<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3572 77-0123732
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
510 COTTONWOOD DRIVE
MILPITAS, CALIFORNIA 95035
(408) 432-1700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL R. CANNON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAXTOR CORPORATION
510 COTTONWOOD DRIVE
MILPITAS, CALIFORNIA 95035
(408) 432-1700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
GREGORY M. GALLO, ESQ. RAYMOND B. CHECK, ESQ.
DIANE HOLT FRANKLE, ESQ. DAVID W. HIRSCH, ESQ.
JEFFREY D. BALL, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON
GRAY CARY WARE & FREIDENRICH LLP ONE LIBERTY PLAZA
400 HAMILTON AVENUE NEW YORK, NEW YORK 10006
PALO ALTO, CALIFORNIA 94301-1825 (212) 225-2000
(650) 328-6561
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE AGGREGATE PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock,
$0.01 par value(4)... shares $ $150,000,000 $41,700
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par
value(5)............. shares $ $300,000,000 $83,400
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares which the underwriters have the option to
purchase to cover overallotments, if any.
(2) Estimated solely for the purpose of computing the registration fee.
(3) Computed pursuant to Rule 457(o) based upon the maximum aggregate offering
price of all of the securities listed in this table.
(4) Common stock which may be offered by Maxtor Corporation or Hyundai
Electronics America.
(5) Common stock which may be delivered by DECS Trust IV pursuant to certain
beneficial interests in the trust which may be offered by DECS Trust IV as
described herein.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (1) a
prospectus relating to an offer by Maxtor to sell newly issued shares of common
stock and an offer by Hyundai Electronics America to sell outstanding shares of
Maxtor common stock; and (2) a prospectus relating to the delivery by DECS Trust
IV of shares of Maxtor common stock owned by Hyundai Electronics America that
may be delivered on , 2002, pursuant to the terms of certain
beneficial interests in DECS Trust IV.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 21, 1998
PROSPECTUS
SHARES
[MAXTOR CORPORATION LOGO]
COMMON STOCK
$ PER SHARE
-------------------------
Maxtor Corporation is selling shares of its common stock and
Hyundai Electronics America is selling shares of Maxtor common stock.
Maxtor will not receive any proceeds from the sale of the shares by Hyundai
Electronics America. The underwriters named in this prospectus may purchase up
to additional shares of common stock from Maxtor and Hyundai
Electronics America under certain circumstances.
In a separate offering, DECS Trust IV is offering DECS. The
terms of the DECS provide that DECS Trust IV may distribute shares of Maxtor
common stock owned by Hyundai Electronics America to DECS holders on or about
, 2002, or earlier in certain circumstances, if DECS Trust IV is
liquidated. DECS Trust IV may distribute an additional shares of
Maxtor common stock owned by Hyundai Electronics America to cover rights to
purchase additional DECS granted to the underwriters of the DECS offering.
Maxtor's common stock is quoted on the Nasdaq National Market under the
symbol "MXTR." The last reported sale price of the common stock on the Nasdaq
National Market on , 1999, was $ per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts...................................... $ $
Proceeds to Maxtor (before expenses)........................ $ $
Proceeds to Hyundai Electronics America (before expenses)... $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
------------------------
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1999
<PAGE> 4
[MAXTOR GRAPHIC]
References in this prospectus to "Korea" are to the Republic of Korea.
Certain technical terms used throughout this prospectus are defined in the
Glossary appearing immediately prior to the consolidated financial statements at
the end of this prospectus. Maxtor(R) and No Quibble(R) are registered
trademarks of Maxtor. The Maxtor logo, DiamondMax(TM) and Formula 4(TM) are
trademarks of Maxtor. All other brand names and trademarks appearing in this
prospectus are the property of their respective holders.
<PAGE> 5
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THIS PROSPECTUS IS NOT AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Relationship Between Maxtor and Hyundai..................... 20
Where You Can Find More Information......................... 24
Price Range of Our Common Stock............................. 25
Dividend Policy............................................. 25
Capitalization.............................................. 26
Dilution.................................................... 27
Selected Consolidated Financial Data........................ 28
Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 29
Business.................................................... 41
Management.................................................. 54
Certain Transactions........................................ 58
Selling Stockholder......................................... 61
Underwriting................................................ 62
Legal Matters............................................... 64
Experts..................................................... 64
Glossary.................................................... 65
Index to Consolidated Financial Statements.................. F-1
</TABLE>
<PAGE> 6
PROSPECTUS SUMMARY
You should read the following summary together with the information set
forth under the heading "Risk Factors" and in the financial statements and
accompanying notes appearing elsewhere in this prospectus.
MAXTOR CORPORATION
We are a leading provider of hard disk drives for desktop computers. Our
DiamondMax product family consists of 3.5 inch hard disk drives with storage
capacities which range from 3.4 gigabytes to 17.2 gigabytes and industry-leading
performance. Our customers are desktop computer manufacturers, including Compaq,
Dell and IBM; distributors, including Bell Micro and Ingram; and retailers,
including Best Buy, CompUSA and Staples.
OUR TURNAROUND
During the mid-1980's, we were a leading technology innovator in the hard
disk drive industry. We completed an initial public offering of our common stock
in 1986. An overly complex business strategy led to a dramatic decline in our
financial performance during the late 1980's and early 1990's. Hyundai
Electronics America acquired all of the outstanding stock of Maxtor through a
series of transactions in 1994 and 1996.
In July 1996, we hired Michael R. Cannon, our current Chief Executive
Officer and President and a 20 year veteran of the hard disk drive industry, to
lead our turnaround. Mr. Cannon immediately took a number of steps to position
us to become a significant provider of hard disk drives to leading computer
manufacturers. These steps included:
- improving product performance and quality;
- improving the timeliness of our new product introductions (also known as
time-to-market introduction);
- reducing the amount of time required to produce new products in large
volume (also known as time-to-volume production); and
- refocusing our sales and marketing efforts.
As a result of these actions, our performance has improved significantly
during a difficult period in the hard disk drive industry. Our turnaround
achievements include:
- time-to-market leadership in storage capacity with our DiamondMax 2880
(2.8 gigabytes per disk), DiamondMax 3400 (3.4 gigabytes per disk) and
DiamondMax 4320 (4.3 gigabytes per disk) hard disk drives;
- significantly improved time-to-volume production results in the first
full quarter of production of our DiamondMax 2160 (1.4 million units),
DiamondMax 2880 (1.3 million units) and DiamondMax 3400 (2.8 million
units);
- increased revenues from leading computer manufacturers, including Compaq,
Dell and IBM, from 3.7% of total revenue in the second quarter of 1996 to
54.5% of total revenue in the third quarter of 1998;
- increased units shipped per quarter from 1.3 million units in the first
quarter of 1997 to 4.3 million units in the third quarter of 1998;
- increased market share of the desktop hard disk drive market in terms of
units shipped from 5.6% in the first quarter of 1997 to 16.7% in the
third quarter of 1998, according to International Data Corporation; and
1
<PAGE> 7
- among the lowest selling, general and administrative costs as a
percentage of revenue in the hard disk drive industry for the 1997 fiscal
year and the first nine months of 1998.
Cumulatively, these changes have led to significantly improved financial
results. During the first nine months of 1997 and 1998, our revenue grew by
82.2% from $922.3 million to $1,680.7 million, while gross margins improved from
1.9% to 11.8% over the same period.
OUR STRATEGY
We seek to be the dominant provider of hard disk drives to leading desktop
computer manufacturers, distributors and retailers. Our strategy to achieve this
goal includes:
- effectively integrating new technology;
- leveraging design excellence;
- capitalizing on flexible manufacturing;
- increasing market share with leading desktop computer manufacturers;
- maintaining customer satisfaction; and
- broadening our product portfolio.
OUR RECENT PUBLIC OFFERING
In the third quarter of 1998, we completed a public offering of
approximately 49.7 million shares of our common stock. Our net proceeds from the
offering were approximately $329.4 million.
OUR RELATIONSHIP WITH HYUNDAI
Hyundai Electronics America owns approximately 46.7% of our common stock
prior to this stock offering. Hyundai Electronics America will own approximately
% of our common stock after this offering (assuming the underwriters do not
exercise their right to purchase any additional shares of our common stock in
the stock offering). We have a number of agreements with Hyundai Electronics
America and its parent and subsidiary corporations that are intended to address
ongoing relationships.
HOW TO REACH US
Maxtor is incorporated in Delaware. Our principal executive offices are
located at 510 Cottonwood Drive, Milpitas, California 95035. Our telephone
number at that address is (408) 432-1700.
2
<PAGE> 8
THE STOCK OFFERING
<TABLE>
<S> <C>
Common stock offered by Maxtor.............................. shares
Common stock offered by Hyundai Electronics America......... _______ shares
Total common stock offered............................. shares
Common stock outstanding after the stock offering(1)(2)..... shares
Common stock held by Hyundai Electronics America immediately
after the stock offering.................................. shares
Nasdaq National Market symbol............................... "MXTR"
</TABLE>
- -------------------------
(1) Based on the number of shares outstanding as of , 1999. Excludes
shares of our common stock issuable upon the exercise of options
outstanding under our Amended and Restated 1996 Stock Option Plan with a
weighted average exercise price of $ per share.
(2) Assumes no exercise of the underwriters' right to purchase additional shares
in the stock offering.
THE DECS OFFERING
DECS Trust IV is offering for sale in a separate, concurrent offering
DECS, plus up to an additional DECS to be sold
only under certain circumstances. On or about , 2002, or upon earlier
liquidation of DECS Trust IV in certain circumstances, DECS Trust IV will
distribute common stock owned by Hyundai Electronics America (or, at Hyundai
Electronics America's option, the cash equivalent) and/or such other
consideration as is delivered by Hyundai Electronics America to DECS Trust IV
under its purchase agreement with the DECS Trust IV, to the holders of the DECS,
at the rate specified in the DECS prospectus.
USE OF PROCEEDS
Our anticipated net proceeds from the sale of our common stock in the stock
offering are estimated to be approximately $ million (approximately
$ million if the underwriters fully exercise their right to purchase
additional shares of common stock in the stock offering), after deducting the
underwriting discounts and estimated offering expenses payable by Maxtor. We
will not receive any proceeds from the sale of shares by Hyundai Electronics
America or from the sale of the DECS.
We will use the proceeds for capital expenditures, working capital and
general corporate purposes, including the possible repayment of outstanding
indebtedness. Pending such uses, we will invest the net proceeds of the stock
offering in investment grade, interest-bearing securities.
3
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL NINE MONTHS FISCAL NINE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED -----------------------------
MARCH 30, DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1996(1) 1997 1997 1998
---------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $1,269.0 $ 798.9 $1,424.3 $922.3 $1,680.7
Gross profit (loss)..................... 72.7 (90.0) 71.4 17.2 197.9
Total operating expenses................ 182.0 148.5 168.8 124.6 174.3(2)
Income (loss) from operations........... (109.3) (238.5) (97.4) (107.4) 23.6(2)
Interest expense........................ (11.8) (18.0) (36.5) (27.5) (24.1)
Net income (loss)....................... (122.8) (256.3) (109.9)(3) (133.0) 1.2(2)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27, SEPTEMBER 26,
1997 1997 1997 1998 1998 1998
----------- ------------- ------------ ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenue....................... $283.1 $392.2 $502.0 $549.6 $531.3 $599.8
Gross profit.................. 2.8 21.5 54.2 62.3 62.4 73.2
Total operating expenses...... 40.9 42.2 44.2 64.0 50.3 60.0
Income (loss) from
operations.................. (38.1) (20.7) 10.0 (1.7) 12.1 13.2
Interest expense.............. (8.7) (10.9) (9.0) (8.8) (8.7) (6.6)
Net income (loss)............. (46.6) (31.4) 23.1(3) (10.3) 5.4 6.1
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 26, 1998
----------------------------
ACTUAL AS ADJUSTED(4)
----------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $162.2 $
Total assets................................................ 743.2
Short-term borrowings, including current portion of
long-term debt............................................ 5.3
Total current liabilities................................... 477.7
Long-term debt and capital lease obligations due after one
year...................................................... 145.1
Total stockholders' equity.................................. 120.4
</TABLE>
- -------------------------
(1) We changed our fiscal year during the period ended December 28, 1996 to
conform to the fiscal year of Hyundai Electronics America.
(2) Total operating expenses, income from operations and net income for the nine
months ended September 26, 1998 reflect a $11.0 million compensation charge
related to certain variable accounting features of our 1996 Stock Option
Plan. Without this compensation charge, we would have had total operating
expenses of $163.3 million, income from operations of $34.6 million and net
income of $12.2 million. We amended and restated our 1996 Stock Option Plan
to remove the variable features and to provide for fixed award options.
(3) Includes recovery of a $20.0 million fully-reserved note from International
Manufacturing Services, Inc.
(4) As adjusted to reflect the sale of shares of our common stock in
the stock offering, after deducting underwriting discounts and commissions
and estimated offering expenses payable by Maxtor and the application of the
estimated net proceeds therefrom.
4
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones that we face. Additional risks and uncertainties that we do not know
about or that we currently think are immaterial also may impair our business
operations.
Any of the following risks, if they actually occur, could materially and
adversely affect our business, financial condition or results of operations. In
such an event, the trading price of our common stock could decline, and you
could lose all or part of your investment.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $771.8 MILLION
We have a history of significant losses. During each of the 19 consecutive
quarters ended September 27, 1997, we incurred significant operating losses
ranging from $125.5 million to $3.1 million per quarter, with net losses ranging
from $130.2 million to $4.5 million. These losses were primarily a result of the
following:
- delayed product introductions;
- product performance and quality problems;
- low manufacturing yields and under-utilization of manufacturing capacity;
- high operating and interest expenses; and
- overall market conditions in the hard disk drive industry, including
fluctuations in demand and declining average selling prices.
As of September 26, 1998, we had an accumulated deficit of approximately
$771.8 million. If we do not address successfully the factors that led to our
history of losses, we will not be profitable in the future. Even if we
successfully address these factors, we still may not be profitable in the
future.
OUR AVERAGE SELLING PRICES ARE DECLINING
It is very difficult to achieve and maintain profitability and revenue
growth in the hard disk drive industry because the average selling price of a
hard disk drive rapidly declines over the commercial life of such product. This
is true even for those products that are competitive and introduced into the
market in a timely manner. Average selling prices decline even further when, as
is often the case in the hard disk drive industry, competitors lower prices to
absorb excess capacity, liquidate excess inventories, restructure or attempt to
gain market share. We anticipate that average selling prices of our products
will continue to decline for the foreseeable future.
UNLESS WE CONSISTENTLY EXECUTE, WE WILL HAVE SIGNIFICANT LOSSES
Most of our products are sold to desktop computer manufacturers. Such
manufacturers use the quality, storage capacity, performance and price
characteristics of hard disk drives to select, or qualify, their hard disk drive
suppliers. Such manufacturers typically seek to qualify three or four suppliers
for each hard disk drive product generation. To qualify consistently with these
manufacturers, and thus succeed in the desktop hard disk drive industry, we must
execute consistently on our product development and manufacturing processes to
be among the first-to-market introduction and first-to-volume production at
leading storage capacity per disk with competitive prices and high quality. Once
a manufacturer has chosen its hard disk drive suppliers for a given desktop
computer product, it generally will purchase hard disk drives from those
suppliers for the commercial life of
5
<PAGE> 11
that product line. If we miss a qualification opportunity, we may not have
another opportunity to do business with that manufacturer until we introduce our
next generation of products. The effect of missing a product qualification
opportunity is magnified by the limited number of high volume manufacturers of
personal computers. If we do not reach the market or deliver volume production
in a timely manner, we may lose opportunities to qualify our products, our gross
margins probably will decline due to rapidly declining average selling prices,
and we probably will lose market share.
SUBSTANTIAL DEPENDENCE ON THE DESKTOP COMPUTER MARKET
While there has been significant growth in the demand for desktop computers
over the past several years, according to International Data Corporation, the
growth rate in the desktop computer market has slowed in recent quarters.
Because of our reliance on the desktop segment of the personal computer market,
we will be affected more by changes in market conditions for desktop computers
than would a company with a broader range of products. Any decrease in the
demand for desktop computers could cause a decrease in the demand for our
products.
Although our current products are designed for the largest segment of the
hard disk drive market, the desktop computer market, demand may shift to other
market segments over time. We also believe that to remain a significant supplier
of hard disk drives to major manufacturers of personal computers, we will need
to offer a broader range of hard disk drive products to our customers.
Therefore, we will need to develop and manufacture new products that address
additional hard disk drive market segments and emerging technologies to remain
competitive in the hard disk drive industry. Examples of potentially important
market segments that our current products are not designed to address include:
- the client-server market;
- lower cost, lower performance personal computer systems (typically below
$699); and
- laptop personal computers.
To specifically address these or additional market segments, we would have
to reengineer some of our existing technology and develop new technology.
Certain of our competitors have significant advantages over us in one or more of
these and other potentially significant new or growing market segments. Any
failure by us to successfully develop and introduce new products to address
specifically these additional market segments could have a material adverse
effect on our business, financial condition and results of operations.
A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS
We sell most of our products to a limited number of customers. During the
nine months ended September 26, 1998, three customers, Dell, Compaq and IBM,
accounted for approximately 27%, 16% and 10%, respectively, of our revenue, and
our top ten customers accounted for approximately 83% of our revenue. During the
fiscal year ended December 27, 1997, two customers, Compaq and Dell, accounted
for approximately 21% and 10%, respectively, of our revenue, and our top ten
customers accounted for approximately 60% of our revenue.
We believe that a relatively small number of customers will continue to
account for a significant portion of our revenue for the foreseeable future, and
that the proportion of our revenue from such customers could continue to
increase in the future. These customers have a wide variety of suppliers to
choose from
6
<PAGE> 12
and therefore can make substantial demands on us. Our customers generally are
not obligated to purchase any minimum volume of products from us and generally
are able to terminate their relationship with us at anytime. Our ability to
maintain strong relationships with our principal customers is essential to our
future performance. If we lose a key customer or if any of our key customers
reduce their orders of our products or require us to reduce our prices before we
are able to reduce costs, our business, financial condition and results of
operations could be materially and adversely affected.
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY
Our recent revenue growth rates may not be sustainable. You should not use
our past results to predict future performance. Our quarterly operating results
have fluctuated significantly in the past and may fluctuate significantly in the
future. Our future performance will depend on many factors, including the
following:
- our ability to be consistently among the first-to-volume production with
competitive products;
- fluctuations in the demand for hard disk drives as a result of the
cyclical and seasonal nature of the desktop computer industry;
- the availability of and efficient use of manufacturing capacity;
- changes in product or customer mix;
- our existing competitors introducing better products at competitive
prices before we do;
- new competitors entering our market;
- our ability to manage successfully the complex and difficult process of
qualifying our products with our customers;
- our customers canceling, rescheduling or deferring significant orders for
our products, particularly in anticipation of new products or
enhancements from us or our competitors;
- the ability of certain of our distribution and retail customers to return
unsold products for credit;
- the ability of certain of our distribution and retail customers to
receive lower prices retroactively on their inventory of our products
when we lower prices on our products;
- our ability to purchase enough components and raw materials at
competitive prices which allow us to make a profit;
- the availability of adequate capital resources;
- increases in research and development expenditures, particularly as a
percentage of revenue, required to maintain our competitive position;
- changes in our strategy;
- personnel changes; and
- other general economic and competitive factors.
Many of our operating expenses are relatively fixed and difficult to reduce
or modify. As a result, the fixed nature of our operating expenses will magnify
any adverse effect of a decrease in revenue on our results of operations.
As a result of these and other factors, we believe that period to period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
7
<PAGE> 13
WE MUST MANAGE OUR GROWTH
In July 1996, we began to modify our management and operational structures.
Our revenues generally have been growing since the first quarter of 1997. Our
restructuring activities and revenue growth have placed, and we expect will
continue to place, a significant strain on our personnel and resources. Our
ability to maintain the advantages of the restructuring and to manage future
growth will depend on our ability to:
- continue to improve our information and control systems;
- hire, train, retain, manage and motivate an expanding employee base; and
- maintain effective cost controls.
OUR CUSTOMERS ARE PLACING NEW AND COSTLY DEMANDS ON US
Our customers are adopting more sophisticated business models that place
additional strains on our business. For example, many personal computer
manufacturers, including some of our largest personal computer manufacturing
customers, are starting to adopt build-to-order manufacturing models that reduce
their component inventories and related costs and enable them to tailor their
products more specifically to the needs of their customers.
Some of our personal computer manufacturing customers also are considering
or have implemented a "channel assembly" model in which the manufacturer ships a
minimal computer system to the dealer or other assembler, and component
suppliers (including hard disk drive manufacturers such as us) ship parts
directly to the dealer or other assembler for installation at its location.
Finally, certain of our manufacturing customers have adopted just-in-time
inventory management processes that require component suppliers to maintain
inventory at or near the customer's production facility. These new business
models require us to hold our products in inventory longer, which increases our
risk of inventory obsolescence and average selling price decline. These changing
models also increase our capital requirements and costs, complicate our
inventory management strategies, and make it difficult for us to match our
manufacturing plans with projected customer demand.
THE HARD DISK DRIVE MARKET IS HIGHLY COMPETITIVE
Although our share of the desktop hard disk drive market has increased
steadily since the first quarter of 1997, this market segment and the hard disk
drive market in general are intensely competitive even during periods when
demand is stable. We compete primarily with manufacturers of 3.5-inch hard disk
drives for the personal computer industry, including:
- Fujitsu Limited;
- Quantum Corporation;
- Samsung Electronic Company Limited;
- Seagate Technology, Inc.; and
- Western Digital Corporation.
We also could face significant competition from other companies, such as
International Business Machines Corporation, in our current markets or in other
markets into which we may expand our product portfolio.
Many of our competitors have a number of significant advantages over us,
including:
- a larger market share;
- a broader array of product lines;
- preferred vendor status with some of our customers;
- extensive name recognition and marketing power; and
8
<PAGE> 14
- significantly greater financial, technical and manufacturing resources.
Unlike us, some of our competitors make many of their own components which
may provide them with certain benefits including lower costs. Our competitors
also may:
- consolidate or establish strategic relationships among themselves to
lower their product costs or to otherwise compete more effectively
against us;
- lower their product prices to gain market share; or
- bundle their products with other products to increase demand for their
products.
In addition, new competitors could emerge and rapidly capture market share.
If we fail to compete successfully against current or future competitors,
our business, operating results and financial condition may be materially and
adversely affected.
DEMAND FOR OUR PRODUCTS FLUCTUATES
We currently offer a single product family that is designed for desktop
computers. As a result, the demand for our products is dependent on the overall
demand for desktop computers. The desktop computer and hard disk drive markets
tend to go through periods of rapid growth followed by periods of oversupply and
rapid price and gross margin erosion. This environment makes it difficult for us
and our customers to reliably forecast demand for our products. We do not have
long-term supply contracts with our customers, and our customers often can defer
or cancel orders with limited notice and without significant penalty.
WE MUST EFFECTIVELY RESPOND TO CHANGING TECHNOLOGY; TRANSITION TO GIANT
MAGNETO-RESISTIVE HEAD TECHNOLOGY
Our future performance will depend on our ability to enhance current
products and to develop and introduce volume production of new competitive
products on a timely and cost-effective basis. We also must keep pace with and
correctly anticipate technological developments and evolving industry standards
and methodologies. Advances in magnetic, optical or other technologies, or the
development of entirely new technologies, could lead to new competitive products
that have better performance and/or lower prices than our products. Examples of
such new technologies include giant magneto-resistive head technology (which
already has been introduced by IBM and Fujitsu and which Western Digital
reportedly will use in its products under an agreement with IBM) and
optically-assisted recording technologies (which currently are being developed
by companies such as TeraStor Corporation and Seagate). We intend to incorporate
giant magneto-resistive head technology into future products. We have decided
not to pursue optically-assisted recording technologies at this time. Our
inability to introduce or achieve volume production of new competitive products
on a timely and cost-effective basis has in the past and in the future could
have a material adverse effect on our business, financial condition and results
of operations.
TO DEVELOP NEW PRODUCTS, WE MUST EFFECTIVELY INTEGRATE PARTS FROM THIRD PARTIES
Unlike some of our competitors, we do not manufacture any of the parts used
in our products. Instead, our products incorporate parts designed by and
purchased from third parties. Consequently, the success of our products is
dependent on our ability to gain access to
9
<PAGE> 15
and integrate parts that use leading-edge technology. To successfully manage
these integration projects we must:
- obtain high quality parts;
- be able to hire skilled personnel;
- effectively integrate different products from a variety of vendors; and
- manage difficult scheduling and delivery problems.
Our success will depend on our ability to develop and maintain
relationships with key suppliers.
WE ARE DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS
A number of the parts used in our products are available from only one or a
limited number of outside suppliers. Currently, we purchase digital signal
processor/controller and spin/servo integrated circuits only from Texas
Instruments, Inc. and purchase channel integrated circuits only from Lucent
Technologies, Inc. As we have experienced in the past, some of the parts we
require may periodically be in short supply. As a result, we must allow for
significant ordering lead times for certain parts. In addition, our cancellation
of orders for parts due to cut-backs in production caused by market oversupply,
reduced demand, transition to new products or technologies or otherwise can
result in us paying significant cancellation charges to suppliers. We order the
majority of our parts on a purchase order basis and only have limited long-term
volume purchase agreements with certain existing suppliers. If we cannot obtain
sufficient quantities of high quality parts when we need them, our business,
financial condition and results of operations could be materially and adversely
affected.
WE ARE DEPENDENT ON MICHAEL R. CANNON AND OUR OTHER KEY PERSONNEL; THREAT OF
LITIGATION OVER OUR HIRING PRACTICES
Our success depends upon the continued contributions of our key employees
many of whom, and in particular Michael R. Cannon, our President and Chief
Executive Officer, would be extremely difficult to replace. We do not have
employment contracts with any of our key personnel other than:
- Mr. Cannon;
- Paul J. Tufano, our Senior Vice President, Finance and Chief Financial
Officer;
- William F. Roach, our Senior Vice President, Worldwide Sales and
Marketing;
- Dr. Victor B. Jipson, our Senior Vice President, Engineering;
- Phillip C. Duncan, our Vice President, Human Resources; and
- K.H. Teh, our Vice President, Worldwide Manufacturing.
We also do not have key person life insurance on any of our personnel. Most
of our senior management and a significant number of our other employees have
been with us for less than three years. Worldwide competition for skilled
employees in the hard disk drive industry is extremely intense. We believe that
some of our competitors recently have made targeted efforts to recruit employees
from us and such efforts have resulted in us losing some skilled managers. If we
are unable to retain our existing employees or to hire and integrate new
employees, our business, financial condition and results of operations could be
materially and adversely affected.
Companies in the hard disk drive industry whose employees accept positions
with competitors often claim that such competitors have engaged in unfair hiring
10
<PAGE> 16
practices. We may receive such claims in the future as we seek to hire qualified
employees. We could incur substantial costs in defending ourselves against any
such claims.
OUR TAX LIABILITY MAY INCREASE IN THE FUTURE
Due to our net operating losses ("NOLs"), NOL carryforwards and favorable
tax status in Singapore, we have not incurred any significant foreign, U.S.
federal, state or local income taxes for any recent fiscal periods. There will
be a significant reduction in, and potential elimination of, the NOL
carryforwards available to us for U.S. federal, state and local income tax
purposes as a result of recent events. As a result, our U.S. tax liability may
increase substantially in the future.
Events resulting in reduction and potential elimination of our NOL
carryforwards include:
- use of our NOLs to offset our income resulting from our receipt of a $400
million dividend in June 1998 from Maxtor Singapore;
- use of our NOLs to offset income of Hyundai Electronics America and/or
other Hyundai Electronics America affiliates with respect to consolidated
or combined tax returns for periods from early 1996 to August 1998 (the
"Affiliation Period") during which we were a member of a consolidated or
combined tax group with Hyundai Electronics America (the "HEA Tax Group")
for U.S. state and local income tax purposes; and
- the July 1998 public offering of our common stock, which caused an
"ownership change" for U.S. federal income tax purposes, resulting in a
limitation on the amount of NOL carryforward that may be used annually to
offset our income with respect to our post-Affiliation Period income tax
returns. The annual limitation is based on the value of all of our
outstanding stock immediately before the ownership change multiplied by
5.15%.
In December 1997, our Singapore subsidiary, Maxtor Peripherals (S) Pte. Ltd
was granted pioneer tax status in Singapore, thus exempting it from paying
Singapore income taxes until June 30, 2003, subject to the ongoing satisfaction
of certain conditions. Maxtor Singapore is eligible for up to two additional
two-year extensions of this pioneer tax status, subject to the satisfaction of
certain additional conditions. Maxtor Singapore may not be able to satisfy or,
if satisfied, to maintain compliance with, the required conditions. If Maxtor
Singapore is unable to satisfy and maintain compliance with the required
conditions and is unable to obtain a waiver of any such failure, it would lose
its pioneer tax status, or would be ineligible for such extensions, which could
have a material adverse effect on our business, financial condition and results
of operations.
