8/12/97
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
- --- Securities Exchange Act of 1934
For the period ended June 28, 1997.
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 77-0123732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
510 Cottonwood Drive, Milpitas, CA 95035
(Address of principal executive offices) (Zip Code)
(408) 432-1700
Registrant's telephone number, including area code
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
----- -----
No shares of Common Stock and 58,208,955 shares of Series A
Preferred Stock were issued and outstanding as of August 11,
1997.
MAXTOR CORPORATION
FORM 10-Q
June 28,1997
INDEX
Part I. Financial
Information Page
- ------------------ -----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations -
Three Months and Six Months Ended
June 28, 1997 and June 29, 1996 3
Consolidated Balance Sheets-
June 28, 1997 and December 28, 1996 4 -5
Consolidated Statements of Cash Flows-
Six Months Ended June 28, 1997
and June 29, 1996 6 -7
Notes to Consolidated Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended Six Months Ended
------------------- ----------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
-------- -------- -------- -------
Revenue $273,976 $255,968 $512,018 $566,555
Revenue from affiliates 9,118 5,370 18,084 9,741
-------- -------- -------- -------
Total revenue 283,094 261,338 530,102 576,296
Cost of revenue 271,968 328,351 517,830 627,362
Cost of revenue from
affiliates 8,359 5,415 16,613 9,317
-------- -------- -------- -------
Total cost of revenue 280,327 333,766 534,443 636,679
Gross profit 2,767 (72,428) (4,341) (60,383)
-------- -------- -------- -------
Operating expenses:
Research and
development 25,523 28,806 51,917 54,107
Selling, general
and administrative 15,347 24,244 30,408 46,418
-------- ------- -------- --------
Total operating expenses 40,870 53,050 82,325 100,525
Loss from operations (38,103) (125,478) (86,666) (160,908)
Interest expense (8,697) (4,768) (16,624) (8,789)
Interest income 416 289 2,197 622
--------- -------- -------- --------
Loss before provision
for income taxes (46,384) (129,957) (101,093) (169,075)
Provision for income taxes 224 232 501 931
--------- -------- -------- ---------
Net loss $(46,608) $(130,189) $(101,594) $(170,006)
See accompanying notes.
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 28, December 28,
1997 1996
------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $33,992 $31,313
Accounts receivable, net of
allowance for doubtful accounts
of $4,376 at June 28, 1997 and
$5,255 at December 28, 1996 141,570 82,876
Accounts receivable from affiliates 2,455 6,248
Inventories:
Raw materials 29,360 33,012
Work-in-process 21,905 15,674
Finished goods 77,461 32,192
------------ --------------
128,726 80,878
Prepaid expenses and other 4,472 5,239
------------ --------------
Total current assets 311,215 206,554
Property, plant and equipment, at cost:
Buildings 32,186 29,512
Machinery and equipment 208,026 194,644
Furniture and fixtures 10,998 13,300
Leasehold improvements 10,120 12,695
----------- -------------
261,330 250,151
Less accumulated depreciation
and amortization (156,395) (158,078)
------------ -------------
Net property, plant and equipment 104,935 92,073
Other assets 13,755 15,912
------------- -----------
$429,905 $314,539
See accompanying notes.
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Continued)
(Unaudited)
June 28, December 28,
1997 1996
------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings $159,170 $149,800
Short-term borrowings due to
affiliates 185,000 -
Accounts payable 150,968 109,956
Accounts payable to affiliates 16,453 13,459
Income taxes payable 5,058 5,088
Accrued payroll and payroll-related
expenses 20,898 17,159
Accrued warranty 15,673 20,194
Accrued expenses 76,629 97,166
Long-term debt and capital lease
obligations due within one year 5,029 71
------------ ------------
Total current liabilities 634,878 412,893
Long-term debt and capital lease
obligations due after one year 224,084 229,109
Commitments and contingencies - -
Stockholder's deficit:
Series A Preferred stock, $0.01 par
value, 95,000,000 shares
authorized; 58,208,955 shares
issued and outstanding at June 28,
1997 and December 28, 1996;
aggregated liquidation value of
$390,000 582 582
Common stock, $0.01 par value,
110,000,000 shares authorized; no
shares issued and outstanding at
June 28, 1997 and December 28, 1996 - -
Additional paid-in capital 335,017 335,017
Accumulated deficit (764,656) (663,062)
------------- ------------
Total stockholder's deficit (429,057) (327,463)
------------- ------------
$ 429,905 $ 314,539
See accompanying notes.
