timely and accurately filing any forms required under Section 16 of the Securities Exchange Act of 1934, provided however, that Executive shall disclose to Seagate any information required in connection with such filing contemporaneously with the transaction upon which the filing is based.

7.    Executive, on behalf of himself, his heirs, executors, administrators, successors, and assigns, fully and forever releases and discharges Seagate, its current, former and future parents, subsidiaries, affiliated companies, related entities, employee benefit plans, and their fiduciaries, predecessors, successors, officers, directors, members, managers, shareholders, agents, employees and assigns (each a “Released Party”) from any and all claims, causes of action, and liabilities up through the date of his execution of this Agreement. The claims subject to this release include, but are not limited to, those relating to his employment with Seagate and/or any predecessor to Seagate and the termination of such employment. All such claims (including related attorneys’ fees and costs) are barred without regard to whether those claims are based on any alleged breach of a duty arising in statute, contract, or tort. This expressly includes waiver and release of any rights and claims arising under any and all laws, rules, regulations, and ordinances, including, but not limited to: Title VII of the Civil Rights Act of 1964; the Older Workers Benefit Protection Act; the Americans With Disabilities Act; the Age Discrimination in Employment Act; the Fair Labor Standards Act; the National Labor Relations Act; the Family and Medical Leave Act; the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); the Workers’ Adjustment and Retraining Notification Act; Sarbanes-Oxley Act; the Equal Pay Act of 1963; the California Fair Employment and Housing Act, and any similar law of any other state or governmental entity.

This release does not extend to, and has no effect upon, (i) any benefits that have accrued, and to which Executive may have become vested, under any employee benefit plan within the meaning of ERISA sponsored by the Company, (ii) reimbursement of travel or other business expenses incurred by Executive in the ordinary course of business and consistent with past practice and Seagate’s policies and prior to the Termination Date, (iii) any rights that (but for this release) Executive has to be indemnified (and advanced expenses) arising under applicable law, the articles of incorporation or bylaws or similar constituent documents of Seagate, any indemnification agreement between Executive and Seagate, or any directors’ and officers’ liability insurance policy of Seagate or its affiliates; and (iv) Executive’s rights to the payments and benefits specified in Paragraph 6 of this Agreement and enforcement of any other obligation of Seagate to Executive under this Agreement or the Plan. Executive acknowledges that his receipt of the payment and benefits described in Paragraph 6 of this Agreement will fully satisfy all obligations owed to him by Seagate in connection with his termination, whether as described in the Plan, this Agreement, or otherwise.


Executive acknowledges that nothing in this release shall prohibit him from exercising legal rights that are, as a matter of law, not subject to waiver such as: (a) his rights under applicable workers’ compensation laws; (b) his right, if any, to seek unemployment benefits; and (c) his right to file a charge with the Equal Opportunity Commission (EEOC) challenging the validity of his waiver of claims under the ADEA.

8.    Executive waives any rights under Section 1542 of the Civil Code of the State of California. Section 1542 states:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which, if known to him or her, must have materially affected his or her settlement with the debtor .”

9.    Executive agrees that he will not file or cause to be filed any action, complaint, suit, claim, charge or motion with any governmental agency, court or tribunal relating to any claim within the scope of the general release set forth in Paragraph 7. Executive represents and warrants that he has not, with respect to any transaction or state of facts existing prior to the date hereof, filed any action, complaint, suit, claim, charge or motion against any Released Party with any governmental agency, court or tribunal. Executive represents and warrants that he has not assigned any claim released herein, or authorized any other person to assert any such claim on his behalf. Executive agrees that he will not voluntarily assist any person in bringing or pursuing, or preparing to bring or pursue, any action, complaint, suit, claim, charge or motion against Seagate or any of its affiliates or any Released Party, except as may be specifically required pursuant to a subpoena or to the extent compelled to do so by law, and in such event, shall notify Seagate in writing in the same manner as set forth in Recital C above as soon as such circumstances come to the attention of Executive.

10.    The Parties agree that they will not, in any forum or fashion, disparage or otherwise make any comment that casts a negative light on the other; provided however, that each Party may respond accurately and fully to any questions, inquiry or request for information when required by applicable law.

11.    All taxes that are required by law to be paid by Executive in connection with this Agreement will be his sole responsibility and Executive agrees that Seagate will have no responsibility whatsoever with respect to these taxes, except as to legally required reporting and withholding obligations.

12.    This Agreement and the documents it references constitute the entire agreement between the Parties with respect to the matters covered and supersede all prior and contemporaneous agreements, representations, and understandings of the parties with respect to such matters, including but not limited to any previously-existing contract, agreement, understanding, or policy relating to separation or severance pay in the event of termination of employment, with the exception of the Plan and the Covenants Agreement as referenced in Recital B and all attachments thereto. Parol evidence will be inadmissible to show agreement by and between the parties to any term or condition contrary to or in addition to the terms and conditions contained in this Agreement.


13.    This Agreement can be amended, modified or terminated only by a writing executed by both Executive and an authorized representative of Seagate.

14.    This Agreement is made, and will be construed, under California law, without regard to any provisions thereof regarding conflicts of laws. The parties further agree that the state or federal courts of California shall be the exclusive and only courts with jurisdiction to hear and decide any claim, dispute or proceeding arising from or related to this Agreement, and that venue shall be proper only in these courts.

15.    If any provision of this Agreement is held to be void, voidable, unlawful, or unenforceable, the remaining portions of this Agreement will continue in full force and effect, except that if Executive’s release of claims set forth in Paragraphs 7 and 8 is held to be invalid or unenforceable based upon a ruling in an action, suit, or counterclaim initiated by Executive, then at its option Seagate may declare the Agreement null and void and recover from Executive the value of compensation provided to him under Paragraph 6 above.

16.    The Parties understand that each party is responsible for bearing his or its own costs and attorneys’ fees incurred in connection with the preparation of this Agreement and the Covenants Agreement.

17.    Executive represents and acknowledges that in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by Seagate or any of Seagate’s agents, representatives or attorneys with regard to the subject matter, basis or effect of this Agreement or the Covenants Agreement or otherwise.

18.    This Agreement may be executed in counterpart originals with each counterpart to be treated the same as a single original. The Parties agree that this Agreement may be executed using facsimile signatures and that such signatures shall be deemed to be valid as original signatures. Executive, by his signature below, states that he has read this Agreement in its entirety, fully understands its terms and its binding effect on him, and signs this Agreement voluntarily and of his own free will.

19.    The intent of the Parties is that payments and benefits under this Agreement comply with Section 409A of the Internal Revenue Code of 1986, as amended and the regulations and other guidance promulgated thereunder (collectively, “Section 409A”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. Seagate and Executive agree that, for all purposes, including Section 409A, Executive’s separation from employment with Seagate is an involuntary termination, and all payments and benefits to Executive under this Agreement are payments on account of Executive’s separation from service resulting from such involuntary termination.


PLEASE READ CAREFULLY. THIS SEPARATION AND GENERAL RELEASE OF CLAIMS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN OR UNKNOWN CLAIMS. THE PARTIES HAVE READ THIS RELEASE, UNDERSTAND AND ACCEPT EACH OF ITS TERMS, AND AGREE TO BE FULLY BOUND HEREUNDER.

 

   
Dated:              , 2009.        
      William D. Watkins
    Seagate Technology (US)
Holdings, Inc.
    Seagate Technology
   
Dated:              , 2009.     By:    
      Kenneth M. Massaroni
      Senior Vice President and General Counsel


EXHIBIT A

RESTRICTIVE COVENANTS AGREEMENT

THIS RESTRICTIVE COVENANTS AGREEMENT (this “Agreement”) is being executed and delivered as of February 4, 2009 by William D. Watkins (“Executive”) in favor and for the benefit of SEAGATE TECHNOLOGY (together with its subsidiaries and affiliates, the “Company”). Executive and the Company are called the “Parties” to this Agreement.

RECITALS

WHEREAS, the Company is engaged in the business of the design, manufacturing, marketing and selling of hard disc drives, as well as the business of selling data storage, archiving and recovery services, along with development of solid state drive products;

WHEREAS, Executive has served as a key employee, executive, and manager of the Company in his capacity as Chief Executive Officer, and had access to and knowledge of Company trade secrets and confidential information;

WHEREAS, Executive’s employment with the Company terminated effective February 4, 2009 (the “Termination Date”), and the Parties subsequently entered into that certain Separation and Release Agreement (the “Release Agreement”) dated as of February 4, 2009 and this Agreement.