During the Affiliation Period, Hyundai Electronics America, Hyundai
Electronics America affiliates and Maxtor filed separate income tax returns in
certain foreign countries and certain U.S. state and local jurisdictions. Under
an agreement between Maxtor, Hyundai Electronics America and other Hyundai
Electronics America affiliates (the "Tax Allocation Agreement"), we agreed to
pay our allocable share of the total consolidated or combined tax return
liability for returns related to the Affiliation Period, we allowed Hyundai
Electronics America and other Hyundai Electronics America affiliates to take
advantage of our tax attributes, such as our NOLs and tax credits and we were
entitled to use Hyundai Electronics America's tax attributes.
The Hyundai Electronics America Tax Group has used substantial amounts
11
<PAGE> 17
of our NOLs and other tax attributes. Under the Tax Allocation Agreement,
neither Hyundai Electronics America nor Maxtor is required to reimburse the
other for any utilization of the other member's NOLs or other tax attributes,
except that each party must reimburse the other for any additional use of the
party's tax attributes as a result of any return or amended return related to
the Affiliation Period filed after September 15, 1999, or as a result of any
taxing authority adjustment to Affiliation Period returns made after September
15, 1999.
We remain liable for our share of the total consolidated or combined tax
return liability. There can be no assurance that our share of the consolidated
or combined tax liability will not be increased as a result of subsequent
events, such as taxing authority audit adjustments or the filing of amended
returns affecting either our items of gain, income, loss, deduction or credit or
another member's items of gain, income, loss, deduction or credit. We have
agreed to indemnify or reimburse Hyundai Electronics America if there is any
increase in our share of the consolidated or combined tax return liability
resulting from revisions to our taxable income or revisions to another Hyundai
Electronics America Tax Group member's taxable income, except to the extent such
revisions to another Hyundai Electronics America Tax Group member's taxable
income are made after September 15, 1999.
Hyundai Electronics America recently sold all of the stock which it
formerly owned of Symbios, Inc. and TV/COM International, Inc., causing these
entities to cease to be members of the Hyundai Electronics America Tax Group.
Under agreements related to these sales, Hyundai Electronics America agreed that
Symbios and TV/COM no longer have any obligations under the Tax Allocation
Agreement. Because we did not agree to assume any additional liability related
to these sales, Hyundai Electronics America should bear the burden of any of
Symbios' and TV/COM's former liabilities under the Tax Allocation Agreement.
Taxing authorities may, by law, generally assess us for the total amount,
and not just our share, of any consolidated or combined tax return deficiencies
of the entire Hyundai Electronics America Tax Group which relate to the
Affiliation Period. There can be no assurance that the Hyundai Electronics
America Tax Group will satisfy all of its tax obligations or that additional
liabilities will not be assessed for such periods. Hyundai Electronics America
has agreed to indemnify and reimburse us if we are required to pay any tax,
interest or penalty to any taxing authority related to any separate tax return
of any member of the Hyundai Electronics America Tax Group other than us, and if
we are required to pay to any taxing authority any amount in excess of our share
of the consolidated or combined tax return liability.
RISKS ASSOCIATED WITH $150.3 MILLION IN DEBT
We historically have operated with a significant amount of debt as compared
to our equity. At September 26, 1998, we had outstanding approximately $150.3
million in principal amount of indebtedness. We incurred $24.1 million in
interest expense in the first nine months of 1998 and $36.5 million in the
fiscal year ended December 31, 1997. We also have an asset securitization
program under which we sell our accounts receivable on a non-recourse basis. At
September 26, 1998, $125.0 million of accounts receivable was securitized under
the program. We must meet certain conditions in order to continue this program.
Following the stock offering, we will continue to be subject to the risks
associ-
12
<PAGE> 18
ated with a large amount of debt, including:
- principal and interest repayment obligations that require the expenditure
of substantial amounts of cash;
- our potential inability to repay principal or interest when due;
- our potential violation of loan covenants that could result in a default
on the debt, such debt becoming immediately payable and legal actions
against us; and
- adverse effects of interest expense on our business, financial condition
and results of operations.
SINGLE MANUFACTURING FACILITY; FUTURE NEED FOR ADDITIONAL CAPACITY
Our volume manufacturing operations currently are based in a single
facility in Singapore. A fire, flood, earthquake or other disaster or condition
affecting our facility could have a material adverse effect on our business,
financial condition and results of operations.
We may need additional manufacturing capacity beyond the capabilities of
our current facility as early as the beginning of the year 2000. Although we
believe that manufacturing facilities will be available, our inability to timely
obtain a facility or facilities which allow us to meet our customers' demands
may limit our growth and could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY NEED MORE CAPITAL IN THE FUTURE BECAUSE THE HARD DISK DRIVE BUSINESS IS
CAPITAL INTENSIVE
Our business is capital intensive, and we may need more capital in the
future. Our future capital requirements will depend on many factors, including:
- the rate of our sales growth;
- the level of our profits or losses;
- the timing and extent of our spending to support facilities upgrades and
product development efforts;
- the timing and size of business or technology acquisitions; and
- the timing of introductions of new products and enhancements to our
existing products.
We may issue additional equity to raise capital. Any future equity
financing will decrease existing stockholders' percentage equity ownership and
may, depending on the price at which the equity is sold, result in significant
economic dilution to such stockholders. Furthermore, our board of directors is
authorized under our charter documents to issue preferred stock with rights,
preferences or privileges senior to those of our common stock without
stockholder approval.
While we currently do not have a revolving credit facility, we intend to
obtain one in the near future. However, we believe that current market
conditions for such facilities are not as favorable as they have been at certain
times in the past, and that for various reasons the number of potential lenders
actively providing credit facilities to companies in the data storage industry
may have decreased recently, and that the terms on which the remaining potential
lenders are willing to offer such facilities have become significantly more
restrictive and/or costly. Consequently, the terms and conditions under which we
might obtain such a facility are uncertain. Any failure to obtain adequate
credit facilities on acceptable terms could have a material and adverse effect
on our business, financial condition and results of operations.
13
<PAGE> 19
LIMITED PROTECTION OF INTELLECTUAL PROPERTY; RISK OF THIRD PARTY CLAIMS OF
INFRINGEMENT
We have patent protection on some of our technology. We may not receive
patents for our current or future patent applications, and any patents that we
have or that are issued to us may be invalidated, circumvented or challenged.
Moreover, the rights granted under any such patents may not provide us with any
competitive advantages. Finally, our competitors may develop or otherwise
acquire equivalent or superior technology.
We also rely on trade secret, copyright and trademark laws, as well as the
terms of our contracts to protect our proprietary rights. We may have to
litigate to enforce patents issued or licensed to us, to protect trade secrets
or know-how owned by us or to determine the enforceability, scope and validity
of our proprietary rights and the proprietary rights of others. Enforcing or
defending our proprietary rights could be expensive and might not bring us
timely and effective relief.
We may have to obtain licenses of other parties' intellectual property and
pay royalties. If we are unable to obtain such licenses, we may have to stop
production of our products or alter our products. In addition, the laws of
certain countries in which we sell and manufacture our products, including
various countries in Asia, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our
protective measures in these countries may be inadequate to protect our
proprietary rights. Any failure to enforce and protect our intellectual property
rights could have a material adverse effect on our business, financial condition
and results of operations.
When we were a majority-owned subsidiary of Hyundai Electronics America, we
had the benefit of certain third party intellectual property rights on terms
that may have been more favorable than would have been available to us if we had
not been a majority-owned subsidiary of Hyundai Electronics America. We may not
be able to obtain similar rights in the future on terms as favorable.
Similar to certain other providers of hard disk drives, we have received
correspondence from Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of at least 13 hard disk drive motor patents. The
patents relate to motors that we purchase from motor vendors and the use of such
motors in hard disk drives. While we believe that we have valid defenses if a
lawsuit is filed, the results of any litigation are inherently uncertain and
there is no assurance that Papst will not assert other infringement claims
relating to current patents, pending patent applications and future patents or
patent applications. Additionally, there is no assurance that Papst will not
initiate a lawsuit against us or that we will be able to successfully defend
ourselves against such a lawsuit. A favorable outcome for Papst in such a
lawsuit could result in the issuance of an injunction against us or our products
and/or the payment of monetary damages equal to a reasonable royalty or
recovered lost profits or, in the case of a finding of a willful infringement,
treble damages and could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE DEPENDENT ON OUR INTERNATIONAL OPERATIONS; WE FACE RISKS FROM OUR
INTERNATIONAL SALES
We conduct most of our manufacturing and testing operations and purchase a
substantial portion of our key parts outside the U.S. We also sell a significant
portion of products to foreign distributors and retailers. Our dependence on
revenue from international sales and our need to manage international operations
each
14
<PAGE> 20
involves a number of inherent risks, including:
- economic slowdown and/or downturn in the computer industry in such
foreign markets;
- international currency fluctuations;
- general strikes or other disruptions in working conditions;
- political instability;
- trade restrictions;
- changes in tariffs;
- the difficulties associated with staffing and managing international
operations;
- generally longer periods to collect receivables;
- unexpected changes in or impositions of legislative or regulatory
requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse taxes; and
- delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers.
The specific economic conditions in each country will impact our
international sales. For example, our international contracts are denominated
primarily in U.S. dollars. Significant downward fluctuations in currency
exchange rates against the U.S. dollar could cause our products to become
relatively more expensive to distributors and retailers in those countries. In
addition, we attempt to manage the impact of foreign currency exchange rate
changes by entering into short-term, foreign exchange contracts. If we do not
effectively manage the risks associated with international operations and sales,
our business, financial condition and results of operations could be materially
and adversely affected.
STORMEDIA; LEGAL PROCEEDINGS
We currently are involved in a lawsuit with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among us, StorMedia and Hyundai
Electronics Industries Co. Ltd. that became effective on November 17, 1995. In
that agreement, StorMedia agreed to supply disk media to us. StorMedia's disk
media did not meet our specifications and functional requirements as required by
the agreement and we ultimately terminated the agreement.
After a lawsuit was filed against StorMedia by certain of StorMedia's
stockholders in September 1996 which alleged, in part, that StorMedia failed to
perform under the agreement with Maxtor and Hyundai Electronics America,
StorMedia sued Hyundai Electronics Industries, Mong Hun Chung (Hyundai
Electronics Industries' Chairman), Dr. Chong Sup Park (Hyundai Electronics
America's President and our then President who signed the agreement on our
behalf) and K.S. Yoo (the individual who signed the agreement on behalf of
Hyundai Electronics Industries) (collectively the "Original Defendants") in
federal court (the "Federal Suit"). In the Federal Suit, StorMedia alleged that
at the time Hyundai Electronics Industries entered into the agreement, it knew
that it would not and could not purchase the volume of products that it
committed to purchase, and that failure to do so caused damages to StorMedia in
excess of $206 million.
In December 1996, we filed a complaint against StorMedia and William Almon
(StorMedia's Chairman and Chief Executive Officer) in a Colorado state court
seeking approximately $100 million in damages and alleging, among other claims,
breach of contract, breach of implied warranty of fitness and fraud under the
StorMedia Agreement (the "Colorado Suit"). This proceeding was stayed pending
resolution of the Federal
15
<PAGE> 21
Suit. The Federal Suit was permanently dismissed early in February 1998. On
February 24, 1998, StorMedia filed a new complaint in a California state court
for $206 million, alleging fraud and deceit against the Original Defendants and
negligent misrepresentation against Hyundai Electronics Industries and us (the
"California Suit"). On May 18, 1998, the stay on the Colorado Suit was lifted by
the Colorado state court. Our motion to dismiss, or in the alternative, stay the
California Suit, is pending. On September 9, 1998, the California Suit was
stayed pending resolution of the Colorado Suit. On October 11, 1998, StorMedia
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act.
This bankruptcy filing caused an automatic stay of proceedings against
StorMedia, including the Colorado Suit. StorMedia has not prosecuted its claims
against us since it filed for bankruptcy protection.
We believe we have valid defenses against the claims alleged by StorMedia
and intend to defend ourselves vigorously. However, due to the nature of
litigation and because the pending lawsuits are in the very early pre-trial
stages, we cannot determine the possible loss, if any, that ultimately may be
incurred either in the context of a trial or as a result of a negotiated
settlement. The litigation could result in significant diversion of time by our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this litigation will not have a material adverse effect on our
business, financial condition or results of operations. However, the results of
these proceedings, including any potential settlement, are uncertain. Any
resolution against us could have a material adverse effect on our business,
financial condition and results of operations.
We have been notified of other claims, including claims of patent
infringement. While the final outcome of these claims cannot be determined at
this time, we believe that resolution of these claims will not have a material
adverse effect on our business, financial condition or results of operations. We
have not reserved any amounts in our financial statements for any legal claims
or actions.
WARRANTY EXPOSURE
Our products may contain defects. We generally warrant our products for
three years. Our standard warranty contains a limit on damages and an exclusion
of liability for consequential damages and for negligent or improper use of the
product. We establish a reserve, at the time of product shipment, in an amount
equal to our estimated warranty expenses. We had warranty reserves of $22.7
million and $31.6 million as of December 27, 1997 and September 26, 1998,
respectively. While we believe that our warranty reserves will be sufficient,
the failure to maintain sufficient warranty reserves or the unenforceability of
our liability limitations could have a material adverse effect on our business,
financial condition and results of operations.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE
Our stock price and the number of shares traded each day has varied
greatly. We expect these fluctuations to continue due to factors including:
- quarterly fluctuations in operating results;
- announcements of new products by us or our competitors;
- gains or losses of significant customers;
- changes in stock market analysts' estimates;
16
<PAGE> 22
- the presence or absence of short-selling of our common stock; and
- events affecting other companies that the market deems comparable to us.
Our stock price also may be affected by events relating to Hyundai
Electronics America and Hyundai Electronics Industries, including sales of our
common stock by Hyundai Electronics America or the perception that such sales
may occur (due to the financial condition of Hyundai Electronics America or
otherwise). Finally, our stock price may be subject to extreme fluctuations in
response to general economic conditions in the U.S., Korea, Southeast Asia and
elsewhere, such as interest rates, inflation rates, exchange rates, unemployment
rates, and trade surpluses and deficits. It is likely that in some future
quarter or quarters our operating results will be below the expectations of
stock market analysts or investors. In such event, our stock price probably will
decline.
Additionally, we do not know how or whether investors in the DECS offering
will resell the DECS. Any market that develops for the DECS could reduce the
demand for our common stock or otherwise negatively affect the market for our
common stock.
ENVIRONMENTAL MATTERS
We use only a limited variety of chemicals in our manufacturing and
research operations. However, we are subject to a wide range of environmental
protection regulations in the U.S. and Singapore. While we have not experienced
any material adverse effect on our operations as a result of such laws, future
regulations may have a material adverse effect on our business, financial
condition and results of operations. We believe that we are in compliance in all
material respects with all present environmental regulations. In the U.S.,
environmental regulations often require parties to fund remedial action
regardless of fault. As a consequence, it often is difficult to estimate the
future impact of environmental matters, including potential liabilities. If we
have to make significant capital expenditures or pay significant expenses in
connection with future remedial actions or to continue to comply with applicable
environmental laws, our business, financial condition and results of operations
could be materially and adversely affected.
EFFECT OF ANTITAKEOVER PROVISIONS
We have a number of protective provisions in place designed to provide our
board of directors with time to consider whether a hostile takeover offer is in
our best interests and the best interests of our stockholders. These provisions,
however, could discourage potential acquisition proposals and could delay or
prevent a change in control of Maxtor. Such provisions also could diminish the
opportunities for a holder of our common stock to participate in tender offers,
including tender offers at a price above the then-current market price for our
common stock. Such provisions also may inhibit fluctuations in our stock price
that could result from takeover attempts.
The first of these provisions is Section 203 of the Delaware General
Corporation Law. Section 203 places significant restrictions on a public
Delaware corporation's ability to engage in any merger, asset or stock sale, or
other transaction resulting in a financial benefit to a stockholder holding 15%
or more of the corporation's voting stock.
In addition, our charter documents allow our board of directors to issue up
to 95 million shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the stockholders. The issuance of preferred stock,
while providing desirable flexibility in connection with possible
17
<PAGE> 23
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of Maxtor, thereby delaying, deferring or preventing a change in control
of Maxtor. Furthermore, such preferred stock may have other rights, including
economic rights, senior to our common stock, and as a result, the issuance of
such preferred stock could have a material adverse effect on our stock price. We
currently do not plan to issue shares of preferred stock.
Our charter documents also contain a number of protective measures
including provisions:
- dividing our board of directors into three classes serving staggered
three-year terms with only one of the three classes being elected each
year;
- requiring cause to remove directors;
- granting our board of directors the exclusive right to set the authorized
number of directors and to fill vacancies on our board of directors;
- requiring that any action required or permitted to be taken by our
stockholders be effected at a duly called annual or special meeting of
the stockholders instead of by a consent in writing;
- providing that only our board of directors, the Chairman of our board of
directors, or the Chief Executive Officer can call special meetings of
the stockholders;
- requiring advance notice for stockholder proposals or director
nominations by stockholders; and
- requiring the affirmative vote of at least two-thirds of our outstanding
voting stock, voting as a single class to amend the above provisions.
In addition, we have entered into a Stockholder Agreement with Hyundai
Electronics America which grants Hyundai Electronics America certain rights to
designate directors for nomination, requires Hyundai Electronics America to vote
in favor of other board of director nominees so long as Hyundai Electronics
America's rights to designate nominees are honored, and restricts Hyundai
Electronics America's right to solicit proxies or acquire additional shares of
our common stock.
THERE ARE SUBSTANTIAL SHARES ELIGIBLE FOR SALE; THE SALE OF SUCH SHARES MAY
DEPRESS OUR STOCK PRICE
Hyundai Electronics America, Maxtor and Maxtor's officers and directors
have agreed that, during the period beginning from the date of this prospectus
and continuing to and including the date days after the date of
this prospectus, they will not, with certain exceptions, offer, sell or
otherwise dispose of any of our securities without the prior written consent of
Salomon Smith Barney.
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options) in the public market
following the stock offering, our stock price could fall. Such sales also might
make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate. Upon completion of the
stock offering, we will have outstanding shares of common stock
(based upon shares outstanding as of , 1999), assuming the
underwriters do not exercise their right to purchase additional shares of our
common stock and no exercise of outstanding options after , 1999. Of
these shares, the shares sold in the stock offering and the 49,731,225
shares sold in our July 1998 public offering are freely tradable. Of the
remaining shares,
18
<PAGE> 24
shares are eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- --------
<S> <C>
</TABLE>
The table above excludes options to purchase shares of our
common stock that were outstanding at , 1999. Any shares
distributed by DECS Trust IV will be freely tradable and may be resold without
further registration with the SEC.
19
<PAGE> 25
RELATIONSHIP BETWEEN MAXTOR AND HYUNDAI
In 1994, Hyundai Electronics Industries and certain of its affiliates
purchased 40% of our outstanding common stock for $150.0 million in cash. In
early 1996, Hyundai Electronics America acquired all of the remaining shares of
our publicly-held common stock in a tender offer and merger for $215.0 million
in cash and also acquired all of our common stock held by Hyundai Electronics
Industries and its affiliates. Immediately following the stock offering, Hyundai
Electronics America will own approximately % of our outstanding common
stock (approximately % if the underwriters fully exercise their right to
purchase additional shares in the stock offering).
Hyundai Electronics Industries, Hyundai Electronics America and Maxtor have
entered into certain agreements described below governing certain relationships
between the parties. Because Hyundai Electronics America controlled Maxtor at
the time these agreements were negotiated, these agreements did not result from
"arms' length" negotiations. In addition, many of the agreements relate to
matters that inherently arise only between a company and its parent or
affiliated companies, and so are not susceptible to comparison to similar
agreements negotiated at arms' length. These agreements resulted from
negotiations between our management representatives and representatives of
Hyundai Electronics America and Hyundai Electronics Industries, with the
participation of each parties' respective legal counsel and other advisors. The
agreements were intended, when taken together, to reflect reasonable tradeoffs
and benefits for all parties. In negotiating these agreements the parties sought
to take into account, to the extent available, terms of arms' length agreements
and the terms that already had been negotiated between Hyundai Electronics
Industries (and its affiliates) and Maxtor at the time of Hyundai Electronics
Industries' initial investment in Maxtor. We might have received more favorable
terms from an unaffiliated party in some or all of the agreements, although we
believe some of the agreements may have more favorable terms than those
available from unaffiliated parties.
Conflicts of interest may arise from time to time in the future between
Maxtor and Hyundai Electronics America or its affiliates in a number of areas
relating to their past and ongoing relationships, including potential
competitive business activities, corporate opportunities, tax matters,
intellectual property matters, indemnity agreements, registration rights, sales
or distributions by Hyundai Electronics America of all or any portion of its
ownership interest in Maxtor or Hyundai Electronics America's attempt to assert
control over the management and affairs of Maxtor. We may not be able to resolve
any potential conflict and if the conflict is resolved, we might have had a more
favorable resolution if we were dealing with an unaffiliated party.
Our board of directors has established an affiliated transactions committee
which is comprised entirely of directors who are not employed by Hyundai
Electronics America, any affiliate thereof or Maxtor. Our board of directors has
adopted resolutions requiring this Affiliated Transactions Committee to review
any material transactions between Maxtor on the one hand, and Hyundai
Electronics America or its affiliates on the other. We also have certain
provisions in our Amended and Restated Certificate of Incorporation concerning
the conduct of certain affairs of Maxtor as they may involve Hyundai Electronics
America and its affiliates on the one hand and Maxtor on the other.
Hyundai Electronics America could decide to sell or otherwise dispose of
all or a portion of its holdings of our common stock at some future date
following the stock offering and the DECS offering, subject to certain
agreements between Hyundai Electronics America and the underwriters. Holders of
our common stock other than Hyundai Electronics America might not be allowed to
participate in any transaction
20
<PAGE> 26
involving a transfer of a controlling interest in Maxtor by Hyundai Electronics
America. Such a transaction could adversely affect the trading price of our
common stock or the interests of the holders of our common stock who do not
participate in such transaction.
The documents we summarize below are filed with the SEC as exhibits to our
registration statement in connection with our July 1998 public offering. You
should read the full text of the documents if you want a complete description of
their terms.
INDEBTEDNESS TO HYUNDAI ELECTRONICS AMERICA
Hyundai Electronics America occasionally advanced cash to us for working
capital prior to our July 1998 public offering. We had outstanding aggregate
principal indebtedness of $55.0 million owing to Hyundai Electronics America as
of September 26, 1998 under a subordinated note due July 31, 2001, bearing
interest at six-month LIBOR plus 2%, due semi-annually. We have a right to
prepay this note without penalty in increments of at least $1 million.
IBM LICENSE AND LICENSE FEES
Hyundai Electronics Industries has licenses to certain IBM patents under a
license agreement with IBM. IBM has agreed to provide a royalty-free license to
an entity that ceases to be a majority-owned subsidiary of Hyundai Electronics
Industries, as long as a request is timely made and certain other conditions are
met. After our July 1998 public offering, we ceased to be a majority-owned
subsidiary of Hyundai Electronics America, which is a majority-owned subsidiary
of Hyundai Electronics Industries. Accordingly, Hyundai Electronics America and
Maxtor requested this license, and IBM has provided a draft license agreement.
We are finalizing the license agreement with IBM, which will cover the period
from the date we ceased to be a majority-owned subsidiary of Hyundai Electronics
America. Hyundai Electronics Industries is required under the IBM license
agreement to pay IBM a license fee, payable in installments through 2007.
Although the license agreement between IBM and Maxtor will be royalty-free,
under the sublicense agreement between Hyundai Electronics Industries and us, we
agreed to pay IBM a portion of the license fee otherwise due from Hyundai
Electronics Industries under the license agreement between Hyundai Electronics
Industries and IBM payable in annual installments, when such amounts are due
from Hyundai Electronics Industries to IBM.
CERTAIN INTELLECTUAL PROPERTY INDEMNIFICATION AND PATENT CROSS LICENSE BETWEEN
HYUNDAI ELECTRONICS INDUSTRIES AND MAXTOR
Hyundai Electronics Industries agreed to indemnify us for any losses from
third party claims arising after we ceased to be a majority-owned subsidiary of
Hyundai Electronics America, if those claims would have been covered under
patent license agreements between Hyundai Electronics Industries or its
affiliates other than Maxtor and such third party, and which were in existence
at the time Maxtor was a majority-owned subsidiary of Hyundai Electronics
America. We ceased to be a majority-owned subsidiary of Hyundai Electronics
America on the date of the closing of our July 1998 public offering. These
indemnifications survive through July 2001, and the maximum dollar amount for
which Hyundai Electronics Industries is liable under the indemnification
provisions is $25.0 million. In addition, Hyundai Electronics Industries and
Maxtor have granted each other royalty-free patent licenses covering patents
owned, or licensable without the payment of royalties or other consideration to
third parties, by each party through August 31, 2003 relating to certain fields
of use. Maxtor and Hyundai Electronics Industries also have agreed to indemnify
each other for losses from the other party's action
21
<PAGE> 27
or inaction under the license agreement between Hyundai Electronics Industries
and IBM including any nonpayment of license fees. Maxtor's maximum liability
under this indemnity agreement is the total amount of money due to IBM under the
sublicense agreement and actual interest costs and/or exchange rate losses
incurred by Hyundai Electronics Industries.
STOCKHOLDER AGREEMENT
Hyundai Electronics America, Hyundai Electronics Industries and Maxtor are
parties to a stockholder agreement. The stockholder agreement does not bind any
Hyundai entity other than Hyundai Electronics America, Hyundai Electronics
Industries, their successors and entities controlled by either of them ("Hyundai
Affiliates"), Maxtor and/or entities controlled by Maxtor.
Registration Rights. Under the terms of the stockholder agreement, if we
propose to register any of our securities under the Securities Act of 1933,
either for our own account or the account of other stockholders exercising
registration rights, Hyundai Electronics America and its transferees are
entitled to notice of such registration and are entitled to include shares of
such common stock therein. However, the underwriters of any offering have the
right to limit the number of shares included in such registration. In addition,
Hyundai Electronics America and certain transferees may require us, on not more
than five occasions, to file a registration statement under the Securities Act
with respect to minimum specified amounts and value of shares held by Hyundai
Electronics America or such transferees. We are required to use reasonable
commercial efforts to effect such registration, subject to certain conditions
and limitations. Registration of such shares under the Securities Act would
result in such shares becoming freely tradable and could have an adverse effect
on the market price for our common stock. In , Hyundai
Electronics America entered into an agreement with us supplementing and
modifying the terms of Hyundai Electronic America's registration rights relating
to the stock offering and DECS offering, to allocate expenses for such
offerings, to provide for indemnification to Maxtor relating to the DECS
offering, to agree to the allocation of the over-allotment option, if exercised,
and certain other matters.
Rights Regarding Our Board of Directors. When the Hyundai Affiliates
beneficially own less than a majority, but at least 30% of our outstanding
voting stock, Hyundai Electronics America has the right to designate for
nomination one director in each of the three classes of our board of directors.
Such designee must be reasonably satisfactory to the nominating committee of the
board of directors. The remaining directors are to be nominated by the
nominating committee, subject to the approval of a majority of our directors who
are not employed by or serving as paid consultants for Hyundai Electronics
America, Maxtor or either of their affiliates. Hyundai Electronics America has
the right to designate for nomination one director in each of two classes at any
time when the Hyundai Affiliates beneficially own less than 30% but at least 20%
of our outstanding voting stock, and one director if the Hyundai Affiliates
beneficially own less than 20% but at least 10% of our outstanding voting stock.
Again, each designee must be reasonably satisfactory to the nominating
committee. If a vacancy occurs with respect to a director which Hyundai
Electronics America had the right to designate initially, and Hyundai
Electronics America has the right at such time to designate a director for
nomination in such director's class, Hyundai Electronics America is entitled to
designate a director to fill the vacancy. If we nominate for election those
persons designated by Hyundai Electronics America, the Hyundai Affiliates are
required to vote their shares of voting stock in favor of all directors
nominated in accordance with the stockholder agreement. Hyundai Electronics
America's
22
<PAGE> 28
right to designate directors for nomination terminates when the Hyundai
Affiliates beneficially own less than 10% of the outstanding voting stock.
Three out of our eight directors are employees of Hyundai Electronics
America or Hyundai Electronics Industries.
Prohibition on Certain Proxy Solicitations. The Hyundai Affiliates are not
permitted to make any solicitation of proxies either with regard to the election
of directors or other proposals, except in response to a solicitation of proxies
by a person other than our management in an election contest or otherwise. This
prohibition on proxy solicitation terminates when the Hyundai Affiliates
beneficially own less than 20% of the outstanding voting stock.
