17
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
Amendment No. 1
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended December 25, 1993
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 0-14016
MAXTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 770123732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
211 River Oaks Parkway, San Jose, CA 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 432-1700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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.
X Yes No
29,616,333 shares of Common Stock were issued and outstanding as of February
4, 1994
This quarterly report on Form 10-Q/A Amendment No. 1 contains 19 pages of
which this is page number 1.
MAXTOR CORPORATION
FORM 10-Q/A
Amendment No. 1
December 25, 1993
INDEX
Page
Part I. Financial Information 3
Item 1. Consolidated Financial Statements
Consolidated Statements of Income (Loss)-
Three Months and Nine Months Ended
December 25, 1993 and December 26, 1992 4
Consolidated Balance Sheets-
December 25, 1993 and March 27, 1993 5-6
Consolidated Statements of Cash Flows-
Nine Months Ended December 25, 1993
and December 26, 1992 7-8
Note 3 of Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
Signature Page 19
PART I. FINANCIAL INFORMATION
During the last three months, there has been a focus on accounting for
restructuring charges by various regulatory and accounting authorities, and
related public statements and positions, and it is expected that certain
clarifications and changes to current accounting practice will be
forthcoming. In anticipation of these expected clarifications and changes,
the Company has revised its treatment of the $88.4 million restructuring
charge previously reported by the Company in its financial results for the
quarter ended December 25, 1993. Certain sections of its Form 10-Q filed for
the quarter ended December 25, 1993 have now been revised to reflect a
restructuring charge of $19.5 million and special charges of approximately
$68.9 million charged to cost of revenue. As a result of these changes, the
amount of the restructuring charge reported in operating expenses has
decreased from $88,375,000 to $19,500,000 and cost of revenue has increased
by $68,875,000 to $371,731,000. In addition, certain items previously
reported as accrued restructuring in the consolidated balance sheet have been
reclassified to either accounts payable or accrued expenses, and the line
item labeled "Accrued restructuring" has been changed to "Accrued special and
restructuring." Further, the consolidated statement of cash flow was revised
to omit the item previously reported as "non-cash restructuring" as it is no
longer applicable. Revenue, income (loss) from operations and net income
(loss), as reported, were not affected by these changes.
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
The following sections of the Form 10-Q previously filed are amended to read
in full as follows:
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
--------------------- ------------------------
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1993 1992 1993 1992
---------- ---------- ---------- ------------
Revenue $ 318,098 $ 402,614 $ 892,218 $1,096,979
Cost of revenue 371,731 321,871 974,313 849,351
---------- ---------- ---------- -----------
Gross margin (53,633) 80,743 (82,095) 247,628
Operating expenses:
Research and development 25,751 29,609 83,111 83,386
Selling, general and
administrative 19,849 26,472 60,086 76,825
Restructuring 19,500 - 19,500 -
---------- ---------- ---------- -----------
Total operating expenses 65,100 56,081 162,697 160,211
---------- ---------- ---------- -----------
Income (loss) from operations (118,733) 24,662 (244,792) 87,417
Interest expense (2,228) (1,981) (8,070) (7,904)
Interest income 156 607 1,255 1,764
Minority interest in loss of
joint venture - - - 1,014
---------- ---------- ---------- -----------
Income (loss) before income
taxes (120,805) 23,288 (251,607) 82,291
Provision for income taxes 500 4,658 1,500 16,487
---------- ---------- ---------- -----------
Net income (loss) $(121,305) $ 18,630 $(253,107) $ 65,804
========== ========== ========== ===========
Net income (loss) per share
-primary $ (4.12) $ 0.61 $ (8.65) $ 2.22
========== ========== ========== ===========
-fully diluted $ (4.12) $ 0.59 $ (8.65) $ 2.12
========== ========== ========== ===========
Shares used in computing net
income (loss) per share
-primary 29,474 30,396 29,255 29,664
========== ========== ========== ===========
-fully diluted 29,474 32,904 29,255 32,218
========== ========== ========== ===========
See accompanying notes.
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
Dec. 25, March 27,
1993 1993
------------- -------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 102,097 $ 135,324
Accounts receivable, net of
allowance for doubtful accounts
of $3,280 at December 25, 1993
and $4,190 at March 27, 1993 100,924 149,397
Inventories:
Raw materials 42,832 77,039
Work-in-process 24,152 32,650
Finished goods 18,173 45,654
------------- -------------
85,157 155,343
Prepaid expenses and other 9,777 10,675
------------- -------------
Total current assets 297,955 450,739
Property, plant and equipment, at cost:
Buildings 21,264 8,585
Machinery and equipment 198,735 204,090
Furniture and fixtures 18,235 19,214
Leasehold improvements 18,347 17,940
------------- -------------
256,581 249,829
Less accumulated depreciation
and amortization (186,705) (130,713)
------------- -------------
Net property, plant and equipment 69,876 119,116
Other assets 7,965 9,258
------------- -------------
$ 375,796 $ 579,113
============= =============
See accompanying notes.