WHEREAS, the covenants provided herein are material, significant and essential to the Company’s designation of Executive as eligible to receive benefits in accordance with the terms of the Release Agreement, and good and valuable consideration under the Release Agreement has been and will be transferred from the Company to Executive in exchange for such covenants.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing recitals, the terms and provisions of this Agreement, and the Release Agreement, the receipt and sufficiency of such consideration being hereby acknowledged by the parties hereto, the parties hereto agree as follows:

1.     Non-Competition .    During the period from the Termination Date until December 2, 2009 (the “Severance Period”), Executive will not directly or indirectly:

(a)    engage in any business that competes with the business of the Company (including, without limitation, any businesses that the Company has specific plans to conduct in the future and as to which Executive is aware of such planning) in any geographical area within 100 miles of any geographical area in which the Company conducts such business (a “Competitive Business”);


(b)    enter the employ of, or render any services to, any person or entity (or any division of any person or entity) who or which engages in a Competitive Business;

(c)    acquire a financial interest in, or otherwise become actively involved with, any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or

(d)    interfere with, or attempt to interfere with, business relationships (whether formed before, on or after the date of this Agreement) between the Company and customers, clients, suppliers, partners, members or investors of the Company.

It is understood and agreed that the geographic limitation set forth in Section 1(a) above shall be construed without regard to the physical location of Executive, but instead with regard to the location or locations of the Competitive Business. Notwithstanding anything to the contrary in this Agreement, Executive may, directly or indirectly, own, solely as a passive investment, securities of any person engaged in the business of the Company that are actively traded on a public securities market (including the OTCBB and similar over-the-counter market) if Executive (i) is not a controlling person of, or a member of a group which controls, such person and (ii) does not, directly or indirectly, own 5% or more of any class of such actively traded securities of such person. Additionally, notwithstanding anything to the contrary in this Agreement, Executive may, directly or indirectly, own an interest in, be employed by or otherwise render services to: (x) any venture capital or private equity firm and its affiliated investment fund(s), so long as no material portion of Executive’s services to such firm or fund(s) relates to any of the businesses described in the first Recital of this Agreement, or (y) any personal digital assistant or similar handheld electronic device business.

2.     Non-Solicitation of Clients .    During the Severance Period, Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly solicit or assist in soliciting in competition with the Company, the business of any client or prospective client:

(a)    with whom Executive had personal contact or dealings on behalf of the Company during the one year period preceding Executive’s Termination Date;

(b)    with whom employees reporting to Executive have had personal contact or dealings on behalf of the Company during the one year immediately preceding Executive’s Termination Date; or

(c)    for whom Executive had direct or indirect responsibility during the one year immediately preceding Executive’s Termination Date.


3.     Non-Solicitation of Employees .    During the Severance Period, Executive will not, whether on Executive’s own behalf or on behalf of or in conjunction with any person, company, business entity or other organization whatsoever, directly or indirectly:

(a)    solicit or encourage any employee of the Company to leave the employment of the Company; or

(b)    encourage to cease to work with the Company any consultant then under contract with the Company.

4.     Confidentiality .    During the term of Executive’s employment with the Company, Executive had access to and became acquainted with the Company’s confidential and proprietary information, including but not limited to, information or plans regarding the Company’s customer relationships, personnel, sales, marketing and financial operations and methods, trade secrets, formulas, devices, secret inventions, processes and other compilations of information, records and specifications (collectively, “Proprietary Information”). Executive shall not disclose any of the Company’s Proprietary Information, directly or indirectly, or use it in any way except in the course of performing services for the Company, as authorized in writing by the Company or as required to be disclosed by applicable law. Notwithstanding the foregoing, Proprietary Information shall not include information that is or becomes generally public knowledge other than as a result of a breach of this Section 4 or any other obligation that Executive has to protect the confidentiality of the Proprietary Information of the Company.

5.     Severance Benefits .    Benefits payable to Executive pursuant to the Release Agreement will terminate immediately if Executive, at any time, violates any terms of this Agreement, the Release Agreement or the Seagate At-Will Employment, Confidential Information, and Invention Assignment Agreement (except as such latter agreement is modified by the Release Agreement).

6.     Scope .    It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Agreement to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, for which injunctive relief or another remedy to the Company provided for under this Agreement is unavailable, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained in this Agreement or other provisions of the Release Agreement. Such determinations shall not limit the Company’s ability to cease providing payments or benefits under the Release Agreement, if applicable, unless a court of competent jurisdiction has expressly declared that action to be unlawful.


7.     Injunctive Relief and Other Remedies .    Executive and the Company (a) intend that the provisions of Sections 1-4 be and become valid and enforceable, (b) acknowledge and agree that the provisions of Sections 1-4 are reasonable and necessary to protect the legitimate interests of the business of the Company and (c) agree that the violation of any provisions of Sections 1-4 might result in irreparable injury to the Company, the exact amount of which would be difficult to ascertain and the remedies at law for which may not be reasonable or adequate compensation to the Company for such a violation. Executive agrees that if he violates or threatens to violate any provisions of Section 3 or 4 of this Agreement, in addition to any other remedy which may be available at law or in equity, including, but not limited to, the cessation of any payments or benefits to be provided to Executive pursuant to the Release Agreement, the Company shall be entitled to seek specific performance and injunctive relief. In addition, in the event of a violation or threatened violation by Executive of any provisions of Sections 1-4 of this Agreement, the Severance Period will be tolled for the period beginning when Executive receives written notice from the Company asserting such violation or threatened violation and continuing until such violation has been duly cured or threatened violation has been ceased. Executive and the Company agree that the cessation of payments under the Release Agreement and/or the filing of a lawsuit for damages shall be the Company’s sole and exclusive remedies of any breach by the Executive of any of the restrictive covenants set forth in Sections 1 or 2 of this Agreement.

8.     Amendment; Waiver; Beneficiary; Termination .    This Agreement may be amended or waived only by a written instrument signed by each of the parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any third person (other than the Company, its affiliates and their respective successors, which parties are hereby expressly made third party beneficiaries of this Agreement) any rights or remedies under or by reason of this Agreement. This Agreement may be terminated only upon the written agreement of all of the parties hereto. No waiver of any provision of this Agreement shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

9.     Complete Understanding .     This Agreement (together with the other agreements between the parties hereto expressly referenced herein) constitutes the full and complete understanding and agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements with respect to the subject matter hereof .

10.     Governing Law .    This Agreement shall be governed and construed in accordance with the laws of the State of California, without reference to conflict of laws. The parties further agree that the state or federal courts of California shall be the exclusive and only courts with jurisdiction to hear and decide any claim, dispute or proceeding arising from or related to this Agreement, and that venue shall be proper only in these courts.

11.     Non-Transfer .    Executive understands and agrees that he is unable to assign, sell, delegate, transfer or otherwise dispose of any part or whole of his duties


under this Agreement and accordingly represents and warrants that he has not and will not assign, sell, delegate, transfer or otherwise dispose of any part or whole of his duties under this Agreement.

12.     Counterparts .    This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. The Parties agree that this Agreement may be executed using facsimile signatures and that such signatures shall be deemed to be as valid as original signatures.

[ signature page follows ]


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

 

EXECUTIVE:
   
  William D. Watkins
SEAGATE TECHNOLOGY
By:    
  Kenneth M. Massaroni
  Senior Vice President and General Counsel


EXHIBIT B

February 4, 2009

Kenneth M. Massaroni

Senior Vice President and General Counsel

Seagate Technology

920 Disc Drive

Scotts Valley, California 95066

 

  Re: Notice of Resignation

Dear Mr. Massaroni:

This letter serves to confirm termination of my role as Chief Executive Officer of Seagate Technology effective January 12, 2009 and my termination as an employee of Seagate (as that term is defined in that Separation and Release Agreement signed by me on this same date), including Seagate Technology (US) Holdings, Inc. effective February 4, 2009.

 

Sincerely,
   
William D. Watkins


EXHIBIT C

February 4, 2009

Stephen J. Luczo

Chairman of the Board of Directors

Seagate Technology

Maples and Calder

P.O.Box 309

Ugland House

Grand Cayman KY1-1104

Cayman Islands

 

  Re: Notice of Resignation

Dear Mr. Luczo:

This letter serves to confirm my resignation as a member of the Board of Directors of Seagate Technology effective February 4, 2009.

 

Sincerely,
   
William D. Watkins

EXHIBIT 10.20

LOGO

January 29, 2009

PERSONAL AND CONFIDENTIAL

Stephen J. Luczo

GID 1226

Dear Steve:

On behalf of Seagate’s Board of Directors, it is my pleasure to confirm your terms of employment as Seagate’s Chairman, President and Chief Executive Officer (CEO), which position you assumed effective January 12, 2009. In this position you will be employed by Seagate Technology (US) Holdings, Inc. (the “Company”).