Standstill and Right to Maintain Ownership; Substantial Stock
Ownership. Hyundai Affiliates are not permitted to acquire additional shares of
our voting stock except for two reasons. First, Hyundai Affiliates may purchase
voting stock if a third party makes a tender offer or exchange offer for at
least 40% of our voting stock or accumulates more than 20% of our voting stock,
unless these actions by the third party have been approved by a majority of our
directors who are not employees of any Hyundai entity or Maxtor. Second, Hyundai
Affiliates may purchase voting stock through December 31, 2000, if as a result
of an issuance of common stock or other equity securities by us, Hyundai
Affiliates will own in the aggregate less than 30% of our outstanding voting
stock, plus one share (the "Minimum Ownership") following such issuance. In the
second case, Hyundai Electronics America is permitted to purchase shares of our
common stock in the open market, subject to our trading window policies, only to
the extent necessary to maintain the Minimum Ownership. Unless such purchases
are made or Hyundai Electronics America otherwise directs, we will automatically
sell Hyundai Electronics America the number of shares of common stock necessary
to allow Hyundai Affiliates in the aggregate to maintain the Minimum Ownership,
at fair market value as determined under the stockholder agreement. The
prohibition on Hyundai Affiliates' acquisition of our voting stock terminates on
the earlier of December 31, 2001 or such time as the Hyundai Affiliates
beneficially own less than 20% of our outstanding voting stock.
So long as Hyundai Electronics America owns a substantial percentage of our
voting stock, it may be able to influence corporate policy decisions and
determine the outcome of any matters submitted to our stockholders. A favorable
vote of two-thirds of our outstanding voting stock is required to approve
certain types of amendments to our Amended and Restated Certificate of
Incorporation and stockholder-proposed amendments to our Amended and Restated
Bylaws. Consequently, Hyundai Electronics America will be able to block such
amendments so long as it owns at least one-third of our common stock, and will
make approval of any such amendment more difficult to achieve if it disapproves
of such amendment even if its ownership drops below one-third.
Agreement Not to Compete. Hyundai Electronics America and Hyundai
Electronics Industries also have agreed not to compete with us in the design,
development, manufacture, marketing or sale of hard disk drives through July
2003. Despite this agreement, Hyundai Affiliates are permitted to make
investments of up to 3% of the outstanding stock of a publicly traded
corporation.
23
<PAGE> 29
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
public reference facilities of the SEC in Washington, D.C., Chicago, Illinois
and New York, New York. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings also are available to
the public from the SEC's web site at http:\\www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and any later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any additional documents
we file with the SEC until the offering of the common stock is terminated. This
prospectus is part of a registration statement on the Form S-3 that we filed
with the SEC. The documents we incorporate by reference are:
(1) Maxtor's Annual Report on Form 10-K/A for the fiscal year ended
December 27, 1997;
(2) Maxtor's Quarterly Report on Form 10-Q for the quarters ended March 28,
1998, June 27, 1998 and September 26, 1998; and
(3) The description of our common stock that is contained in our
Registration Statement on Form 8-A filed on July 28, 1998.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Investor Relations
Maxtor Corporation
510 Cottonwood Drive
Milpitas, California 95035
(408) 432-1700
In addition, we will deliver a copy of our (1) Annual Report on Form 10-K/A
for the fiscal year ended December 27, 1997 and (2) most recent Form 10-Q,
without charge, to each person receiving a copy of this prospectus.
24
<PAGE> 30
PRICE RANGE OF OUR COMMON STOCK
Our common stock has been trading publicly on the Nasdaq National Market
under the symbol "MXTR" since July 31, 1998. The table below sets forth the
range of quarterly high and low closing sales prices for our common stock on the
Nasdaq National Market. Our fiscal year end is the last Saturday of December,
conforming to a 52/53-week year methodology.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1999 First Quarter (through , 1999)..... $ $
Fiscal 1998 Fourth Quarter..................................
Fiscal 1998 Third Quarter (from July 31, 1998)..............
</TABLE>
On , 1999, the closing price of our common stock as reported
by the Nasdaq National Market was $ per share. As of , 1999,
there were approximately stockholders of record of our common
stock.
DIVIDEND POLICY
We have never paid cash dividends on our stock. We do not anticipate paying
cash dividends on our stock, including our common stock, in the near future.
25
<PAGE> 31
CAPITALIZATION
The following table sets forth our capitalization as of September 26, 1998,
(1) on an actual basis and (2) on a pro forma basis as adjusted to reflect the
sale of our common stock offered by us in the stock offering and the receipt and
application of the proceeds therefrom, after deducting the estimated
underwriting discount and offering expenses payable by us. This information
should be read in conjunction with our consolidated financial statements and the
notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 26, 1998
--------------------------
AS
ACTUAL ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings, including current portion of
long-term debt...................................... $ 5,261 $
========= ======
Long-term debt:
Long-term debt due to affiliates.................... $ 55,000 $
Long-term debt and capital lease obligations due
after one year................................... 90,051
--------- ------
Total long-term debt........................ 145,051
========= ======
Stockholders' equity:
Preferred stock, $0.01 par value, 95,000,000 shares
authorized; no shares issued and outstanding,
actual; no shares issued and outstanding, as
adjusted......................................... --
Common stock, $0.01 par value, 250,000,000 shares
authorized; 94,257,791 shares issued and
outstanding, actual; shares issued
and outstanding, as adjusted..................... 943
Additional paid-in capital............................ 878,019
Unrealized gain on investments in equity securities... 13,234
Accumulated deficit................................... (771,778)
--------- ------
Total stockholders' equity....................... 120,418
--------- ------
Total capitalization............................. $ 265,469 $
========= ======
</TABLE>
26
<PAGE> 32
DILUTION
As of , 1998, our net tangible book value was approximately
$ , or $ per share of common stock, based on shares
of common stock outstanding. Net tangible book value per share is equal to our
total tangible assets less our total liabilities, divided by the total number of
shares of common stock outstanding. After giving effect to our sale of
shares of our common stock in the stock offering at an assumed
public offering price of $ per share, and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our as adjusted net tangible book value as of , 1998 would
have been approximately , or $ per share. This represents an
immediate increase in net tangible book value of $ per share of common stock
to existing stockholders and an immediate dilution in net tangible book value of
$ per share to investors purchasing shares of common stock in the stock
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............. $
------
Net tangible book value per share as of ,
1999............................................... $
Increase in net tangible book value per share
attributable to new investors......................
------
Net tangible book value per share after stock
offering...........................................
------
Dilution per share to new investors.................. $
======
</TABLE>
The calculation of net tangible book value and other computations above
assume no exercise of outstanding options. As of , 1999,
shares of common stock were issuable upon exercise of outstanding
stock options at a weighted average exercise price of $ per share. To the
extent the outstanding options are exercised with exercise prices below the
public offering price, there will be further dilution to new investors.
27
<PAGE> 33
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
thereto included elsewhere in this prospectus. The table below sets forth our
selected consolidated financial data for, and as of the end of, each of the
fiscal periods indicated. The selected consolidated financial data for the
fiscal years ended March 26, 1994, March 25, 1995, and March 30, 1996, have been
derived from our consolidated financial statements audited by Ernst & Young LLP.
The selected consolidated financial data for the nine-month period ended
December 28, 1996 and the fiscal year ended December 27, 1997 have been derived
from our consolidated financial statements audited by PricewaterhouseCoopers
LLP, included elsewhere in this prospectus. The selected consolidated financial
data for the nine-month period ended September 26, 1998 is derived from our
unaudited financial statements included elsewhere in this prospectus. In the
opinion of our management, such unaudited financial statements have been
prepared on the same basis as the audited financial statements referred to above
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our financial position and results of
operations for the indicated period. Operating results for the nine months ended
September 26, 1998 are not necessarily indicative of the results that may be
expected for the full year.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR NINE MONTHS FISCAL YEAR NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 26, MARCH 25, MARCH 30, DECEMBER 28, DECEMBER 27, SEPTEMBER 26,
1994 1995 1996 1996(1) 1997 1998
----------- ----------- ----------- ------------ ------------ -------------
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... $1,152.6 $ 906.8 $1,269.0 $ 798.9 $1,424.3 $1,680.7
Cost of revenue........................... 1,205.0 850.7 1,196.3 888.9 1,352.9 1,482.8
-------- ------- -------- ------- -------- --------
Gross profit (loss)................. (52.4) 56.1 72.7 (90.0) 71.4 197.9
-------- ------- -------- ------- -------- --------
Operating expenses:
Research and development................ 97.2 60.7 94.7 87.8 106.2 110.3
Selling, general and administrative..... 78.9 81.6 82.8 60.7 62.6 53.0
Stock compensation expense.............. -- -- -- -- -- 11.0(2)
Other................................... 19.5 (10.2) 4.5 -- -- --
-------- ------- -------- ------- -------- --------
Total operating expenses............ 195.6 132.1 182.0 148.5 168.8 174.3(2)
-------- ------- -------- ------- -------- --------
Income (loss) from operations............. (248.0) (76.0) (109.3) (238.5) (97.4) 23.6(2)
Interest expense.......................... (10.0) (8.4) (11.8) (18.0) (36.5) (24.1)
Interest and other income................. 2.3 4.2 1.1 1.0 25.0(3) 3.9
-------- ------- -------- ------- -------- --------
Income (loss) before income taxes......... (255.7) (80.2) (120.0) (255.5) (108.9) 3.4(2)
Provision for income taxes................ 1.9 2.0 2.8 0.8 1.0 2.2
-------- ------- -------- ------- -------- --------
Net income (loss)......................... $ (257.6) $ (82.2) $ (122.8) $(256.3) $ (109.9)(3) $ 1.2(2)
======== ======= ======== ======= ======== ========
Net income (loss) per
share -- diluted(4)..................... $ (16.00) $ (3.25) $ (5.94) $ -- $ -- $ 0.02
======== ======= ======== ======= ======== ========
Shares used in per share calculation (in
thousands).............................. 16,102 25,292 20,677 -- -- 54,491
======== ======= ======== ======= ======== ========
Pro forma net loss per share -- diluted... $ -- $ -- $ -- $(17.62) $ (3.62) $ 0.02
======== ======= ======== ======= ======== ========
Shares used in pro forma share calculation
(in thousands).......................... -- -- -- 14,552 30,350 55,491
======== ======= ======== ======= ======== ========
BALANCE SHEET DATA:
Total assets.............................. $ 492.4 $ 381.8 $ 442.5 $ 314.5 $ 555.5 $ 743.2
Total current liabilities................. 265.7 236.0 413.1 412.9 552.2 477.7
Long-term debt and capital lease
obligations due after one year.......... 107.4 102.0 100.2 229.1 224.3 145.1
Total stockholders' equity (deficit)...... 119.2 43.9 (71.1) (327.5) (221.0) 120.4
</TABLE>
- -------------------------
(1) We changed our fiscal year during the period ended December 28, 1996 to
conform our fiscal year to that of Hyundai Electronics America.
(2) Total operating expenses, income from operations, income before income taxes
and net income for the nine months ended September 26, 1998 reflect a $11.0
million compensation charge related to certain variable accounting features
of our option plan. Without such charge, we would have had total operating
expenses of $163.3 million, income from operations of $34.6 million, income
before income taxes of $14.4 million and net income of $12.2 million. Our
1996 Stock Option Plan was amended and restated to remove the variable
features and provide for fixed award options. See Note 10 of notes to
consolidated financial statements.
(3) Includes recovery of a $20.0 million fully-reserved note from International
Manufacturing Services.
(4) Net loss per share information for the fiscal periods ended December 28,
1996 and December 27, 1997 have not been presented since such information is
not meaningful due to the limited number of shares of common stock
outstanding at that time.
28
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and the notes thereto which appear elsewhere in this prospectus. This
prospectus contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this prospectus, particularly in "Risk Factors." In addition to the other
information in this prospectus, investors should consider carefully the
following discussion and the information set forth under "Risk Factors" in
evaluating us and our business before purchasing our common stock in the stock
offering.
We are a leading provider of hard disk drives for desktop computers. Our
DiamondMax product family consists of 3.5 inch hard disk drives with storage
capacities which range from 3.4 gigabytes to 17.2 gigabytes and industry-leading
performance.
REVENUE RECOGNITION
We generally recognize revenue upon shipment to our customers. Sales to
certain distributors and retailers are governed by agreements providing limited
rights of return, as well as price protection on unsold merchandise.
Accordingly, we record reserves upon shipment for estimated returns, exchanges
and credits for price protection. We also record reserves for the estimated cost
to repair or replace products under warranty at the time of sale. We warrant our
products against defects in parts and labor for a period of three years from the
date of shipment with an additional three months allowed for distributors to
account for "shelf life."
CHANGE IN FISCAL YEAR
During 1996, we changed our fiscal year end to be consistent with the
fiscal year end of Hyundai Electronics America. The fiscal year end changed from
the last Saturday of March, the date used in our previous filings of our Form
10-K with the SEC, to the last Saturday of December, conforming to a 52/53-week
year methodology.
29
<PAGE> 35
RESULTS OF OPERATIONS
Quarterly Results of Operations
The following table sets forth certain quarterly financial information for
each of the six quarters in the six quarter period ended September 26, 1998.
This information is derived from our unaudited consolidated financial
statements, prepared on a basis consistent with our audited consolidated
financial statements which appear elsewhere in this prospectus. In the opinion
of our management, this information includes all adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of such
information. Past quarterly operating results are not necessarily indicative of
the results that may be expected for future periods. The data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information of Maxtor included elsewhere in this prospectus. Quarterly
results are based on fiscal quarters of thirteen weeks in duration ending on the
last Saturday of each quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27, SEPTEMBER 26
1997 1997 1997 1998 1998 1998
----------- ------------- ------------ ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue........................ $283.1 $392.2 $502.0 $549.6 $531.3 $599.8
Cost of revenue................ 280.3 370.7 447.8 487.3 468.9 526.6
------ ------ ------ ------ ------ ------
Gross profit.......... 2.8 21.5 54.2 62.3 62.4 73.2
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development..... 25.5 26.7 27.6 33.4 36.7 40.2
Selling, general and
administrative............. 15.4 15.5 16.6 15.9 18.4 18.6
Stock compensation expense... -- -- -- 14.7(1) (4.8)(1) 1.2(1)
------ ------ ------ ------ ------ ------
Total operating expenses..... 40.9 42.2 44.2 64.0(1) 50.3(1) 60.0(1)
------ ------ ------ ------ ------ ------
Income (loss) from
operations................... (38.1) (20.7) 10.0 (1.7)(1) 12.1(1) 13.2(1)
Interest expense............... (8.7) (10.9) (9.0) (8.8) (8.7) (6.6)
Interest and other income...... 0.4 0.4 22.4(2) 0.3 2.1 1.5
------ ------ ------ ------ ------ ------
Income (loss) before income
taxes........................ (46.4) (31.2) 23.4(2) (10.2)(1) 5.5(1) 8.2(1)
Provision for income taxes..... 0.2 0.2 0.3 0.1 0.1 2.1
------ ------ ------ ------ ------ ------
Net income (loss).............. $(46.6) $(31.4) $ 23.1(2) $(10.3)(1) $ 5.4(1) $ 6.1(1)
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27, SEPTEMBER 26
1997 1997 1997 1998 1998 1998
----------- ------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................ 99.0 94.5 89.2 88.7 88.3 87.8
----- ----- ----- ----- ----- -----
Gross profit.......... 1.0 5.5 10.8 11.3 11.7 12.2
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development..... 9.0 6.8 5.5 6.0 6.9 6.7
Selling, general and
administrative............. 5.5 4.0 3.3 2.9 3.5 3.1
Stock compensation expense... -- -- -- 2.7(1) (0.9)(1) 0.2(1)
----- ----- ----- ----- ----- -----
Total operating
expenses............ 14.5 10.8 8.8 11.6(1) 9.5(1) 10.0(1)
----- ----- ----- ----- ----- -----
Income (loss) from
operations................... (13.5) (5.3) 2.0 (0.3)(1) 2.2(1) 2.2(1)
Interest expense............... (3.0) (2.7) (1.8) (1.7) (1.6) (1.1)
Interest and other income...... 0.1 0.1 4.5(2) 0.1 0.4 0.3
----- ----- ----- ----- ----- -----
Income (loss) before income
taxes........................ (16.4) (7.9) 4.7(2) (1.9)(1) 1.0(1) 1.4(1)
Provision for income taxes..... 0.1 0.1 0.1 -- -- 0.4
----- ----- ----- ----- ----- -----
Net income (loss).............. (16.5) (8.0) 4.6(2) (1.9)(1) (1.0)(1) 1.0(1)
===== ===== ===== ===== ===== =====
</TABLE>
30
<PAGE> 36
- -------------------------
(1) Total operating expenses, loss from operations, loss before income taxes and
net loss for the three months ended March 28, 1998 reflect a $14.7 million
compensation charge related to certain variable accounting features of our
1996 Stock Option Plan. Without such charge, we would have had total
operating expenses of $49.3 million, income from operations of $13.0
million, income before income taxes of $4.5 million and net income of $4.4
million. During the second quarter of 1998, variable plan accounting
adjustments resulted in a benefit of $4.8 million. Without such benefit, the
quarter ended June 27, 1998 would have reflected total operating expenses of
$55.1 million, income from operations of $7.3 million, income before income
taxes of $0.7 million and net income of $0.6 million. During the third
quarter of 1998, adjustments which related to the amortization of
compensation costs incurred when our 1996 Stock Option Plan was variable
resulted in a charge of $1.2 million. Without such charge, the quarter ended
September 26, 1998 would have reflected total operating expenses of $58.8
million; income from operations of $14.4 million, income before income taxes
of $9.4 million and net income of $7.3 million. Our 1996 Stock Option Plan
was amended and restated to remove the variable features and provide for
fixed award options. See Note 10 of notes to consolidated financial
statements.
(2) Includes recovery of a $20.0 million fully-reserved note from International
Manufacturing Services.
Revenue. During the six quarter period ended September 26, 1998, our
revenue grew by 111.9%, increasing from $283.1 million in the second quarter of
1997 to $599.8 million in the third quarter of 1998. The increase in revenue is
attributable primarily to an increase in unit shipments arising from improved
time-to-market introduction and time-to-volume production and a shift in our
customer base to desktop computer manufacturers. Revenue growth from increased
unit shipments was offset partially by continued rapid price erosion in the hard
disk drive market as a whole, which resulted in declining average selling prices
throughout the period. We believe that the effect of hard disk drive market
average selling price declines on our average selling prices was mitigated
partially by our improved time-to-market introduction and time-to-volume
production and by a Maxtor trend toward shipping higher-capacity hard disk
drives, which tend to have higher initial average selling prices.
From the second quarter of 1997 to the third quarter of 1998, revenue from
sales to desktop computer manufacturers increased from 50.2% to 77.8% of our
revenue. During this period, sales as a percentage of our revenue to three of
the largest desktop computer manufacturers, Compaq, Dell and IBM, increased from
23.2% to 54.5%.
Cost of Revenue; Gross Profit. Cost of revenue consists principally of the
cost of hard disk drive components purchased from outside vendors, labor and
manufacturing overhead. During the six quarter period ended September 26, 1998,
gross profit improved from a profit of $2.8 million in the second quarter of
1997 to a profit of $73.2 million in the third quarter of 1998. Gross margin
improved, quarter-over-quarter during this period, increasing from 1.0% in the
second quarter of 1997 to 12.2% in the third quarter of 1998. The
quarter-over-quarter improvement in gross margin is due primarily to the timely
introduction of new, higher margin products that achieved market acceptance and
higher manufacturing yields. Gross margin also was affected favorably by
improved product designs that led to improved manufacturing yields and lower
component costs. Growth of our gross margins, however, was constrained partially
by continued rapid price erosion in the hard disk drive market as a whole that
resulted in declining average selling prices for our products throughout the
period.
Operating Expenses
Research and Development Expense. During each of the quarters in the six
quarter period ended September 26, 1998, we made substantial R&D investments.
Our R&D expense as a percentage of revenue decreased from 9.0% in the second
quarter of 1997 to 5.5% in the fourth quarter of 1998, while the absolute dollar
level of R&D spending during the last three quarters of the 1997 fiscal year
remained relatively constant. The decrease in
31
<PAGE> 37
R&D expense as a percentage of revenue was due to an increase in our revenue.
Over the first three quarters of 1998, however, R&D spending increased to $40.2
million, or 6.7% of revenue, in the third quarter of 1998 from $27.6 million, or
5.5% of revenue, in the fourth quarter of 1997. This increase was due to our
efforts to develop new products for the desktop computer market and future
products in other hard disk drive market segments. We anticipate that R&D
expenses will continue to increase in absolute dollars during 1998 due to
continuing efforts to diversify our product portfolio.
Selling, General and Administrative Expense. SG&A expenses consist mainly
of employee-related expenses, including sales commissions and outside services.
During the six quarter period ended September 26, 1998, our SG&A expenses as a
percentage of revenue decreased from a high of 5.5% in the second quarter of
1997 to 3.1% in the third quarter of 1998. The decrease in SG&A expenses as a
percentage of revenue during this six quarter period is due to the increase in
our revenue combined with our ongoing cost control efforts. We anticipate that
SG&A expenses will increase in absolute dollars during 1998 due to continuing
expenses related to expected increased sales activity.
Stock Compensation Expense. In 1996, we adopted our 1996 Stock Option Plan
pursuant to which substantially all of our domestic employees and certain
international employees received options that were required to be accounted for
as variable options. These options, which were granted between May 1996 and
October 1997, required remeasurement of any intrinsic compensation element at
each reporting date determined by the difference between the estimated current
fair value of our stock and the exercise price of the options. In the first
quarter of 1998, we amended and restated our 1996 Stock Option Plan to remove
the variable features and all grants subsequent to October 1997 have been
subject to fixed terms. In the second quarter of 1998, we offered and re-issued
new fixed award options in exchange for options previously issued under variable
terms, thereby eliminating the requirement to remeasure these options in
subsequent periods. Compensation expense has been reflected in our financial
statements in accordance with Financial Accounting Standards Board
Interpretation No. 28, "Accounting for Appreciation Rights and Other Variable
Stock Option or Award Plans." Accordingly, we recorded non-cash compensation
expense of $1.2 million and $11.0 million for the three and nine-month periods
ended September 26, 1998, respectively. The remaining unrecognized compensation
element will be reflected in quarterly charges, decreasing sequentially from the
third quarter of 1998 through the second quarter of 2001. During 1997, we also
granted options to the employees of MMC Technology, a wholly owned subsidiary of
Hyundai Electronics America. MMC Technology has agreed to reimburse us for any
compensation expense arising from such grants.
Interest Expense. During the six quarter period ended September 26, 1998,
our interest expense as a percentage of revenue declined from a high of 3.0% in
the second quarter of 1997 to a low of 1.1% in the third quarter of 1998. During
the second and third quarters of 1997, our interest expense in absolute dollars
increased due to a growth in short-term borrowings used to fund our operations.
During the fourth quarter of 1997 and first three quarters of 1998, our interest
expense in absolute dollars declined due to conversion of $200.0 million of
subordinated debt held by Hyundai Electronics America into equity in Maxtor with
an associated reduction in interest payments, and a reduction in other debt of
$244.1 million, approximately $200.0 million of which was paid using proceeds
from our July 1998 public offering. The benefits derived from such debt
reductions were, however, partially offset prior to our July 1998 public
offering by an increase in our interest expense due to higher interest rates
applied to our intercompany loan from Hyundai Electronics America and bank
credit facilities, in each case as a result
32
<PAGE> 38
of the higher cost of borrowing resulting from changes in the economic
environment in Korea.
Interest and Other Income. During the six quarter period ended September
26, 1998, our interest and other income remained relatively constant at
approximately 0.2% of revenue, except for a one time event in the fourth quarter
of 1997 which related to a $20.0 million fully-reserved note issued to us by
International Manufacturing Services and a one time event in the second quarter
of 1998 which related to the recovery of $1.8 million interest receivable on the
International Manufacturing Services note.
Nine months ended September 27, 1997 compared to nine months ended September 26,
1998
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.............................................. $ 922.3 $1,680.7
Cost of revenue...................................... 905.1 1,482.8
------- --------
Gross profit............................... 17.2 197.9
------- --------
Operating expenses:
Research and development........................... 78.6 110.3
Selling, general and administrative................ 45.9 53.0
Stock compensation expense......................... -- 11.0(1)
------- --------
Total operating expenses................... 124.6 174.3(1)
------- --------
Income (loss) from operations........................ (107.4) 23.6(1)
Interest expense..................................... (27.5) (24.1)
Interest and other income............................ 2.6 3.9
------- --------
Income (loss) before income taxes.................... (132.3) 3.4(1)
Provision for income taxes........................... 0.7 2.2
------- --------
Net income (loss).................................... $(133.0) $ 1.2(1)
======= ========
</TABLE>
33
<PAGE> 39
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
<S> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue.............................................. 100.0% 100.0%
Cost of revenue...................................... 98.1 88.2
----- ------
Gross profit............................... 1.9 11.8
----- ------
Operating expenses:
Research and development........................... 8.5 6.6
Selling, general and administrative................ 5.0 3.2
Stock compensation expense......................... -- 0.6(1)
----- ------
Total operating expenses................... 13.5 10.4(1)
----- ------
Income (loss) from operations........................ (11.6) 1.4(1)
Interest expense..................................... (3.0) (1.4)
Interest and other income............................ 0.3 0.2
----- ------
Income (loss) before income taxes.................... (14.3) 0.2(1)
Provision for income taxes........................... 0.1 0.2
----- ------
Net income (loss).................................... (14.4) 0.1(1)
===== ======
</TABLE>
- -------------------------
(1) Total operating expenses, income from operations, income before income taxes
and net loss for the nine months ended September 26, 1998 reflect a $11.0
million compensation charge related to certain variable accounting features
of our 1996 Stock Option Plan. Without such charge, we would have had total
operating expenses of $163.3 million, income from operations of $34.6
million, income before income taxes of $14.4 million and net income of $12.2
million. Our 1996 Stock Option Plan has been amended and restated to remove
the variable features and provide for fixed award options. See Note 10 of
notes to consolidated financial statements.
Revenue. From the first nine months of 1997 to the first nine months of
1998, revenue grew by 82.2%, increasing from $922.3 million to $1,680.7 million,
respectively. This increase in revenue is attributable primarily to an increase
in unit shipments arising from improved time-to-market introduction and
time-to-volume production and a shift in our customer base to desktop computer
manufacturers. Revenue growth from increased unit shipments was partially offset
by continued rapid price erosion in the hard disk drive market as a whole, which
resulted in declining average selling prices throughout the period. We believe
that the effect of hard disk drive market average selling price declines on our
average selling prices was contained partially by our improved time-to-market
introduction and time-to-volume production and by a Maxtor trend toward shipping
higher-capacity hard disk drives, which tend to have higher initial average
selling prices.
From the first nine months of 1997 to the first nine months of 1998,
revenue from sales to desktop computer manufacturers increased from 57.5% to
75.4% of our revenue. During this period, sales to three of the largest desktop
computer manufacturers, Compaq, Dell and IBM, increased from 28.3% to 53.5% of
our revenue.
Gross Profit. Gross profit improved from a profit of $17.2 million for the
first nine months of 1997 to a profit of $197.9 million in the first nine months
of 1998. Gross margin increased from 1.9% in the first nine months of 1997 to
11.8% in the first nine months of 1998. The improvement in gross margin is due
to the timely introduction of new, higher
34
<PAGE> 40
margin products which achieved market acceptance and higher manufacturing
yields. Gross margin also was favorably affected by improved product designs
which led to improved manufacturing yields and lower component costs. Growth of
our gross margin, however, was constrained partially by continued rapid price
erosion in the hard disk drive market as a whole, which resulted in declining
average selling prices for our products.
Operating Expenses
Research and Development Expense. R&D expense as a percentage of revenue
decreased from 8.5% in the first nine months of 1997 to 6.6% in the first nine
months of 1998, while the absolute dollar level of R&D spending during the same
periods increased from $78.6 million to $110.3 million. This increase in
absolute dollars was due to our efforts to develop new products for the desktop
computer market and future products in other hard disk drive market segments.
Selling, General and Administrative Expense. SG&A expense as a percentage
of revenue declined from 5.0% in the first nine months of 1997 to 3.2% during
the first nine months of 1998, while the absolute dollar level of SG&A expenses
increased slightly from $45.9 million to $53.0 million, respectively. The
decrease in SG&A expenses as a percentage of revenue between these periods was
due to the increase in our revenues combined with our ongoing cost control
efforts.