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
--------------------------------------
June 28, June 29,
1997 1996
-------------- ------------
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net loss $(101,594) $(170,006)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 26,244 30,472
Inventory reserves for lower of cost
or market (3,295) 42,338
Gain on sale of subsidiary - (2,385)
Other (425) 633
Change in assets and liabilities:
Accounts receivable (35,280) 49,137
Accounts receivable from affiliates 3,793 (2,979)
Net collections of accounts receivable
sold to financing company (42,239) 36,144
Inventories (45,756) (67,048)
Prepaid expenses and other 767 17
Accounts payable 25,358 11,298
Accounts payable to affiliates 2,994 11,504
Income taxes payable (30) (1,347)
Accrued payroll and
payroll-related expenses 3,739 5,310
Accrued warranty (4,521) (4,746)
Accrued expenses (509) 465
------------ ----------
Total adjustments (69,160) 108,813
------------ ----------
Net cash used in operating activities (170,754) (61,193)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of subsidiary - 25,000
Purchase of property, plant and equipment (23,955) (47,842)
Proceeds under note receivable from supplier 1,476 -
Other 1,606 (5,932)
----------- -----------
Net cash used in investing activities (20,873) (28,774)
Cash flows from financing activities:
Proceeds from issuance of short-term
borrowings 194,370 77,310
Principal payments on short-term borrowings - (1,291)
Principal payments on debt,
including capital lease obligations (64) (112)
Proceeds from issuance of common stock, net of
notes receivable and stock repurchases - 1,492
--------- -------
Net cash provided by financing activities 194,306 77,399
Net change in cash and cash equivalents 2,679 (12,568)
Cash and cash equivalents at beginning
of period 31,313 41,366
----------- -----------
Cash and cash equivalents at end of period $ 33,992 $ 28,798
See accompanying notes.
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
- ---------------------------------------------------------------------------
June 28, June 29,
1997 1996
- --------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 11,885 $ 7,283
Income taxes 514 136
Supplemental information on non-cash investing and financing activities:
Purchase of property, plant and equipment
financed by accounts payable 15,654 2,334
Exchange of Common Stock for
Series A Preferred Stock - 582
- --------------------------------------------------------------------------
See accompanying notes.
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidated financial statements
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the
accounts of Maxtor Corporation (Maxtor or the Company) and its
wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. Maxtor
Corporation operates as a wholly-owned subsidiary of Hyundai
Electronics America (HEA). Accordingly, no earnings per share
information is disclosed. All adjustments of a normal recurring
nature which, in the opinion of management, are necessary for a
fair statement of the results for the interim periods have been
made. It is recommended that the interim financial statements be
read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the fiscal year ended
December 28, 1996. Interim results are not necessarily indicative
of the operating results expected for later quarters or the full
fiscal year.
2. Short-term borrowings
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. Under this
program, the Company can sell its qualified trade accounts
receivable up to $100 million on a non-recourse basis. The face
amount of the eligible receivables are discounted based on the
Capital Receivables Corporation commercial paper rate (5.63% as of
June 28, 1997) plus commission and is subject to a 10% retention.
As of June 28, 1997, $61.5 million in sales of accounts
receivable, for which proceeds had not yet been received, were
included in accounts receivable and $35.6 million in collections
of accounts receivable not yet remitted were included in accrued
and other liabilities.