Your confirmation and acceptance of these terms represents the sole agreement between you and the Company regarding the terms of your employment at Seagate. No prior promises, representations or understanding relative to any terms or conditions of your employment are to be considered as part of this agreement unless expressed in writing in this letter. More specifically, effective as of the start of business on January 12, 2009 when you resumed employment with the Company as Chairman, President and CEO (the “Commencement Time”), the Company and you agreed that (i) that certain Agreement between yourself and Seagate Technology dated October 26, 2006 (copy attached) would terminate and no longer be of any force or effect, and; (ii) that you will be compensated for your continued services as Chairman of the Board of Directors of Seagate Technology via the compensation received for your employment as Chairman, President and CEO and as described below—i.e., you will no longer receive cash or additional equity compensation for Board service.

The key elements of your compensation and benefits are as follows:

Base Pay:

A salary of $1,000,000, if annualized, payable bi-weekly and subject to applicable withholdings. As with all other named executive officers, this salary will be temporarily reduced by 25% to $750,000, if annualized, until business conditions improve.

Stock Awards:

The unvested equity granted during prior board service will continue to vest per the terms of the grant agreement as long as you remain in continuous service as an employee or board member of the Company.

Three million five hundred thousand, 3,500,000 stock options and one hundred fifty thousand, 150,000 performance shares bonus (restricted shares) will be reserved for you.

Vesting Schedule :

Stock Options : One fourth of the shares vest upon completion of one year of continuous service from your date of hire. 1/48th of the shares vest each month of service thereafter over the next three years. Therefore, your award will be fully vested after the completion of four years of service with Seagate. You may purchase the shares subject to the vested portion of your award by exercising your award while the award remains outstanding.

Performance Share Bonus: Vesting not earlier than 25% annually. Please refer to the grant agreement for further details.

Vesting Commencement Date: Vesting for your award will commence on your date of hire (i.e., January 12, 2009).

Expiration Date: Your award will expire no later than seven years from its grant date. Your award will generally expire at an earlier date in the event that your service with Seagate ends prior to the end of this seven-year period. Once your stock option award expires, it may no longer be exercised in order to purchase vested shares.

Grant Price: The grant price of your stock option will be the average of the high and low trading prices on the NASDAQ on the grant date.


Grant Date: January 30, 2009. An email will be sent to you on the grant date providing you with the award price. You will receive your award agreement within an administratively reasonable period of time after the grant date. If there are any inconsistencies between this summary and your award agreement, the terms of the award agreement will govern and be binding on both you and Seagate.

Additional information regarding the Company’s stock award plan can be found on the Internet at the following address: http://eq.seagate.com .

Executive Performance Bonus Plan:

You will be eligible to participate in the Seagate Executive Bonus Plan, which has a target value of 150% of your base salary. Your bonus award may vary based on company earnings and an evaluation of your performance at the end of the fiscal year. The bonus payment, which could be in cash or equity at fair market value, is at the sole discretion of the Seagate Board of Directors and the Board’s Compensation Committee.

Executive Perquisite Allowance

The Perquisite Allowance is a cash payment provided by Seagate to match competitive practices at market peer group companies which may provide executive employees with cash allowances or with paid services or products such as cars, drivers, gas, car service, parking, personal travel, and club memberships. The Seagate Executive Perquisite Allowance is provided on each paycheck and is not included with salary for calculation of benefits or variable pay amounts. Executives receiving the allowance may also claim reimbursement for business expenses in the same manner as other employees as the allowance is intended to cover only personal (not business) expenses.

The current annual amount of the perquisite allowance for senior vice presidents and above in the U.S. is $24,024.

Deferred Compensation:

You will be eligible to participate in Seagate’s Deferred Compensation Plan that will allow you to set aside a percentage of your base pay and bonus on a pre-tax basis starting at the next enrollment period. This program is in addition to any 401(k) contributions you may make during the year.

Benefits:

A comprehensive benefits package for you.

Severance Benefits

Your employment with the Company is “at-will” and terminable by either yourself or the Company at any time, with or without notice or cause. However, subject to the terms set forth in the accompanying Seagate Executive Officer Severance and Change in Control (CIC) Plan (“the Plan”), you may be eligible for receipt of severance benefits allowance if your employment is terminated involuntarily by the Company without Cause, as defined in the Plan. A copy of the Plan is attached for your reference.

Please signify your formal acceptance of the terms set forth in this letter by signing and returning it to me at the earliest possible date.

 

Sincerely,
SEAGATE TECHNOLOGY
Karen Hanlon
SVP, Worldwide Human Resources

I agree to the terms set forth above.

 

 

    

 

  
Stephen J. Luczo      Date   

 

cc: Kenneth Massaroni, General Counsel and Corporate Secretary

Attachments:

Copy of this Confirmation Letter to be signed and returned*

Seagate Executive Officer Severance and Change in Control (CIC) Plan

Agreement between Stephen J. Luczo and Seagate Technology dated October 26, 2006

 

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EXHIBIT 10.21

SEAGATE TECHNOLOGY 2004

STOCK COMPENSATION PLAN

OPTION AGREEMENT

(with acknowledgement of Compensation Recovery Policy)

THIS AGREEMENT (including any exhibits hereto, the “Agreement”) is made effective as of the Date of Grant (as set forth in the attached Notice of Stock Option Grant (including any exhibits thereto, the “Notice”), the terms of which Notice are hereby made a part of this Agreement) between Seagate Technology, a limited company incorporated in the Cayman Islands (the “Company”), and the Participant named in the Notice.

R E C I T A L S :

WHEREAS, the Company has adopted the Seagate Technology 2004 Stock Compensation Plan (including any exhibits thereto, the “Plan”), which Plan is incorporated herein by reference and made a part of this Agreement. Capitalized terms not otherwise defined herein shall have the same meanings as in the Plan; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its shareholders to grant the Option provided for herein to the Participant pursuant to the Plan and the terms set forth herein and in the Notice.

NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows:

1. Grant of the Option . The Company hereby grants to the Participant the right and option (the “Option”) to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate of that number of Shares set forth in the Notice, subject to adjustment from time to time pursuant to the provisions of Section 13 of the Plan. The purchase price per share of the Shares subject to the Option (the “Option Price”) shall be the “Exercise Price (Per Share)” set forth in the Notice, subject to adjustment from time to time pursuant to the provisions of Section 13 of the Plan. The Option is intended to be a non-qualified stock option, and is not intended to be treated as an option that complies with Section 422 of the Internal Revenue Code of 1986, as amended.

2. Vesting . At any time, the portion of the Option which has become vested and exercisable as described in this Section 2 is hereinafter referred to as the “Vested Portion.”

(a) Vesting Schedule .

(i) Subject to Sections 2(a)(ii), 2(a)(iii), and 2(b) below, the Option shall vest and become exercisable with respect to 25% of the Shares initially


subject to the Option on the first anniversary of the Vesting Commencement Date (as set forth in the Notice) and shall vest and become exercisable with respect to an additional 1/48th of the Shares initially subject to the Option at the end of each full month thereafter (measured by using the same day of each subsequent month as the Vesting Commencement Date (as set forth in the Notice), or if there is no same day in a given subsequent month, the last day of such subsequent month).

(ii) Notwithstanding the foregoing, in the event of a Change of Control in which the Option is not to be assumed or replaced with a substitute option which substantially preserves both the intrinsic value (i.e., the excess of the Fair Market Value of the Shares subject to the Option over the aggregate Option Price) and the rights and benefits of the Option as in effect immediately prior to such Change of Control or is not otherwise to be continued in effect by the Company or any successor entity in the Change of Control, then the Option shall, for at least 10 days prior to the consummation of the Change of Control, vest and become exercisable for all the Shares at the time subject to the Option and the Option shall terminate upon the consummation of the Change of Control.

(iii) In addition to the foregoing, in the event of the Participant’s termination of Continuous Service with the Company on account of the Participant’s death, the Participant shall be deemed to have completed an additional year of service for purposes of determining the portion of the Option which is the Vested Portion.

(b) Termination of Employment

If the Participant’s Continuous Service with the Company is terminated for any reason, the Option shall, to the extent not then vested, be canceled by the Company without consideration. The Vested Portion of the Option shall remain exercisable for the period set forth in Section 3(a).

3. Exercise of Option .

(a) Period of Exercise

Subject to the provisions of the Plan and this Agreement, the Participant may exercise all or any part of the Vested Portion of the Option at any time prior to the earliest to occur of:

(i) the “Expiration Date” set forth in the Notice;

(ii) one year following the date of the Participant’s termination of Continuous Service as a result of death or Disability (as defined in the Plan);

(iii) three (3) months following the date of the Participant’s termination of Continuous Service by the Company without Cause (other than as a result of death or Disability) or by the Participant for any reason; and

 

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(iv) the date of the Participant’s termination of Continuous Service by the Company for Cause.