Stock Compensation Expense. In 1996, we adopted our 1996 Stock Option Plan,
pursuant to which substantially all of our domestic employees and certain
international employees received options which were required to be accounted for
as variable options. As a consequence, we recorded non-cash compensation expense
of $11.0 million in the first nine months of 1998, related to the difference
between the estimated fair market value of our stock and the exercise price of
the options granted under our 1996 Stock Option Plan between May 1996 and
October 1997. If this expense were not incurred, we would have realized net
income of $12.2 million for the first nine months of 1998. In the second quarter
of 1998, we amended and restated our 1996 Stock Option Plan to remove the
features which resulted in variable accounting.
Interest Expense. Interest expense as a percentage of revenue declined from
3.0% in the first nine months of 1997 to 1.4% in the first nine months of 1998,
while the absolute dollar level of interest expense decreased from $27.5 million
in the first nine months of 1997 to $24.1 million in the first nine months of
1998. The decrease in the absolute dollar amount of our interest expense between
the first nine months of 1997 and the first nine months of 1998 was due
primarily to the retirement of $244.0 million of debt in the fourth quarter of
1997 and the first quarter of 1998. We had $349.2 million of short-term and
$224.0 million of long-term credit borrowings outstanding at September 27, 1997,
as compared to $5.3 million current portion of long-term debt and $145.1 million
of long-term borrowings outstanding at September 26, 1998.
Interest and Other Income. Interest and other income increased slightly
from $2.6 million to $3.9 million between the first nine months of 1997 and the
first nine months of 1998. The increase was primarily due to the increase in
cash and cash equivalents generated from the July 1998 public offering.
35
<PAGE> 41
YEAR 2000 COMPLIANCE
Year 2000 Issue Described
Many currently installed computer systems and software products are coded
to accept, store or report only two digit entries in date code fields. Beginning
in the Year 2000, these date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. This is the "Year
2000 Issue." As a result, computer systems and/or software used by many
companies, including Maxtor and our vendors and customers, will need to be
upgraded to comply with such Year 2000 requirements. We could be impacted by
Year 2000 Issues occurring in our own infrastructure or faced by our major
distributors, suppliers, customers, vendors and financial service organizations.
Such Year 2000 Issues could include information errors, significant information
system failures, or failures of equipment, vendors, suppliers or customers. Any
disruption in our operations as a result of Year 2000 Issues, whether by us or a
third party, could have a material adverse effect on our business, financial
condition and results of operations.
Our Hard Disk Drives Comply
Our hard disk drives are able to operate in the Year 2000 and beyond. The
Year 2000 Issue is only relevant to hardware and software components that use or
affect time and date data or system settings. In the case of our hard disk
drives, the ability to operate correctly in the next century is dependent on the
software and programming loaded on our hard disk drives by the system. Since our
hard disk drives have no inherent time or date function, they will not determine
whether a given system, or any software on a given system, will operate
correctly or incorrectly in the next century. As a result, all of our hard disk
drives are able to receive, store and retrieve data, and operate with a system
or software that is Year 2000 compliant without modification.
Our State of Readiness
Overview. To address internal Year 2000 readiness activities, we have
implemented a corporate program to coordinate efforts across all business
functions and geographic areas, which includes addressing risks associated with
business partners and other third-party relationships. Our internal Year 2000
readiness program is separated into four phases: (1) Awareness, (2) Inventory,
(3) Assessment and (4) Resolution. We are currently in the "assessment" phase
and expect to have substantially completed all four phases by the end of 1999.
Additionally, we are in the process of forming a Year 2000 Project Office to
coordinate the foregoing corporate program. We also are considering engaging
external Year 2000 consultants to assist with methodology and process of the
inventory, assessment and resolution phases. We target substantial completion of
"assessment" by the end of the first quarter of 1999. There can be no assurance
that we will be able to complete all four phases in a timely manner, if at all,
or that the process will adequately address the Year 2000 Issue.
Core IT Systems. We have implemented the R3 system from SAP A.G. The SAP
system is designed to automate more fully our business processes and is
certified by SAP A.G. as Year 2000 compliant. The initial step of this
implementation was completed in early October 1998 and included most of the
major functional areas of our business.
Other Information Technology Systems. Our other information technology
systems include factory information and control systems, computer aided design
systems, banking interface systems, electronic data interchange systems, credit
card processing, customer call management, human resources systems, non-United
States payroll processing, and
36
<PAGE> 42
shipment and just in time delivery management systems. We have determined that
most of our human resources systems, factory information systems, call
management system, non-United States payroll processing and supplier
just-in-time delivery management systems are not Year 2000 compliant. We have
completed our assessment of our human resources and United States payroll
processing systems and have engaged vendors to repair or replace these systems.
The assessment of other information technology systems has not yet been
completed. Assessment will continue for these systems to determine the level of
risk of business interruption for each system and assignment of priority to
resolution activities. Resolution priority will be assigned to repair or
replacement of items that affect new product development, volume production and
distribution.
Non-Information Technology Systems. Our non-information technology systems
include departmental and personal automated applications used in all of our
functional areas, building systems such as heating, cooling, and air
purification, component and hard disk drive test equipment, and manufacturing
equipment. Assessment of our non-information technology systems is underway.
Assessment will include determination of the level of risk of business
interruption associated with a failure of the non-information technology system
and assignment of priority to resolution activities. Resolution priority will be
assigned to repair or replacement of items that affect new product development,
volume production and distribution.
Vendors and Suppliers. Our vendors and suppliers include the sources of
materials used in our hard disk drives, the sources of the equipment and
supplies used by us in the conduct of our business, as well as our landlord's,
financial institutions, and other service providers. Inventory of our suppliers
is underway. Assessment will include determination of the level of risk of
business interruption associated with a failure of a vendor or supplier because
of the Year 2000 Issue and assignment of priority to resolution activities. We
intend to seek written assurance of Year 2000 compliance from our vendors and
suppliers whose Year 2000 compliance is important to our business.
Customers. Our assessment of our Year 2000 issues with our customers will
dovetail with similar activities which our customers will engage in with respect
to Maxtor. Several of our customers, including Compaq, Dell and IBM, have begun
the process of asking us for written assurances that our hard disk drives do not
have Year 2000 Issues and that our business will not be affected by the Year
2000 Issue.
The Costs to Address Our Year 2000 Issues
We have not determined historic or period costs which may have been
incurred in connection with the resolution of Year 2000 Issues. We do not have
any projections of costs which may be incurred in future periods to resolve Year
2000 Issues. We have not determined whether such costs would be material.
The Risks of Our Year 2000 Issues
Resolution of the foregoing has been and will be complex, expensive and
time intensive and could be adversely affected by various risk factors,
including without limit:
- any failure to provide adequate training to employees;
- any failure to retain skilled personnel to implement the SAP system
or find suitable replacements for such personnel;
37
<PAGE> 43
- any expansion of the scope of the implementation plan due to
unanticipated changes in our business or findings in our awareness,
inventory or assessment of risk;
- any failure to devise and run appropriate testing procedures that
accurately reflect the demands that will be placed on new systems
following implementation;
- any failures by vendors or other third parties to accurately assess
their own Year 2000 readiness or the Year 2000 readiness of their
respective vendors and other third parties and any resulting
failures; and
- any failure to develop and implement adequate fall-back, work around
or other contingency plans in the event that difficulties or delays
arise.
It has been widely predicted that a significant amount of litigation
surrounding business interruptions will arise out of Year 2000 Issues. It is
uncertain whether, or to what extent, we may be affected by such litigation.
Because our hard disk drives are able to operate in the Year 2000 and beyond, we
do not anticipate exposure to material product defect or similar litigation. Any
such litigation, however, could have a material adverse effect on our business,
financial condition and results of operations. We also may not receive any
assistance, damages or other relief as a result of our initiation of any
litigation related to the Year 2000 Issue. Our inability to implement our Year
2000 plans or to otherwise address Year 2000 Issues in a timely manner could
have a material adverse effect on our business, financial condition and results
of operations.
Our Contingency Plans
As part of the four-step process outlined above, specific contingency plans
will be developed in connection with the assessment and resolution to the risks
identified. We have established certain information technology contingency
plans, and we are continuing to develop such plans regarding each specific area
of risk associated with the Year 2000 Issue. There is no assurance that we will
complete contingency plans that address risks which actually arise or that any
such contingency plans will properly address their intended purposes if they are
implemented. In addition, we do not have and do not anticipate obtaining any
insurance policy which contains material coverage for potential injuries or
damages related to or caused by the Year 2000 Issue.
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1998, we had $162.2 million in cash and cash equivalents
as compared to $16.9 million at December 27, 1997. In August 1998, we completed
an underwritten public offering of 49,731,225 shares of our common stock. We
received $329.4 million net of offering costs and underwriters' commissions.
Operating activities provided net cash of $222.1 million for the nine-month
period ended September 26, 1998 as compared to utilizing net cash of $142.0
million for the nine-month period ended September 27, 1997. Cash provided by
operating activities for the nine months ended September 26, 1998 was generated
principally by operations and a decrease in working capital. The increase in
cash generated from operations was due primarily to increased sales and improved
margins. We used $55.4 million in investing activities during the nine months
ended September 26, 1998, principally for the purchase of plant and equipment.
In this nine-month period, we reduced short and long-term debt
38
<PAGE> 44
by $239.1 million using approximately $200.0 million of the proceeds from our
July 1998 public offering and cash from operations.
At September 26, 1998, we had approximately $145.0 million of long-term
unsecured debt and $5.3 million in current portion of long term debt which were
comprised of $55.0 million evidenced by a three year subordinated note issued to
Hyundai Electronics America and $95.0 million of publicly-traded Convertible
Subordinate Debentures, due March 1, 2012. Our outstanding 5.75% Convertible
Subordinated Debentures are entitled to annual sinking fund payments of $5.0
million which commenced March 1, 1998. These debentures no longer are
convertible into our common stock or any other security of Maxtor. The $55.0
million note was issued to Hyundai Electronics America to replace an existing
revolving line of credit. This note is due on July 31, 2001 and bears interest
at a rate equal to six-month LIBOR plus 2% due semiannually.
We also have a $200.0 million asset securitization program with Fleet
National Bank under which we sell our eligible trade accounts receivable on a
non-recourse basis through a special purpose vehicle. At September 26, 1998,
$125.0 million of accounts receivable was securitized under the program.
We have been investing significant amounts of capital to increase the
capacity and enhance the productivity of our manufacturing facilities and update
our information technology systems. In the nine-month period ended September 26,
1998 and the fiscal year ended December 27, 1997, we made total capital
expenditures of $61.6 million and $82.5 million, respectively. During 1998 and
1999, capital expenditures are expected to be approximately $100.0 million and
$130.0 million, respectively, to be used principally for adding manufacturing
capacity and implementing new and updating existing information technology
systems.
We believe that the proceeds that we will receive in the stock offering,
together with cash generated from operations and borrowing capacity, will be
sufficient to fund our operations through at least the next 12 months. We
require substantial working capital to fund our business, particularly to
finance accounts receivable and inventory, and to invest in property and
equipment. We may seek long-term financing arrangements, including a line of
credit to fund our future capacity expansion plans, as necessary. However, our
cash needs will depend on, among other things, demand in the desktop hard disk
drive market and pricing conditions. There can be no assurance that lower than
expected revenue, increased expenses, decisions to increase capacity or other
events, including the acquisition of technology, products or businesses, will
not cause us to seek more capital, or to seek capital sooner than currently
expected. If we need additional capital, there can be no assurance that such
additional financing can be obtained, or, if obtained, that it will be available
on satisfactory terms. The failure to obtain additional financing on
satisfactory terms would also hinder our ability to invest in capital
expenditures or in research and development and could have a material adverse
effect on our business, financial condition and results of operations.
Intellectual Property
When we were a majority-owned subsidiary of Hyundai Electronics America, we
had the benefit of certain third-party intellectual property rights on terms
that may have been more favorable than would have been available to us if we had
not been a majority-owned subsidiary of Hyundai Electronics America. On June 25,
1998, we entered into an agreement with Hyundai Electronics America whereby we
agreed to pay an allocated share of the license fees associated with certain
third party rights in annual installments ranging
39
<PAGE> 45
from $1.0 million to $2.3 million through 2007. There can be no assurance that
we will be able to obtain similar rights in the future on terms as favorable as
those currently available to us.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No 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
SFAS 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. We are evaluating the
requirements of SFAS 131 and the effects, if any, on our current reporting and
disclosures.
In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on when costs related to software
developed or obtained for internal use should be capitalized or expensed. The
SOP is effective for transactions entered into for fiscal years beginning after
December 15, 1998. We have reviewed the provisions of the SOP and do not believe
adoption of this standard will have a material effect upon our results of
operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires us to recognize all derivatives on our balance sheet at fair value.
Derivatives which are not hedges must be adjusted to fair value through net
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
recognized immediately in earnings. SFAS 133 is effective for fiscal years
beginning after June 15, 1999, but companies can adopt SFAS 133 earlier. We are
evaluating the requirements of SFAS 133, but do not expect this pronouncement to
materially impact our financial position or results of operations.
40
<PAGE> 46
BUSINESS
We are a leading provider of hard disk drive storage products for desktop
computer systems. Our DiamondMax product family consists of 3.5-inch hard disk
drives with storage capacities which range from 3.4 gigabytes to 17.2 gigabytes.
These products have high speed interfaces for greater data throughput, a robust
mechanical design for improved reliability, magneto-resistive head technology
and a digital signal processor-based electronic architecture that, when
combined, provide industry-leading benchmark performance. On October 1, 1998, we
announced our newest hard disk drive product, the DiamondMax 4320. The
DiamondMax 4320 is our seventh hard disk drive using magneto-resistive head
technology, our eighth hard disk drive utilizing our digital signal
processor-based electronic architecture and our tenth hard disk drive based on
our Formula 4 mechanical structure. Our customers are desktop computer
manufacturers, including Compaq, Dell and IBM; distributors, including Bell
Micro and Ingram; and retailers, including Best Buy, CompUSA and Staples.
COMPANY BACKGROUND
We were founded in 1982 and completed an initial public offering of common
stock in 1986. In the mid-1980's, we were a leading technology innovator in the
hard disk drive industry. As is true today, the hard disk drive industry during
the 1980's was intensely competitive and characterized by rapid technological
change, rapid rates of product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant erosion of average
selling prices. In an effort to mitigate the risks associated with these
factors, we pursued all major product segments in the hard disk drive market,
utilizing multiple product families and technology platforms. This costly
strategy added significant complexity to the business which caused us to delay
or miss a number of key product introductions and ultimately led to the
deterioration of our overall financial condition. As a result of this
deterioration, we sold 40% of our outstanding common stock to Hyundai
Electronics Industries and its affiliates in 1994.
THE MAXTOR TURNAROUND
In early 1996, Hyundai Electronics America acquired all of the remaining
publicly-held shares of our common stock as well as all of our common stock then
held by Hyundai Electronics Industries and its affiliates. Shortly thereafter,
Hyundai Electronics America invested in renewed efforts to revitalize Maxtor. In
July 1996, we hired Michael R. Cannon, our current Chief Executive Officer and
President and a 20 year veteran of the hard disk drive industry, who had
previously served in senior management positions in the systems storage division
at IBM, SyQuest Technology and Control Data Corporation. With a view toward
capturing business at leading desktop computer manufacturers, Mr. Cannon
identified four key areas requiring improvement:
Corporate Leadership. To provide strong leadership and the required focus
on execution, we recruited seasoned, industry veterans for key senior management
positions. In addition to Mr. Cannon, key management position additions
included:
- Paul J. Tufano, our Senior Vice President, Finance, and Chief Financial
Officer, who previously had spent more than 17 years in a variety of
management positions at IBM;
41
<PAGE> 47
- William F. Roach, our Senior Vice President, Worldwide Sales and
Marketing, who previously had spent 20 years in a variety of sales and
marketing management positions at Quantum and Intel; and
- K.H. Teh, our Vice President, Worldwide Manufacturing, who previously had
spent 20 years in a variety of manufacturing management positions at
Iomega, Quantum and SyQuest.
These new senior managers joined Dr. Victor B. Jipson, our Senior Vice
President, Engineering, who has been at Maxtor since December 1995 and had
previously spent 16 years at IBM in a variety of research, technical strategy,
product strategy, research and development, and general management positions. In
addition, we added personnel with significant industry experience to our
engineering, manufacturing, procurement, human resources and sales and marketing
departments.
Cost Competitiveness. In the third quarter of 1996, we aggressively moved
to reduce our cost structure. We stopped using a hard disk drive manufacturing
facility owned and operated by Hyundai Electronics Industries in Korea and
consolidated our volume hard disk drive manufacturing facilities in Singapore.
We also closed our sub-assembly manufacturing facility in Thailand and sold our
majority interest in International Manufacturing Services, our former printed
circuit board division, to certain members of International Manufacturing
Services management and institutional investors. These actions helped reduce our
workforce by approximately 54% by October of 1996. We also removed layers of
management and implemented strict discretionary expense controls. In addition,
we improved the productivity of our research and development expenditures by
simplifying our technology and product roadmap to focus on desktop computer hard
disk drives using a single core technology platform.
Timely Introduction of New Products. Our new management team took a number
of steps designed to improve time-to-market introduction, time-to-volume
production, quality, performance and manufacturability of our products, and the
effectiveness and efficiency of our research and development expenditures. In
particular, we:
- simplified our product and technology roadmap by canceling our 5.25-inch
and 2.5-inch programs;
- focused our research and development efforts on a single core technology
platform that includes magneto-resistive head technology and a digital
signal processor-based electronic architecture, which we believe are
capable of supporting rapid extension of our product and technology
roadmap; and
- restructured our product development process by creating an advanced
technology group, which is responsible for assessing new technology
viability, developing early prototypes and exploiting common design
architectures, and by strengthening our existing product design teams,
which are responsible for taking the building blocks provided by the
advanced technology group and designing high performance, highly
manufacturable, cost-effective products which meet customer
specifications.
Customer/Channel Mix. Recognizing that the vast majority of the growth in
the desktop computer market was being captured by a limited number of leading
personal computer manufacturers, our new management team simplified our sales
channels and focused our sales and marketing resources on establishing Maxtor as
a preferred supplier to leading desktop computer manufacturers and a limited
number of leading distributors and retailers. To improve overall customer
satisfaction and capture accounts with leading
42
<PAGE> 48
desktop computer manufacturers, we took a number of steps to improve product
quality and created dedicated account support teams for our major desktop
computer manufacturer clients, emphasizing senior management involvement in
developing and maintaining customer relationships.
TURNAROUND RESULTS
As a result of the changes described above, our performance has improved
significantly during a period of severe fluctuations in the overall hard disk
drive market.
Timely Introduction of New Products. Our restructured manufacturing and
product development processes, as well as a simplified product and technology
roadmap, enabled us to complete one of the fastest transitions in the industry
from hard disk drives utilizing thin-film head technology to 100% use of
magneto-resistive head technology by the end of the fourth quarter of 1997. With
our DiamondMax 2160 and 2880, we demonstrated significantly improved
time-to-volume manufacturing in the fourth quarter of 1997 and the second
quarter of 1998 by producing 1.4 and 1.3 million units of these products,
respectively, during their first full quarters of production. In the first
quarter of 1998, we established ourselves as a time-to-market entry leader with
our 2.8 gigabytes per disk hard disk drive, the DiamondMax 2880. In the second
quarter of 1998, we continued our trend of being a time-to-market leader with a
3.4 gigabytes per disk hard disk drive, the DiamondMax 3400, and the DiamondMax
Plus 2500, our first 7200 RPM product. Our time-to-market leadership continued
in the fourth quarter of 1998 with the introduction of our 4.3 gigabytes per
disk hard disk drive, the DiamondMax 4320. These improvements, in turn, enabled
us to increase our units shipped per quarter from 1.3 million units during the
first quarter of 1997 to 4.3 million units in third quarter of 1998, and
increased our share of the desktop hard disk drive market in terms of units
shipped from 5.6% in the first quarter of 1997 to 16.7% in the third quarter of
1998.
Customer/Channel Mix. Our new focus on leading desktop computer
manufacturers led to significant improvements in our customer/channel mix. For
example, our revenue from shipments to Compaq, Dell and IBM have increased from
approximately 3.7% of total revenue in the second quarter of 1996 to 54.5% of
our total revenue in the third quarter of 1998. We also became a leading
supplier of desktop hard disk drives to Dell in less than 6 months and were a
leading provider of desktop hard disk drives shipped to the domestic retail
channel during 1997. Cumulatively, these changes have resulted in significantly
improved financial results. We increased revenues by 82.2%, from $922.3 million
to $1,680.7 million for the first nine months of 1997 and 1998, respectively,
and improved gross margins from 1.9% to 11.8% for the same periods.
Cost Competitiveness. Our cost competitiveness initiatives led to a
significant reduction of operating expenses. Our selling, general and
administrative expense as a percentage of revenue was among the lowest in the
industry for the 1997 fiscal year and the first nine months of 1998.
43
<PAGE> 49
INDUSTRY BACKGROUND
The Desktop Hard Disk Drive Market. According to International Data
Corporation, the desktop computer segment is the largest segment of the
worldwide personal computer market, accounting for approximately 80% of global
personal computer shipments in 1997. As a result, desktop computers were the
leading source of demand for hard disk drives, accounting for more than 75% of
all hard disk drive units shipped worldwide in 1997, according to International
Data Corporation. The demand for desktop computers and, therefore, desktop
computer hard disk drives, continues to grow in part due to:
- continued improvements in desktop computing price to performance ratios,
including the emergence of the sub-$1000 desktop computer;
- the rapid accumulation of data resulting from the digitization of
information previously stored in paper form;
- larger file sizes created by multimedia-intensive applications;
- the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of collaborative computing;
and
- increased demand for desktop computer upgrades as a result of Year 2000
compliance efforts.
Future demand growth for hard disk drives also may be driven by new and
emerging hard disk drive markets. In November 1998, International Data
Corporation forecasted that the worldwide desktop computer segment of the hard
disk drive market would grow from approximately 107 million units in 1998 to 192
million units in 2002, reflecting a compound annual growth rate of approximately
15.6%.
Hard Disk Drive Technology. The basic operation of a hard disk drive has
not changed materially since its introduction in the 1950s. To improve the
performance of hard disk drives, hard disk drive manufacturers have concentrated
their efforts on optimizing the performance of the various components of the
hard disk drive.
The main components of the hard disk drive are the head disk assembly and
the printed circuit board. The head disk assembly includes the head, media
(disks), head positioning mechanism (actuator) and spin motor. These components
are contained in a hard base plate protective package in a contamination-free
environment. The printed circuit board includes custom integrated circuits, an
interface connector to the host computer and a power connector.
The head disk assembly is comprised of one or more disks positioned around
a spindle hub that rotates the disks by a spin motor. Disks are made of a smooth
substrate to which a thin coating of magnetic materials is applied. Each disk
has a head suspended directly above it, which can read data from or write data
to the spinning disk. The sensor element of the head, also known as the slider,
is getting progressively smaller, resulting in reduced material costs.
The integrated circuits on the printed circuit board typically include a
drive interface and a controller. The drive interface receives instructions from
the computer, while the controller directs the flow of data to or from the
disks, and controls the heads. The location of data on each disk is logically
maintained in tracks, divided into sectors. The computer sends instructions to
read data from or write data to the disks based on track and sector locations.
Industry standard interfaces are utilized to allow the disk drive to communicate
with the computer.
44
<PAGE> 50
A key performance metric in the hard disk drive industry is "areal
density," which is the measure of stored bits per square inch on the recording
surface of a disk. An increase in areal density allows a hard disk drive
provider to decrease the price per megabyte stored by increasing overall storage
capacity per disk, thus reducing product costs through reduced component
requirements. During 1996 and 1997, certain hard disk drive providers began
transitioning to magneto-resistive heads. Prior to this transition, most hard
disk drives utilized thin-film inductive recording heads. Magneto-resistive
heads have discrete read and write structures which provide more signal than the
older thin-film inductive heads. This results in significantly higher areal
densities, which increases storage capacity per disk and improves manufacturing
margin and product reliability. Hard disk drive providers are evaluating or
implementing a number of technological innovations designed to further increase
hard disk drive performance and reduce product costs, including attempting to
simplify the electronic architecture by combining the traditional servo-control
functions of the digital signal processor-based electronic architecture and the
error recovery and interface management functions of traditional hard disk drive
microprocessors on a single integrated circuit. Moreover, to consistently
achieve timely introduction and rapid volume production of new products, some
hard disk drive providers are striving to simplify their product design
processes by focusing on creating extendible core technology platforms which
utilize common firmware and mechanical designs and re-use of manufacturing
tooling and application specific integrated circuits across various product
generations and product lines.
Hard Disk Drive Market Challenges. Personal computer manufacturers compete
in a consolidating market. The top ten personal computer manufacturers accounted
for greater than 50% of all personal computer units shipped during 1997 and the
first six months of 1998. These personal computer manufacturers use the quality,
storage capacity and performance characteristics of hard disk drives to select
their hard disk drive providers. Personal computer manufacturers typically seek
to qualify three or four providers for a given hard disk drive product
generation. To qualify consistently with personal computer manufacturers and
thus succeed in the desktop hard disk drive industry, a hard disk drive provider
must consistently execute on its product development and manufacturing processes
in order to be among the first-to-market introduction and first-to-volume
production at leading storage capacity per disk with competitive prices. Failure
to reach the market on time or to deliver timely volume production usually
results in significantly decreased gross margins due to rapidly declining
average selling prices and dramatic losses in market share. Successful
achievement on the performance parameters, however, is only part of the
competitive equation. As personal computer manufacturers seek to develop
successful business models, they also are requiring their hard disk drive
vendors to maintain high levels of quality to enable low cost of ownership and
adapt their inventory management models to be compatible with the emerging
build-to-order business model in the personal computer industry.
OUR SOLUTION
We have established ourselves as a leading provider of high quality, high
performance hard disk drives to major desktop computer manufacturers,
distributors and retailers. Our management team has extensive hard disk drive
industry experience across all functional areas. As a result, we have been able
to define and implement the key business processes necessary to fulfill the
needs of our customers. These processes focus on the efficient, timely and
cost-effective integration of leading-edge technology to create highly
manufacturable hard disk drives. Moreover, our senior management team rigorously
monitors these
45
<PAGE> 51
processes in an effort to ensure consistent execution and prompt response to
customer demands. We intend to strengthen our leadership position in the desktop
hard disk drive industry by consistently executing these fundamental business
processes.
OUR STRATEGY
We seek to be the dominant provider of hard disk drives to leading desktop
computer manufacturers, distributors and retailers. Our strategy to achieve this
goal includes the following elements:
Effectively Integrate New Technology. In 1996, we overhauled our research
and development process by augmenting our traditional product development teams
with a new advanced technology group. The advanced technology group's purpose is
to monitor and evaluate advancements in hard disk drive technology for possible
integration into our future products. This group also works closely with our
product development teams and strategic component vendors to:
- obtain early access to the latest hard disk drive component technology;
- allow for flexibility in choosing state-of-the-art components; and
- ensure viability of new product technologies and components prior to
product design.
Through this process, we intend to continue to integrate new technologies
into our existing core technology platform and to strengthen our ability to
introduce high quality, highly manufacturable, high performance hard disk drive
products with industry leading time-to-volume production on a consistent basis.
As a result of this process, we were able to complete one of the fastest
transitions to 100% magneto-resistive head hard disk drives in the industry by
the end of 1997.
Leverage Design Excellence. Our product development methodology reduces
risks associated with design changes by focusing on common firmware and
mechanical designs, and re-use of manufacturing tooling and application specific
integrated circuits. Through this process, we have created a technology platform
which is used as the common core of each of our current hard disk drive products
and which we believe is extendible into products for new and emerging hard disk
drive market opportunities. To reduce the overall cost of ownership of our hard
disk drive products, we use a robust mechanical architecture designed to reduce
defects that result from customer mishandling during installation. We also work
closely with leading component suppliers in an effort to ensure that adequate
tolerances are designed into our products to achieve high manufacturing yields
and product quality. By utilizing this product development methodology, we have
successfully introduced and achieved timely volume production of seven
generations of magneto-resistive head hard disk drives in less than 2 years.
Capitalize on Flexible Manufacturing. Our Singapore manufacturing facility
utilizes a flexible cell-based process that enables us to:
- dedicate manufacturing cells to particular customers, thereby allowing us
to identify, isolate and remedy manufacturing defects quickly, resulting
in improved product quality, faster time-to-volume production and
improved overall customer satisfaction;
- simultaneously manufacture multiple product configurations;
46
<PAGE> 52
- quickly reconfigure the facility to respond to customer change requests
and changes in product and customer mix;
- effectively adapt our inventory management model to the emerging
build-to-order business model employed by certain of our desktop computer
manufacturer customers; and
- add incremental capacity as needed at a relatively low cost.
This flexible cell-based process, when coupled with our product design
methodology, has enabled us to significantly improve time-to-volume production.
For example, we manufactured 2.8 million units of our DiamondMax 3400 in the
third quarter of 1998, the first full quarter of production.