The Company has two unsecured, revolving lines of credit totaling
$225 million (the Facilities) through Citibank, N.A. and
syndicated among fifteen banks. The Facilities are guaranteed by
Hyundai Electronics Industries Co., LTD (HEI). A total of $96
million of the Facility is a 364-day committed facility, renewable
annually at the option of the syndicate banks. The facility is
used primarily for general operating purposes and bears interest
at a rate based on LIBOR plus 0.53 percent. As of June 28, 1997,
$96 million of borrowings under this line of credit were
outstanding. A total of $129 million of the Facilities is a three
year committed facility that is also used primarily for general
operating purposes and bears interest at a rate based on LIBOR
plus 0.53 percent. As of June 28, 1997, $129 million of
borrowings under this facility were outstanding.
From September 30, 1996 to June 28, 1997, the Company obtained
credit facilities amounting to $50 million in the aggregate from
three banks. The facilities, which are guaranteed by HEI, are used
primarily for general operating purposes and bear interest at a
rate ranging from 5.97 to LIBOR plus 0.60 percent. As of June 28,
1997, $50 million of borrowings under these credit facilities were
outstanding.
On April 10, 1997, the Company obtained a $150 million line of
credit from HEA which replaced all previous HEA lines. In June
1997, this line was amended, increasing the line of credit to $185
million. As of June 28, 1997, $185 million was outstanding.
Interest is paid quarterly at approximately 6.5%.
Under the terms of the Company's line of credit facilities, the
Company may not declare or pay any dividends without the prior
consent of its lenders.
3. Contingencies
On December 20, 1996, the Company filed an action in Colorado
District Court, County of Boulder, against StorMedia, Inc., its
subsidiary, StorMedia International, Ltd. and its Chief Executive
Officer, William J. Almon. This action, which arose out of an
agreement for the purchase of media by the Company from StorMedia,
was stayed in March 1997.
The Company has been notified of certain other claims, including
claims of patent infringement. While the ultimate outcome of
such claims is not determinable, it is reasonably possible that
an adverse resolution of certain of these matters could have a
material impact on the financial condition, results of operations
or cash flows of the Company. This statement should be read in
conjunction with "PART I, Item 1. Patents and Licenses" included
in the Company's Annual Report on Form 10-K for the year ended
December 28, 1996.
4. Sale of Subsidiary
In May 1996, the Company entered into an agreement to sell a
majority interest in International Manufacturing Services, Inc
(IMS) to certain IMS management and other investors ("Buyer"). At
completion of the transaction in June 1996, the Company received
$25 million in cash and $20 million in notes from IMS, and
retained a 23.5% ownership interest in IMS. As a result of the
transaction, the IMS consolidated financial position at June 29,
1996 reflected a stockholders' deficit of approximately $14
million. Therefore, the Company has written down its remaining
equity interest in IMS to zero. In addition, given the stockholder
deficit of IMS and the subordination of the Company's notes
receivable from IMS to bank debt of IMS, combined with certain
specified conditions which must be achieved before any payment of
principal will occur, the Company has fully reserved its notes
from IMS.
5. Derivatives
The Company uses forward foreign exchange contracts to hedge
certain assets denominated in foreign currencies. For these
instruments, risk reduction is assessed on a transaction basis and
the instruments are designed as, and effective as a hedge and are
highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on
these hedges are included in the carrying amount of the assets and
are ultimately recognized in income as part of those carrying
amounts. If a hedging instrument ceases to qualify as a hedge, any
subsequent gains and losses are recognized currently in income.
The Company does not use any derivatives for trading or
speculative purposes. If a derivative ceases to qualify for hedge
accounting, it is accounted for on a mark to market basis.
6. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income. This statement establishes
requirements for disclosure of comprehensive income and becomes
effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income
generally represents all changes in stockholders' equity except
those resulting from investments or contributions by stockholders.
The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially
impact the Company's results of operations.
In June 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for disclosure
about operating segments in annual financial statements and
selected information in interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement
supersedes Statement of Financial Accounting Standards No. 14,
Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for fiscal years beginning after
December 15, 1997, and requires that comparative information from
earlier years be restated to conform to the requirements of this
standard. The Company is evaluating the requirements of SFAS 131
and the effects, if any, on the Company's current reporting and
disclosures.