For purposes of this Agreement:

“Cause” shall mean (i) the Participant’s continued failure substantially to perform the material duties of his office (other than as a result of total or partial incapacity due to physical or mental illness), (ii) the embezzlement or theft by the Participant of the Company’s property, (iii) the commission of any act or acts on the Participant’s part resulting in the conviction of such Participant of a felony under the laws of the United States or any state, (iv) the Participant’s willful malfeasance or willful misconduct in connection with the Participant’s duties to the Company or any other act or omission which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries or affiliates, or (v) a material breach by the Participant of the material terms of his employment agreement or any non-compete, non-solicitation or confidentiality provisions to which the Participant is subject. However, no termination shall be deemed for Cause under clause (i), (iv) or (v) unless the Participant is first given written notice by the Company of the specific acts or omissions which the Company deems constitute grounds for a termination for Cause and is provided with at least 30 days after such notice to cure the specified deficiency.

(b) Method of Exercise .

(i) Subject to Section 3(a), the Vested Portion of the Option may be exercised by delivering to the Company at its principal office or its designee written notice of intent to so exercise; provided that , the Option may be exercised with respect to whole Shares only. Such notice shall specify the number of Shares for which the Option is being exercised and shall be accompanied by payment in full of the Option Price. The purchase price for the Shares as to which the Option is exercised shall be paid to the Company, at the election of the Participant, (i) in cash or by check or (ii) if there should be a public market for the Shares at such time, (A) in Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased and satisfying such other requirements as may be imposed by the Committee; provided , that if such Shares were acquired, directly or indirectly, from the Company, such Shares have been held by the Participant for no less than six months (or such other period as established from time to time by the Committee or generally accepted accounting principles in order to avoid variable grant date accounting for financial accounting purposes), (B) partly in cash and partly in such Shares or (C) subject to such rules as may be established by the Committee, through the delivery of irrevocable instruments to a broker to sell all or a portion of such Shares and deliver promptly to the Company an amount equal to the aggregate Option Price for the Shares being purchased. The Participant shall also be required to pay all withholding taxes relating to the exercise.

(ii) Notwithstanding any other provision of the Plan or this Agreement to the contrary, unless there is an available exemption from such registration, qualification or other legal requirements, the Option may not be exercised prior to

 

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the completion of any registration or qualification of the Option or the Shares that is required to comply with applicable state and federal securities or any ruling or regulation of any governmental body or national securities exchange or compliance with any other applicable federal, state or foreign law that the Committee shall in its sole discretion determine in good faith to be necessary or advisable.

(iii) Upon the Company’s determination that the Option has been validly exercised as to any of the Shares, the Company shall issue certificates in the Participant’s name for such Shares. However, the Company shall not be liable to the Participant for damages relating to any delays in issuing the certificates to him, any loss of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves.

(iv) Should the Participant die while holding the Option, the Vested Portion of the Option shall remain exercisable by the Participant’s executor or administrator, or the person or persons to whom the Participant’s rights under this Agreement shall pass by will, by the laws of descent and distribution, or by beneficiary designation, as the case may be, for the period set forth in Section 3(a). Any heir or legatee of the Participant shall take rights herein granted subject to the terms and conditions hereof.

4. Seagate Technology Compensation Recovery for Fraud or Misconduct Policy . The Participant hereby acknowledges and agrees that the Participant and the award evidenced by this Agreement are subject to the Seagate Technology Compensation Recovery for Fraud and Misconduct Policy as in effect from time to time, a current copy of which is attached hereto as Exhibit A. To the extent the Participant is subject to the policy, the terms and conditions of the policy are hereby incorporated by reference into this Agreement.

5. No Right to Continued Employment . Neither the Plan nor this Agreement shall be construed as giving the Participant the right to be retained in the employ of, or in any consulting relationship to, the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss the Participant or discontinue any consulting relationship, free from any liability or any claim under the Plan or this Agreement, except as otherwise expressly provided herein.

6. Transferability . The Option is exercisable only by the Participant during the Participant’s lifetime and may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.

7. Withholding . A Participant shall be required to pay to the Company or any Affiliate and the Company shall have the right and is hereby authorized to withhold, any applicable withholding taxes in respect of an Option, its exercise or any payment or transfer under an Option or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such withholding taxes.

 

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8. Securities Laws . Upon the acquisition of any Shares pursuant to the exercise of the Option, the Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws or with this Agreement.

9. Notices . Any notice necessary under this Agreement shall be addressed to the Company in care of its Secretary at the principal executive office of the Company and to the Participant at the address appearing in the personnel records of the Company for the Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

10. Choice of Law . THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

11. Option Subject to Plan . By entering into this Agreement the Participant agrees and acknowledges that the Participant has received a copy of the Plan. The Option is subject to the Plan. The terms and provisions of the Plan, as it may be amended from time to time in accordance with its respective terms, are hereby incorporated herein by reference. The Participant acknowledges that the Notice, this Agreement and the Plan set forth the entire understanding between the Participant and the Company regarding the Participant’s rights to acquire the Shares subject to this Option and supersede all prior oral and written agreements with respect thereto, including, but not limited to, any other agreement or underwriting between the Participant and the Company or an Affiliate relating to the Participant’s employment, consulting relationship, or directorship, and any termination thereof, his compensation, or his rights, claims or interests in or to shares of the capital stock of the Company. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

12. Amendments . The Committee at any time, and from time to time, may amend the terms of the Option; provided, however, that the rights under any Option shall not be materially impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing.

 

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EXHIBIT A

SEAGATE TECHNOLOGY COMPENSATION RECOVERY FOR FRAUD OR MISCONDUCT

POLICY

Effective January 29, 2009

The Seagate Technology Compensation Recovery for Fraud or Misconduct Policy is intended to support accurate disclosure by recovering compensation paid to an executive covered by this policy where such compensation was based on incorrectly reported financial results due to the fraud or willful misconduct of the executive who received such compensation.

Employees Covered :

“Executive” is defined as U.S. employees of Seagate Technology or one of its subsidiaries (the “Company”) at the Senior Vice President level or above and any other officers subject to Section 16 of the Securities Exchange Act of 1934, as amended.

Compensation Covered :

The repayment and other obligations of an Executive described in this policy apply to any bonus paid, stock grant issued (whether or not vested) and/or vested during the covered period, or stock option exercised during the covered period, defined as the period commencing with the later of the effective date of this policy or the date that is four years prior to beginning of the fiscal year in which a restatement is announced and ending on the date recovery is sought pursuant to this policy; provided, however, that in no event shall this policy apply to any stock or option award granted before the effective date of this policy.

Fraud or Misconduct :

For the purposes of this policy, “Fraud” or “Misconduct” shall mean any of the following events that are significant contributing factors to a restatement of the Company’s financial results, as determined pursuant to “Determination of Fraud or Misconduct”, below: (A) embezzlement or theft by the Executive, (B) the commission of any act or acts on the Executive’s part resulting in the conviction (or plea of guilty or nolo contendere) of such Executive of a felony under the laws of the United States or any state (or equivalent law of any jurisdiction outside of the United States), (C) Executive’s willful malfeasance or willful misconduct in connection with Executive’s financial reporting obligations for the Company, or (D) Executive’s other misrepresentation, act, or omission which is materially injurious to the Company’s financial reporting obligations.

Recovery Event :

A recovery event occurs when:

 

   

The Company issues a restatement of financial results, and

 

   

The independent members of the Board of Directors determine in good faith that the Fraud or Misconduct of an Executive covered by this policy was a significant contributing factor to such restatement, and

 

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During the covered period, (i) some or all of a bonus previously paid or performance-based stock grant that vested prior to such restatement, in either case, having a value of at least $100,000, would not have been paid or become vested, as applicable, based upon the restated financial results, (ii) the Executive exercised one or more stock options, sold the Company’s common shares acquired upon such exercises and in the aggregate realized proceeds of at least $100,000 or (iii) the Executive sold the Company’s common shares attributable to one or more non-performance-based stock grants and in the aggregate realized proceeds of at least $100,000.

Determination of Fraud or Misconduct :

The determination of whether an Executive’s Fraud or Misconduct was a significant contributing factor to the Company’s restatement of financial results shall only be made by the affirmative vote of a majority of all of the independent members of the Board at an in-person meeting of the independent members of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive, with or without legal counsel, is given an opportunity to be heard at such meeting). Any determination by the Board pursuant to this policy shall be subject to the Executive’s right to review by an arbitrator pursuant to procedures set forth in the Seagate Executive Severance and Change of Control Plan, a copy of which is attached hereto.