Increase Market Share With Leading Desktop Computer Manufacturers. We
intend to continue to achieve leading time-to-volume production of high quality,
high performance hard disk drives to capture additional market share with
leading personal computer manufacturers. Our quarterly market share of the
desktop hard disk drive market in terms of units shipped increased from 5.6% in
the first quarter of 1997 to 16.7% in the third quarter of 1998. Shipments to
Compaq, Dell and IBM accounted for 3.7% of our total revenue in the quarter
ended June 29, 1996 and increased to 54.5% in the quarter ended September 26,
1998.
Maintain Customer Satisfaction. We believe we distinguish ourselves from
our competitors by focusing on ease of doing business and overall customer
satisfaction. For example, our "No Quibble" service program has been well
received by our customers. We also have begun to place significant attention on
total supply chain management to align our business model with the evolving
build-to-order manufacturing business model of certain desktop computer
manufacturers. We use our flexible, cell-based manufacturing process coupled
with a just-in-time inventory model to rapidly respond to the changing needs of
our key desktop computer manufacturer customers. To further automate and improve
the efficiency of our total supply chain management, we are in the process of
installing new enterprise resource planning and related software.
Broaden Product Portfolio. To capture higher margin opportunities and meet
the needs of our desktop computer manufacturer customers, we intend to leverage
our existing technology platform and product development methodology to develop
hard disk drive products for the enterprise data storage market and the high
performance desktop and the sub-$1000 desktop computer market segments. To this
end, on June 15, 1998, we introduced the DiamondMax Plus 2500, our first 7200
RPM hard disk drive, which is designed for the high performance desktop computer
market. We also intend to explore opportunities in a number of other emerging
hard disk drive markets.
PRODUCT DEVELOPMENT/TECHNOLOGY
One of the most important changes undertaken as part of our turnaround was
the restructuring of our product development process to separate the enabling
technology development phase from the product design phase. In early 1996, we
suffered from poor product quality and performance and products that were late
to market. This contrasts sharply with 1998 as we now enjoy strong customer
relationships based on excellent product quality, time-to-volume production
leadership and industry-leading performance.
47
<PAGE> 53
Enabling Technology Development Phase. The advanced technology group is
responsible for the enabling technology development phase, including:
- working closely with our product design teams and strategic component
suppliers to create a variety of state-of-the-art technologies to be used
in our future products;
- developing early prototypes to ascertain the stability and
manufacturability of our planned products; and
- analyzing the latest head, disk, channel, motor and application specific
integrated circuit technologies and designs to broaden and strengthen our
technology platform.
This group also focuses on leveraging our current proven technology
platform by re-using as much electronic and mechanical technology as possible in
each successive product generation. In an effort to deliver the highest product
quality possible, the advanced technology group begins its review of emerging
technologies as early as possible, normally 18 months before such technologies
might be included in our products. For example, our advanced technology group
currently is evaluating giant magneto-resistive technology and pico sliders from
a variety of head suppliers for inclusion in our future products. Giant
magneto-resistive technology is designed to increase drive capacity and
reliability by significantly improving amplitude sensitivity and providing the
basis for significant future increases in areal density and improved
manufacturing margin. Pico sliders are smaller than nano sliders and are
designed to provide improved performance at lower costs.
Product Design Phase. The creation of the advanced technology group as part
of our turnaround freed our existing product design group from the
responsibility of assessing the viability of new and emerging technologies and
allowed it to concentrate on improving product performance, robustness,
manufacturability, quality and materials costs. The product design group also is
responsible, in part, for executing our new product introduction process. This
process is a highly disciplined review procedure designed to ensure that new
product designs meet clearly specified criteria in terms of yield, scrap,
quality, productivity and production ramp rates prior to release into volume
production.
PRODUCTS
We currently provide hard disk drives exclusively for the desktop computer
market. Our DiamondMax product family consists of 3.5-inch hard disk drives with
storage capacities ranging from approximately 3.4 gigabytes to 17.2 gigabytes.
Our products have a number of features including high speed interfaces for
greater data throughput, a robust mechanical design for improved reliability,
magneto-resistive head technology and a digital signal processor-based
electronic architecture that, when combined, provides industry-leading
performance. On October 1, 1998, we announced our newest hard disk drive
product, the DiamondMax 4320. The DiamondMax 4320 is our seventh
magneto-resistive head hard disk drive, our eighth disk drive utilizing our
digital signal processor-based electronic architecture and our tenth hard disk
drive based on our Formula 4 mechanical structure.
48
<PAGE> 54
The table below sets forth key performance metrics for our seven
generations of magneto-resistive products introduced since December of 1996.
<TABLE>
<CAPTION>
DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX
1280* 1750* 2160* 2880* 3400 PLUS 2500 4320
---------- ------------ ------------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Capacity
(GB)................ 5.12 7.00 8.40 11.52 13.6 10.0 17.2
Capacity per Disk
(GB)................ 1.28 1.75 2.16 2.88 3.40 2.50 4.32
Rotational Speed
(RPM)............... 5400 5400 5400 5400 5400 7200 5400
First Shipment
Date................ Dec. 1996 June 1997 Sept. 1997 March 1998 June 1998 June 1998 Oct. 1998
</TABLE>
- -------------------------
* No longer in volume production.
Our DiamondMax product family has won a number of recent editorial and
industry awards including:
<TABLE>
<S> <C>
WINDOWS Magazine Winlist for DiamondMax Plus 2500 -- December 1998
Computer Reseller News CRN Test Center Recommended for DiamondMax 4320
-- November 1998
Staples 1997 Products Category Development Award -- September
1998
Storage Review Editor's Choice Award for DiamondMax Plus 2500 and
DiamondMax 2880 -- Summer 1998
WINDOWS Magazine Winlist for DiamondMax 2880 -- July 1998
PC WORLD Magazine World Class Awards -- Best Hard Drive DiamondMax 2160
-- June 1998
WINDOWS Magazine Win 100 for DiamondMax 2160 -- June 1998
WINDOWS Magazine Win 100 for DiamondMax 1750 -- June 1998
VARBusiness 1998 Product Report Award for DiamondMax Family -- May
1998
Computer Reseller News CRN Test Center Recommended for DiamondMax 2880
-- April 1998
WINDOWS Magazine Winlist for DiamondMax 2160 -- February 1998
BYTE Magazine Best Overall: Server Class Drive -- DiamondMax 2160
-- February 1998
BYTE Magazine Best Overall: Desktop Drive -- DiamondMax
1280 -- February 1998
CompUSA 1997 Accessories Vendor of the Year
WINDOWS Magazine Win 100 for DiamondMax 1280 -- July 1997
Home PC Reviewer's Choice DiamondMax 1280 -- May 1997
WINDOWS Magazine Recommended List DiamondMax 1280 -- April 1997
</TABLE>
MANUFACTURING/QUALITY
To be competitive, we must manufacture high quality, highly manufacturable,
high performance hard disk drives with industry leading time-to-volume
production at competitive costs. Our hard disk drive manufacturing operations
consist primarily of the
49
<PAGE> 55
final assembly of high-level subassemblies built to our specifications and
testing of completed products.
Manufacturing. Pilot production of our products, as well as cost reduction,
quality and product improvement engineering on current products, are conducted
at our Longmont, Colorado facility. We manufacture our hard disk drives in
volume at a single facility in Singapore which uses a flexible, cell-based
process. The Singapore facility consists of modular production units ("MPUs"),
each of which contains a number of modular work cells ("MWCs"). Each MWC
essentially is a mini-serial production line consisting of all of the tooling
and test equipment necessary to build and test an hard disk drive. Each MPU is
responsible for managing the supply of the components and other parts required
by its MWCs. We coupled our cell-based manufacturing approach with a
sophisticated factory information system that collects data from each MWC on
various productivity and quality metrics.
We have been investing significant amounts of capital to increase the
capacity and enhance the productivity of our Singapore manufacturing facility.
We believe that we will be able to add capacity at our current facility or
another facility to provide sufficient capacity through at least the end of
1999.
We may need additional manufacturing capacity beyond the capabilities of
our current facility as early as the beginning of the year 2000. We currently
are investigating additional manufacturing facilities within Singapore. In the
summer of 1997, Hyundai Electronics Industries began construction of a 450,000
square foot manufacturing facility in Dalian, China for the purpose of making
additional manufacturing capacity available to us. The Dalian facility is only
partially completed and construction has been suspended. We believe significant
additional capital expenditures will be required to complete the Dalian
facility. Maxtor and Hyundai Electronics Industries have agreed to discuss in
the future the terms under which the Dalian facility would be completed, and the
terms for any purchase or lease of the Dalian facility.
Quality. Consistent with our goal to establish Maxtor as a leader in
product quality and overall customer satisfaction, we have implemented a
corporate-wide quality program which focuses on the following:
- robustness of design and improved design tolerances;
- quality of incoming parts and factory process control; and
- customer feedback, failure analysis and timely response.
In addition, our quality, materials, enabling technology and product
development groups work closely with leading component vendors in an effort to
ensure sufficient tolerances are designed into our hard disk drives to achieve
high manufacturing yields and product quality. Our Singapore facility also is
ISO 9002 certified. Finally, our executives meet regularly with customers to
exchange product quality information to facilitate rapid analysis of customer
failures and timely implementation of corrective actions.
MATERIALS AND SUPPLIES
We have developed and continue to develop strategic relationships with
leading suppliers of many of the key components for our hard disk drive
products. These relationships enable us to actively manage our supply chain to
improve flexibility in choosing state-of-the-art components and to reduce
component, inventory and overall product costs. In addition, our strategic
suppliers work closely with our advanced
50
<PAGE> 56
technology group, enabling us to gain early access to leading-edge hard disk
drive technology and to improve the overall efficiency of our product design
process.
We rely on a limited number of leading suppliers for the parts used in the
manufacturing of our products, including magneto-resistive heads and head stack
assemblies, media, custom integrated circuits, read channel integrated circuits,
printed circuit boards and motor/baseplate assemblies. In general, we seek to
have at least two or three suppliers for each of our component requirements.
Custom application specific integrated circuits, including our digital signal
processor controller chips, and channels, however, currently are sole-sourced
from Texas Instruments and Lucent, respectively. Because of their custom nature,
these products require significant design-in periods and long lead times. We
outsource a majority of our printed circuit board assembly to International
Manufacturing Services, an affiliate of Maxtor.
CUSTOMERS AND SALES CHANNELS
From 1986 to 1997, chronic performance and quality issues, as well as being
late to the market, had impacted adversely our ability to win business with
leading desktop computer manufacturers. As a result, we were heavily dependent
on sales to a large number of regional distributors which limited our ability to
forecast periodic shipments and shifted our product mix toward lower
performance, lower margin products. Recognizing that the majority of the growth
in shipments in the desktop computer market was being captured by a limited
number of desktop computer manufacturers, we simplified our sales channels and
focused our sales and marketing efforts on becoming a significant provider of
hard disk drives to leading desktop computer manufacturers, including Compaq,
Dell, Gateway and IBM, and a limited number of leading distributors and
retailers. By emphasizing overall customer satisfaction, product quality and
performance and time-to-volume production, we believe that we have established a
strong customer base.
Manufacturers. Shipments to Compaq, Dell and IBM, our three primary desktop
computer manufacturer customers, accounted for 3.7% of our total revenue in the
quarter ended June 29, 1996 and increased to 54.5% in the quarter ended
September 26, 1998. We believe that our success depends on our ability to
maintain and further develop strong desktop computer manufacturer customer
relationships and to provide products that fit the needs of the desktop computer
manufacturer channel.
Distributors. We use a select group of distributors to sell our products
cost-effectively to the large number of geographically dispersed customers which
tend to hold very small market shares of the overall desktop computer market,
including value-added resellers, dealers, system integrators and small desktop
computer manufacturers. Distributors accounted for 37.2% of revenue for the
fiscal year ended March 30, 1996; 47.6% of revenue for the nine-month period
ended December 28, 1996; 35.6% of revenue for the year ended December 27, 1997;
and 24.6% of revenue for the nine-month period ended September 26, 1998.
Distributors generally enter into non-exclusive agreements with us for purchase
and redistribution of product on a quick turnover basis. Purchase orders are
placed and revised on a weekly basis. We grant certain of our distributors price
protection and limited rights to return product on a rotation basis. Our major
distributors include Bell Micro and Ingram.
Retailers. To increase awareness of the Maxtor brand name and benefit from
the typically higher gross margins of the retail sales channel, we sell our
retail-packaged products directly to major retailers such as computer
superstores, warehouse clubs and computer electronics stores and authorized
sales through distributors to smaller retailers.
51
<PAGE> 57
Retailers accounted for 4.8% of revenue for the fiscal year ended March 30,
1996; 7.7% of revenue for the nine-month period ended December 28, 1996; 9.2% of
revenue for the year ended December 27, 1997; and 8.7% of revenue for the
nine-month period ended September 26, 1998. Our current retail customer base is
in the United States and Canada; however, we have begun efforts to establish a
retail channel presence in the emerging retail markets in Europe and Asia. We
believe the retail channel complements other sales channels. Retailers supply
aftermarket "upgrade" sector in which end-users purchase and install products to
upgrade their computers. We grant certain of our retailers price protection and
limited rights to return product on a rotation basis.
SALES AND MARKETING
We employ 239 individuals who market and sell our products to leading
desktop computer manufacturers, distributors and retailers. Sales offices are
located throughout the U.S. and in Australia, France, Germany, Great Britain,
Hong Kong, Japan, Korea, Singapore and Taiwan. Maxtor has formed
multi-disciplined, dedicated account and channel teams focused on each of its
current and target strategic desktop computer manufacturer, distributor and
retail accounts. These teams generally are comprised of representatives from our
sales, marketing, engineering and quality organizations. Our senior management
also takes an active role in our sales efforts. Dedicated field sales and
technical support personnel are located in close proximity to the manufacturing
facilities of each of our desktop computer manufacturer customers.
Our marketing and public relations functions are performed both internally
and through outside firms. Public relations, direct marketing, worldwide
packaging and marketing materials are targeted to various end-user segments. We
utilize both consumer media and trade publications. We have programs under which
qualifying resellers are reimbursed for certain advertising expenditures. We
also have invested in direct marketing and customer satisfaction programs. We
maintain ongoing contact with end-users through primary and secondary market
research, focus groups, product registrations and technical support databases.
BACKLOG
We generally sell standard products according to standard agreements or
purchase order terms. Delivery dates are specified by purchase orders. Such
orders may be subject to change, cancellation or rescheduling by the customer
without significant penalties. The quantity actually purchased and shipment
schedules are frequently revised to reflect changes in the customer's needs. In
addition, orders for our products are filled for several large customers from
just-in-time inventory warehouses, whereby orders are not placed ahead of time
on our order entry backlog system. Instead, we receive a periodic forecast of
requirements from the customer. Upon shipment from the just-in-time warehouse,
the customer is invoiced. In light of these factors, backlog reporting as of any
particular date may not be indicative of our actual revenue for any succeeding
period and, therefore, is not necessarily an accurate predictor of our future
revenue.
COMPETITION
Maxtor competes primarily with manufacturers of 3.5-inch hard disk drives,
including Fujitsu, Quantum, Samsung, Seagate and Western Digital, some of which
have a larger share of the desktop hard disk drive market than Maxtor. Other
companies, such as IBM, will be significant competitors in one or more of the
markets into which we plan to expand
52
<PAGE> 58
our product portfolio, and could be significant competitors of Maxtor in our
current market should they choose to commit substantial resources to providing
desktop hard disk drives.
We believe that important competitive factors in the hard disk drive market
are quality, storage capacity, performance, price, time-to-market introduction,
time-to-volume production, desktop computer manufacturer product qualifications,
breadth of product lines, reliability and technical service and support. We
believe we compete favorably with respect to these factors.
EMPLOYEES
As part of our turnaround, we reduced our personnel from 9,330 in March
1996 to 4,330 in October 1996. Since October 1996, we have added significant
personnel to our research and development, sales and marketing and production
staffs. As of September 26, 1998, we had 5,686 employees worldwide, including
709 in engineering, research and development; 239 in marketing, sales and
customer support; 4,564 in manufacturing; and 174 in general management and
administration. As of September 26, 1998, we had 4,270 employees at our
manufacturing facilities in Singapore and 72 employees at our foreign sales
offices. None of our U.S. employees currently are represented by a labor
organization; however, in May 1997, Maxtor Singapore recognized a labor union,
the United Workers of Electronic and Electrical Industries. On November 27,
1998, Maxtor Singapore signed a three year collective bargaining agreement with
the United Workers of Electronic and Electrical Industries. We believe that our
employee relations are positive.
FACILITIES
Our sales and administrative offices and advanced technology operations are
located at a 180,087 square foot facility in Milpitas, California.
We also maintain 373,457 square feet of engineering and pilot production
facilities as well as administrative, marketing and materials facilities in
Longmont, Colorado. All of our domestic facilities are leased. Our leases for
our Longmont, Colorado facility begin to expire on December 31, 1999. We intend
to explore opportunities for renewing our existing leases or entering into new
leases for space in the Longmont area. There can be no assurance that we will be
able to obtain additional space that can accommodate our needs or that, if
obtained, such additional space will be available to us on terms at least as
favorable as the terms governing our current leases.
Our volume manufacturing facilities are located in Singapore. We own a
384,000 square-foot building in Singapore, situated on land leased through the
year 2016 (subject to an option to renew for an additional 30 years).
53
<PAGE> 59
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers as of December 15, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MAXTOR
---- --- --------------------
<S> <C> <C>
Dr. Chong Sup Park(1).......... 50 Chairman of the Board
Michael R. Cannon(1)........... 46 President, Chief Executive Officer and Director
Charles F. Christ(2)(3)........ 59 Director
Thomas Chun(4)................. 57 Director
Chang See Chung(2)............. 46 Director
Charles Hill(1)(3)(4).......... 62 Director
Y. H. Kim...................... 56 Director
Philip S. Paul(2)(3)(4)........ 60 Director
Dr. Victor B. Jipson........... 46 Senior Vice President, Engineering
William F. Roach............... 54 Senior Vice President, Worldwide Sales and
Marketing
Paul J. Tufano................. 45 Senior Vice President, Finance and Chief
Financial Officer
Glenn H. Stevens............... 48 Vice President, General Counsel and Secretary
Phillip C. Duncan.............. 48 Vice President, Human Resources
K. K. Kim...................... 46 Vice President, Business Development
Misha Rozenberg................ 36 Vice President, Quality
K. H. Teh...................... 44 Vice President, Worldwide Manufacturing
David L. Beaver................ 44 Vice President, Materials
</TABLE>
- -------------------------
(1) Member of the Nominating Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
(4) Member of the Affiliated Transactions Committee.
Dr. Chong Sup Park has been Chairman of our board of directors since May
1998 and assumed the position of Chairman, President and Chief Executive Officer
of Hyundai Electronics America in September 1996. Dr. Park also has been
Chairman of MMC Technology's board of directors since January 1998. From
September 1996 to May 1998, Dr. Park served as Vice Chairman of our board of
directors. Dr. Park previously served as our President and Chief Executive
Officer from February 1995 until his appointment as Vice Chairman. From 1993
until joining us in 1995, he was Chairman, President and Chief Executive Officer
of Axil Computer, Inc., a workstation computer manufacturer and a Hyundai
Business Group company, in Santa Clara, California. Dr. Park is also Corporate
Executive Vice President of Hyundai Electronics Industries and formerly held
various other management positions with Hyundai Electronics Industries,
including the position of Senior Vice President, Semiconductor Sales and
Marketing, which he held from 1990 to 1992. From 1985 to 1989, Dr. Park was
President and Chief Executive Officer of Hyundai Electronics America.
54
<PAGE> 60
Michael R. Cannon has been our President, Chief Executive Officer and a
member of our board of directors since July 1996. From 1993 until he joined us
in 1996, Mr. Cannon held several senior management positions with IBM's Storage
Systems division, including Vice President, Mobile and Desktop Business Unit;
Vice President, Product Design; and Vice President, Worldwide Operations. From
1991 to 1993, he served as Senior Vice President of SyQuest, a removable disk
drive company, and prior to joining SyQuest, he held the position of Vice
President, Southeast Asia Operations, with Imprimis Technology. He is also a
director of MMC Technology, a wholly owned subsidiary of Hyundai Electronics
America.
Charles F. Christ has been a member of our board of directors since August
1995. Mr. Christ has served as Chairman of the board of directors of MaxOptix
Corporation since October 1998. He was President, Chief Executive Officer and a
member of the board of directors of Symbios from 1997 to August 1998. From 1994
to 1997, Mr. Christ was Vice President and General Manager of the Components
Division of Digital Equipment Corporation. From 1989 to 1990, Mr. Christ was a
Senior Partner with the management consulting group of Coopers & Lybrand L.L.P.
From 1986 to 1988, he was President and Chief Executive Officer of Digital Sound
Corporation, a telecommunications voice processing company.
Thomas Lyman Chun has been a member of our board of directors since
December 1998. He has been President and Chief Executive Officer of Talkway,
Inc. since January 1997. From 1985 to 1996, Mr. Chun was a member of the Board
of Advisors of Logitech International S.A. and its predecessors. From 1995 and
1996, he also served Logitech in both consulting and employee roles. From 1991
to 1995, he served as Vice President, Strategy & Business Development and as
Vice President & General Counsel of SyQuest Technology. From 1989 to 1990, he
served as President and Chief Executive Officer of Cooper Software. From 1980 to
1988, he served in various capacities at Tandem Computers, including Vice
President -- Corporate Projects and Vice President -- Legal Affairs. He also was
Chairman of the Corporation for Open Systems from 1986 to 1987.
Chang See Chung has been a member of our board of directors since May 1998.
Mr. Chung has served as Senior Vice President of Hyundai Electronics America
since May 1998. From 1995 to 1998, he served as Vice President, Strategic
Planning and Corporate Coordination of Symbios. From 1976 to 1995, Mr. Chung
held various management positions with Hyundai Electronics America, Hyundai
Electronics Europe, Hyundai Electronics Industries and Hyundai Heavy Industries.
Mr. Chung was previously the Chief Financial Officer and Treasurer of Hyundai
Electronics America.
Charles Hill has been a member of our board of directors since March 1992.
He has been a Senior Research Fellow at the Hoover Institution since 1989. From
1983 to 1984, he served as Chief of Staff of the U.S. State Department and from
1982 to 1989 as Executive Assistant to former U.S. Secretary of State George P.
Shultz. From 1992 to 1996, Mr. Hill was Special Consultant to the Secretary
General of the United Nations. Presently, he is Diplomat-in-Residence and
Lecturer in International Studies at Yale University.
Y. H. Kim has been a member of our board of directors since January 1996.
He has been President and representative Director of Hyundai Electronics
Industries since September 1996. From 1989 to 1996, Mr. Kim was President and
Chief Executive Officer of Hyundai Electronics America. Mr. Kim has been
employed by the Hyundai group since 1971.
55
<PAGE> 61
Philip S. Paul has been a member of our board of directors since March
1998. Since 1991, he has managed Paul Capital Partners, L.P., a private equity
firm. From 1985 to 1991, Mr. Paul was Chairman and Chief Executive Officer of
Hillman Ventures, Inc., a venture capital firm specializing in technology
investments. From 1982 to 1985, Mr. Paul was President and Chief Executive
Officer of Machine Intelligence Corp., a robotics company.
Dr. Victor B. Jipson has been our Senior Vice President, Engineering since
December 1995. From 1991 to 1995, he was General Manager of IBM's Optical
Storage Solutions business unit. From 1975 to 1991, Dr. Jipson held key
management positions in research, technical strategy, product strategy and
research and development with IBM.
William F. Roach has been our Senior Vice President, Worldwide Sales and
Marketing since January 1997. From 1989 to 1996, he held various sales and
marketing positions with Quantum, an information storage products company,
including Executive Vice President, Worldwide Sales, from 1994 to 1996. From
1977 to 1989, Mr. Roach held sales and marketing positions with Intel
Corporation, a semiconductor company.
Paul J. Tufano has been our Senior Vice President, Finance since November
30, 1998 and Chief Financial Officer since July 1996. From July 1996 to his
appointment as Senior Vice President, Finance, Mr. Tufano served as our Vice
President, Finance. From 1979 to 1996, Mr. Tufano held a variety of management
positions at IBM. From 1995 to 1996, Mr. Tufano was Manager of Worldwide
Logistics for IBM's Storage Systems division. Other management positions
included Manager of Plans and Controls for IBM's Desktop and Mobile Storage
products business unit, and Controller for IBM's San Jose, California facility.
He is currently a director of International Manufacturing Services, an
electronic manufacturing service company.
Glenn H. Stevens has been our Vice President, General Counsel and Secretary
since June 1994. From 1992 to 1994, Mr. Stevens had a private law practice. From
1979 to 1992, he held various positions within the legal department at U S WEST,
Inc., a telecommunications products and services provider, including Chief
Counsel and Secretary for its research and development organization and Chief
Intellectual Property Counsel for the family of U S WEST, Inc. companies.
Phillip C. Duncan has been our Vice President, Human Resources since August
1996. From 1994 to 1996, he was Vice President, International Sales and
Marketing and Human Resources of Berkeley Systems, a software company. From 1992
to 1994, he held senior human resources management positions at SyQuest, and
from 1990 to 1992, he held similar positions at Cirrus Logic, a semiconductor
company.
K. K. Kim has been our Vice President, Business Development since May 1994.
From 1991 to 1994, Mr. Kim was Director of Corporate Planning Office for Hyundai
Electronics Industries. Prior to 1991, he held various management positions with
other companies affiliated with Hyundai Electronics America.
Misha Rozenberg has been our Vice President, Quality since March 1998. From
1996 to 1998, he was Vice President, Supplier Engineering. From 1994 to 1996,
Mr. Rozenberg was a Senior Director of Supplier Engineering with Conner
Peripherals, Inc., a disk drive company. From 1990 to 1994, he was a Manager
with Apple Computer.
K. H. Teh has been our Vice President, Worldwide Manufacturing since May
1997. From 1996 to 1997, he was with Iomega, a removable disk drive company,
where he had been Managing Director of its Malaysia manufacturing facility. From
1994 to 1996, he was
56
<PAGE> 62
a Managing Director, Malaysia Manufacturing, with Quantum, and was a Senior
Director with SyQuest from 1993 to 1994.
David L. Beaver has been our Vice President, Materials since May 1998. From
1994 to 1997, he was Director of Operations-Materials at EMASS, a data storage
company, and from 1991 to 1994, he was Director of Corporate Materials
Procurement at SyQuest.
There are no family relationships among any of our directors or executive
officers.
BOARD OF DIRECTORS
Our board of directors consists of eight (8) members and is divided into
three classes. Messrs. Chung, Hill and Paul are Class I directors, Messrs. Kim,
Christ and Chun are Class II directors, and Dr. Park and Mr. Cannon are Class
III directors. Class I, Class II and Class III directors serve until the annual
meetings of stockholders to be held in 1999, 2000 and 2001, respectively, and
until their respective successors are duly elected and qualified. Directors in a
class are elected for a term of three years to succeed the directors in such
class whose terms expire at such annual meeting.
BOARD COMMITTEES
Our board of directors currently has four standing committees: an audit
committee, a compensation committee, an affiliated transactions committee and a
nominating committee. The Audit Committee currently consists of Messrs. Christ,
Hill and Paul. The Audit Committee selects and engages, on our behalf, the
independent public accountants to audit our annual financial statements and
reviews and approves the planned scope of the annual audit. The Compensation
Committee currently consists of Messrs. Christ, Chung and Paul. The Compensation
Committee establishes compensation policies governing our executive officers,
sets bonuses and salaries for certain officers of Maxtor, including the Chief
Executive Officer, and administers or supervises the administration of our
employee benefit programs and executive compensation programs. The Affiliated
Transactions Committee currently consists of Messrs. Chun, Hill and Paul. The
Affiliated Transactions Committee is responsible for reviewing all material
transactions regarding contractual, corporate or business relations by and
between us and any related or affiliated entity of Hyundai Electronics
Industries or Hyundai Electronics America following the stock and DECS
offerings. The Nominating Committee currently consists of Dr. Park and Messrs.
Cannon and Hill. The Nominating Committee recommends from time to time
candidates for nomination for election as members of our board of directors.
