Seagate 2008 Annual Report Download - page 31

Table of Contents
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.
Substantial Leverage
—Our substantial leverage may place us at a competitive disadvantage in our industry.
We are leveraged and have significant debt service obligations. We also recently completed a private offering of $430 million of 10%
Senior Secured Second-
Priority Notes due 2014 (the "10% Notes"). 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, strategic
acquisitions, investments and 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 future dividends or make other restricted payments and investments.
In addition, because a portion of our debt bears interest at floating rates, an increase in interest rates has an immediate effect on our interest
expense. If the extreme volatility in interest rates observed during the fiscal year 2009 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 changes our credit rating or outlook, our debt and equity securities could be negatively affected, which could adversely affect our
ability to refinance existing debt or raise additional capital.
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.
29