11/10/97
UNITED STATE 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 September
27, 1997.
Transition report pursuant to Section 13 or 15(d) of the
- -----
Securities Exchange Act of 1934 For the transition period
from to
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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 November 10,
1997.
MAXTOR CORPORATION
FORM 10-Q
September 27,1997
INDEX
Part I. Financial Information Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 27, 1997 and September 28, 1996 3
Condensed Consolidated Balance Sheets-
September 27, 1997 and December 28, 1996 4
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended September 27, 1997
and September 28, 1996 5 -6
Notes to Condensed Consolidated Financial
Statements 7 -8
Item 2. Management's Discussion and Analysis of
Condensed Financial Condition and Results
of Operations 9 -13
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. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenue $ 383,363 $ 276,640 $ 895,381 $ 843,195
Revenue from affiliates 8,863 7,859 26,947 17,600
------------ ------------ ------------ ------------
Total revenue 392,226 284,499 922,328 860,795
------------ ------------ ------------ ------------
Cost of revenue 362,659 282,883 880,489 910,245
Cost of revenue from
affiliates 8,020 7,973 24,633 17,290
------------ ------------ ------------ ------------
Total cost of revenue 370,679 290,856 905,122 927,535
------------ ------------ ------------ ------------
Gross profit (Loss) 21,547 (6,357) 17,206 (66,740)
------------ ------------ ------------ ------------
Operating expenses:
Research and
development 26,714 30,002 78,631 84,109
Selling, general and
administrative 15,536 19,800 45,944 66,218
------------ ------------ ------------ ------------
Total operating expenses 42,250 49,802 124,575 150,327
------------ ------------ ------------ ------------
Loss from operations (20,703) (56,159) (107,369) (217,067)
Interest expense (10,856) (6,355) (27,480) (15,144)
Interest income 395 296 2,592 918
------------ ------------ ------------ ------------
Loss before provision
for income taxes (31,164) (62,218) (132,257) (231,293)
Provision for income
taxes 199 221 700 1,152
------------ ------------ ------------ ------------
Net loss $ (31,363) $ (62,439) $ (132,957) $ (232,445)
------------ ------------ ------------ ------------
See accompanying notes.
MAXTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 27, December 28,
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,231 $ 31,313
Accounts receivable, net of allowance
for doubtful accounts of $3,544
at September 28, 1997 and $5,255
at December 28, 1996 323,032 124,806
Accounts receivable sold not yet
received (99,438) (41,930)
Inventories:
Raw materials 35,183 33,012
Work-in-process 18,299 15,674
Finished goods 80,293 32,192
------------- -------------
133,775 80,878
Prepaid expenses and other 11,577 11,487
------------- -------------
Total current assets 383,177 206,554
Property, plant and equipment, net 103,113 92,073
Other assets 13,434 15,912
------------- -------------
$ 499,724 $ 314,539
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Short-term borrowings $ 94,170 $ 149,800
Short-term borrowings due to affiliate 270,000 -
Accounts payable 198,952 109,956
Accounts payable to affiliates 20,069 13,459
Accrued payroll and payroll-related
expenses 24,953 17,159
Accrued expenses 59,135 66,649
Collection of receivable sold not
yet remitted 63,245 55,799
Long-term debt and capital lease
obligations due within one year 5,298 71
------------- -------------
Total current liabilities 735,822 412,893
------------- -------------
Long-term debt and capital lease
obligations due after one year 224,322 229,109
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Commitments and contingencies - -
Stockholder's deficit:
Series A Preferred stock 582 582
Common stock - -
Additional paid-in capital 335,017 335,017
Accumulated deficit (796,019) (663,062)
------------- -------------
Total stockholder's deficit (460,420) (327,463)
------------- -------------
$ 499,724 $ 314,539
============= =============
See accompanying notes.
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
-------------------------------
September 27, September 28,
1997 1996
-------------- --------------
Increase (decrease) in cash and cash
equivalents
Cash flows from operating activities:
Net loss $ (132,957) $ (232,445)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 41,108 43,631
Inventory reserves for lower of
cost or market (10,446) 33,414
Gain on sale of subsidiary - (2,385)
Other (128) 785
Change in operating assets and
liabilities:
Accounts receivable (91,457) 31,610
Accounts receivable from affiliates 516 (6,658)
Net collections of accounts receivable
sold to financing company (40,289) 6,000
Inventories (51,182) 19,238
Prepaid expenses and other (606) 2,771
Accounts payable 89,060 (29,771)
Accounts payable to affiliates 6,610 9,874
Income taxes payable (425) (1,813)
Accrued payroll and payroll-related
expenses 7,794 4,433
Accrued warranty (4,272) (5,736)
Accrued expenses 4,388 (5,934)
------------- ------------
Total adjustments (49,329) 99,459
------------- ------------
Net cash used in operating activities (182,286) (132,986)
------------- ------------
Cash flows from investing activities:
Proceeds from sale of subsidiary - 25,000
Purchase of property, plant and equipment (52,755) (58,587)
Other 3,954 (6,427)
------------- ------------
Net cash used in investing activities (48,801) (40,014)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of short-term
borrowings 279,370 27,310
Principal payments on short-term borrowings (65,000) 127,362
Principal payments on debt, including
capital lease obligations (365) (137)
Proceeds from issuance of common stock, net
of notes receivable and stock repurchases - 1,492
------------- ------------
Net cash provided by financing activities 214,005 156,027
------------- ------------
Net change in cash and cash equivalents (17,082) (16,973)
Cash and cash equivalents at beginning of period 31,313 41,366
------------- ------------
Cash and cash equivalents at end of period $ 14,231 $ 24,393
------------- ------------
(Continued)
See accompanying notes.