57
<PAGE> 63
CERTAIN TRANSACTIONS
TRANSACTIONS WITH HYUNDAI ELECTRONICS AMERICA
In December 1995, Hyundai Electronics America loaned us $100 million, which
was due on April 10, 1996 and accrued interest at LIBOR plus 0.65%, with
interest payable at maturity. This $100 million loan was replaced in April 1996
with a one year $100 million revolving line of credit bearing interest at
Hyundai Electronics America's cost of funds plus 0.10%, with interest payable
quarterly. In July 1996, we borrowed an additional $35 million from Hyundai
Electronics America due in August 1996, bearing interest at LIBOR plus 0.70%
with interest payable at maturity; this loan was repaid at maturity. In April
1997, Hyundai Electronics America renewed the $100 million revolving line of
credit and increased the borrowing limit to $150 million. Hyundai Electronics
America increased the borrowing limit on this line of credit to $185 million in
June 1997, and to $270 million in August 1997. In December 1997, $200 million of
this outstanding indebtedness was cancelled in exchange for 29,859,766 shares of
our preferred stock, the borrowing limit was reduced to $150 million, and we
repaid an additional $5 million in principal. In January 1998, we repaid an
additional $10 million in principal. In April 1998, this revolving line of
credit was renewed with a borrowing limit of $100 million. On July 31, 1998, we
replaced this revolving line, which had an outstanding principal balance of
$55.0 million, with a three-year subordinated term note in the same principal
amount. This note matures on July 31, 2001 and bears interest, payable
semi-annually, at a rate equal to six-month LIBOR plus 2.0%.
Hyundai Electronics America currently is an unconditional guarantor of our
facilities lease in Milpitas, California. The aggregate monthly rent under the
lease is currently $558,270 per month.
TRANSACTIONS WITH HYUNDAI ELECTRONICS INDUSTRIES
In August 1995, Hyundai Electronics Industries guaranteed a $100 million
364-day revolving credit facility of ours that expired in August 1996. In
January 1996, Hyundai Electronics Industries guaranteed a $13.8 million one year
loan to Maxtor Singapore, which was renewed in January 1997 for an additional
year and repaid at maturity on January 1998. In August 1996, Hyundai Electronics
Industries guaranteed an $86 million 364-day revolving credit facility and a
$129 million three year revolving credit facility. In October 1996, the $86
million 364-day revolving credit facility was increased by $10 million and
Hyundai Electronics Industries guaranteed the additional amount. In addition, in
October 1996, Hyundai Electronics Industries guaranteed a separate $10 million
one year revolving credit facility which was repaid by us in January 1998. In
December 1996, Hyundai Electronics Industries guaranteed two additional credit
facilities, one of which was a three month $20 million uncommitted line that we
repaid at maturity in March 1997 and the other of which was a $10 million one
year facility which was repaid at maturity in December 1997. In August 1997, we
repaid $65 million of the $96 million 364-day revolving credit facility and
extended the balance of $31 million for an additional 364 days, continuing
Hyundai Electronics Industries' guarantee. In October 1997, Hyundai Electronics
Industries guaranteed an additional $10 million one year revolving credit
facility.
Hyundai Electronics Industries served as guarantor for our borrowings under
various revolving bank credit facilities from August 1995 through June 1998. At
March 28, 1998, our aggregate indebtedness guaranteed by Hyundai Electronics
Industries under such facilities was $170.0 million. Due to the economic
conditions in Korea and significant recent devaluations of
58
<PAGE> 64
the Korean won versus the U.S. dollar, Hyundai Electronics Industries' reported
financial condition as of year-end 1997 was not in compliance with certain
financial covenants applicable to Hyundai Electronics Industries as guarantor
under such revolving credit facilities, and such non-compliance constituted a
default by us under such revolving credit facilities and also a default (through
a cross-default clause) under an uncommitted credit facility. The default under
the revolving credit facilities was waived by the lending banks in June 1998 in
exchange for another Hyundai affiliate, Hyundai Heavy Industries, becoming the
guarantor under such facilities in place of Hyundai Electronics Industries and
an increase in pricing to reflect borrowing rates based on Hyundai Heavy
Industries' current credit rating. Indebtedness of $200 million under the
revolving credit facilities, guaranteed by Hyundai Heavy Industries was paid
with the proceeds of our July 1998 public offering.
On March 30, 1996, we entered into an accounts receivable securitization
program with Citicorp Securities, Inc. Under this program, we could sell our
qualified trade accounts receivable up to $100 million on a non-recourse basis.
As of December 27, 1997, $79.8 million of advances related to sales of accounts
receivable were included in accrued and other liabilities. As of June 27, 1998,
this amount was $19.4 million. In connection with this program, Hyundai
Electronics Industries entered into a performance undertaking under which
Hyundai Electronics Industries agreed to cause us to collect receivables and to
perform our obligations in the event of our failure to perform under the
program. Hyundai Electronics Industries also indemnified the purchasers from any
expenses incurred in enforcing their rights under the program. This asset
securitization program was subject to certain conditions, among which was a
condition that all of Hyundai Electronics Industries' long-term public senior
debt securities achieve a specified rating. This condition was not met in
February 1998, and we obtained waivers of this condition through April 8, 1998.
We entered into a new asset securitization program dated on April 8, 1998
(the "New Program") arranged by Citicorp Securities to replace the then existing
program. Under the New Program, we sell our trade accounts receivable through a
special purpose vehicle with a purchase limit of $100 million on a non-recourse
basis, subject to increase to $150 million, upon the fulfillment of the
conditions subsequent described below. On April 8, 1998, the receivables then
securitized under the existing program, in the amount of approximately $100
million, were transferred to Citicorp's Corporate Receivables Corporation under
the New Program. Hyundai Heavy Industries entered into a new performance
undertaking similar to that under the former program. On July 31, 1998 we
replaced the New Program with an asset securitization program with Fleet
National Bank which does not require any support from Hyundai Electronics
Industries or any of its affiliates.
TRANSACTIONS WITH INTERNATIONAL MANUFACTURING SERVICES
In 1996, we sold a majority interest in International Manufacturing
Services to certain members of International Manufacturing Services management
and other investors for $25 million in cash and $20 million in notes and
retained a 23.5% ownership interest in International Manufacturing Services. In
October 1997, International Manufacturing Services completed an initial public
offering and repaid in full the note and its related interest, which aggregated
$21.8 million. As of June 27, 1998 our equity interest in International
Manufacturing Services was 16.2%. We have agreed to indemnify the investors and
International Manufacturing Services up to $17.5 million for certain breaches of
representations, provided that tax and environmental representations are not
subject to the liability limit.
59
<PAGE> 65
International Manufacturing Services and Celestica Inc. are parties to a
merger and reorganization agreement. Their stockholders will vote on this
agreement in late December 1998. If the agreement is approved, International
Manufacturing Services stockholders will have the right to receive either $7.00
in cash or 0.4 shares of Celestica stock for each share of International
Manufacturing Services common stock. We own 2,985,000 shares of International
Manufacturing Services common stock.
We outsource most of our printed circuit board assembly to International
Manufacturing Services; International Manufacturing Services supplies us with
printed circuit boards, sub-assemblies and fully integrated products under a
manufacturing services agreement. We made purchases from International
Manufacturing Services in the years ended December 28, 1996 and December 27,
1997 of $191.9 million and $115.3 million, respectively. Two former officers of
Maxtor, Robert Behlman (formerly our Vice President of Manufacturing) and Nathan
Kawaye (formerly our Vice President and Chief Financial Officer), hold positions
as President and Chief Executive Officer and Vice President and Chief Financial
Officer, respectively, at International Manufacturing Services. Mr. Tufano is a
director of International Manufacturing Services.
TRANSACTIONS WITH HYUNDAI INFORMATION TECHNOLOGY
We have commenced the implementation of the SAP System. Our rights to this
new information system are governed by a license agreement between Hyundai
Information Technology and SAP. We currently are discussing with SAP the terms
on which we could obtain a direct license with SAP.
TRANSACTIONS WITH MMC TECHNOLOGY
Hyundai Electronics America formed a division in May 1996 to provide us
with supply of hard disk media. This division of Hyundai Electronics America was
incorporated as MMC Technology in December 1997 and is currently a wholly-owned
subsidiary of Hyundai Electronics America. Michael Cannon, our President and
Chief Executive Officer, is a director of MMC Technology. During the quarter
ended December 27, 1997, the quarter in which we first began to purchase media
from MMC Technology, and the nine months ended September 26, 1998, MMC
Technology supplied media to Maxtor of an aggregate purchase price of $13.2
million and $95.0 million, respectively. In August 1998, we entered into an
agreement with MMC Technology with respect to pricing of future purchases that
provided for pricing discounts in return for a purchase volume commitment based
on a percentage of Maxtor's total media purchases through September 30, 2001.
On May 18, 1998, we entered into an agreement with MMC Technology relating
to options to purchase shares of our common stock granted by us to MMC
Technology employees. Under the agreement MMC Technology agreed to reimburse us
for financial statement expenses relating to such options.
OTHER RELATED PARTY TRANSACTIONS
We have entered into employment agreements and change of control agreements
with certain of our officers and have made a loan to one officer. We have
entered into indemnification agreements with each of our directors and executive
officers. Such indemnification agreements require us to indemnify such
individuals to the fullest extent permitted by law.
All material transactions between us and our executive officers, directors,
principal stockholders and other affiliates occurring after the offering will be
subject to approval by the affiliated transaction committee or by a majority of
the our independent and disinterested directors.
60
<PAGE> 66
SELLING STOCKHOLDER
The following table sets forth information about Hyundai Electronics
America's beneficial ownership of our common stock before and after the stock
offering and the DECS offering. Beneficial ownership is determined in accordance
with SEC rules. Hyundai Electronics America will remain the beneficial owner of
the Maxtor shares sold in the DECS offering until delivery of the shares upon
termination of DECS Trust IV, on , 2002. The information in the table
assumes that the underwriters will not exercise their right to purchase
additional shares in the stock offering.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERLYING
NUMBER OF SHARES SECURITIES
SHARES SHARES BENEFICIALLY PERCENTAGE OF EXPECTED
BENEFICIALLY EXPECTED TO OWNED SHARES TO BE SOLD
OWNED PRIOR BE SOLD AFTER OWNED IN THE
TO STOCK IN STOCK STOCK AFTER STOCK DECS
OFFERING OFFERING OFFERING OFFERING OFFERING(*)
------------ ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Hyundai Electronics America
3101 North First Street
San Jose, CA 95134
</TABLE>
- -------------------------
(*) Hyundai Electronics America may deliver up to shares upon termination
of DECS Trust IV on , 2002. If Hyundai Electronics America delivers
the maximum number of shares upon termination of DECS Trust IV, it will own
an aggregate of shares of our common stock, or % of the shares
outstanding at , 1999, assuming no change in the number of shares
owned by it or outstanding. Hyundai Electronics America may deliver fewer
shares or may choose to settle its obligations under the DECS in cash. See
the DECS prospectus for a description of the obligations of Hyundai
Electronics America in the DECS offering.
61
<PAGE> 67
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and Maxtor and Hyundai Electronics America have agreed to sell to such
underwriter, the number of shares set forth opposite the name of such
underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
--------
========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.
The underwriters, for whom are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to certain dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share on sales to certain other
dealers. After the initial offering of the shares to the public, the public
offering price and such concessions may be changed by the representatives.
Hyundai Electronics America and DECS Trust IV have entered into a separate
underwriting agreement for the offer and sale by DECS Trust IV to
of DECS, plus up to an additional
DECS solely to cover over-allotments. On or about , 2002, or upon
earlier liquidation of DECS Trust IV in certain circumstances, DECS Trust IV
will distribute Maxtor's common stock (or, at Hyundai Electronics America's
option, the cash equivalent value and/or such other consideration as is
delivered by Hyundai Electronics America to DECS Trust IV pursuant to the
Contract) to the holders of the DECS at the rate specified in the DECS
prospectus. The closings of the stock offering and the DECS offering are not
conditioned upon each other.
Maxtor and Hyundai Electronics America have granted to the underwriters an
option, exercisable for 30 days from the date of this prospectus, to purchase up
to additional shares of common stock at the public offering price less the
underwriting discount. The underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
To the extent such option is exercised, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.
Maxtor, its officers and directors, Hyundai Electronics America have agreed
that, for a period of days from the date of this prospectus, they will not,
without the prior
62
<PAGE> 68
written consent of , offer, sell, contract to sell, or otherwise
dispose of, any shares of common stock of Maxtor or any securities convertible
into, or exercisable or exchangeable for, common stock. in its
sole discretion may release any of the securities subject to these lock-up
agreements at any time without notice.
The common stock is quoted on the Nasdaq National Market under the symbol
"MXTR".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Maxtor and Hyundai Electronics America in connection
with this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.
<TABLE>
<CAPTION>
PAID BY MAXTOR PAID BY HYUNDAI ELECTRONICS AMERICA
------------------------------------ ------------------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share............ $ $ $ $
Total................ $ $ $ $
</TABLE>
In connection with the offering, , on behalf of
the underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when , in covering syndicate short
positions or making stabilizing purchases, repurchases shares originally sold by
that syndicate member. These activities may cause the price of common stock to
be higher then the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the common stock on the Nasdaq National Market, prior to the pricing and
completion of the offering. Passive market making consists of displaying bids on
the Nasdaq National Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than those independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the common stock during a specified period and
must be discontinued when such limit is reached. Passive market making may cause
the price of the common stock to be higher than the price that otherwise would
exist in the open market in the absence of such transactions. If passive market
making is commenced, it may be discontinued at any time.
Maxtor and Hyundai Electronics America estimate that their respective
portions of the total expenses of this offering will be $ and
$ .
The representatives have performed certain investment banking and advisory
services for Maxtor from time to time for which they have received customary
fees and expenses.
63
<PAGE> 69
The representatives may, from time to time, engage in transactions with and
perform services for Maxtor in the ordinary course of their business.
Maxtor and Hyundai Electronics America have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
LEGAL MATTERS
Certain legal matters with respect to the validity of our common stock
offered hereby and with respect to the selling stockholder will be passed upon
for Maxtor by Gray Cary Ware & Freidenrich LLP, Palo Alto, California and for
the underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The consolidated balance sheets of Maxtor as of December 28, 1996 and
December 27, 1997 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the nine months ended December
28, 1996 and for the year ended December 27, 1997 included in this prospectus
and registration statement, have been included herein in reliance on the report,
which includes an emphasis of a matter related to Maxtor's ultimate parent,
Hyundai Electronics Industries Co., Ltd., of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing. The consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Maxtor for the year ended March
30, 1996 included in this prospectus and registration statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report, given upon the authority of such firm as experts in accounting and
auditing.
64
<PAGE> 70
GLOSSARY
Application Specific Integrated Circuit (ASIC) -- a custom designed
integrated circuit that performs a specific application rather than
general-purpose chips such as conventional logic chips with discrete gates. The
use of an ASIC in place of a conventional logic chip reduces product size and
cost.
Actuator -- the mechanism that moves the head assembly across a disk to the
proper track. This mechanical assembly positions the read/write heads over the
circumferential line which describes the target cylinder.
Areal density -- the maximum number of bits per linear inch of storage
surface times the number of tracks per radial inch yields the areal density of
bits per square inch.
Build-to-Order (BTO) -- supply chain management methodology where personal
computers are built to the unique requirements of a specific end-user customer
order.
Controller -- a portion of the integrated circuit circuit that manages the
flow of data to and from the disk media including the error correction coding,
media defect management, actuator positioning and system host interface
interaction.
Digital Signal Processor (DSP) -- a compact integrated circuit that
provides an ultra-fast simplified instruction set processor commonly used in
actuator control applications.
Firmware -- the permanent instructions and data programmed directly into
the circuitry of read only memory, written either in high-level language or in
assembly or machine language, which, when combined with the mechanical
mechanisms and ASICs within the drive, controls the functions of the hard drive.
Gigabyte (GB) -- one billion bytes.
Hard Disk Drive (hard disk drive) -- An electro-mechanical device composed
of an HSA, PCBA and magnetic disks that records data onto spinning rigid media
in discrete data blocks each of which can be randomly accessed. The primary mass
storage device of a computer.
Head Disk Assembly (HDA) -- the mechanical components of a disk drive
(minus the electronics), which includes the actuators, read/write heads and
platters.
Head Stack Assembly (HSA) -- the sub-assembly that contains the read/write
heads and actuator assembly.
Interface -- the all-inclusive definition of the connection and interaction
between the hard drive and the host system.
Just-in-Time (JIT) -- inventory management system where components are
stored near a manufacturing facility so they can be released as they are needed
to support the flow of material on the assembly line.
Magnetic Disk -- are disks made of a smooth substrate to which a thin
coating of magnetic materials is applied. Each disk has a slider suspended
directly above it, holding the head, which can read from or write data to the
spinning disk.
Magneto-resistive (MR) -- a technology used for the read element of a
read/write head used with a high-density magnetic disk. hard disk drives use a
magneto-resistive read head for reading and an inductive element for writing. As
storage capacity increases and the bit gets smaller, the magnetic field of the
bit becomes weaker. The magneto-resistive head is more sensitive to magnetic
fields than inductive read heads.
65
<PAGE> 71
Media -- materials that hold data in any form or that allow data to pass
through them, including paper, transparencies, multipart forms, hard, floppy and
optical disks, magnetic tape, wire, cable and fiber.
Megabyte (MB) -- one million bytes.
Printed Circuit Board (PCB) -- a flat board that holds chips and other
electronic components. The board is made of reinforced fiberglass or plastic and
interconnects components via copper pathways. The main printed circuit board in
a system is called a system board or motherboard, while smaller PCBs that plug
into the slots in the motherboard are called boards or cards.
Read Channel -- a circuit in a disk drive that translates the signal read
from or recorded to the read/write head into a single serial stream of data.
Read/Write Head -- a device that reads (senses) and writes (records) data
on a magnetic disk or tape. For writing, the surface of the disk or tape is
moved past the read/write head. By discharging electrical impulses at the
appropriate times, bits are recorded as tiny, magnetized spots of positive or
negative polarity. For reading, the surface is moved past the read/write head,
and the bits that are present induce an electrical current within the head.
Sector -- the smallest unit of storage read or written on a disk.
Sliders -- aerodynamically designed objects that keep the read/write head
at a proper distance from the disk platter. The read/write head is embedded
within the slider.
Spindle -- a rotating shaft in a disk drive.
Thin-film -- a microscopically thin layer of semiconductor or magnetic
material that is deposited onto a metal or ceramic disk.
Thin-film Head -- a read/write head for high-density disks that is made
from thin layers of a conducting film deposited onto a nickel-iron core.
66
<PAGE> 72
MAXTOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF MAXTOR CORPORATION
Consolidated Balance Sheets December 28, 1996, December 27,
1997 and September 26, 1998 (unaudited)................... F-2
Consolidated Statements of Operations fiscal year ended
March 30, 1996, nine months ended December 28, 1996,
fiscal year ended December 27, 1997, and for each of the
nine-month periods ended September 27, 1997 and September
26, 1998 (unaudited)...................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit)
fiscal year ended March 30, 1996, nine months ended
December 28, 1996, fiscal year ended December 27, 1997 and
for the nine months ended September 26, 1998
(unaudited)............................................... F-4
Consolidated Statements of Cash Flows fiscal year ended
March 30, 1996, nine months ended December 28, 1996,
fiscal year ended December 27, 1997 and for each of the
nine-month periods ended September 27, 1997 and September
26, 1998 (unaudited)...................................... F-5
Notes to Consolidated Financial Statements.................. F-6
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-28
Report of Ernst & Young LLP, Independent Auditors........... F-29
</TABLE>
F-1
<PAGE> 73
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, SEPTEMBER 26,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 31,313 $ 16,925 $ 162,225
Accounts receivable, net of allowance for doubtful
accounts of $5,255 at December 28, 1996, $3,573 at
December 27, 1997 and $5,935 at September 26, 1998...... 82,876 241,777 279,367
Accounts receivable from affiliates....................... 6,248 5,870 4,170
Inventories............................................... 80,878 155,312 151,952
Prepaid expenses and other................................ 5,239 20,814 22,245
--------- --------- ---------
Total current assets............................... 206,554 440,698 619,959
Net property, plant and equipment........................... 92,073 99,336 112,008
Other assets................................................ 15,912 15,438 11,201
--------- --------- ---------
$ 314,539 $ 555,472 $ 743,168
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings, including current portion of
long-term debt.......................................... $ 149,800 $ 100,057 $ 5,261
Short-term borrowings due to affiliates................... -- 65,000 --
Accounts payable.......................................... 109,956 206,563 371,677
Accounts payable to affiliates............................ 13,459 25,022 153
Accrued and other liabilities............................. 139,678 155,563 100,608
--------- --------- ---------
Total current liabilities.......................... 412,893 552,205 477,699
Long-term debt due affiliate................................ -- -- 55,000
Long-term debt and capital lease obligations due after one
year...................................................... 229,109 224,313 90,051
--------- --------- ---------
Total liabilities........................................... 642,002 776,518 622,750
Commitments and contingencies (Note 8)
Stockholders' equity (deficit):
Series A Preferred Stock, $0.01 par value, 95,000,000 shares
authorized; 58,208,955 shares issued and outstanding at
December 28, 1996; 88,059,701 issued and outstanding at
December 27, 1997; all outstanding shares converted into
44,029,850 shares of common stock at August 5, 1998;
aggregate liquidation value $390,000 at December 28, 1996,
$590,000 at December 27, 1997............................. 582 880 --
Common Stock, $0.01 par value, 250,000,000 shares
authorized; no shares issued and outstanding at December
28, 1996; 7,563 shares issued and outstanding at December
27, 1997 and 94,257,791 shares issued and outstanding at
September 26, 1998........................................ -- -- 943
Additional paid-in capital.................................. 335,017 534,765 878,019
Cumulative other comprehensive income -- unrealized gain on
investments in equity securities.......................... -- 16,262 13,234
Accumulated deficit......................................... (663,062) (772,953) (771,778)
--------- --------- ---------
Total stockholders' equity (deficit)............... (327,463) (221,046) 120,418
--------- --------- ---------
$ 314,539 $ 555,472 $ 743,168
========= ========= =========
</TABLE>
See accompanying notes.
F-2
<PAGE> 74
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1996 1997 1997 1998
----------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue............................ $ 1,264,627 $ 771,655 $ 1,384,799 $ 895,381 $ 1,674,482
Revenue from affiliates............ 4,371 27,229 39,521 26,947 6,197
----------- --------- ----------- --------- -----------
Total revenue............ 1,268,998 798,884 1,424,320 922,328 1,680,679
Cost of revenue.................... 1,192,403 861,551 1,316,774 880,489 1,477,510
Cost of revenue from affiliates.... 3,902 27,307 36,162 24,633 5,241
----------- --------- ----------- --------- -----------
Total cost of revenue.... 1,196,305 888,858 1,352,936 905,122 1,482,751
Gross profit (loss)................ 72,693 (89,974) 71,384 17,206 197,928
----------- --------- ----------- --------- -----------
Operating expenses:
Research and development........... 94,717 87,752 106,249 78,631 110,285
Selling, general and
administrative................... 82,775 60,701 62,520 45,944 52,958
Stock compensation expense......... -- -- -- -- 11,068
Other.............................. 4,460 -- -- -- --
----------- --------- ----------- --------- -----------
Total operating
expenses.............. 181,952 148,453 168,769 124,575 174,311
----------- --------- ----------- --------- -----------
Income (loss) from operations...... (109,259) (238,427) (97,385) (107,369) 23,617
Interest expense................... (11,849) (18,075) (36,502) (27,480) (24,109)
Interest and other income.......... 1,169 1,000 25,031 2,592 3,936
----------- --------- ----------- --------- -----------
Income (loss) before income
taxes............................ (119,939) (255,502) (108,856) (132,257) 3,444
Provision for income taxes......... 2,826 824 1,035 700 2,269
----------- --------- ----------- --------- -----------
Net income (loss).................. (122,765) (256,326) (109,891) (132,957) 1,175
----------- --------- ----------- --------- -----------
Other comprehensive income:
Unrealized gain (loss)on
investments in equity
securities....................... -- -- 16,262 -- (3,028)
----------- --------- ----------- --------- -----------
Comprehensive loss................. $ (122,765) $(256,326) $ (93,629) $(132,957) $ (1,853)
=========== ========= =========== ========= ===========
Net income (loss) per share --
-- basic......................... $ (5.94) $ -- $(58,112.64) $ -- $ 0.06
-- diluted....................... $ (5.94) $ -- $(58,112.64) $ -- $ 0.02
Shares used in per share
calculation --
-- basic......................... 20,677,000 -- 1,891 -- 19,991,259
-- diluted....................... 20,677,000 -- 1,891 -- 55,491,542
</TABLE>
See accompanying notes.
F-3
<PAGE> 75
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
PREFERRED STOCK COMMON STOCK ADDITIONAL INVESTMENTS TOTAL
-------------------- -------------------- PAID-IN IN EQUITY ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES DEFICIT (DEFICIT)
----------- ------ ----------- ------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 25, 1995...... -- -- 25,848,642 $ 258 $327,616 -- $(283,971) $ 43,903
Issuance of common stock
under stock option plans... -- -- 567,403 6 4,739 -- -- 4,745
Issuance of common stock
under stock purchase
plan....................... -- -- 400,213 4 2,976 -- -- 2,980
Shares canceled resulting
from acquisition by HEA.... -- -- (26,815,958) (268) 268 -- -- --
Net loss..................... -- -- -- -- -- -- (122,765) (122,765)
----------- ----- ----------- ----- -------- ------- --------- ---------
Balance, March 30, 1996...... -- -- 300 -- 335,599 -- (406,736) (71,137)
Exchange of common shares for
Series A Preferred......... 58,208,955 $ 582 (300) -- (582) -- -- --
Net loss..................... -- -- -- -- -- -- (256,326) (256,326)
----------- ----- ----------- ----- -------- ------- --------- ---------
Balance, December 28, 1996... 58,208,955 582 -- -- 335,017 -- (663,062) (327,463)
Issuance of additional Series
A Preferred to parent in
exchange for debt.......... 29,850,746 298 -- -- 199,702 -- -- 200,000
Issuance of stock under
stock option plan and
related
benefits................... -- -- 7,563 -- 46 -- -- 46
Change in unrealized gain on
equity securities.......... $16,262 16,262
Net loss..................... -- -- -- -- -- (109,891) (109,891)
----------- ----- ----------- ----- -------- ------- --------- ---------
Balance, December 27, 1997... 88,059,701 880 7,563 -- 534,765 16,262 (772,953) (221,046)
Issuance of stock under
stock option and restricted
stock plan (unaudited)..... 489,153 5 589 594
Issuance of common stock in
Initial public offering
(unaudited)................ 49,731,225
Conversion of preferred stock
to......................... 44,029,850 498 328,348 328,846
common stock (unaudited)... (88,059,701) (880) 440 440 --
Stock compensation
(unaudited)................ 11,068 11,068
Stock compensation
reimbursement due from an
affiliate (unaudited)...... -- -- -- -- 2,809 -- -- 2,809
Change in unrealized gain on
equity investments
(unaudited)................ -- -- -- -- -- (3,028) -- (3,028)
Net income (unaudited)....... -- -- -- -- -- -- 1,175 1,175
----------- ----- ----------- ----- -------- ------- --------- ---------
Balance, September 26, 1998
(unaudited)................ -- $ -- 94,257,791 $ 943 $878,019 $13,234 $(771,778) $ 120,418
=========== ===== =========== ===== ======== ======= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE NINE NINE
YEAR MONTHS YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1996 1997 1997 1998
--------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $(122,765) $(256,326) $(109,891) $(132,957) $ 1,175
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 45,200 47,064 65,642 41,108 48,454
Stock compensation expense............................ -- -- -- -- 11,068
Reserves for lower of cost or market.................. -- 15,194 -- (10,446) 7,852
Change in deferred taxes.............................. 300 -- -- -- --
Loss (gain) on disposal of property, plant and
equipment........................................... 669 700 4,366 -- 5,897
Gain on sale of subsidiary............................ -- (2,385) -- -- --
Gain on fully reserved note receivable from
affiliate........................................... -- -- (20,000) -- --
Other................................................. -- (589) (157) (128) --
Changes in assets and liabilities:
Accounts receivable................................. (12,485) 62,786 (142,860) (91,457) 8,908
Accounts receivable from affiliates................. (2,229) (1,822) 378 516 4,509
Inventories......................................... (66,255) 45,955 (74,434) (51,182) (4,492)
Prepaid expenses and other assets................... (2,947) 3,839 687 (606) (4,459)
Accounts payable.................................... 18,407 (37,297) 102,108 89,060 157,710
Accounts payable to affiliates...................... 8,656 4,803 11,563 6,610 (24,869)
Accrued and other liabilities....................... 637 13,015 15,885 7,485 10,362
--------- --------- --------- --------- ---------
Total adjustments....................................... (10,047) 151,263 (36,822) (9,040) 220,940
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities..... (132,812) (105,063) (146,713) (141,997) 222,115
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of subsidiary...................... -- 25,000 -- -- --
Cash received on a note receivable from affiliate..... -- -- 20,000 -- --
Proceeds from maturities of available-for-sale
investments......................................... 11,998 -- -- -- --
Purchase of property, plant and equipment............. (72,655) (53,780) (82,489) (52,755) (61,600)
Proceeds from disposals of property, plant and
equipment........................................... 353 363 609 -- 3,059
Other assets.......................................... (928) (7,599) 621 3,954 3,175
--------- --------- --------- --------- ---------
Net cash used in investing activities................. (61,232) (36,016) (61,259) (48,801) (55,366)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt, including short-term
borrowings.......................................... 145,595 410,715 319,363 279,370 69,775
Principal payments on debt, including short-term
debt................................................ (3,000) (307,444) (309,784) (65,365) (308,849)
Proceeds from issuance of common stock, net of
issuance of notes receivable and stock repurchase... 7,725 -- 46 -- 329,441
Proceeds from intercompany notes issued to parent..... -- -- 200,000 -- --
Net payments under accounts receivable
securitization...................................... -- 16,327 (16,041) (40,289) (111,816)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities... 150,320 119,598 193,584 173,716 (21,449)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... (43,724) (21,481) (14,388) (17,082) 145,300
Cash and cash equivalents at beginning of period...... 96,518 52,794 31,313 31,313 16,925
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period............ $ 52,794 $ 31,313 $ 16,925 $ 14,231 $ 162,225
========= ========= ========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest.............................................. $ 9,362 $ 13,444 $ 26,540 $ 17,792 $ 24,047
Income taxes.......................................... 1,801 2,009 1,025 832 985
Income tax refunds.................................... (3,173) -- -- -- --
Supplemental information on noncash investing and
financing activities:
Purchase of property, plant and equipment financed by
accounts payable...................................... 4,949 8,171 2,670 (64) 7,404
Purchase of property, plant and equipment financed by
capital leases........................................ -- -- 881 620 16
Exchange of Common Stock for Series A Preferred Stock... -- 582 -- -- --
Exchange of notes payable for Series A Preferred
Stock................................................. -- -- 200,000 -- --
Unrealized gain (loss) on equity securities............. -- -- 16,262 -- (3,028)
Stock compensation reimbursement due from an
affiliate............................................. -- -- -- -- 2,809
Short-term borrowing from affiliate exchanged for
note.................................................. -- -- -- -- 55,000
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Maxtor
Corporation and its wholly-owned subsidiaries ("Maxtor" or the "Company"). All
significant intercompany accounts and transactions have been eliminated. From
January 1996 through July 30, 1998, Maxtor Corporation operated as a
majority-owned subsidiary of Hyundai Electronics America ("HEA"). HEA is a
subsidiary of Hyundai Electronics Industries Co. Ltd. ("HEI"), a Korean
corporation. In August of 1998, the Company completed an Initial Public Offering
of its Common Stock (the "Offering") which reduced the ownership interest of HEA
to approximately 47% (see Note 14 -- unaudited).