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Continued)
Dec. 25, March 27,
1993 1993
------------- -------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings $ 40,182 $ 33,000
Accounts payable 140,506 130,192
Income taxes payable 6,904 4,664
Accrued payroll and payroll-
related expenses 14,447 16,516
Accrued warranty 25,381 16,089
Accrued special and restructuring 37,491 -
Accrued expenses 26,999 21,753
Long-term debt and capital lease
obligations due within one year 4,316 16,373
------------- -------------
Total current liabilities 296,226 238,587
Long-term debt and capital lease
obligations ue after one year 108,304 119,868
Deferred tax liabilities 1,000 1,000
Minority interest - -
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value,
5,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $0.01 par value,
200,000,000 shares authorized;
issued and outstanding:
December 25, 1993 - 29,582,188 shares;
March 27, 1993 - 28,809,277 shares 296 288
Additional paid-in capital 167,413 163,747
Retained earnings (deficit) (197,267) 55,840
------------- -------------
(29,558) 219,875
Less notes receivable from stockholders (176) (217)
------------- -------------
Total stockholders' equity (deficit) (29,734) 219,658
------------- -------------
$ 375,796 $ 579,113
============= =============
See accompanying notes.
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Nine Months Ended
Dec. 25, Dec. 26,
1993 1992
----------- -----------
Cash flows from operating activities:
Net income (loss $ (253,107) $ 65,804
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 74,063 42,862
Change in non-current deferred tax liabilities - 11,070
Minority interest in loss of joint venture - (1,023)
Loss on disposal of property, plant and equipment 1,327 1,563
Change in current assets and liabilities:
Accounts receivable 48,473 (24,231)
Inventories 70,186 (58,966)
Prepaid expenses and other 898 (3,386)
Accounts payable 10,314 28,887
Income taxes payable 2,240 2,713
Accrued payroll and payroll-related expenses (2,069) (279)
Accrued warranty 9,292 (386)
Accrued expenses 5,246 9,594
Accrued special and restructuring 37,491 -
----------- -----------
Total adjustments 257,461 8,418
----------- -----------
Net cash provided by operating activities 4,354 74,222
Cash flows from investing activities:
Proceeds from sale of subsidiary - 17,400
Net book value of certain of the assets sold
associated with sale of subsidiary, net of costs - (12,735)
Purchase of property, plant and equipment, net (26,109) (71,738)
Proceeds from disposal of property, plant and
equipment 940 1,477
Other 312 (4,327)
----------- -----------
Net cash used in investing activities (24,857) (69,923)
Cash flows from financing activities:
Proceeds from issuance of short-term borrowings,net 7,182 -
Proceeds from issuance of debt 5,810 22,827
Principal payments of debt (28,563) (13,005)
Principal payments under capital lease obligations (868) (1,759)
Proceeds from issuance of common stock, net of
notes receivable and stock repurchases 3,715 14,961
----------- -----------
Net cash provided by (used in) financing activities (12,724) 23,024
----------- -----------
Net change in cash and cash equivalents (33,227) 27,323
Cash and cash equivalents at beginning of period 135,324 75,859
----------- -----------
Cash and cash equivalents at end of period $ 102,097 $ 103,182
=========== ===========
Supplemental disclosures of cash flow information:
(In thousands) Nine Months Ended
- -----------------------------------------------------------------------
Dec. 25, Dec. 26,
1993 1992
- -----------------------------------------------------------------------
Cash paid (received) for: (Unaudited)
Interest $ 6,771 $ 2,074
Income taxes 1,142 4,547
Income tax refunds (1,824) (185)
Supplemental information on non-cash investing and financing activities:
Capital lease obligations approximating $115,000 and $336,000 were incurred
during the nine month periods ended December 25, 1993 and December 26, 1992,
respectively.
MAXTOR CORPORATION
(Unaudited)
Footnote 3 of Notes to Consolidated Financial Statements is amended to read
in full as follows:
3. SPECIAL AND RESTRUCTURING CHARGES
During fiscal year 1994, the Company experienced significant production
delays with certain product lines as a result of both design and vendor
problems. Due to continuing production and sales issues, the Company
assessed its competitive position during the third quarter of fiscal year
1994 and has determined that it is unable to bring to market profitable
successor products to certain existing products.