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In thousands)
(Unaudited)
Nine Months Ended
- ----------------------------------------------------------------------------
September 27, September 28,
1997 1996
- ----------------------------------------------------------------------------
Supplemental disclosures of cash flow
information:
Cash paid for:
Interest $11,885 $ 16,022
Income taxes 514 2,334
Supplemental information on non-cash
investing and financing activities:
Purchase of property, plant and equipment
financed by accounts payable - 8,522
Exchange of Common Stock for Series A
Preferred Stock - 582
- ----------------------------------------------------------------------------
See accompanying notes.
MAXTOR CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Condensed Consolidated financial statements
The accompanying unaudited condensed 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 (5.60% as of
September 27, 1997) plus commission and is subject to a 10%
retention. As of September 27, 1997, $87.3 million in sales of
accounts receivable, for which proceeds had not yet been received,
were included in accounts receivable and $63.2 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
$160 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 $31
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 September 27,
1997, $31 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 September 27, 1997, $129 million of
borrowings under this facility were outstanding.
From September 30, 1996 to September 27, 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 6.30 to LIBOR plus 0.65 percent.
As of September 27, 1997, $50 million of borrowings under these
credit facilities were outstanding.
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.
On April 10, 1997, the Company obtained a $150 million line of
credit from HEA which replaced all previous HEA lines. In August
1997, this line was amended, increasing the line of credit to $270
million, all other term stay the same. As of September 27, 1997,
$270 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. Subsequent Event
On October 22, 1997, International Manufacturing Services, Inc.
(IMS), completed an Initial Public Offering (IPO) of 5 million
common shares at a price of $11.50 per share. Under the terms of
the note due to the Company, if the proceeds of the IPO are in
excess of $45 million, IMS would be required to repay both
principle and interest on the note. The note and its related
interest, which aggregated $20.1 million, was paid in full as of
October 28, 1997. The Company had previously fully reserved the
amount of the note and related interest and expects to record a
gain on the transaction of approximately $21.9 million in the
fourth quarter of fiscal year 1997.
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 market 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", "-Trends and Uncertainties",
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 CONDENSED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
QUARTER ENDED September 27, 1997 COMPARED TO QUARTER ENDED September 28, 1996
Three Months Ended Nine Months Ended
- -----------------------------------------------------------------------------
(In millions) September 27, September 28, September 27, September 28,
Fiscal quarter
ended 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------
Revenue $ 392.2 $ 284.5 $ 107.7 $ 922.3 $ 860.8 $ 61.5
Gross profit $ 21.5 $ (6.4) $ 27.9 $ 17.2 $ (66.7) $ 83.9
As a percentage
of revenue 5.5% (2.2%) 1.9% (7.8%)
Net loss $ (31.4) $ (62.4) $ 31.0 $(133.0) $(232.4) $ 99.4
As a percentage
of revenue (8.0%) (21.9%) (14.4%) (27.0%)
- -----------------------------------------------------------------------------
Revenue
Revenue for the quarter ended September 27, 1997 increased 37.9%
primarily due to united volume increases, and a shift in product
mix to the Company's higher capacity products. Unit volumes
increased by 47.1% versus the quarter ended September 28, 1996.
Revenue and unit volume growth were a result of better time to
market performance, strengthening of the customer base and a trend
to shipping higher capacity drives. Revenue for the nine months
ended September 27, 1997 increased 7.1% when compared to the same
period of the prior year due to an increase in units sold. Pricing
pressures resulted in slightly lower average selling prices when
compared to the same period a year ago, and this trend is expected
to continue in the near future.
During the three and nine months ended September 27, 1997, one
customer accounted for 20.0% and 20.4% of the Company's revenue,
respectively. During the quarter ended September 28, 1996, two
customers accounted for over 10% of the Company's revenue.
Gross profit
Gross profit as a percentage of revenue improved in the quarter
ended September 27, 1997 compared to the quarter ended September
28, 1996. As a result of the introduction of new products during
the year of 1997, the Company's gross profit for the three and
nine months ended September 27, 1997 increased $27.9 million and
$83.9 million, respectively, as compared with the same period a
year ago. This improvement is due to new products which represent
a return to competitive aerial density. Additionally, margins
were affected by reserves for lower of cost or market of $33.4
million in the first nine months of 1996.