Repayment Obligation :

Upon receiving from the Company the revised calculations and determination of the independent members of the Board of Directors setting forth the amount of a previously paid bonus or bonuses that would not have been paid and/or a performance-based stock grant or grants that would not have vested, in all cases based upon the restated financial results, and/or the proceeds of sales of shares acquired upon the exercise of stock options or following the vesting of any non-performance-based stock grants, the affected Executive will be required to deliver, within 30 days of such written notification of the amount due, to the Company an amount in equal to: (i) the bonus payments that would not have been made during the covered period had the restated financial results been used to determine such bonus awards; (ii) with respect to a performance-based stock grant that was issued and/or vested during the covered period, an amount in cash or equivalent value in the Company’s common shares (or a combination of the two) equal to the net proceeds realized by the Executive upon the issuance and, if applicable, subsequent sale of any stock that would not have been issued or vested based upon the restated financial results; (iii) with respect to any stock option that was exercised during the covered period, an amount in cash equal to the net proceeds realized by the Executive upon the sale during the covered period of some or all of the stock acquired upon the exercise of such stock option; and (iv) with respect to the sale of shares following the vesting of any non-performance-based stock grant, an amount in cash determined by the independent members of the Board of Directors to be attributable to the Executive’s Fraud or Misconduct. The Executive shall also immediately comply with any instructions delivered by the Company with respect to any of the Company’s common shares that have not yet been sold or otherwise disposed of and would not have been issued or vested based upon the restated financial results. For this purpose, “net proceeds” shall be net of any brokerage commissions and amounts paid to the Company to satisfy the aggregate exercise price and/or tax withholding obligations paid in respect of the award. With respect to amounts to be paid in cash, the form of payment may be a certified cashier check, money transfer, or other method as approved by the Board of Directors.

Other Terms :

The Company shall be able to enforce the repayment obligation described in this policy by all legal means available, including, without limitation, by withholding such amount from other sums owed to the affected Executive.

 

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EXHIBIT 10.22

SEAGATE TECHNOLOGY

2004 STOCK COMPENSATION PLAN

RESTRICTED STOCK BONUS AGREEMENT

(with acknowledgement of Compensation Recovery Policy)

Seagate Technology (the “Company”) has awarded you shares of Common Stock of the Company, pursuant to the provisions of the Company’s 2004 Stock Compensation Plan (the “Plan”), the Restricted Stock Bonus Grant Notice (including any attachments thereto, “Grant Notice”) and this Restricted Stock Bonus Agreement (including any attachments hereto, “Agreement”) (collectively, the “Award”). Defined terms not explicitly defined in this Agreement or the Notice but defined in the Plan shall have the same definitions as in the Plan.

The details of your Award are as follows:

1. G RANT OF R ESTRICTED S TOCK . You are entitled to the aggregate number of restricted shares of Common Stock (the “Restricted Shares”) specified in your Grant Notice pursuant to the terms and conditions of this Agreement. You agree to execute three (3) copies of the Assignment Separate From Certificate (with date and number of shares blank) in the form attached to the Grant Notice as Attachment III and one (1) copy of the Joint Escrow Instructions in the form attached to the Grant Notice as Attachment IV and to deliver the same to the Company, along with the certificate or certificates evidencing the Restricted Shares, for use by the Escrow Agent pursuant to the terms of the Joint Escrow Instructions (as further described in Section 2(c) below).

2. V ESTING  & C OMPANY S R EPURCHASE R IGHT .

(a) Subject to the limitations contained herein, the shares you purchase will vest as provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Service with the Company and its Subsidiaries and Affiliates (“Termination”). Notwithstanding anything to the contrary, the vesting of the Restricted Shares shall be conditioned upon your making adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the release of the Restricted Shares from the Company’s Repurchase Right (as defined in Section 2(b) below) or at the time a Section 83(b) election (as described in further detail below) is made, whether by withholding (whether authorized pursuant to Section 8(b) of this Agreement or otherwise), direct payment to the Company, the triggering of the automatic sale provisions of Section 8(d) of this Agreement, or otherwise. In addition, if on any date on which the shares would otherwise vest you would be in violation of Rule 10b-5 promulgated under the Exchange Act if you were to sell any of the shares on that date, the vesting of those shares shall be delayed until the first date on which you would no longer be in violation of Rule 10b-5, unless, prior to the commencement of any trading blackout or closed window period in effect on the scheduled vesting date, you established an effective Rule 10b5-1 trading plan that provides for the sale of a sufficient number of the shares scheduled to vest on such vesting date to fund the payment of any tax withholding obligations imposed in connection with the vesting of the shares, which trading plan remains in effect on the applicable vesting date.


(b) The Company shall, simultaneously with your voluntary or involuntary Termination for any reason (including death or Disability), automatically reacquire without payment of any consideration by the Company all of the Restricted Shares that have not yet vested in accordance with the Vesting Schedule on the Grant Notice (the “Repurchase Right”) on the date of your Termination (the “Termination Date”) and any and all accrued but unpaid dividends paid or payable with respect to Restricted Shares that have not yet vested as of the Termination Date automatically shall be forfeited to the Company without payment of any consideration by the Company, and neither you nor any of your successors, heirs, assigns, or personal representatives shall thereafter have any further rights or interests in such Restricted Shares, certificates or dividends.

(c) The shares issued under your Award and any dividends paid thereon shall be held in escrow pursuant to the terms of the Joint Escrow Instructions attached to the Grant Notice as Attachment IV.

(d) Subject to the provisions of your Award, you shall exercise all rights and privileges of a shareholder of the Company with respect to the Restricted Shares deposited in escrow. You shall be deemed to be the holder of the Restricted Shares for purposes of receiving any dividends that may be paid with respect to such Restricted Shares and for purposes of exercising any voting rights relating to such Restricted Shares, even if some or all of such Restricted Shares have not yet vested and been released from the Company’s Repurchase Right.

(e) If, from time to time, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding stock of the corporation the stock of which is subject to the provisions of your Award, then in such event any and all new, substituted or additional securities or property to which you are entitled by reason of your ownership of the Restricted Shares acquired under your Award shall be immediately subject to the Repurchase Right with the same force and effect as the Restricted Shares subject to the Repurchase Right immediately before such event.

(f) If at any time during the term of the Repurchase Right, there occurs a Change of Control, then: (i) if there will be no successor to the Company, the Company shall apply its Repurchase Right as to all or any portion of the shares then subject to the Repurchase Right set forth above to the same extent as if your Termination had occurred on the date preceding the date of consummation of said event or transaction, or (ii) if there will be a successor to the Company, the Company shall assign its Repurchase Right to any successor of the Company, and the Repurchase Right shall apply in the event of your Termination with such successor on the same basis as set forth above in Section 2(b). In that case, references herein to the “Company” shall be deemed to refer to such successor. In addition, such successor may elect at the time of the assignment to purchase all, but not less than all, of the unvested Restricted Shares held by you at the then current Fair Market Value of the Company’s Common Stock (or the security into which such Common Stock has been converted), and the Repurchase Right shall thereupon immediately lapse as to all such shares.

3. N UMBER OF S HARES . The number of Restricted Shares subject to your Award may be adjusted from time to time for changes in capitalization, as provided in Article XIII of the Plan.

4. S EAGATE T ECHNOLOGY C OMPENSATION R ECOVERY FOR F RAUD OR M ISCONDUCT P OLICY . The Participant hereby acknowledges and agrees that the Participant and

 

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the award evidenced by this Agreement are subject to the Seagate Technology Compensation Recovery for Fraud and Misconduct Policy as in effect from time to time, a current copy of which is attached hereto as Exhibit A. To the extent the Participant is subject to the policy, the terms and conditions of the policy are hereby incorporated by reference into this Agreement.

5. S ECURITIES L AW C OMPLIANCE . You will not be issued any shares under your Award unless the shares are either (a) then registered under the Securities Act or (b) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations governing the Award, and you will not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations.

6. R ESTRICTIVE L EGENDS . The shares issued under your Award shall be endorsed with appropriate legends determined by the Company.

7. T RANSFERABILITY . The Restricted Shares that remain subject to the Company’s Repurchase Right may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant without the prior written consent of the Company and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.

8. A WARD NOT A S ERVICE C ONTRACT . Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or on the part of the Company or an Affiliate to continue your employment. In addition, nothing in your Award shall obligate the Company or an Affiliate, their respective shareholders, boards of directors, Officers or Employees to continue any relationship that you might have as an Employee, Director or Consultant for the Company or an Affiliate.

9. T AX C ONSEQUENCES . Set forth below is a brief summary as of the Grant Date of certain United States federal income tax consequences of the award of Restricted Shares. THIS SUMMARY DOES NOT ADDRESS EMPLOYMENT, SPECIFIC STATE, LOCAL OR FOREIGN TAX CONSEQUENCES THAT MAY BE APPLICABLE TO YOU. YOU UNDERSTAND THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.