The Company has therefore decided to discontinue certain products and
manufacturing activities, and has recorded special charges amounting to $68.9
million in cost of revenue in the third quarter of fiscal year 1994. The
charges consist of estimated costs associated with the termination of certain
products, a reduction in manufacturing capacity, write downs of inventory and
equipment that are no longer productive, and related future commitments to
third parties. The charges are comprised of approximately $45.4 million of
inventory-related expenses, approximately $19.8 million of equipment-related
expenses, and approximately $3.7 million of other associated expenses. The
Company anticipates that net expenditures of approximately $13.0 million of
cash will be required over the next twelve-month period to fund the expenses
accrued. Such expenditures will be funded by cash flow from operations or
capital infusions. As of December 25, 1993, current liabilities included
accruals related to these special charges totaling approximately $35.0
million.
The decisions described above reduced the scope of the Company's product and
manufacturing activities and, as a result, the Company then initiated a
restructuring plan which provides for the consolidation and streamlining of
certain operations and administration. The Company recorded a restructuring
charge of $19.5 million in the third quarter of fiscal year 1994 related to
these activities, which are expected to be completed within the twelve-month
period from the date of the charge. The plan provides for a worldwide
headcount reduction of approximately 500 employees, which was substantially
completed during February 1994. The Company's research and development
activities will be consolidated at its Longmont, Colorado facilities, which
will eliminate the need for certain facilities in San Jose, California. In
addition, the Company's actions will eliminate the need for certain
manufacturing facilities in Singapore. The charge consists of approximately
$11.8 million in estimated costs related to the worldwide reduction in
headcount and approximately $7.7 million associated with facility
consolidations, including lease and other obligations on certain facility
leases, none of which extend beyond calendar year 1994. The Company
anticipates that these restructuring actions will require the expenditures of
approximately $19.0 million of cash over the next twelve-month period, which
will be funded by cash flow from operations or capital infusions. As of
December 25, 1993, approximately $19.0 million of the $19.5 million charge
remained in current liabilities. As a result of these activities, the
Company has eliminated an estimated $9.0 million of quarterly operating
costs.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is amended to read in full as follows:
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
(Tabular information: Dollars in millions, except per share amounts)
RESULTS OF OPERATIONS
General
Since its inception in 1982, Maxtor Corporation (Maxtor or the Company) has
been subject to the highly cyclical nature of the disk drive industry. In
fiscal year 1993, as a result of an industry-wide increase in demand and the
related stabilization in prices, the Company grew its revenues to over $1.4
billion and reported income of $46.1 million. However, from December 1992
through September 1993, the disk drive industry was experiencing intense
price competition. In the quarter ended June 26, 1993 the Company's revenues
decreased nearly 25% from the previous quarter to $260.6 million; revenues
increased to $313.5 million in the quarter ended September 25, 1993 and
increased modestly to $318.1 million in the quarter ended December 25, 1993.
In all three quarters of fiscal year 1994, revenues were below the levels in
the same quarters of the prior fiscal year. The Company incurred losses of
$19.7 million, $72.2 million, $59.6 million, and $121.3 million in the
quarters ending March 27, 1993, June 26, 1993, September 25, 1993, and
December 25, 1993, respectively. Such losses through September 1993 were
primarily the result of negative industry conditions and the Company's
inability to bring certain products to market in a timely and cost effective
manner. The negative industry conditions were primarily the result of
intense price competition and excess industry capacity. In addition, the
Company's losses were the result of insufficient differentiation between the
products of the Company and its competitors, and efforts by better financed
competitors to increase market share. The Company experienced an increase in
demand in the third quarter of fiscal year 1994, with most products in short
supply, concurrent easing of price reductions and certain price increases.
Although general industry conditions improved between October and December
1993, and most of the Company's competitors were profitable during such
quarter, the Company's financial results are not likely to be profitable
until the Company is successful in bringing new products to market in a
timely and cost effective manner. However, the Company does expect that its
results of operations for the fourth quarter of fiscal year 1994 will improve
over the prior four quarters. The Company has been less successful than its
competitors in managing product transitions, and successful new products
introduced by competitors have tended to displace older products, including
the Company's products. If the Company does not successfully manage new
product transitions in the near-term, further losses will be incurred.