REVERSE STOCK SPLIT
On May 29, 1998, the Board approved a one-for-two reverse split of the
Company's outstanding common stock, which became effective upon the Company's
filing of an amended and restated certificate of incorporation in Delaware on
July 24, 1998. All references in the financial statements to the number of the
Company's common shares and price per share amounts, as well as the conversion
ratio of preferred shares, have been retroactively restated to reflect the
reverse split. The Board of Directors also approved the increase of the
Company's authorized common stock to 250,000,000 shares.
FISCAL YEAR
During 1996, the Company changed its fiscal year end to be consistent with
the fiscal year end of HEA. The fiscal year end changed from the last Saturday
of March, the date used in the Company's preceding filing of its Form 10-K with
the Securities and Exchange Commission, to the last Saturday of December
conforming to a 52/53-week year methodology. The fiscal year ended March 30,
1996 comprised 53 weeks. The fiscal year ended December 28, 1996 comprised 39
weeks. The current year ended December 27, 1997 comprised 52 weeks. The nine
month periods ended September 27, 1997 and September 26, 1998 both comprised 39
weeks.
NATURE OF BUSINESS
The Company develops, manufactures and markets hard disk drive products to
customers who sell their products in the personal computer industry. Products
are designed for desktop applications to meet both value and high-performance
needs of customers. Customers include original equipment manufacturers ("OEMs"),
distributors, and retailers. The Company relies on suppliers for components
including heads, disks and custom integrated circuits. Although printed circuit
board assemblies and head stack assemblies are outsourced, head disk assemblies
are completed by the Company. All the Company's products are manufactured by
Maxtor at its manufacturing facility in Singapore and sold worldwide.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim consolidated balance sheet of September 26, 1998
and the consolidated statements of operations and cash flows for the nine month
periods ended September 27, 1997 and September 26, 1998 and the statement of
stockholders' equity
F-6
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(deficit) for the nine months ended September 26, 1998, together with the
related notes are unaudited but include all adjustments, consisting of only
normal recurring adjustments, which the Company considers necessary for a fair
presentation of the consolidated financial position at September 26, 1998, and
the consolidated results of its operations and cash flows for the periods ended
September 27, 1997 and September 26, 1998. Results for the nine months ended
September 26, 1998 are not necessarily indicative of results that may be
expected for the full year.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The actual results with regard to warranty expenditures could have a
material unfavorable impact on the Company if the actual rate of unit failure or
the cost to repair a unit is greater than what the Company has used in
estimating its warranty expense accrual.
Given the volatility of the market for disk drives and for the Company's
products, the Company makes adjustments to the value of inventories based on
estimates of potentially excess and obsolete inventories and negative margin
products after considering forecasted demand and forecasted average selling
prices. However, forecasts are always subject to revisions, cancellations, and
rescheduling. Actual demand will inevitably differ from such anticipated demand
and such differences may have a material impact on the financial statements.
RISKS AND UNCERTAINTIES
The Company's business entails a number of risks. As is typical in the disk
drive industry, the Company must utilize leading edge components for its new
generation of products which may only be available from a limited number of
suppliers. 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, the availability of supply from its vendors for many semi-custom and custom
integrated circuits, heads, media and other key components. Any de-commitments
from customers for product or delays of components from vendors could have an
adverse impact on the Company's ability to ship products as scheduled to its
customers.
Prior to the Offering, Company's ultimate parent was HEI, a Korean
corporation. The Korean economy has recently suffered a period of economic
turmoil, which has resulted in the devaluation of the Korean currency and large
volatility in interest rates. A significant portion of the Company's debt was
guaranteed by HEI, and the Company has relied upon the HEI guarantees. As of
June 1, 1998, the Company substituted Hyundai Heavy Industries Co., Ltd. ("HHI")
as the guarantor of substantially all of the debt previously guaranteed by HEI.
The Company's parent, HEA, also has a written letter of support from HEI to
support operations for it and all of its subsidiaries through May 31, 2000. As
further described in Note 7, it is reasonably possible that further
deteriorations in the Korean economy and the value of the Korean currency could
have an adverse effect on the ability of the ultimate parent or HHI to continue
to guarantee the debt of the Company. While the Company believes that other
sources of credit would be available, there is no
F-7
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assurance that such other credit would be available, either in the amount or at
the rates currently available to the Company. In August 1998, all debt subject
to guarantees by HEI and its affiliates was paid off and the related agreements
were terminated (see Note 14 -- unaudited).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which are purchased
with an original maturity of three months or less, to be cash equivalents.
EQUITY SECURITIES
All equity securities are classified as available-for-sale.
Available-for-sale securities are carried at market value. Unrealized gains and
losses on securities classified as available-for-sale, when material, are
reported as a separate component of stockholders' deficit. Realized gains and
losses on sales of all such investments are included in the results of
operations computed using the specific identification cost method.
INVENTORIES
Inventories are stated at the lower of cost (computed on a first-in,
first-out basis) or market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated on the
straight-line basis over the estimated useful lives of the assets, which
generally range from three to five years, except for buildings which are
depreciated over thirty years. Assets under capital leases and leasehold
improvements are amortized over the shorter of the asset life or the remaining
lease term. Capital lease amortization is included with depreciation expense.
Upon disposal, the Company removes the asset and accumulated depreciation from
its records and recognizes the related gain or loss in results of operations.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenue is recognized upon product shipment. Revenue from sales to certain
distributors and retailers is subject to agreements providing limited rights of
return, as well as price protection on unsold merchandise. Accordingly, the
Company records reserves upon shipment for estimated returns, exchanges and
credits for price protection. The Company also provides for the estimated cost
to repair or replace products under warranty at the time of sale. The Company
currently warrants its products against defects in parts and labor from the date
of shipment with an additional three months allowed for distributors to account
for "shelf life." All products currently in production are warranted for a
period of three years after shipment.
ADVERTISING EXPENSE
Cooperative advertising costs are charged as the related revenue is earned
and other advertising costs are expensed as incurred. Advertising costs were not
significant for the fiscal year ended March 30, 1996, the nine months ended
December 28, 1996, the fiscal year ended December 27, 1997 or the nine months
ended September 27, 1997 and September 26, 1998, respectively.
F-8
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company is required to adjust
its deferred tax liabilities in the period when tax rates or the provisions of
the income tax laws change. Valuation allowances are established to reduce
deferred tax assets to the amounts expected to be realized.
FOREIGN CURRENCY TRANSLATION
The functional currency for all foreign operations is the U.S. dollar. As
such, all material foreign exchange gains or losses are included in the
determination of net income (loss). Net foreign exchange losses included net
income (loss) for the fiscal year ended March 30, 1996, the nine months ended
December 28, 1996, the fiscal year ended December 27, 1997 and the nine months
ended September 27, 1997 and September 26, 1998 (unaudited) were immaterial.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable and cash
equivalents. The Company has cash equivalent and short-term investment policies
that limit the amount of credit exposure to any one financial institution and
restrict placement of these funds to financial institutions evaluated as highly
credit-worthy. The Company's products are sold worldwide to OEMs, distributors,
and retailers. Concentration of credit risk with respect to the Company's trade
receivables is limited by the Company's ongoing credit evaluation process and
the geographical dispersion of sales transactions. Therefore, the Company
generally requires no collateral from its customers. The allowance for doubtful
accounts is based upon the expected collectibility of all accounts receivable.
One customer accounted for more than 10% of outstanding trade receivables at
March 30, 1996. As of December 27, 1997, the Company had one customer who
accounted for more than 10% of the outstanding trade receivables. As of
September 26, 1998 (unaudited) three customers represent more than 51% of
outstanding trade receivables. If the customers fail to perform their
obligations to the Company, such failures would have adverse effects upon the
Company's financial position, results of operations, cash flows, and liquidity.
LONG-LIVED ASSETS
The Company reviews property, plant and equipment and other long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability is
measured by comparison of its carrying amount to future net cash flows the
assets are expected to generate. If such assets are considered to be impaired,
the impairment to be recognized is measured as the amount by which the carrying
amount of the asset exceeds the present value of the future net cash flows.
F-9
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes and
has adopted the disclosure only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123. "Accounting for Stock-Based Compensation."
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
The Company accounts for its accounts receivable securitization program in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed in accordance with SFAS 128.
Basic net income (loss) per share is computed using the weighted average common
shares outstanding during the period. Diluted net income (loss) per share is
computed using the weighted average common shares and potentially dilutive
securities outstanding during the period. Potentially dilutive securities are
excluded from the computation of net diluted loss per share for those presented
periods in which their effect would be anti-dilutive due to the Company's net
losses. Net income (loss) per share information presented for the year ended
December 27, 1997 is not meaningful due to the very limited number of common
shares outstanding during such period. No common shares were outstanding for the
nine month period ended December 28, 1996 and September 27,1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
issued SFAS No. 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 supercedes SFAS 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.
In June 1998, the Financial Accounting Standards Board issued statement of
Accounting Standards No. 133 (SFAS 133). "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives which are not hedges
must be adjusted to fair value through net income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
SFAS 133 is effective for years beginning after June 15, 1999, but companies can
early adopt as of the beginning of any fiscal quarter that begins after June
1998. The Company is evaluating the requirements of SFAS 133, but does not
expect this pronouncement to materially impact the Company's financial position
or results of operations.
F-10
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
when costs related to software developed or obtained for internal use should be
capitalized or expensed. The SOP is effective for transactions entered into for
fiscal years beginning after December 15, 1998. The Company has reviewed the
provisions of the SOP and does not believe adoption of this standard will have a
material effect upon its results or operations, financial position or cash
flows.
2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 27, 1997 SEPTEMBER 26, 1998
----------------- ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Raw materials............... $ 33,012 $ 48,834 $ 33,887
Work-in-process............. 15,674 15,177 14,109
Finished goods.............. 32,192 91,301 103,956
--------- --------- ---------
$ 80,878 $ 155,312 $ 151,952
========= ========= =========
Prepaid expenses and other:
Investments in equity
securities, at fair
value.................... $ -- $ 16,262 $ 13,234
Prepaid expenses and
other.................... 5,239 4,552 9,011
--------- --------- ---------
$ 5,239 $ 20,814 $ 22,245
========= ========= =========
Property, plant and equipment,
at cost:
Buildings................... $ 29,512 $ 32,453 $ 34,269
Machinery and equipment..... 194,644 220,213 251,605
Furniture and fixtures...... 13,300 11,374 14,483
Leasehold improvements...... 12,695 9,012 10,951
--------- --------- ---------
250,151 273,052 311,308
Less accumulated depreciation
and amortization............ (158,078) (173,716) (199,300)
--------- --------- ---------
Net property, plant and
equipment................... $ 92,073 $ 99,336 $ 112,008
========= ========= =========
Accrued and other liabilities:
Income taxes payable........ $ 5,088 $ 2,416 $ 3,840
Accrued payroll and payroll-
related expenses......... 17,159 29,116 33,611
Accrued warranty............ 20,194 22,716 31,603
Accrued expenses............ 42,851 21,561 16,954
Advances under
securitization........... 54,386 79,754 14,600
--------- --------- ---------
$ 139,678 $ 155,563 $ 100,608
========= ========= =========
</TABLE>
F-11
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform to current classifications. These reclassifications had no impact on
any prior years or the Company's net assets or results of operations.
4. FINANCIAL INSTRUMENTS
FAIR VALUE DISCLOSURES
The fair values of cash and cash equivalents approximate carrying values
due to the short period of time to maturity. The carrying values of notes
receivable, which are classified in other assets, approximate fair values. The
fair values of the Company's fixed rate debt are estimated based on the current
rates offered to the Company for similar debt instruments having the same
remaining maturities. The fair values of the Company's variable rate debt
approximate carrying values as these instruments are adjusted periodically
during the course of the year at market prices. The fair values of the Company's
convertible subordinated debentures are based on the bid price of the last trade
for the fiscal period ended December 28, 1996 and fiscal year ended December 27,
1997, respectively.
The carrying values and fair values of the Company's financial instruments
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 27, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 31,313 $ 31,313 $ 16,925 $ 16,925
Notes receivable.................. 11,492 11,492 11,492 11,492
Short and long-term debt:
fixed rates..................... 13,800 13,800 13,800 13,800
variable rates.................. 265,000 265,000 210,570 210,570
debt from parent -- fixed
rates........................ -- -- 65,000 65,000
Convertible subordinated
debentures...................... 100,000 68,000 100,000 70,000
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company attempts to minimize the impact of foreign currency exchange
rate changes on certain underlying assets, liabilities and anticipated cash
flows for operating expenses denominated in foreign currencies by entering into
short-term foreign exchange (primarily forward purchase and sale) contracts. The
Company's policy is to hedge all material transaction exposures on a quarterly
basis. Contracts are generally entered into at the end of each fiscal quarter to
reduce foreign currency exposures for the following fiscal quarter. Contracts
generally have maturities of three months or less. Any gains or losses on these
instruments are accounted for in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation," and are generally
included in cost of revenue. Unrealized gains or losses on foreign currency
forward contracts that are designated and effective as hedges of firm
commitments, are deferred and recorded in the same period as the underlying
transaction. Notional amounts of outstanding currency
F-12
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
forward contracts were $17.3 million, $0 and $83.3 million, as of December 28,
1996, December 27, 1997 and September 26, 1998 (unaudited), respectively.
5. INTERNATIONAL MANUFACTURING SERVICES
In May 1996, the Company entered into an agreement to sell a majority
interest in International Manufacturing Services, Inc. ("IMS"), previously a
wholly-owned subsidiary, to certain members of IMS management and other
investors. At completion of the transaction in June 1996, the Company received
$25.0 million in cash and $20.0 million in notes from IMS, and retained a 24%
ownership interest in IMS. The note receivable, which was fully reserved at the
time of sale, was recovered in the fourth quarter of 1997 resulting in a gain of
$20.0 million. As of December 27, 1997, the Company's ownership interest was
16%. The Company's share of IMS results of operations for the fiscal year ended
December 28, 1996 and the fiscal period ended December 27, 1997 were not
material to the Company's results of operations for either period presented.
The Company outsources most of its printed circuit board assembly to IMS;
IMS supplies the Company with printed circuit boards, sub-assemblies and fully
integrated products under a manufacturing services agreement. The Company made
purchases from IMS in the years ended December 28, 1996 and December 27, 1997 of
$191.9 million and $115.3 million, respectively.
6. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: the design, manufacture
and sale of data storage products for desktop computer systems. It has a
world-wide sales, service and distribution network. The Company markets and
sells its products through a direct sales force to OEMs, distributors and
retailers.
During the year ended March 30, 1996, no customer accounted for more than
10% of the Company's revenue. During the nine months ended December 28, 1996,
one customer, SED International accounted for 11% of the Company's revenue.
During the year ended December 27, 1997, two customers, Compaq and Dell,
accounted for more than 21% and 10%, respectively, of the Company's revenue.
The Company's export sales represented 41%, 48% and 40% of total revenue
for the year ended March 30, 1996, the nine months ended December 28, 1996 and
the year ended December 27, 1997, respectively. Approximately 60%, 38% and 57%,
of export sales were to Europe, while 35%, 55%, and 36% of export sales were to
Asia Pacific for the year ended March 30, 1996, the nine months ended December
28, 1996 and year ended December 27, 1997, respectively.
F-13
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operations outside the United States primarily consist of the manufacturing
plant in Singapore that produces subassemblies and final assemblies for the
Company's disk drive products. The geographic breakdown of the Company's
activities for each of the three fiscal periods is presented in the following
table:
<TABLE>
<CAPTION>
U.S. ASIA PACIFIC ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended March 30, 1996
Revenue from unaffiliated
customers...................... $1,196,105 $ 68,522 $ -- $1,264,627
Revenue from affiliated
customers...................... 3,417 954 -- 4,371
Transfers between geographic
locations...................... 14,600 1,585,545 (1,600,145) --
---------- ---------- ----------- ----------
Total Revenue.................... $1,214,122 $1,655,021 $(1,600,145) $1,268,998
========== ========== =========== ==========
Income (loss) from operations.... $ (204,376) $ 95,035 $ 82 $ (109,259)
========== ========== =========== ==========
Identifiable assets.............. $ 326,106 $ 397,837 $ (281,456) $ 442,487
========== ========== =========== ==========
Nine Months Ended December 28, 1996
Revenue from unaffiliated
customers...................... $ 751,597 $ 20,058 $ -- $ 771,655
Revenue from affiliated
customers...................... 25,712 1,517 -- 27,229
Transfers between geographic
locations...................... 14,150 918,488 (932,638) --
---------- ---------- ----------- ----------
Total Revenue.................... $ 791,459 $ 940,063 $ (932,638) $ 798,884
========== ========== =========== ==========
Income (loss) from operations.... $ (323,061) $ 79,926 $ 4,708 $ (238,427)
========== ========== =========== ==========
Identifiable assets.............. $ 286,084 $ 369,631 $ (341,176) $ 314,539
========== ========== =========== ==========
Year Ended December 27, 1997
Revenue from unaffiliated
customers...................... $1,384,703 $ 96 $ -- $1,384,799
Revenue from affiliated
customers...................... 39,521 -- -- 39,521
Transfers between geographic
locations...................... 21,886 1,595,189 (1,617,075) --
---------- ---------- ----------- ----------
Total Revenue.................... $1,446,110 $1,595,285 $(1,617,075) $1,424,320
========== ========== =========== ==========
Income (loss) from operations.... $ (284,915) $ 187,496 $ 34 $ (97,385)
========== ========== =========== ==========
Identifiable assets.............. $ 498,778 $ 569,207 $ (512,513) $ 555,472
========== ========== =========== ==========
</TABLE>
Revenue from unaffiliated and affiliated customers is based on the origin
of the sale. Transfers between geographic locations are accounted for at amounts
that are above cost. Such transfers are eliminated in the consolidated financial
statements. Identifiable assets are those assets that can be directly associated
with a particular geographic location through acquisition and/or utilization. In
determining each of the geographic locations' income (loss) from operations and
identifiable assets, the expenses and assets relating to general corporate or
headquarter activities are included in the amounts for the geographic locations
where they were incurred, acquired or utilized.
F-14
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LINES OF CREDIT, DEBT AND CAPITAL LEASE OBLIGATIONS
Lines of credit, debt and capital lease obligations consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, SEPTEMBER 26,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
5.75% Convertible Subordinated Debentures
due March 1, 2012....................... $100,000 $100,000 $ 95,000
Short-term borrowings; interest payable at
variable rates ranging from 6.24% to
7.88% per annum......................... 136,000 80,967 --
Short-term borrowings from affiliates;
interest payable at rate of 10.29%...... -- 65,000 --
Short-term borrowing; interest payable at
a rate of 6.52%; collateralized by
equipment............................... 13,800 13,800 --
Long-term borrowing from affiliates;
interest payable at rate of LIBOR plus
2%...................................... -- -- 55,000
Long-term borrowing, interest payable at
variable rates ranging from 6.18% to
6.24% per annum......................... 129,000 129,000 --
Other obligations......................... 109 603 312
-------- -------- --------
378,909 389,370 150,312
Less amounts due within one year.......... 149,800 165,057 5,261
-------- -------- --------
Due after one year........................ $229,109 $224,313 $145,051
======== ======== ========
</TABLE>
Future aggregate maturities as of December 27, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ ---------------
<S> <C>
1998...................................... $165,057
1999...................................... 134,313
2000...................................... 5,000
2001...................................... 5,000
2002...................................... 5,000
Later years............................... 75,000
--------
Total................................ $389,370
========
</TABLE>
The 5.75% Convertible Subordinated Debentures ("Debentures") originally
were convertible at any time prior to maturity, unless previously redeemed, into
shares of common stock of the Company at a conversion rate of 12.5 shares per
each $1,000 principal amount of debentures (equivalent to a conversion price of
$80 per common share), subject to adjustment in certain events. Pursuant to the
terms of the Indenture governing the Debentures, dated March 1, 1987, upon the
closing of the acquisition by HEA under the Agreement and Plan of Merger, dated
November 2, 1995, between HEA and the Company, Debenture holders were entitled
to receive in lieu of shares of common stock of the Company the same
consideration per share received by holders of common
F-15
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock at the closing of the merger. A First Supplemental Indenture, dated
January 11, 1996, provides that each $1,000 principal amount of Debentures may
be convertible to 12.5 shares of common stock of the Company (equivalent to a
conversion price of $80 per share), which is immediately converted into a cash
payment of $167.50. Interest on the Debentures is payable on March 1 and
September 1 of each year. The Debentures, at the option of the Company, are
redeemable at 100.575% of principal amount as of March 30, 1996 and thereafter
at prices adjusting to the principal amount on or after March 1, 1997, plus
accrued interest. The Debentures are entitled to a sinking fund of $5.0 million
principal amount of Debentures, payable annually beginning March 1, 1998, which
is calculated to retire at least 70% of the Debentures prior to maturity. The
Debentures are subordinated in right to payment to all senior indebtedness.
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. Under this program the
Company could sell its qualified trade accounts receivable up to $100.0 million
on a non-recourse basis. The face amount of the eligible receivables are
discounted based on the Corporate Receivables Corporation commercial paper rate,
5.85% as of December 27, 1997 plus commission and is subject to a 10% retention.
As of December 27, 1997, $79.8 million of advances related to sales of accounts
receivable were included in accrued and other liabilities. The Company's asset
securitization program was subject to certain conditions, among which was a
condition that all of HEI's long-term public senior debt securities achieve a
specified rating. This condition was not met in February 1998, and the Company
obtained waivers of this condition through April 8, 1998.
The Company completed a new asset securitization program dated as of April
8, 1998 (the "New Program") arranged by Citicorp to replace the existing
program. Under the New Program, the Company sells all of its trade accounts
receivable through a special purpose vehicle with a purchase limit of $100.0
million on a non-recourse basis, subject to increase to $150.0 million, upon the
fulfillment of the conditions subsequent described below. On April 8, 1998, the
uncollected purchase price under the existing program, in the amount of
approximately $100.0 million, was transferred to represent the purchased
interest of Citicorp's Corporate Receivables Corporation ("CRC") under the New
Program. Continuance of the New Program is subject to certain conditions,
including a condition that all of the long-term public senior debt securities of
HHI, an affiliated company, achieve a specified rating. In addition, the New
Program remains subject to certain conditions subsequent related to obtaining
appropriate waivers as may be necessary from lenders of the Company's credit
facilities, or effecting a cure of any outstanding defaults under such credit
facilities of the Company and obtaining a performance guarantee from HHI of the
obligations of the Company under the New Program. The Company must satisfy these
conditions subsequent within 30 days of receiving undertaking documents from
Citicorp and presently believes that it will be able to successfully satisfy
these conditions. This securitization program was replaced by a new program with
Fleet Bank on July 31, 1998 (see Note 14 -- unaudited).
On January 31, 1996 the Company signed a one year credit facility in the
amount of $13.8 million to be used for capital equipment requirements at the
Singapore facility, which was fully utilized as of December 27, 1997. This
credit facility was guaranteed by HEI and all outstanding amounts of principal
and accrued interest were paid in January 1998.
F-16
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On April 10, 1997, the Company obtained a $150.0 million intercompany line
of credit from HEA. This line of credit allows for draw downs up to $150.0
million and interest is payable quarterly. As of December 27, 1997, $65.0
million was outstanding under this facility and on July 31, 1998, outstanding
borrowings of $55.1 million were replaced with a subordinated note (see Note
14 -- unaudited).
On August 29, 1996, the Company established two uncollateralized, revolving
lines of credit totaling $215.0 million (the "Facilities") through Citibank,
N.A. and syndicated among fifteen banks. In September 1996, the Facilities were
increased $10.0 million to a total of $225.0 million. The Facilities are
guaranteed by HEI and a total of $129.0 million of the Facilities is a three
year committed Facility that is used primarily for general operating purposes
and bears interest at a rate based on LIBOR plus 0.53%. A total of $96.0 million
of the Facility is a 364-day committed facility, renewable annually at the
option of the syndicate banks. On August 28, 1997, this Facility was amended and
reduced to $31.0 million. The Facility is primarily for general operating
purposes and bears interest at a rate based on LIBOR plus 0.53%. In August 1998,
borrowings under both of the Facilities were paid off and the related agreements
terminated (see Note 14 -- unaudited).
The Company had credit facilities amounting to $50.8 million in the
aggregate from three banks as of December 27, 1997. The facilities, which are
guaranteed by HEI, are used primarily for general operating purposes. In January
1998, one $10.0 million facility was retired and all principal, owing has been
paid. In August 1998, borrowings under both of these facilities were paid off
and the related agreements terminated (see Note 14 -- unaudited).
HEI was the guarantor of an aggregate $170.0 million outstanding under the
Company's credit facilities as of December 27, 1997. HEI has various obligations
as guarantor, including the satisfaction of certain financial covenants. Due to
the economic conditions in the Republic of Korea and a significant recent
devaluation of the Korean won versus the U.S. dollar, the Company received
notice on April 9, 1998 from the administrative agent for the Facilities that
HEI is not in compliance with certain financial covenants. Due to HEI's
inability, as guarantor, to comply with such financial covenants, there is
currently a technical default under the terms of the guaranty which constitutes
a default under the Company's credit facilities guaranteed by HEI and due to
certain cross-default provisions a default under a credit facility with $30
million outstanding as of December 27, 1997 not guaranteed by HEI. The Company
had requested waivers of the non-compliance for the year ended December 27,
1997, and had obtained a commitment from an affiliated company to provide an
equivalent long-term facility in the event the waivers were not successfully
obtained. Consequently, the Company did not reclassify the debt outstanding
under the credit facilities as a current liability. As of June 1, 1998, the
Company obtained waivers for $160.0 million of $170.0 million of the debt which
was in default and substituted HHI as the guarantor. In August 1998, borrowings
under all facilities subject to guarantee by HHI were paid off and the related
agreements terminated (see Note 14 -- unaudited).
F-17
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its principal facilities and certain
machinery and equipment under operating lease arrangements. The future minimum
annual rental commitments as of December 27, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
<S> <C>
1998..................................... $10,602
1999..................................... 8,401
2000..................................... 5,261
2001..................................... 4,610
2002..................................... 1,735
Later years.............................. 8,556
-------
Total............................... $39,165
=======
</TABLE>
The above commitments extend through fiscal year 2016. Rental expense was
approximately $12.0 million for the year ended March 30, 1996, $8.9 million for
the nine months ended December 28, 1996 and $10.7 million for the year ended
December 27, 1997.