The Company continues its efforts to reduce its average unit
manufacturing costs and 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 margin for the
industry as a whole, including the Company's gross margin.
Operating expenses
Three Months Ended Nine Months Ended
- ------------------------------------------------------------------------------
(In millions) September 27,September 28, September 27, September 28,
Fiscal quarter ended 1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------------
Research and
development $ 26.7 $ 30.0 $ (3.3) $ 78.6 $ 84.1 $ (5.5)
As a percentage
of revenue 6.8% 10.5% 8.5% 9.8%
Selling, general and
administrative $ 15.5 $ 19.8 $ (4.3) $ 45.9 $ 66.3 $ (20.4)
As a percentage
of revenue 4.0% 7.0% 5.0% 7.7%
- ------------------------------------------------------------------------------
Research and development (R&D) expenses decreased for the three
and nine months ended September 27, 1997 primarily as a result of
the Company's continued emphasis on expense 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 the Company 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 nine months ended September 27, 1997.
Interest expense and interest income
Three Months Ended Nine Months Ended
- ------------------------------------------------------------------------------
(In millions) September 27, September 28, September 27, September 28,
Fiscal quarter ended 1997 1996 Change 1997 1996 Change
- ------------------------------------------------------------------------------
Interest expense $ 10.9 $ 6.4 $ 4.5 $ 27.4 $ 15.1 $ 12.3
Interest income $ .4 $ .3 $ .1 $ 2.6 $ .9 $ 1.7
- ------------------------------------------------------------------------------
Interest expense increased due to a substantial increase in short-
term borrowings required in order to fund the Company's
operations. The Company had $369.5 million of short-term and
$224.3 million of long-term lines of credit borrowings and debt
outstanding at September 27, 1997, compared with $149.8 million of
short-term and $229.1 million of long-term lines of credit
borrowings and debt outstanding at September 28, 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 nine months ended September
27, 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 Nine Months Ended
- -----------------------------------------------------------------------------
(In millions) September 27, September 28, September 27, September 28,
Fiscal quarter ended 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------
Provision for
income taxes $ 0.2 $ 0.2 $ 0.0 $ 0.7 $ 0.9 $ (0.2)
- -----------------------------------------------------------------------------
The provision for income taxes consists primarily of foreign
taxes. The decrease of $.2 million for the nine 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 nine months ended the nine months ended
(In millions) September 27, 1997 September 28, 1996
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 14.2 $ 24.4
Short-term borrowings $ 94.2 $ 54.8
Short-term borrowings due to
affiliate $ 270.0 $ 70.0
Net cash used in operating
activities $ 182.3 $ 133.0
Net cash used in investing
activities $ 48.8 $ 40.0
Net cash provided by financing
activities $ 214.0 $ 156.0
- -----------------------------------------------------------------------------
As of September 27, 1997, the Company had cash and cash
equivalents of $14.2 million as compared to $31.3 million as of
December 28, 1996, a decrease of $17.1 million.
Net cash used in operating activities during the nine months
ending September 27, 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
nine months ended September 27, 1997 were $52.8 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 $214 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
$160 million (the Facilities) through Citibank, N.A. and
syndicated among fifteen banks. The Facilities are guaranteed by
HEI. A total of $31 million of the Facility is a 364-day
committed facility, renewable annually at the option of the
syndicate banks and expiring August 27, 1998. The facility is
used primarily for general operating purposes and bears interest
at a rate based on LIBOR plus 0.53 percent. As of September 27,
1997, $31 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 September 27, 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 6.30 percent to LIBOR plus 0.65
percent. As of September 27, 1997, $50 million of borrowings
under this line of credit were outstanding.
On April 10, 1997, the Company obtained a $150 million line of
credit from HEA which replaced all previous HEA lines. In August
1997, this line was amended, increasing the line of credit to $270
million. As of September 27, 1997, $270 million was outstanding.
Interest is paid quarterly at approximately 6.5%.
The liquidity of the Company continued to be adversely affected
during the nine months ended September 27, 1997 by significant
losses from operations. 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. 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. 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 market 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 broader product lines which allow
them to mitigate certain volatility 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 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 and 1997, 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 2. Not Applicable
Item 3. Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting was held August 13, 1997, at which
its sole stockholder reelected Charles F. Christ and Y. H. Kim as
Class II directors to hold office for a three-year term, and
ratified the appointment of Coopers & Lybrand L.L.P. as the
Company's independent accounting firm for the Corporation's
fiscal year ending December 27, 1997.
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: November 10 , 1997 By: /s/ Paul J. Tufano
-----------------------
Paul J. Tufano
Vice President Finance and
Chief Financial Officer
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