The disk drive industry is subject to rapid technological change and short
product life cycles as data storage manufacturers continually strive for
smaller form factors, larger storage capacities, higher performance and lower
cost. As a result, Maxtor expects that the Company's new products will
replace the products which accounted for a majority of the Company's revenues
in fiscal year 1993 and the first nine months of fiscal year 1994. The
Company's ability to anticipate market trends and to successfully develop,
manufacture in volume and sell new products in a timely manner and at
favorable gross margins will be important factors affecting the Company's
future results and there can be no assurance that the Company will be
successful in such efforts. Shorter product life cycles also increase the
importance of the Company's ability to successfully manage product
transitions. The failure to adequately manage product transitions could
result in the loss of market opportunities, decreased sales of existing
products, cancellation of products or product lines, the accumulation of
obsolete and excess inventory, and unanticipated charges related to obsolete
capital equipment. On February 3, 1994, the Company announced a major shift
in strategy which devotes Company resources primarily to the design,
manufacture and sale of its 7000 Series of inch-high, 3.5-inch disk drives
and its new family of mobile computing products, including the MobileMax
family of PCMCIA-based mobile computing data storage products. The Company
believes this shift in strategy will result in improved financial results,
however, the Company's financial results will be more dependent on the
success of these products, particularly the MobileMax family of products.
The disk drive industry is intensely competitive and significant price
erosion is typical during the life of a product. Industry participants
include both independent suppliers and large computer manufacturers that both
supply their own internal requirements and sell disk drives to third parties.
Sales by such large computer manufacturers to third parties are an
increasingly important factor in the market. Bringing new products to market
on a timely basis has become increasingly critical to competing in this
market environment. When a new product is not brought to market on a timely
basis, the selling price of older products must be reduced in order to
compete effectively with competitors' new products, which are being produced
at lower costs. If competitors introduce products which offer greater
capacity, better performance, lower prices or any combination of these
factors, or if certain customers produce more disk drives for internal use,
the Company's results of operations would be adversely affected.
As a result of volatile business conditions in the personal computer (PC)
industry, including the trend toward consolidation among PC manufacturers,
sales to the major PC manufacturers have become increasingly important to the
success of the disk drive industry participants. Although the Company
intends to continue in its efforts to increase its share of this large OEM
market, particularly in the marketing of its new products, there can be no
assurance that the Company will be successful in such efforts. Furthermore,
fluctuations in demand for computer systems, or other end-user demand, can
result, and have in the past resulted, in deferral or cancellation of orders
for the Company's products.
The Company's manufacturing process requires large volumes of high quality
components supplied by outside suppliers. The Company periodically receives
communication from vendors that they may be unable to supply required volumes
of certain key components, including vendors who are key to the production of
the Company's 7000 Series, MXT and MobileMax product lines. During the first
quarter of fiscal year 1994, the Company temporarily shut down production of
its MXT product line as a result of a quality problem related to a particular
supplier's component. Production resumed when it was determined that the
problem was limited to that particular supplier's component and that an
alternate supplier's components were not affected by the quality problem.
The Company's 25252 2.5-inch drive has also been subject to significant and
on-going production delays as a result of both design and vendor problems.
Similar problems in the future or the inability of the Company to obtain
required volumes of key components or obtain continued reduction of component
costs, or excessive rework costs associated with defective components would
adversely affect the Company's operating results.
While the Company has qualified and continues to qualify multiple sources for
many components, it is reliant on, and will continue to be reliant on, single
sources for many semi-custom and custom integrated circuits and other key
components. The Company will continue to aggressively work with its vendor
base to minimize its exposure. There can be no assurance, however, that the
Company will be successful in such efforts or that in the future the
Company's vendors will meet the Company's requirements for required volumes
of high-quality components in a timely and cost effective manner.
During the first three quarters of fiscal year 1994, the Company experienced
significant production delays with certain product lines as a result of both
design and vendor problems. Due to continuing production and sales issues,
the Company assessed its competitive position during the third quarter of
fiscal year 1994 and has determined that it is unable to bring to market
profitable successor products to certain existing products. The Company has
therefore decided to discontinue certain products and manufacturing
activities, and has recorded special charges amounting to $68.9 million in
cost of revenue in the third quarter of fiscal year 1994. The charges consist
of estimated costs associated with the termination of certain products, a
reduction in manufacturing capacity, write downs of inventory and equipment
that are no longer productive, and related future commitments to third
parties. The decisions described above reduced the scope of the Company's
product and manufacturing activities and, as a result, the Company then
initiated a restructuring plan and recorded a restructuring charge of $19.5
million in the third quarter of fiscal year 1994. The restructuring plan
provides for the consolidation and streamlining of certain operations and
administration, including a reduction in the Company's worldwide headcount by
approximately 500 employees. As part of the restructuring plan, the
Company's research and development activities will be consolidated at its
Longmont, Colorado facilities. The Company's research and development
efforts will focus on new products targeted at the desktop personal computing
market and the emerging mobile computing market.