This report includes a number of forward-looking statements which
reflect the Company's current views with respect to future events
and financial performance. These forward-looking statements are
subject to certain risks and uncertainties, including those
discussed in Item 2. Management's Discussions and Analysis of
Financial Condition and "-Results of Operations", "-Gross Margin",
"-Liquidity and Capital Resources", and elsewhere in this report,
that could cause actual results to differ materially from
historical results or those anticipated. In this report, the
words "anticipates", "believes", "expects", "intends", "future"
and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
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.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 28, 1997 COMPARED TO QUARTER ENDED JUNE 29, 1996
Three Months Ended Six Months Ended
- ------------------------------------------------------------------------
(In millions) June 28, June 29, June 28, June 29,
Fiscal quarter ended 1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------
Revenue $283.1 $ 261.3 $21.8 $530.1 $576.3 $(46.2)
Gross profit $ 2.8 $(72.4) $ 75.2 $(4.3) $(60.4) $ 56.1
As a percentage
of revenue 1.0% (27.7%) (0.8%) (10.5%)
Net loss $(46.6) $(130.2) $83.6 $(101.6) $(170.0) $68.4
As a percentage
of revenue (16.5%) (49.8%) (19.2%) (29.5%)
- ------------------------------------------------------------------------
Revenue
Revenue for the quarter ended June 28, 1997 increased 8.3%
primarily due to a shift in product mix to the Company's higher
capacity products. Unit volumes also increased by 26% versus the
quarter ended June 29, 1996. Over 80% of the Company's unit volume
for the quarter comprised drives with a capacity of 1.6 gigabytes
(GB) or higher, whereas the Company's unit volume for the same
quarter in the prior year primarily comprised drives with a
capacity of 1.6GB or less. Revenue for the six months ended June
28, 1997 decreased 8.0% when compared to the same period of the
prior year due primarily to lower volumes in the first quarter of
the current year, not offset entirely by higher volumes in the
second quarter.
During the three and six months ended June 28, 1997, one customer
accounted for 26% and 28% of the Company's revenue, respectively.
During the quarter ended June 29, 1996, one customer accounted for
over 10% of the Company's revenue.
Gross margin
Gross margin as a percentage of revenue improved in the quarter
ended June 28, 1997 compared to the quarter ended June 29, 1996.
As a result of the introduction of new products during the year of
1997, the Company's gross margin for the three and six months
ended June 28, 1997 increased dramatically as compared with the
same period a year ago. This improvement is due to new products
with better performance which result in higher prices.
Additionally, margins were affected by reserves for costs lower
than sales prices of $42.3 million in the first six months of
1996.
The Company continues its efforts to reduce its average unit
manufacturing costs however, the Company expects the industry will
continue to be characterized by price competition. In the next
three to six months, pricing pressures may be higher than
experienced in the past year. Any aggressive pricing moves by
competitors tend to have negative impacts on gross margins for the
industry as a whole, including the Company's gross margins.
Operating expenses
Three Months Ended Six Months Ended
- ------------------------------------------------------------------------
(In millions) June 28, June 29, June 28, June 29,
Fiscal quarter ended 1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------
Research and
development $ 25.5 $ 28.8 $ (3.3) $ 51.9 $54.1 $(2.2)
As a percentage
of revenue 9.0% 11.0% 9.8% 9.4%
Selling, general and
administrative $ 15.3 $ 24.2 $ (8.9) $ 30.4 $46.4 $(16.0)
As a percentage
of revenue 5.4% 9.3% 5.7% 8.1%
- ------------------------------------------------------------------------
Research and development (R&D) expenses decreased for the three
and six months ended June 28, 1997 primarily as a result of the
Company's continued emphasis on cost containment. The Company
intends to continue making substantial investments in research and
development since the timely introduction and transition to volume
production of new products is an essential factor in management's
efforts to restore it to profitability.