(a) Unless you make a Section 83(b) election as described below, you shall recognize ordinary income at the time or times the restrictions lapse with respect to the Restricted Shares that have been released from the Repurchase Right in an amount equal to the the fair market value of such shares on each such date and the Company shall be required to collect all the applicable withholding taxes with respect to such income.

(b) At the time your Award is made, or at any time thereafter as requested by the Company, you hereby authorize, to the fullest extent not prohibited by applicable law, withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your Award. However, no such withholding shall be made unless the net proceeds from the automatic sale, if permitted, of certain Restricted Shares as set forth in Section 8(d) below are not sufficient to satisfy such withholding obligations.

 

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(c) Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no obligation to issue a certificate for such Restricted Shares or release such Restricted Shares from any escrow provided for herein.

(d) In the event that (a) you are not subject to the requirements of Section 16 of the Securities Exchange Act of 1934, as amended, on a date that the Repurchase Right lapses with respect to some or all of the Restricted Shares (“Lapse Date”) and (b) you have not made a Section 83(b) Election or taken similar action under other applicable law such that you incur a tax liability on such Lapse Date, then the Escrow Agent determined under Section 2(c) above shall sell forty percent (40%) of those shares of Restricted Shares with respect to which the Repurchase Right shall have lapsed on the Lapse Date and a Section 83(b) Election was not made or similar action was not taken. The net proceeds from such sale shall be remitted to the relevant tax authorities by the Escrow Agent for your benefit in the amounts directed by the Company and any remaining net proceeds, if any, shall be delivered to you.

10. S ECTION  83(b) E LECTION . You hereby acknowledge that you have been informed that, with respect to the grant of Restricted Shares, you may file an election with the Internal Revenue Service, within 30 days of the Grant Date, electing pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to be taxed currently on the fair market value of the Restricted Shares on the Grant Date (“Section 83(b) Election”).

YOU ACKNOWLEDGE THAT IF YOU CHOOSE TO FILE AN ELECTION UNDER SECTION 83(b) OF THE CODE, IT IS YOUR SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO FILE TIMELY SUCH SECTION 83(b) ELECTION, EVEN IF YOU REQUEST THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON YOUR BEHALF.

BY SIGNING THIS AGREEMENT, YOU REPRESENT THAT YOU HAVE REVIEWED WITH YOUR OWN TAX ADVISORS THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND THAT YOU ARE RELYING SOLELY ON SUCH ADVISORS AND NOT ON ANY STATEMENTS OR REPRESENTATIONS OF THE COMPANY OR ANY OF ITS AGENTS. YOU UNDERSTAND AND AGREE THAT YOU (AND NOT THE COMPANY) SHALL BE RESPONSIBLE FOR ANY TAX LIABILITY THAT MAY ARISE AS A RESULT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

11. N OTICES . Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.

12. M ISCELLANEOUS .

(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns.

 

4


(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.

13. G OVERNING P LAN D OCUMENT . Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control.

 

5


EXHIBIT A

SEAGATE TECHNOLOGY COMPENSATION RECOVERY FOR FRAUD OR MISCONDUCT

POLICY

Effective January 29, 2009

The Seagate Technology Compensation Recovery for Fraud or Misconduct Policy is intended to support accurate disclosure by recovering compensation paid to an executive covered by this policy where such compensation was based on incorrectly reported financial results due to the fraud or willful misconduct of the executive who received such compensation.

Employees Covered :

“Executive” is defined as U.S. employees of Seagate Technology or one of its subsidiaries (the “Company”) at the Senior Vice President level or above and any other officers subject to Section 16 of the Securities Exchange Act of 1934, as amended.

Compensation Covered :

The repayment and other obligations of an Executive described in this policy apply to any bonus paid, stock grant issued (whether or not vested) and/or vested during the covered period, or stock option exercised during the covered period, defined as the period commencing with the later of the effective date of this policy or the date that is four years prior to beginning of the fiscal year in which a restatement is announced and ending on the date recovery is sought pursuant to this policy; provided, however, that in no event shall this policy apply to any stock or option award granted before the effective date of this policy.

Fraud or Misconduct :

For the purposes of this policy, “Fraud” or “Misconduct” shall mean any of the following events that are significant contributing factors to a restatement of the Company’s financial results, as determined pursuant to “Determination of Fraud or Misconduct”, below: (A) embezzlement or theft by the Executive, (B) the commission of any act or acts on the Executive’s part resulting in the conviction (or plea of guilty or nolo contendere) of such Executive of a felony under the laws of the United States or any state (or equivalent law of any jurisdiction outside of the United States), (C) Executive’s willful malfeasance or willful misconduct in connection with Executive’s financial reporting obligations for the Company, or (D) Executive’s other misrepresentation, act, or omission which is materially injurious to the Company’s financial reporting obligations.

Recovery Event :

A recovery event occurs when:

 

   

The Company issues a restatement of financial results, and

 

   

The independent members of the Board of Directors determine in good faith that the Fraud or Misconduct of an Executive covered by this policy was a significant contributing factor to such restatement, and

 

6


   

During the covered period, (i) some or all of a bonus previously paid or performance-based stock grant that vested prior to such restatement, in either case, having a value of at least $100,000, would not have been paid or become vested, as applicable, based upon the restated financial results, (ii) the Executive exercised one or more stock options, sold the Company’s common shares acquired upon such exercises and in the aggregate realized proceeds of at least $100,000 or (iii) the Executive sold the Company’s common shares attributable to one or more non-performance-based stock grants and in the aggregate realized proceeds of at least $100,000.

Determination of Fraud or Misconduct :

The determination of whether an Executive’s Fraud or Misconduct was a significant contributing factor to the Company’s restatement of financial results shall only be made by the affirmative vote of a majority of all of the independent members of the Board at an in-person meeting of the independent members of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive, with or without legal counsel, is given an opportunity to be heard at such meeting). Any determination by the Board pursuant to this policy shall be subject to the Executive’s right to review by an arbitrator pursuant to procedures set forth in the Seagate Executive Severance and Change of Control Plan, a copy of which is attached hereto.

Repayment Obligation :

Upon receiving from the Company the revised calculations and determination of the independent members of the Board of Directors setting forth the amount of a previously paid bonus or bonuses that would not have been paid and/or a performance-based stock grant or grants that would not have vested, in all cases based upon the restated financial results, and/or the proceeds of sales of shares acquired upon the exercise of stock options or following the vesting of any non-performance-based stock grants, the affected Executive will be required to deliver, within 30 days of such written notification of the amount due, to the Company an amount in equal to: (i) the bonus payments that would not have been made during the covered period had the restated financial results been used to determine such bonus awards; (ii) with respect to a performance-based stock grant that was issued and/or vested during the covered period, an amount in cash or equivalent value in the Company’s common shares (or a combination of the two) equal to the net proceeds realized by the Executive upon the issuance and, if applicable, subsequent sale of any stock that would not have been issued or vested based upon the restated financial results; (iii) with respect to any stock option that was exercised during the covered period, an amount in cash equal to the net proceeds realized by the Executive upon the sale during the covered period of some or all of the stock acquired upon the exercise of such stock option; and (iv) with respect to the sale of shares following the vesting of any non-performance-based stock grant, an amount in cash determined by the independent members of the Board of Directors to be attributable to the Executive’s Fraud or Misconduct. The Executive shall also immediately comply with any instructions delivered by the Company with respect to any of the Company’s common shares that have not yet been sold or otherwise disposed of and would not have been issued or vested based upon the restated financial results. For this purpose, “net proceeds” shall be net of any brokerage commissions and amounts paid to the Company to satisfy the aggregate exercise price and/or tax withholding obligations paid in respect of the award. With respect to amounts to be paid in cash, the form of payment may be a certified cashier check, money transfer, or other method as approved by the Board of Directors.

Other Terms :

The Company shall be able to enforce the repayment obligation described in this policy by all legal means available, including, without limitation, by withholding such amount from other sums owed to the affected Executive.

 

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EXHIBIT 10.23

SEAGATE TECHNOLOGY

2004 STOCK COMPENSATION PLAN

RESTRICTED STOCK UNIT AGREEMENT

(with acknowledgement of Compensation Recovery Policy)

Seagate Technology (the “Company”) has awarded you Restricted Stock Units, pursuant to the provisions of the Company’s 2004 Stock Compensation Plan (the “Plan”), the Restricted Stock Unit Grant Notice (including any attachments thereto, “Grant Notice”) and this Restricted Stock Unit Agreement (including any attachments hereto, “Agreement”) (collectively, the “Award”). Defined terms not explicitly defined in this Agreement or the Notice but defined in the Plan shall have the same definitions as in the Plan.