- -----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1993 1992 1993 1992
- -----------------------------------------------------------------------------
Revenue $ 318.1 $ 402.6 $ 892.2 $ 1,097.0
Gross margin $ (53.6) $ 80.7 $ (82.1) $ 247.6
As a percentage of revenue (16.9%) 20.1% (9.2%) 22.6%
Net income (loss) $ (121.3) $ 18.6 $ (253.1) $ 65.8
As a percentage of revenue (38.1%) 4.6% (28.4%) 6.0%
Net income (loss) per share:
- Primary $ (4.12) $ 0.61 $ (8.65) $ 2.22
- Fully diluted $ (4.12) $ 0.59 $ (8.65) $ 2.12
Revenue
Revenue for the Company's third quarter of fiscal year 1994 and first nine
months of fiscal year 1994 decreased by 21% and 18.7%, respectively, from the
same periods of the prior fiscal year. Unit sales of the Company's 7000
Series disk drives, which accounted for a significant portion of the
Company's revenue during both the current fiscal year and the prior fiscal
year, increased significantly during the third quarter and first nine months
of fiscal year 1994 as compared to the same periods of the prior fiscal year.
However, these product offerings, particularly 100-200 megabyte products,
have been subject to intense price competition and excess industry capacity
during most of the first nine months of fiscal year 1994 compared to the
first nine months of fiscal year 1993, which negatively impacted per unit
revenue despite the increase in unit volumes. In addition, while there was a
significant shift in product mix from the older, lower capacity 3.5-inch and
5.25-inch product offerings to the current higher capacity 7000 Series and
MXT product offerings during the twelve-month period since the third quarter
of fiscal year 1993, average unit selling prices, in terms of megabyte per
dollar, have declined substantially during that same period. Revenue for the
first nine months of fiscal year 1994 did not include $10.0 million of non-
recurring revenue recognized in the first quarter of fiscal year 1993 related
to a royalty and licensing agreement. Revenue for the first nine months of
fiscal year 1993 included approximately $61 million generated by the
Company's wholly-owned subsidiary, Storage Dimensions, Inc. (SDI); no such
revenue was recognized in the first nine months of fiscal year 1994 due to
the sale of SDI on December 26, 1992.
During the third quarter of fiscal year 1994, the Company had one customer
which accounted for approximately 29% of the Company's revenue. This
percentage may fluctuate in future periods and the Company expects that it
will decline substantially during the last quarter of fiscal year 1994.
During the third quarter of fiscal year 1993, one customer accounted for
approximately 15% of the Company's revenue.
Given the Company's recent decision to discontinue certain product lines in
the third quarter of fiscal year 1994, the Company anticipates a decline in
revenue generated by these products in the fourth quarter of fiscal year
1994. As a result of the Company's shift in strategy, the Company will be
more dependent on the success of certain products, particularly the MobileMax
family of products. During the third quarter of fiscal year 1994, the
Company announced several new products, including additions to the MobileMax
family of PCMCIA-compatible storage products for mobile computing
applications. The Company anticipates that these new products will not
contribute significantly to revenue in the fourth quarter of fiscal year
1994. The Company's ability to increase revenues is dependent on its ability
to anticipate market trends and to successfully develop, manufacture in
volume and sell new products in a timely manner, particularly the MobileMax
family of products. There can be no assurance that the Company will be
successful in such efforts.
Gross Margin
Gross margin as a percentage of revenue decreased significantly to (16.9%)
for the third quarter of fiscal year 1994 from 20.1% for the same quarter of
the prior fiscal year, and decreased to (9.2%) for the first nine months of
fiscal year 1994 compared to 22.6% for the same nine-month period of the
prior fiscal year. As discussed previously, the Company recorded special
charges amounting to $68.9 million in cost of revenue in the third quarter of
fiscal year 1994. The charges consist of estimated costs associated with the
termination of certain products, a reduction in manufacturing capacity,
write downs of inventory and equipment that are no longer productive, and
related future commitments to third parties. Excluding the special charges
of $68.9 million, gross margins for the third quarter of fiscal year 1994 and
the first nine months of fiscal year 1994 were 4.8% and (1.5%), respectively.
Excluding the non-recurring revenue of $10.0 million recognized in the first
quarter of fiscal year 1993, gross margin for the first nine months of fiscal
year 1993 was 21.9%.