Selling, general and administrative (SG&A) expenses decreased as a
percentage of revenue and in absolute dollars due to the Company's
ongoing efforts to control costs. Reductions in overall headcount
and controlled marketing expenses contributed to lower expenses
for the three and six months ended June 28, 1997.
Interest expense and interest income
Three Months Ended Six Months Ended
- --------------------------------------------------------------------------
(In millions) June 28, June 29, June 28, June 29,
Fiscal quarter ended 1997 1996 Change 1997 1996 Change
- --------------------------------------------------------------------------
Interest expense $8.7 $4.8 $3.9 $16.6 $8.8 $7.8
Interest income $ .4 $ .3 $ .1 $2.2 $ .6 $1.6
- --------------------------------------------------------------------------
Interest expense increased due to a substantial increase in short-
term and long-term borrowings required in order to fund the
Company's operations. The Company had $344.2 million of short-
term and $129 million of long-term lines of credit borrowings
outstanding at June 28, 1997, compared with $278.8 million of
total borrowings outstanding at June 29, 1996. The Company
expects to maintain approximately the same or higher levels of
borrowings for the remainder of the year.
Interest income increased slightly due to the availability of cash
for investing purposes. Income for the six months ended June 28,
1997 increased substantially over 1996 due to payments received
under notes receivable from a former subsidiary that were
recognized on the recovery basis.
Provision for income taxes
Three Months Ended Six Months Ended
- -----------------------------------------------------------------------
(In millions) June 28, June 29, June 28, June 29,
Fiscal quarter ended 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------
Provision for
income taxes $0.2 $0.2 $ 0.0 $ 0.5 $0.9 $(0.4)
- ------------------------------------------------------------------------
The provision for income taxes consists primarily of foreign taxes. The
decrease of $.4 million for the six month comparative periods is due to
the elimination of taxes in Hong Kong as a result of the June 1996 sale
of a subsidiary. The Company's effective tax rate for fiscal years 1997
and 1996 differs from the combined federal and state rates due to the
repatriation of foreign earnings absorbed by current year losses, and
the Company's U.S. operating losses and valuation of temporary
differences not providing current tax benefits, offset in part by the
tax savings associated with the Company's Singapore operations. Income
from the Singapore operations is not taxable in Singapore as a result of
the Company's pioneer tax status.
LIQUIDITY AND CAPITAL RESOURCES
- ------------------------------------------------------------------------
As of and for As of and for
the six months ended the six months ended
(In millions) June 28, 1997 June 29, 1996
- ------------------------------------------------------------------------
Cash and cash equivalents $ 34.0 $ 28.8
Short-term borrowings $159.2 $109.8
Short-term borrowings
due to affiliate $185.0 $ 65.0
Net cash used in
operating activities $170.8 $ 61.2
Net cash used in
investing activities $ 20.9 $ 28.8
Net cash provided by
financing activities $194.3 $ 77.4
- ------------------------------------------------------------------------
As of June 28, 1997, the Company had cash and cash equivalents of
$34.0 million as compared to $31.3 million as of December 28,
1996, an increase of $2.7 million. The increase in the Company's
cash and cash equivalents was primarily the result of the
slightest excess of credit borrowing over operating losses and
capital expenditures.
Net cash used in operating activities during the six months ending
June 28, 1997 was primarily attributable to the net loss from
operations net of non-cash depreciation and amortization, an
increase in accounts receivable and inventories offset by cash
provided by increases in accounts payable and other current
liabilities. Other significant uses of cash during the six months
ended June 28, 1997 were $24.8 million in capital expenditures
related primarily to acquisition of manufacturing and engineering
equipment to develop new products and enhance productivity of the
Singapore manufacturing facility. Funding these uses of cash, the
Company drew down $194 million on its credit facilities. Credit
lines are discussed at length below.