The details of your Award are as follows:

1. G RANT OF R ESTRICTED S TOCK U NITS . You are entitled to the aggregate number of restricted stock units (the “Restricted Stock Units”) specified in your Grant Notice pursuant to the terms and conditions of this Agreement. Each restricted stock unit represents the right to receive one share of the Company’s Common Stock (the “Common Stock”), subject to the terms and conditions set forth in the Grant Notice, this Agreement, and the Plan, each as amended from time to time.

2. V ESTING  & S ETTLEMENT . Subject to the limitations contained herein, the Restricted Stock Units will vest as provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Service with the Company and its Subsidiaries and Affiliates (“Termination”). Upon the vesting of any Restricted Stock Units, as promptly as is reasonably practicable, shares of Common Stock shall be issued to you and the Company shall deliver to you a stock certificate or other appropriate documentation evidencing the number of shares of Common Stock of the Company issued in settlement of such vested Restricted Stock Units. Notwithstanding anything to the contrary, the settlement of the Restricted Stock Units shall be conditioned upon your making adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the settlement of the Restricted Stock Units.

3. T ERMINATION . In the event your Termination, you shall forfeit any or all of the Restricted Stock Units that have not vested as of the date of Termination.

4. R IGHTS AS H OLDER OF R ESTRICTED S TOCK U NITS . You shall have no rights as a stockholder of the Company with respect to your Restricted Stock Units until the date of issuance to you of a certificate or other evidence of ownership representing Common Stock of the Company.

5. N UMBER OF S HARES . The number of shares of Common Stock subject to your Restricted Stock Unit Award may be adjusted from time to time for changes in capitalization, as provided in Article XIII of the Plan.

6. S EAGATE T ECHNOLOGY C OMPENSATION R ECOVERY FOR F RAUD OR M ISCONDUCT P OLICY . The Participant hereby acknowledges and agrees that the Participant and the award evidenced by this Agreement are subject to the Seagate Technology Compensation Recovery for Fraud and Misconduct Policy as in effect from time to time, a current copy of which is attached hereto as Exhibit A. To the extent the Participant is subject to the policy, the terms and conditions of the policy are hereby incorporated by reference into this Agreement.


7. S ECURITIES L AW C OMPLIANCE . You will not be issued any shares under your Award unless the shares are either (a) then registered under the Securities Act or (b) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations governing the Award, and you will not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations.

8. T RANSFERABILITY . The Restricted Units may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant without the prior written consent of the Company and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate; provided that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.

9. A WARD NOT A S ERVICE C ONTRACT . Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or on the part of the Company or an Affiliate to continue your employment. In addition, nothing in your Award shall obligate the Company or an Affiliate, their respective shareholders, boards of directors, Officers or Employees to continue any relationship that you might have as an Employee, Director or Consultant for the Company or an Affiliate.

10. T AX C ONSEQUENCES . Set forth below is a brief summary as of the Grant Date of certain United States federal income tax consequences of the award of Restricted Units. THIS SUMMARY DOES NOT ADDRESS EMPLOYMENT, SPECIFIC STATE, LOCAL OR FOREIGN TAX CONSEQUENCES THAT MAY BE APPLICABLE TO YOU. YOU UNDERSTAND THAT THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THAT THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.

(a) You shall recognize ordinary income at the time or times your Restricted Units vest and are settled by delivery of the shares subject thereto to you in an amount equal to the fair market value of such shares on each such settlement date and the Company shall be required to collect all the applicable withholding taxes with respect to such income.

(b) You will be solely responsible for the payment of all U.S. federal income and other taxes, including any state, local or non-U.S. income or employment tax obligation that may be related to the Shares, including any such taxes that are required to be withheld and paid over to the applicable tax authorities (the “Tax Withholding Obligation”).

(c) Unless the Company, in its sole discretion, chooses to satisfy the Tax Withholding Obligation by some other means in accordance with clause (d) below, your acceptance of this Agreement constitutes your instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to sell on your behalf a whole number of shares from those shares issuable to you upon settlement of the Restricted Stock Units as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the applicable Tax Withholding Obligation. Such shares will be sold on the day the Tax Withholding Obligation

 

2


arises or as soon thereafter as practicable. You will be responsible for all brokers’ fees and other costs of sale, which fees and costs may be deducted from the proceeds of the foregoing sale of shares, and you agree to indemnify and hold the Company and any brokerage firm selling such shares harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed your Tax Withholding Obligation, such excess cash will be deposited into the securities account established with the brokerage service provider for the settlement of your Restricted Stock Units. You acknowledge that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy your Tax Withholding Obligation. Accordingly, you agree to pay to the Company as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of shares described above.

(d) At any time before any Tax Withholding Obligation arises, the Company may, in its sole discretion, elect to satisfy your Tax Withholding Obligation through share withholding pursuant to this Section 9(d). As such, to the extent the Company makes such an election, you hereby authorize the Company to withhold shares otherwise deliverable upon settlement of the Restricted Stock Units having a Fair Market Value on the date of settlement equal to the amount required to be withheld; an amount sufficient to satisfy the applicable Tax Withholding Obligation.

(e) Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no obligation to issue any shares subject to your Restricted Stock Units.

11. N OTICES . Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.

12. M ISCELLANEOUS .

(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assignees.

(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.

13. G OVERNING P LAN D OCUMENT . Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control.

 

3


EXHIBIT A

SEAGATE TECHNOLOGY COMPENSATION RECOVERY FOR FRAUD OR MISCONDUCT

POLICY

Effective January 29, 2009

The Seagate Technology Compensation Recovery for Fraud or Misconduct Policy is intended to support accurate disclosure by recovering compensation paid to an executive covered by this policy where such compensation was based on incorrectly reported financial results due to the fraud or willful misconduct of the executive who received such compensation.

Employees Covered :

“Executive” is defined as U.S. employees of Seagate Technology or one of its subsidiaries (the “Company”) at the Senior Vice President level or above and any other officers subject to Section 16 of the Securities Exchange Act of 1934, as amended.

Compensation Covered :

The repayment and other obligations of an Executive described in this policy apply to any bonus paid, stock grant issued (whether or not vested) and/or vested during the covered period, or stock option exercised during the covered period, defined as the period commencing with the later of the effective date of this policy or the date that is four years prior to beginning of the fiscal year in which a restatement is announced and ending on the date recovery is sought pursuant to this policy; provided, however, that in no event shall this policy apply to any stock or option award granted before the effective date of this policy.

Fraud or Misconduct :

For the purposes of this policy, “Fraud” or “Misconduct” shall mean any of the following events that are significant contributing factors to a restatement of the Company’s financial results, as determined pursuant to “Determination of Fraud or Misconduct”, below: (A) embezzlement or theft by the Executive, (B) the commission of any act or acts on the Executive’s part resulting in the conviction (or plea of guilty or nolo contendere) of such Executive of a felony under the laws of the United States or any state (or equivalent law of any jurisdiction outside of the United States), (C) Executive’s willful malfeasance or willful misconduct in connection with Executive’s financial reporting obligations for the Company, or (D) Executive’s other misrepresentation, act, or omission which is materially injurious to the Company’s financial reporting obligations.

Recovery Event :

A recovery event occurs when:

 

   

The Company issues a restatement of financial results, and

 

   

The independent members of the Board of Directors determine in good faith that the Fraud or Misconduct of an Executive covered by this policy was a significant contributing factor to such restatement, and

 

4


   

During the covered period, (i) some or all of a bonus previously paid or performance-based stock grant that vested prior to such restatement, in either case, having a value of at least $100,000, would not have been paid or become vested, as applicable, based upon the restated financial results, (ii) the Executive exercised one or more stock options, sold the Company’s common shares acquired upon such exercises and in the aggregate realized proceeds of at least $100,000 or (iii) the Executive sold the Company’s common shares attributable to one or more non-performance-based stock grants and in the aggregate realized proceeds of at least $100,000.

Determination of Fraud or Misconduct :

The determination of whether an Executive’s Fraud or Misconduct was a significant contributing factor to the Company’s restatement of financial results shall only be made by the affirmative vote of a majority of all of the independent members of the Board at an in-person meeting of the independent members of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive, with or without legal counsel, is given an opportunity to be heard at such meeting). Any determination by the Board pursuant to this policy shall be subject to the Executive’s right to review by an arbitrator pursuant to procedures set forth in the Seagate Executive Severance and Change of Control Plan, a copy of which is attached hereto.