Excluding the impact of the special charges recorded in the third quarter of
fiscal year 1994, the significant decline in gross margin during the first
nine months of fiscal year 1994 is primarily attributable to the prevailing
negative business conditions in the disk drive industry, including intense
price competition and excess industry capacity, as well as to cost and time-
to-market issues with regard to the Company's new products. Industry
conditions improved during the third quarter of fiscal year 1994 relative to
the preceding quarter. During the third quarter of fiscal year 1994, the
Company and its competitors generally experienced an increase in demand and
concurrent easing of price reductions. Most products were in short supply
and, in certain instances, there were prices increases.
During the first nine months of fiscal year 1994, gross margin was negatively
impacted by the Company's failure to produce planned unit volumes of its MXT
product line due to a quality problem involving a particular supplier's
component plus higher costs than planned due to related design and
manufacturing issues, and failure to produce planned unit volumes of its 2.5-
inch product line due to design and component issues. A temporary shutdown
of production of the MXT product occurred during the first quarter and
resulted in an estimated loss of $25.0 million of revenue and an accompanying
negative gross margin for this product offering during that quarter. This
first quarter production shutdown of the MXT product also adversely affected
production costs in the second quarter of fiscal year 1994 until efficient
production levels were achieved. The design and component issues related to
the 2.5-inch product line resulted in a negative gross margin for this
product line during the first nine months of fiscal year 1994.
Beginning in the third quarter of fiscal year 1992, there was an industry-
wide increase in demand for disk drive products which led to a stabilization
in prices. This increase in demand, combined with a shift in the product mix
to higher capacity, higher gross margin products, led to improved gross
margin during the first eight months of fiscal year 1993. During the last
four months of fiscal year 1993 and continuing through the second quarter of
fiscal year 1994, however, gross margin declined significantly due to
increased price competition for 100-200 megabyte 3.5-inch products, price
erosion on older products as they are being phased out, and costs associated
with the startup and initial production of the Company's MXT products. Gross
margin improved between the second and third fiscal quarters of fiscal year
1994 from (3.3%) to 4.8%, excluding the special charges of $68.9 million, as
a result of increased unit sales volumes of certain products for which
average unit selling prices were relatively constant and average unit
manufacturing costs declined from quarter to quarter.
The Company believes that the reduced rate of decline in average unit selling
prices experienced in the third quarter of fiscal year 1994 may continue
through the fourth quarter of fiscal year 1994. Gross margin is expected to
improve during the fourth quarter of fiscal year 1994 as compared to the
prior quarter, but it is expected to remain in all likelihood at unacceptably
low levels. The Company will continue its efforts to reduce its average unit
manufacturing costs and to introduce and produce in volume new higher margin
products in an effort to improve gross margin during the remainder of fiscal
year 1994. However, there can be no assurance that the Company will be
successful in such efforts, and an additional loss, although less than the
previous four quarters, is anticipated for the fourth quarter of fiscal year
1994.
Operating Expenses
- -----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1993 1992 1993 1992
- -----------------------------------------------------------------------------
Research and development $ 25.8 $ 29.6 $ 83.1 $ 83.4
As a percentage of revenue 8.1% 7.4% 9.3% 7.6%
Selling, general and
administrative $ 19.8 $ 26.5 $ 60.1 $ 76.8
As a percentage of revenue 6.2% 6.6% 6.7% 7.0%
Restructuring $ 19.5 $ - $ 19.5 $ -
As a percentage of revenue 6.1% n/a 2.2% n/a
Research and Development
Research and development (R&D) expenses for the third quarter of fiscal year
1994 decreased from the same period of the prior fiscal year in absolute
dollars as planned. For the first nine months of fiscal year 1994, R&D
expenses were relatively flat in absolute dollars as compared to the same
period of the prior fiscal year. R&D increased as a percentage of revenue as
a result of the decreased revenue bases between each of the three-month and
six-month periods. While R&D spending in absolute dollars is expected to
decrease during the fourth quarter of fiscal year 1994, the Company must
continue to make substantial investments in research and development since
the timely introduction and transition to volume production of new products
is essential to its future success. In addition, R&D expenses may fluctuate
in the future resulting from the cost of acquiring rights to new
technologies.
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) declined in absolute
dollars and as a percentage of revenue for the third quarter and first nine
months of fiscal year 1994 compared to the same periods of the prior fiscal
year primarily due to the sale of the assets of SDI. SG&A for the third
quarter and first nine months of fiscal year 1993 included expenses incurred
by SDI until December 1992 at which time the Company sold the assets of SDI.