The Company has a credit facility in the amount of $13.8 million
to be used for capital equipment requirements at the Singapore
facility. This credit facility is guaranteed by HEI and was
extended for one year under similar terms with principal and
interest due on January 30, 1998.
The Company has two unsecured, revolving lines of credit totaling
$225 million (the Facilities) through Citibank, N.A. and
syndicated among fifteen banks. The Facilities are guaranteed by
HEI. A total of $96 million of the Facility is a 364-day
committed facility, renewable annually at the option of the
syndicate banks and expiring August 28, 1997. The facility is
used primarily for general operating purposes and bears interest
at a rate based on LIBOR plus 0.53 percent. As of June 28, 1997,
$96 million of borrowings under this line of credit were
outstanding. A total of $129 million of the Facilities is a three
year committed facility that is also used primarily for general
operating purposes and bears interest at a rate based on LIBOR
plus 0.53 percent. As of June 28, 1997, $129 million of
borrowings under this line of credit were outstanding.
The Company has credit facilities amounting to $50 million in the
aggregate from three banks. The facilities, which are guaranteed
by HEI, are used primarily for general operating purposes and bear
interest rates ranging from 5.97 percent to LIBOR plus 0.65
percent. As of June 28, 1997, $50 million of borrowings under
this line of credit were outstanding.
On April 10, 1997, the Company renewed its intercompany line of
credit from HEA for $185 million. This line of credit allows for
draw downs up to $185 million and interest is payable quarterly at
approximately 6.5%. As of June 28, 1997, $185 million was
outstanding.
The liquidity of the Company continued to be adversely affected
during the six months ended June 28, 1997 by significant losses
from operations and liquidity has been significantly reduced
compared to the same period last year. The Company is
implementing ongoing measures with the goal of decreasing losses
from operations and thus improving liquidity. In addition to
attempting to improve operating margins on product sales through
the introduction of new products and reduction of manufacturing
costs, the Company remains focused on controlling other operating
expenses. However, the Company believes that it must continue to
make substantial investments in R&D since the timely introduction
and transition to volume production of new products is essential
to its future success.
The Company expects that it will require alternative sources of
liquidity, including additional sources of financing for the
remainder of 1997. The Company is engaged in ongoing discussions
with various parties, including HEI, HEA and certain financial
institutions regarding renewed or additional sources of financing,
including an additional infusion of equity from HEA, which is
subject to various contingencies including approval by the Bank of
Korea. While the Company believes that additional sources of
financing will be available, there can be no assurance that
financing will be available on terms which are favorable to the
Company.
Subject to unforeseen changes in general business conditions, the
Company believes that the combination of the measures described
above and other available actions, together with its balances of
cash and cash equivalents, equipment financing and line of credit
borrowing capabilities (supported by HEI and HEA) and the expected
equity infusion, will be sufficient to fund the Company's working
capital and capital expenditure requirements at least through
fiscal year 1997.
The Company uses forward foreign exchange contracts to hedge
certain assets denominated in foreign currencies. For these
instruments, risk reduction is assessed on a transaction basis and
the instruments are designed as, and effective as a hedge and are
highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on
these hedges are included in the carrying amount of the assets and
are ultimately recognized in income as part of those carrying
amounts. If a hedging instrument ceases to qualify as a hedge, any
subsequent gains and losses are recognized currently in income.
The Company does not use any derivatives for trading or
speculative purposes. If a derivative ceases to qualify for hedge
accounting, it is accounted for on a mark to market basis.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income. This statement establishes
requirements for disclosure of comprehensive income and becomes
effective for the Company for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income
generally represents all changes in stockholders' equity except
those resulting from investments or contributions by stockholders.
The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially
impact the Company's results of operations.
In June 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for disclosure
about operating segments in annual financial statements and
selected information in interim financial reports. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement
supersedes Statement of Financial Accounting Standards No. 14,
Financial Reporting for Segments of a Business Enterprise. The new
standard becomes effective for fiscal years beginning after
December 15, 1997, and requires that comparative information from
earlier years be restated to conform to the requirements of this
standard. The Company is evaluating the requirements of SFAS 131
and the effects, if any, on the Company's current reporting and
disclosures.