Repayment Obligation :

Upon receiving from the Company the revised calculations and determination of the independent members of the Board of Directors setting forth the amount of a previously paid bonus or bonuses that would not have been paid and/or a performance-based stock grant or grants that would not have vested, in all cases based upon the restated financial results, and/or the proceeds of sales of shares acquired upon the exercise of stock options or following the vesting of any non-performance-based stock grants, the affected Executive will be required to deliver, within 30 days of such written notification of the amount due, to the Company an amount in equal to: (i) the bonus payments that would not have been made during the covered period had the restated financial results been used to determine such bonus awards; (ii) with respect to a performance-based stock grant that was issued and/or vested during the covered period, an amount in cash or equivalent value in the Company’s common shares (or a combination of the two) equal to the net proceeds realized by the Executive upon the issuance and, if applicable, subsequent sale of any stock that would not have been issued or vested based upon the restated financial results; (iii) with respect to any stock option that was exercised during the covered period, an amount in cash equal to the net proceeds realized by the Executive upon the sale during the covered period of some or all of the stock acquired upon the exercise of such stock option; and (iv) with respect to the sale of shares following the vesting of any non-performance-based stock grant, an amount in cash determined by the independent members of the Board of Directors to be attributable to the Executive’s Fraud or Misconduct. The Executive shall also immediately comply with any instructions delivered by the Company with respect to any of the Company’s common shares that have not yet been sold or otherwise disposed of and would not have been issued or vested based upon the restated financial results. For this purpose, “net proceeds” shall be net of any brokerage commissions and amounts paid to the Company to satisfy the aggregate exercise price and/or tax withholding obligations paid in respect of the award. With respect to amounts to be paid in cash, the form of payment may be a certified cashier check, money transfer, or other method as approved by the Board of Directors.

Other Terms :

The Company shall be able to enforce the repayment obligation described in this policy by all legal means available, including, without limitation, by withholding such amount from other sums owed to the affected Executive.

 

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EXHIBIT 10.24

LOGO

November 6, 2008

Charles C. Pope (GID 294)

Dear Charles:

Thank you for delaying your retirement and accepting an important new role on my team. Please accept this note as confirmation of the terms for your upcoming transfer to the newly created position of Business Development Officer, Strategic Planning and Corporate Development. Your new Seagate title and compensation changes will take effect on January 5, 2009. You will continue to be based in our Scotts Valley, California, offices.

You and your Strategic Planning & Corporate Development organization will be responsible for business development and i365. Specifically, you will:

 

   

Oversee the identification and pursuit of strategic business opportunities, mergers, acquisitions, partnerships, alliances, joint ventures, and licensing agreements.

 

   

Direct i365 and you will be responsible to me for the attainment of revenue and profit goals, and the achievement of current and long-range objectives.

Our offer is comprised of the following elements:

 

   

Your annual base salary will be $350,000.

 

   

You will be eligible to participate in the Seagate Executive Bonus Plan, which has a target of 80% of your base salary. Your actual bonus amount may vary based on company earnings and an evaluation of your performance at the end of the fiscal year. The bonus payment is at the sole discretion of the Seagate Board of Directors and the Board’s compensation committee.

 

   

The current annual amount of the executive perquisite allowance for senior vice presidents and above in the U.S. is $24,008.

 

   

The existing comprehensive benefits package will continue for you and your family. Click here for Benefits Information .

Please acknowledge your agreement with the terms of this offer by signing below. By signing below you are also providing your express written consent to the above-described changes to your title, compensation, and job responsibilities, and agreeing that a subsequent resignation of employment due to dissatisfaction with these terms will not be considered a resignation for “Good Reason” as defined in the Seagate Officer Severance and Change in Control Plan, a copy of which was provided to you by letter dated August 22, 2008. You should not sign this letter unless you understand and agree to the terms set forth above.

 

Sincerely,
SEAGATE TECHNOLOGY
/s/ William D. Watkins
William D. Watkins
Chief Executive Officer

 

 

I acknowledge and agree to the terms of this letter agreement.

 

 
/s/ Charles C. Pope      
Charles C. Pope   Date        


EXHIBIT A

Summary of Compensation Arrangements for Charles C. Pope

The following is a description of the compensation arrangements for Charles C. Pope, Executive Vice President of Strategic Planning and Corporate Development of Seagate Technology (the “Company”). This description is provided pursuant to Paragraph 10(iii) to Item 601(b) of Regulation S-K, which requires a written description of a compensatory arrangement when no formal document contains the compensation information.

Consistent with the temporary salary reductions announced by the Company and disclosed in the Company’s Forms 8-K filed with the Securities and Exchange Commission on January 14, 2009 and January 21, 2009, Mr. Pope’s base salary was reduced by 25%, effective February 2, 2009.

EXHIBIT 10.25

Summary of Compensation Arrangements for Patrick J. O’Malley

The following is a description of the compensation arrangements for Patrick J. O’Malley, Executive Vice President and Chief Financial Officer of Seagate Technology (the “Company”). This description is provided pursuant to Paragraph 10(iii) to Item 601(b) of Regulation S-K, which requires a written description of a compensatory arrangement when no formal document contains the compensation information.

On April 24, 2008, the Company’s Board of Directors appointed Patrick J. O’Malley to serve as Executive Vice President and Chief Financial Officer, effective August 25, 2008. Upon commencement of his service as Executive Vice President and Chief Financial Officer, Mr. O’Malley’s annual base salary was increased to $490,000, with a bonus at target of 100% of his base salary.

Consistent with the temporary salary reductions announced by the Company and disclosed in the Company’s Forms 8-K filed with the Securities and Exchange Commission on January 14, 2009 and January 21, 2009, Mr. O’Malley’s base salary was reduced by 25%, effective February 2, 2009.

EXHIBIT 10.26

Summary of Compensation Arrangements for Brian S. Dexheimer

The following is a description of the compensation arrangements for Brian S. Dexheimer, Division President, Consumer Solutions of Seagate Technology (the “Company”). This description is provided pursuant to Paragraph 10(iii) to Item 601(b) of Regulation S-K, which requires a written description of a compensatory arrangement when no formal document contains the compensation information.

As disclosed in the Company’s Proxy Statement filed with the Securities and Exchange Commission (“SEC”) on September 19, 2008, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) increased the annual salary for Brian S. Dexheimer, Division President to $691,226, effective February 5, 2008. As disclosed in the Company’s Form 8-K, filed with the SEC on September 12, 2008, the Compensation Committee authorized a target bonus level for Mr. Dexheimer of 125% of his base salary.

Consistent with the salary reductions announced by the Company and disclosed in the Company’s Forms 8-K filed with the SEC on January 14, 2009 and January 21, 2009, Mr. Dexheimer’s base salary was reduced by 25%, effective February 2, 2009.

EXHIBIT 10.27

Summary of Compensation Arrangements for Robert Whitmore

The following is a description of the compensation arrangements for Robert Whitmore, Executive Vice President and Chief Technology Officer of Seagate Technology (the “Company”). This description is provided pursuant to Paragraph 10(iii) to Item 601(b) of Regulation S-K, which requires a written description of a compensatory arrangement when no formal document contains the compensation information.

As previously disclosed in the Company’s Form 8-K filed with the Securities Exchange Commission (“SEC”) on January 12, 2009, Robert Whitmore, the Company’s Executive Vice President and Chief Technology Officer, assumed the additional responsibilities previously performed by David Wickersham, who resigned from his position as the Company’s President and Chief Operating Officer effective January 12, 2009. In connection therewith, on January 29, 2009, the Compensation Committee of the Board of Directors increased Mr. Whitmore’s annual base salary to $650,000, retroactive to January 12, 2009, with a bonus at target of 100% of his base salary. Consistent with the temporary salary reductions announced by the Company and disclosed in the Company’s Forms 8-K filed with the Securities and Exchange Commission on January 14, 2009 and January 21, 2009, Mr. Whitmore’s base salary was reduced by 25%, effective February 2, 2009.

In connection with his assumption of additional responsibilities as described above, on January 30, 2009, Mr. Whitmore received a grant of stock options to acquire 1,000,000 of the Company’s common shares under the 2004 Stock Compensation Plan.

EXHIBIT 31.1

CERTIFICATION

I, Stephen J. Luczo, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Seagate Technology;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses 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 have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 10, 2009     /s/ S TEPHEN J. L UCZO
    Name:   Stephen J. Luczo
    Title:   Chairman, President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

I, Patrick J. O’Malley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Seagate Technology;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses 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 have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 10, 2009     /s/ P ATRICK J. O’M ALLEY
    Name:   Patrick J. O’Malley
    Title:   Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certification is not to be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and does not constitute a part of the Quarterly Report of Seagate Technology (the “Company”) on Form 10-Q for the fiscal quarter ended January 2, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”).

In connection with the Report, we Stephen J. Luczo, Chief Executive Officer of the Company, and Patrick J. O’Malley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: February 10, 2009

      /s/ S TEPHEN J. L UCZO
      Stephen J. Luczo
      Chairman, President and Chief Executive Officer
Date: February 10, 2009       /s/ P ATRICK J. O’M ALLEY
     

Patrick J. O’Malley

Chief Financial Officer