This decline in SG&A expenses also reflects the Company's efforts to control
and reduce expenditures. The Company has ongoing efforts to control costs and
expenditures and reduce SG&A expenses in future quarters, however, there can
be no assurance that the Company will be successful in such efforts.
Restructuring
The Company recorded a restructuring charge of $19.5 million in the third
quarter of fiscal year 1994. The restructuring plan provides for the
consolidation and streamlining of certain operations and administration, and
is expected to be completed within the twelve-month period from the date of
the charge. The restructuring plan provides for a worldwide headcount
reduction of approximately 500 employees, which was substantially completed
during February 1994. The Company's research and development activities will
be consolidated at its Longmont, Colorado facilities, which will eliminate
the need for certain facilities in San Jose, California. In addition, the
Company's actions will eliminate the need for certain manufacturing
facilities in Singapore. The charge consists of approximately $11.8 million
in estimated costs related to the worldwide reduction in headcount and
approximately $7.7 million associated with facility consolidations, including
lease and other obligations on certain facility leases, none of which extend
beyond calendar year 1994. The Company anticipates that these restructuring
actions will require the expenditures of approximately $19.0 million of cash
over the next twelve-month period, which will be provided by cash flow from
operations or capital infusions. As of December 25, 1993, approximately
$19.0 million of the $19.5 million charge remained in current liabilities.
As a result of these activities, the Company has eliminated an estimated $9.0
million of quarterly operating costs.
Interest expense, interest income, and minority interest in loss of joint
venture
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Three Months Ended Nine Months Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1993 1992 1993 1992
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Interest $ 2.2 $ 2.0 $ 8.1 $ 7.9
Interest income $ .2 $ .6 $ 1.3 $ 1.8
Minority interest $ - $ - $ - $ 1.0
The Company's minority interest account is related to Maxoptix Corporation
(Maxoptix), a joint venture formed in March 1989 with Kubota Corporation
(Kubota), 63% owned by Maxtor and 34% owned by Kubota, subject to certain
adjustments. All operating losses incurred by Maxoptix from March 31, 1990
through June 27, 1992 were allocated to the minority interest account and,
therefore, did not impact Maxtor's net income (loss). During the fiscal
quarter ended September 26, 1992, the minority interest account was reduced
to zero. Thereafter, all future operating losses incurred by Maxoptix were
and will continue to be fully allocated to Maxtor.
Provision for income taxes and effective tax rate
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Three Months Ended Nine Months Ended
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1993 1992 1993 1992
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Provision for income taxes $ .5 $ 4.7 $ 1.5 $ 16.5
Effective tax rate n/a 20.0% n/a 20.0%
The tax provision for the third quarter and first nine months of fiscal year
1994 consists primarily of foreign taxes. The Company's effective tax rate
for the third quarter and first nine months of fiscal year 1993 was 20%,
which was below the combined federal and state statutory rate due to the tax
benefits associated with the Company's Singapore operations and the benefit
of net operating loss carryforwards.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). Under SFAS No. 109, the liability method is used in
accounting for income taxes. For purposes of this method, deferred tax
assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
by applying enacted tax rates and laws to the taxable years in which such
differences are expected to reverse. The Company adopted the provisions of
SFAS No. 109 in its financial statements effective March 28, 1993 for fiscal
year 1994. Adoption of SFAS No. 109 had no financial impact on the Company's
consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's recent losses have also impacted its financial position by
decreasing available cash and requiring the Company to seek alternative
financing, including replacing its existing revolving line of credit and
seeking other long-term financing. As of December 25, 1993, the Company had
cash and cash equivalents of $102.1 million ($61.9 million net of $40.2
million of short-term borrowings) as compared to $135.3 million of cash and
cash equivalents as of March 27, 1993 ($102.3 million net of $33.0 of short-
term borrowings). However, the Company subsequently received $150 million
from Hyundai on February 3, 1994, pursuant to the Stock Purchase Agreement
described below.
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Nine Months Ended
Dec. 25, 1993
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Cash and cash equivalents $ 102.1
Net cash provided by operating activities $ 4.4
Net cash used in investing activities $ 24.9
Net cash used in financing activities $ 12.7
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Of the net cash provided by operating activities during the first nine months
of fiscal year 1994, decreases in accounts receivable and inventories
accounted for approximately $119 million, and increases in current
liabilities accounted for an additional $62 million. This was offset in
part by the net loss less non-cash depreciation and amortization, which used
a net $179 million. The decline in accounts receivable primarily reflects
lower sales levels in the quarter ending December 25, 1993 than in the
quarter ending March 27, 1993. Days sales outstanding improved to 29 days at
the end of the third quarter of fiscal year 1994 from 39 days at the end of
the quarter ending March 27, 1993, however, this is not intended to be
indicative of future results and days sales outstanding may change
significantly in future periods. Inventories decreased primarily because of
the Company efforts to balance production with demand and control inventory
purchases. Despite the Company's efforts to tightly control inventory
levels, inventories may increase in the future based on changes in market
demand or industry-wide production. Current liabilities increased by
approximately $54 million as a result of the special and restructuring
charges recorded by the Company in the third quarter of fiscal year 1994.