TRENDS AND UNCERTAINTIES
General
The Company competes in the highly cyclical disk drive industry
and is subject to a number of risks which have affected the
Company's operating results in the past and may affect its future
operating results. The industry is characterized by rapid
technological change, intense competition, short product life
cycles, and significant price erosion during a product life cycle.
At times, the industry is also subject to excess production
capacity and component cost pressures as a result of key component
shortages. Managing product transitions and bringing products to
market in a timely and cost effective manner are critical to the
success of industry participants, including the Company. Many of
the Company's competitors have had broader product lines than the
Company with which to compete in this environment.
Industry Characteristics
As with all companies in the disk drive industry, the Company's
financial results continue to be heavily dependent on the success
of its products. Competitive areal densities are continuing to
increase dramatically. Several larger competitors have already
focused their desktop drive products on magneto-resistive (MR)
head technology. MR heads provide more signal than older inductive
head technologies at today's high densities. Currently, the
Company believes this more aggressive MR-based areal density curve
is dictating the capacities of choice at major OEM accounts.
Additionally, the Company believes alternative head technologies
are lagging behind the MR curve by four to six months. Because of
the factors discussed above, the Company's strategy in 1997
forward is centered on introducing desktop products which
incorporate MR technology and which are increasingly less
expensive to manufacture.
Data storage manufacturers continually strive for larger storage
capacities, higher performance and lower cost. Short product life
cycles also increase the importance of the Company's ability to
successfully manage product transitions. During 1996, the Company
successfully managed certain product transitions. However, certain
new products introduced by competitors, as well as by the Company,
tend to displace older products. The failure to adequately manage
product transitions could result in the loss of market
opportunities, significantly lower gross margins, decreased sales
of existing products, cancellation of products or product lines,
the accumulation of obsolete and excess inventory, and resulting
charges related to obsolete capital equipment. 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.
Manufacturing Characteristics
The Company's manufacturing processes require large volumes of
leading edge, high-quality components supplied by outside vendors.
Generally, the Company does not have long-term supply agreements
with its vendors. The Company has qualified multiple vendors for
components where practical. However, some leading edge components
for the Company's new generation of products may only be available
from a limited number of vendors. The Company has periodically
received notices from vendors that they are unable to supply
required volumes of certain key components. Vendor de-commitments
can adversely impact the Company's ability to ship products as
scheduled to its customers. While the Company has qualified and
continues to qualify multiple vendors for many components, it is
reliant on, and will continue to be reliant on, the availability
of supply from its vendors for many semi-custom and custom
integrated circuits, heads, media and other key components.
Because the Company is less vertically integrated than its
competitors, an extended shortage of required materials and
supplies could have a more severe effect on the Company's revenues
and earnings as compared to its competition. In light of current
industry conditions, the Company is focused on developing good
business relationships with its vendors and utilizing strategic
alliances for certain components where practical.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On December 20, 1996, the Company filed an action in Colorado
District Court, County of Boulder, against StorMedia, Inc., its
subsidiary, StorMedia International, Ltd. and its Chief Executive
Officer, William J. Almon. This action, which arose out of an
agreement for the purchase of media by the Company from StorMedia,
was stayed in March 1997.
The Company has been notified of certain other claims, including
claims of patent infringement. While the ultimate outcome of
such claims is not determinable, it is reasonably possible that
an adverse resolution of certain of these matters could have a
material impact on the financial condition, results of operations
or cash flows of the Company. This statement should be read in
conjunction with "PART I, Item 1. Patents and Licenses" included
in the Company's Annual Report on Form 10-K for the year ended
December 28, 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a)Exhibits:
See Index to Exhibits on pages to hereof.
---- ----
b)Reports on Form 8-K:
None
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: August 11, 1997 By: /s/ Paul J. Tufano
-----------------------
Paul J. Tufano
Vice President,
Finance and Chief
Financial Officer
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