Net cash used in investing activities was primarily attributable to $26.1
million of capital expenditures. A significant portion of the capital
expenditure activity was related to the acquisition of manufacturing
equipment. Depending on business conditions, the Company currently expects
to make capital expenditures of approximately $30 to $35 million during
fiscal year 1994, as compared to approximately $92 million during fiscal
year 1993.
Net cash used in financing activities during the first nine months of fiscal
year 1994 primarily reflects cash used to reduce outstanding debt, offset in
part by proceeds received from short-term borrowings.
In September 1992, the Company established a $70.0 million domestic unsecured
revolving line of credit. In April 1993, in consideration of the amendment
of certain financial covenants, the Company agreed to grant the lenders a
security interest in the Company's inventories and receivables which would
automatically become effective under certain circumstances. In July 1993,
the Company obtained a waiver and second amendment of certain financial
covenants through September 27, 1993, and in connection with the waiver,
agreed to grant the lenders a security interest in the Company's inventories
and receivables and agreed to limit its borrowings to the $27.0 million of
current borrowings at that time. During fiscal year 1993, the Company
established a $48.0 million term loan facility in Singapore with several
banks. In July 1993, the Company repaid in full the outstanding borrowings
on that term loan facility and terminated the agreement.
On September 17, 1993, the Company obtained a secured, asset-based revolving
line of credit of $76.0 million. This line of credit replaced the existing
$70.0 million line of credit from different lenders, as well as $6.0 million
equipment term loans. This asset-based revolving line of credit provides for
borrowings up to $76.0 million based on eligible receivables at various
interest rates over a two year term and is secured by receivables, certain
inventories and other assets. As of December 25, 1993, $40.2 million of
borrowings and $2.3 million of letters of credit were outstanding. As of
February 4, 1993, the $40.2 million of borrowings had been fully repaid. The
Company was in default of certain loan covenants as of the end of the quarter
ended December 25, 1993. In January 1993, the Company obtained an
unconditional waiver of those defaults as of December 25, 1993 and may,
therefore, utilize the line of credit, if borrowing is necessary.
In August 1993, the Company signed a letter of intent for the creation of a
strategic relationship with Hyundai. In September 1993, the Company then
signed the Stock Purchase Agreement with Hyundai. Conclusion of the
transaction was conditional upon approval of the U.S. and Korean governments,
Maxtor stockholders and a number of other conditions. In November 1993, the
U.S. government provided all necessary approvals. In December 1993, Maxtor
stockholders approved all matters submitted to them regarding the proposed
investment. At the end of January 1994, Korean government approval was
granted. The transaction closed on February 3, 1994 and will be recorded in
the fourth quarter of fiscal year 1994.
Under the terms of the agreement, Hyundai invested $150 million in Maxtor and
received approximately 19.4 million shares of common stock, representing a
per share price of $7.70, and constituting 40% of the Company's outstanding
voting stock. The stock issued to Hyundai is a special series of common
stock, entitling Hyundai to representation on the Company's Board of
Directors proportionate to its share of ownership and certain voting rights.
In addition, the Company's Board of Directors is required to elect as
Chairman of the Board the director designated by Hyundai. The agreement also
provides that Hyundai may not acquire more than 45% of Maxtor except in a
tender for all outstanding shares or in certain other cases. These
provisions could deter a third party from making a tender or exchange offer
for the stock of the Company.
The Company believes that the $150 million of funding generated by the
Hyundai investment, and the Company's cash flow from operations, equipment
financing and available lines of credit will be sufficient to fund the
Company's working capital and capital expenditure requirements through fiscal
year 1995.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. It is the
present policy of the Board of Directors to retain earnings for use in the
business. The Company does not anticipate paying cash dividends in the near
future. Under the terms of the Company's line of credit, the Company may not
declare or pay any dividends without the prior consent of its lenders.
SIGNATURE
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.
MAXTOR CORPORATION
Date: May 9, 1994 By: /s/ Walter D. Amaral
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Walter D. Amaral
Chief Financial Officer