LEGAL PROCEEDINGS
The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
HEI which became effective on November 17, 1995 (the "StorMedia Agreement").
Pursuant to the StorMedia Agreement, StorMedia agreed to supply disk media to
the Company. StorMedia's disk media did not meet the Company's specifications
and functional requirements as required by the StorMedia Agreement and the
Company ultimately terminated the StorMedia Agreement. After a class action
securities lawsuit was filed against StorMedia by certain of its shareholders in
September 1996 which alleged, in part, that StorMedia failed to perform under
the StorMedia Agreement, StorMedia sued HEI, Mong Hun Chung (HEI's chairman),
Dr. Chong Sup Park (HEA's President and the individual who signed the StorMedia
Agreement on behalf of the Company) and K.S. Yoo (the individual who signed the
StorMedia Agreement on behalf of HEI) (collectively the "Original Defendants")
in the U.S. District Court for the Northern District of California (the "Federal
Suit"). In the Federal Suit, StorMedia alleged that at the time HEI entered into
the StorMedia Agreement, it knew that it would not and could not purchase the
volume of products which it committed to purchase, and that failure to do so
caused damages to StorMedia in excess of $206 million.
In December 1996, the Company filed a complaint against StorMedia and
William Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado
state court seeking approximately $100 million in damages and alleging, among
other claims, breach of contract, breach of implied warranty of fitness and
fraud under the StorMedia Agreement (the "Colorado Suit"). This proceeding was
stayed pending resolution of the Federal Suit. The Federal Suit was permanently
dismissed early in February 1998. On February 24, 1998, StorMedia filed a new
complaint in Santa Clara County Superior Court for the State of California for
$206 million, alleging fraud and deceit against the Original
F-18
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Defendants and negligent misrepresentation against HEI and the Company (the
"California Suit").
The Company believes that it has meritorious defenses against the claims
alleged by StorMedia and intends to defend itself vigorously. However, due to
the nature of the litigation and because the pending lawsuits are in the very
early pre-trial stages, the Company cannot determine the possible loss, if any,
that may ultimately be incurred either in the context of a trial or as a result
of a negotiated settlement. The litigation could result in significant diversion
of time by the Company's technical personnel, as well as substantial
expenditures for future legal fees. After consideration of the nature of the
claims and facts relating to the litigation, including the results of
preliminary discovery, the Company's management believes that the resolution of
this matter will not have a material adverse effect on the Company's business,
financial condition or results of operations. However, the results of these
proceedings, including any potential settlement, are uncertain and there can be
no assurance that they will not have a material adverse effect on the Company's
business, financial position and results of operations.
The Company has been notified of certain other claims, including claims of
patent infringement. While the ultimate outcome of these claims and the claims
described above is not determinable, the Company does not believe that
resolution of these matters will have a material impact on the Company's
business, financial condition or results of operations. No amounts related to
any action or actions have been reserved in the accompanying financial
statements.
9. RELATED PARTY TRANSACTIONS
In January 1996, the Company became a wholly-owned subsidiary of HEA.
Subsequently, trading of Maxtor common stock on the NASDAQ National Market was
suspended. Currently, there is no public market for the Company's equity
securities. The Company's 5.75% convertible subordinated Debentures, due March
1, 2012, remain publicly traded.
HEI has guaranteed certain debts of the Company (Note 7) and has provided
commitments of financial support necessary for the Company to continue
operations on an ongoing basis.
Revenue and related cost of revenue from affiliates consists principally of
product sales to HEI.
The cost of revenue includes certain component parts purchased from MMC
Technology, Inc., an affiliated company, amounting to $13.2 million during the
year ended December 31, 1997 and $95.0 million during the nine months ended
September 26, 1998 (unaudited).
HEA currently is an unconditional guarantor of the Company's Milpitas,
California facilities lease. The aggregate monthly rent under the lease is
currently $558,270 per month.
F-19
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' DEFICIT
PREFERRED STOCK
The Company has one class of $0.01 par value preferred stock with
95,000,000 shares authorized, designated as Series A Preferred Stock. Each share
of preferred stock is convertible, at the option of the holder, to shares of the
Company's common stock on a two for one basis, subject to adjustment under
certain circumstances pursuant to anti-dilution provisions. The preferred stock
automatically converts to common stock upon the earlier of the time the consent
of at least a majority of the outstanding Series A Preferred Stock subject to
such conversion is obtained, or the closing of the sale of the Corporation's
securities pursuant to a firm commitment, underwritten public offering. The
holders of preferred shares are entitled to one vote for each share of common
stock into which the preferred stock is convertible.
Holders of Series A Preferred Stock are entitled to dividends, when and as
declared by the board of directors of the Company (the "Board"), at an annual
rate of $0.40 per share. Dividends are noncumulative, and to date, no dividends
have been declared or paid by the Company. The Series A Preferred Stock has a
liquidation preference of $6.70 per share, plus any declared but unpaid
dividends on such shares.
In June 1996, the Company entered into an exchange agreement with HEA
whereby HEA exchanged 300 shares of Common Stock for 58,208,955 shares of Series
A Preferred Stock. On December 12, 1997 the Company entered into an exchange
with HEA where HEA exchanged $200.0 million of debt for 29,850,746 shares of
Series A Preferred Stock. As of December 27, 1997, 88,059,701 shares of Series A
Preferred Stock and 7,563 shares of Common Stock, were issued and outstanding.
As of December 27, 1997 all outstanding shares of Series A Preferred Stock were
held by HEA and all outstanding Common Stock, issued pursuant to the Corporation
1996 Stock Option Plan, were held by three individuals. All outstanding
preferred stock automatically converted to Common Stock upon closing of the
Offering (see Note 14 -- unaudited).
At the time of the acquisition by HEA, the Company canceled its employee
stock purchase plan and stockholder rights plan.
STOCK OPTIONS
Effective as of the acquisition by HEA, the Company's 1988, 1992, 1995
Stock Option Plans and the 1986 and 1996 Outside Directors Stock Option Plans
were terminated and were subsequently replaced by the 1996 Stock Option Plan
(the "Plan"). The Plan was approved by the Board in May 1996 and provides for a
maximum of 5,136,084 shares to be reserved for grants. Options under the Plan
expire ten years from the date of grant. On February 25, 1998, the Board
approved an additional one million common shares for issuance under the Plan.
The Plan generally provides for non-qualified stock options and incentive
stock options to be granted to eligible employees, consultants, and directors of
the Company (or any parent or subsidiary of the Company) at a price not less
than 85% of the fair market value at the date of grant, as determined by the
Board. The Board or an executive committee appointed by the Board also approves
other terms such as number of shares granted and exercisability thereof. Any
person who is not an employee may be granted only a non-qualified stock option.
Options granted under the Plan generally vest over a four-year
F-20
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
period with 25% vesting of the first anniversary date of the vest date and 6.25%
each quarter thereafter. The vesting schedule for new participants begins
February 1, 1996 or the participant's hire date, whichever is later.
Until there is a "public market" for the Company's Common Stock, the
Company has (i) the right to repurchase any vested shares at the greater of the
exercise price or fair market value upon termination of service by the holder,
and (ii) a 90-day right of first refusal whereby the Company may repurchase all
shares held by the holder on the same terms and at the same price as offered by
a third party (collectively, the "Repurchase Rights"). While the Company is
privately-held, the holder must give the Company written notice prior to any
proposed transfer.
In the event that the Company has not completed an initial public offering
("IPO") within six months of the date it reaches an "IPO Trigger Date", the
Company is required to purchase all the Common Stock acquired by participants
under the Plan, if tendered, at fair market value (the "Pseudo-IPO Purchase").
The IPO Trigger Date is the date, on or before February 1, 2001, on which all of
the following have occurred: (a) the Company has a positive net income for four
consecutive quarters, (b) the fair market value of the Company as determined by
an independent appraisal equals or exceeds $700.0 million, and (c) the Company
receives the written opinion of a nationally recognized investment banking firm
stating that the Company may undertake an underwritten IPO of its common stock.
The Company amended and restated the Plan in February 1998 to remove the
Pseudo-IPO Purchase, the Repurchase Rights and rights of first refusal, which
had given rise to variable accounting, and offered and modified employee option
agreements in the second quarter of 1998 for the majority of employees which had
previously held variable options to achieve fixed-award accounting. To comply
with variable plan accounting, the Company has recorded compensation expense
related to the difference between the estimated fair market value of its stock
and the stated exercise price of the Company's options. Compensation cost was
reflected in accordance with Financial Accounting Standards Board Interpretation
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans."
The following table summarizes option activity through September 26, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE EXERCISE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE VALUE
---------- ---------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at March 25, 1995......... 1,590,256 3,076,483 $11.98 $ 36,833
Options granted................... (970,274) 970,273 9.50 9,226
Options exercised................. -- (567,403) 8.36 (4,745)
Options canceled.................. 496,431 (496,431) 11.12 (5,519)
Plan shares expired............... (75,943) -- -- --
Options canceled due to
acquisitions.................... (1,040,470) (2,982,922) 12.00 (35,795)
---------- ---------- --------
</TABLE>
F-21
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE EXERCISE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE VALUE
---------- ---------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at March 30, 1996......... -- -- -- --
Shares reserved................... 5,136,084 -- -- --
Options granted................... (4,661,099) 4,661,099 6.00 27,966
Option canceled................... 1,108,349 (1,108,349) 6.00 (6,650)
---------- ---------- --------
Balance at December 28, 1996...... 1,583,334 3,552,750 6.00 21,316
Options granted................... (1,622,375) 1,622,375 6.00 9,735
Options exercised................. -- (7,563) 6.00 (46)
Option canceled................... 759,645 (759,645) 6.00 (4,558)
---------- ---------- --------
Balance at December 27, 1997...... 720,604 4,407,917 6.00 26,447
Shares reserved (unaudited)....... 8,662,097 -- -- --
Options granted (unaudited)....... (2,786,192) 2,786,192 7.00 19,502
Options exercised (unaudited)..... -- (99,153) 6.00 (595)
Options cancelled (unaudited)..... 721,190 (721,190) 7.99 (5,763)
---------- ---------- --------
Balance at September 26, 1998
(unaudited)....................... 7,317,699 6,373,766 $ 39,591
========== ========== ========
</TABLE>
There were no shares vested as of March 30, 1996 and December 28, 1996 and
1,229,081 shares vested as of December 27, 1997 at a weighted average exercise
price of $6.00. There were 7,563 shares outstanding subject to repurchase as of
December 27, 1997 and no shares outstanding subject to repurchase as of March
30, 1996 and December 28, 1996. As of September 26, 1998, options for 2,338,747
shares were vested and there were no shares outstanding subject to repurchase
(unaudited).
Under SFAS No. 123, the Company is required to calculate the pro forma fair
market value of options granted and report the impact that would result from
recording the compensation expense. Pro forma net loss for the nine months ended
December 28, 1996 and the year ended December 27, 1997 is set forth in the table
below. Comparable information for the year ended March 30, 1996 is not presented
due to the termination of all formerly existing options pursuant to the January
1996 acquisition by HEA.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 28, 1996
------------------------
AS REPORTED PRO FORMA
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net Loss................................................ $256,326 $257,488
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 27, 1997
------------------------
AS REPORTED PRO FORMA
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net Loss................................................ $109,891 $111,613
</TABLE>
F-22
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma net loss disclosures made above are not necessarily
representative of the effects on pro forma net income (loss) for future years as
options granted typically vest over several years and additional option grants
are expected to be made in future years.
Pro forma compensation expense resulting from stock options is to be based
upon fair value at the date of grant. To calculate this fair value, the Company
has elected to apply the Black-Scholes pricing model which is one of the
currently accepted models recognized by SFAS 123.
To compute the estimated grant date fair market value of the Company's
stock option grants for 1996 and 1997, the following weighted-average
assumptions were used:
<TABLE>
<CAPTION>
GROUP A GROUP A GROUP B GROUP B
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Risk-free interest rate...................... 6.14% 5.69% 6.21% 6.02%
Weighted average expected life............... 4 years 4 years 5 years 5 years
</TABLE>
No dividend yield and price volatility are assumed because the Company's
equity securities are not traded publicly.
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of each subgroup. Group A represents higher
paid participants who tend to exercise prior to the vesting period to take
advantage of tax laws, and Group B represents all other participants. The
risk-free interest rate was calculated in accordance with the grant date and
expected life calculated for each subgroup.
The following table summarizes information for stock options outstanding at
December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$6.00 4,407,917 8.81 $6.00 1,229,081 $6.00
</TABLE>
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED
-----------------------------------------
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
--------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Foreign................................... $2,526 $1,124 $1,035
Deferred:
Foreign................................... 300 (300) --
------ ------ ------
Total..................................... $2,826 $ 824 $1,035
====== ====== ======
</TABLE>
F-23
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the U.S. statutory rate of 35% to the loss before income taxes for the twelve
months ended March 30, 1996, the nine months ended December 28, 1996, and the
twelve months ended December 27, 1997. The principal reasons for this difference
are as follows:
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED
-----------------------------------------
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
--------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at U.S. statutory rate....... $(41,982) $(89,442) $(38,100)
Tax savings from foreign operations...... (30,757) (27,104) (63,487)
Repatriated foreign earnings absorbed by
current year losses.................... 11,624 -- --
U.S. loss providing current tax
benefit................................ 27,325 52,722 100,748
Valuation of temporary differences....... 36,550 64,492 2,361
Other.................................... 66 156 (487)
-------- -------- --------
Total.......................... $ 2,826 $ 824 $ 1,035
======== ======== ========
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and accruals..................... $ 16,211 $ 8,975
Depreciation........................................ 5,423 6,149
Sales related reserves.............................. 10,836 11,006
Net operating loss carryforwards.................... 152,519 218,718
Tax credit carryforwards............................ 18,252 19,335
Capitalized research and development................ 77,466 102,049
Notes receivable reserve............................ 7,561 1,220
Other............................................... 2,496 10,965
--------- ---------
Total deferred tax assets................. 290,764 378,417
Valuation allowance for deferred tax assets......... (251,464) (289,832)
--------- ---------
Net deferred tax assets............................. $ 39,300 $ 88,585
========= =========
Deferred tax liabilities:
Unremitted earnings of certain foreign entities..... $ 39,300 $ 88,585
--------- ---------
Total deferred tax liabilities............ $ 39,300 $ 88,585
========= =========
</TABLE>
Pre-tax income from foreign operations was approximately $95.9 million,
$79.0 million and $86.0 million for the twelve months ended March 30, 1996, nine
months ended December 28, 1996 and twelve months ended December 27, 1997,
respectively. Subject to
F-24
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
its continued compliance with certain legal requirements, the Company currently
enjoys a tax holiday for its operations in Singapore that has been extended
until June 30, 2003.
During the year ended December 27, 1997, the valuation allowance for
deferred tax assets increased by $38.4 million.
At December 27, 1997, for federal income tax purposes, the Company had net
operating loss carryforwards of $616.7 million and tax credit carryforwards of
approximately $18.8 million which will expire beginning in fiscal year 1999.
Certain changes in stock ownership can result in a limitation on the amount of
net operating loss and tax credit carryovers that can be utilized each year. The
Company determined it had undergone such an ownership change. Consequently,
utilization of approximately $253.0 million of net operating loss carryforwards
and the deduction equivalent of approximately $18.3 million of tax credit
carryforwards will be limited to approximately $22.4 million per year.
The acquisition of the Company by HEA resulted in the Company becoming part
of the HEA consolidated group for federal income tax purposes during January
1996. As a member of the HEA consolidated group, the Company is subject to a tax
allocation agreement. For financial reporting purposes, however, Company's tax
loss has been computed on a separate tax return basis, and, as such, Company has
not recorded any tax benefit in its financial statements for the amount of the
net operating loss included in the HEA consolidated income tax return.
12. NET INCOME (LOSS) PER SHARE:
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted net (loss)
per share calculations is provided as follows (in thousands, except share and
per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1996 1997 1997 1998
----------- ----------------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss).............. $ (122,765) $(256,326) $ (109,891) $ (132,957) $ 1,175
=========== ========= =========== ========== ===========
Net income (loss) available to
common stockholders.......... $ (122,765) $(256,326) $ (109,891) $ (132,957) $ 1,175
=========== ========= =========== ========== ===========
DENOMINATOR
Basic weighted average common
shares outstanding........... 20,677,000 -- 1,891 -- 19,991,259
EFFECT OF DILUTIVE SECURITIES
-- Common stock options...... -- -- -- -- 731,324
-- Convertible preferred
stocks..................... -- -- -- -- 34,768,959
----------- --------- ----------- ---------- -----------
Diluted weighted average common
shares....................... 20,677,000 -- 1,891 -- 55,491,542
=========== ========= =========== ========== ===========
Basic net income (loss) per
share (see Note 1)........... $ (5.94) $ -- $(58,112.64) $ -- $ 0.06
=========== ========= =========== ========== ===========
Diluted net income (loss) per
share........................ $ (5.94) $ -- $(58,112.64) $ -- $ 0.02
=========== ========= =========== ========== ===========
</TABLE>
F-25
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following securities and contingently issuable shares are excluded in
the calculation of diluted shares outstanding as their effects would be
antidilutive:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1996 1997 1997 1998
---------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Stock options................... -- 3,552,000 4,408,000 4,116,000 --
Convertible preferred stock..... -- 29,104,000 44,030,000 44,030,000 --
</TABLE>
Pro forma net income (loss) per share information reflecting the 44,029,850
shares of convertible preferred stock as if converted on issuance is presented
as follows:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1996 1997 1997 1998
---------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss)................. $(122,765) $ (256,326) $ (109,891) $ (132,957) $ 1,175
========= =========== =========== =========== ===========
Net income (loss) available to
common stockholders............. $(122,765) $ (256,326) $ (109,891) $ (132,957) $ 1,175
========= =========== =========== =========== ===========
DENOMINATOR -- PRO FORMA
Pro forma basic weighted average
common shares Outstanding....... -- 14,552,000 30,350,000 44,029,850 54,760,218
Effect of dilutive common stock
options......................... -- -- -- -- 731,324
--------- ----------- ----------- ----------- -----------
Pro forma diluted weighted average
common shares................... -- 14,552,000 30,350,000 44,029,850 55,491,542
========= =========== =========== =========== ===========
Pro forma basic net income (loss)
per share....................... $ -- $ (17.62) $ (3.62) $ (3.02) $ 0.02
========= =========== =========== =========== ===========
Pro forma diluted net income
(loss) per share................ $ -- $ (17.62) $ (3.62) $ (3.02) $ 0.02
========= =========== =========== =========== ===========
</TABLE>
13. EMPLOYEE BENEFIT PLAN:
The Company maintains a retirement and deferred savings plan for its
employees (the "401(k) Plan") that is intended to qualify as a tax-qualified
plan under the Code. The 401(k) Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (up to a statutory
limit). Under the 401(k) Plan, the Company may make discretionary contributions.
The Company's contributions to the 401(k) Plan for the fiscal periods ended
March 30, 1996 and December 28, 1996 and December 27, 1997 were $600,000, $1.2
million, and $1.6 million, respectively. All amounts contributed by participants
and earnings on such contributions are fully vested at all times.
14. SUBSEQUENT EVENTS (UNAUDITED):
1998 RESTRICTED STOCK PLAN
On May 29, 1998, the Company adopted the 1998 Restricted Stock Plan which
provides for awards of shares of common stock to employees. Restricted stock
awarded under this plan vests three years from the date of grant and is subject
to forfeiture in the
F-26
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
event of termination of employment with the Company. The Company has granted
390,000 shares of common stock under this plan.
STOCK OPTION REPRICING
On July 30, 1998 the Company reduced the exercise price of options to
purchase 437,763 shares. The exercise price of such options originally ranged
from $8.00 to $9.50 per share and were reduced to $7.00 per share.
SHORT-TERM BORROWINGS FROM PARENT
On July 31, 1998, the Company replaced its short-term borrowings from HEA
of $55.0 million with a three year subordinated note due July 31, 2001. This
note bears interest at six month LIBOR plus 2.0% which is payable semi-annually.
As of September 26, 1998, $55.0 million was outstanding on this note.
SECURITIZATION
On July 31, 1998, the Company entered into a three year agreement with
Fleet Bank for a $200.0 million asset securitization program. This program
replaces the previous Citicorp program which was terminated on July 31, 1998
and, unlike the Citicorp program, it does not require any support from HEA or
any of HEA's affiliates. Under the Fleet program, the Company sells all of its
eligible trade accounts receivable on a non-recourse basis through a special
purpose vehicle. The Company has arranged for a $204.0 million back-up liquidity
facility to support the program. As of September 26, 1998, $125.0 million of
accounts receivable was securitized under the program.
INITIAL PUBLIC OFFERING
In the third quarter of 1998, the Company completed the issuance of
49,731,225 shares of its common stock in an initial public offering. The Company
received approximately $329.4 million, net of issuance costs and underwriters'
commissions. Approximately $200.0 million of the proceeds have been used for
repayment of certain outstanding indebtedness under credit facilities due to
various banks (see Note 7). Upon closing of the July 1998 public offering, all
outstanding shares of the Series A Preferred Stock converted into 44,029,850
shares of common stock. As a result of the July 1998 public offering, the
Company ceased to be a majority-owned subsidiary of HEI and therefore no longer
subject to HEI's commitment of financial support.
F-27
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Maxtor Corporation:
We have audited the consolidated financial statements of Maxtor Corporation
(a subsidiary of Hyundai Electronics America) listed in the index on page F-1 of
this Form S-3 as of December 28, 1996 and December 27, 1997, and for the nine
month period ended December 28, 1996 and the year ended December 27, 1997. We
have also audited the financial statement schedule listed in Item 16(b) of this
Form S-3. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Maxtor
Corporation as of December 28, 1996 and December 27, 1997, and the consolidated
results of its operations and its cash flows for the nine month period ended
December 28, 1996 and the year ended December 27, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Note 1 to the financial statements, the Company's ultimate
parent, Hyundai Electronics Industries, Co., Ltd., (HEI) is located in the
Republic of Korea. The Republic of Korea has recently experienced volatility in
its currency and interest rates which have affected the operations of most
Korean companies, including HEI. HEI has provided certain financial support to
the Company in the past and is a guarantor of the Company's debt.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 3, 1998, except for
Notes 7 and 10 for which
the date is April 9, 1998,
the ninth paragraph of
Note 1 and the tenth paragraph
of Note 7, for which
date is June 3, 1998, and
the second paragraph of Note 1,
for which the date is July 24, 1998
F-28
<PAGE> 100
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Maxtor Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Maxtor Corporation (a
wholly-owned subsidiary of Hyundai Electronics America) for the year ended March
30, 1996. Our audit also included the financial statement schedule for the year
ended March 30, 1996 listed in the Index at Item 16(b). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Maxtor Corporation for the year ended March 30, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule for the year ended March 30, 1996, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
April 25, 1996
except for the second paragraph of
Note 1 as to which this date is July 24, 1998
F-29
<PAGE> 101
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
MAXTOR CORPORATION
COMMON STOCK
LOGO
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 102
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 21, 1998
PROSPECTUS
SHARES
LOGO
COMMON STOCK
------------------------
This prospectus accompanies a separate prospectus of DECS Trust IV covering
the sale of DECS. DECS Trust IV may distribute an additional
shares of Maxtor common stock owned by Hyundai Electronics America cover rights
to purchase additional DECS granted to the underwriters of the DECS offering.
This prospectus covers the distribution by DECS Trust IV of up to
shares of Maxtor common stock owned by Hyundai Electronics
America. The terms of the DECS provide that DECS Trust IV may distribute the
Maxtor common stock to DECS holders on or about , 2002, or earlier
in certain circumstances, if DECS Trust IV is liquidated.
Maxtor will not receive any of the proceeds from the sale of DECS or the
delivery of the Maxtor common stock under this prospectus.
Maxtor is not responsible for any information included in or omitted from
the prospectus used by DECS Trust IV to sell the DECS. The prospectus used to
sell the DECS is not part of this prospectus and is not incorporated by
reference into this prospectus.
In a separate but concurrent public offering of common stock by Maxtor,
Maxtor is selling shares of newly-issued common stock and Hyundai
Electronics America is selling shares of common stock of Maxtor.
Maxtor will not receive any proceeds from the shares of common stock sold by
Hyundai Electronics America.
Maxtor's common stock is traded on the Nasdaq National Market under the
symbol "MXTR." On , 1998, the last reported sale price for our
common stock on the Nasdaq National Market was $ per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
, 1999
A-1
<PAGE> 103
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THIS PROSPECTUS IS NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Relationship Between Maxtor and Hyundai..................... 20
Where You Can Find More Information......................... 24
Price Range of Our Common Stock............................. 25
Dividend Policy............................................. 25
Capitalization.............................................. 26
Dilution.................................................... 27
Selected Consolidated Financial Data........................ 28
Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 29
Business.................................................... 41
Management.................................................. 54
Certain Transactions........................................ 58
Selling Stockholder......................................... 61
Underwriting................................................ 62
Legal Matters............................................... 64
Experts..................................................... 64
Glossary.................................................... 65
Index to Consolidated Financial Statements.................. F-1
</TABLE>
A-2
<PAGE> 104
THE DECS OFFERING
DECS Trust IV is offering for sale DECS under the DECS
prospectus, plus up to an additional DECS solely to cover
over-allotments. On or about , 2002, or upon earlier liquidation
of DECS Trust IV in certain circumstances, DECS Trust IV will distribute Maxtor
common stock (or, at Hyundai Electronics America's option, the cash equivalent)
and/or such other consideration as is delivered by Hyundai Electronics America
to the Trust. This prospectus covers the delivery by DECS Trust IV under the
DECS of up to shares of Maxtor common stock that may be delivered
by Hyundai Electronics America, plus up to an additional shares
of Maxtor common stock that may be delivered by Hyundai Electronics America to
cover (1) the underwriters' right to purchase additional DECS and (2) DECS
purchased by Salmon Smith Barney Inc. in connection with the organization of the
DECS Trust IV.
THE STOCK OFFERING
Maxtor and Hyundai Electronics America, a major holder of Maxtor common
stock, also are offering for sale in a separate offering shares
of Maxtor common stock. Maxtor and Hyundai Electronics America are offering up
to an additional shares solely to cover over-allotments.
A-3
<PAGE> 105
PLAN OF DISTRIBUTION
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and DECS Trust IV has agreed to sell to such underwriter, the number
of DECS set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF DECS
---- --------
<S> <C>
--------
Total................................................
========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the DECS included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the DECS (other than those
covered by the over-allotment option described below) if they purchase any of
the DECS.
The underwriters, for whom are acting as
representatives, propose to offer some of the DECS directly to the public at the
public offering price set forth on the cover page of the DECS prospectus and
some of the DECS to certain dealers at the public offering price less a
concession not in excess of $ per DECS. The underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per DECS on sales to
certain other dealers. After the initial offering of the DECS to the public, the
public offering price and such concessions may be changed by the
representatives.
DECS Trust IV has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to additional DECS at
the same price per DECS as the initial DECS purchased by the underwriters. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the DECS offering. To the extent
such option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional DECS approximately proportionate
to such underwriter's initial purchase commitment. In addition,
purchased DECS in connection with the organization of
DECS Trust IV.
Maxtor, Hyundai Electronics America and certain other stockholders of
Maxtor have agreed that, for a period of days from the date of this
prospectus, they will not, without the prior written consent of
, offer, sell, contract to sell, or otherwise dispose of,
any shares of common stock of Maxtor or any securities convertible into, or
exercisable or exchangeable for, common stock. in its sole
discretion may release any of the securities subject to these lock-up agreements
at any time without notice. However, this agreement will not restrict the
ability of Maxtor and Hyundai Electronics America to take any of the actions
listed above in connection with the offering by DECS Trust IV of the DECS or any
delivery of shares of Maxtor common stock pursuant to the terms of the DECS.
The DECS will be a new issue of securities with no established trading
market. DECS Trust IV has applied to list the DECS on the Nasdaq National Market
under the symbol " ". The underwriters intend to make a market in the
DECS, subject to
A-4
<PAGE> 106
applicable laws and regulations. However, the underwriters are not obligated to
do so and any such market-making may be discontinued at any time at the sole
discretion of the Underwriters without notice. Accordingly, no assurance can be
given as to the liquidity of such market.
Pursuant to the Contract, DECS Trust IV has agreed, subject to the terms
and conditions set forth therein, to purchase from Hyundai Electronics America
an aggregate number of shares of Maxtor common stock equal to the aggregate
number of DECS to be purchased by the underwriters from DECS Trust IV pursuant
to the underwriting agreement (including any DECS to be purchased by the
underwriters upon exercise of the over-allotment option plus the number of DECS
purchased by the underwriters in connection with the organization of the Trust).
Pursuant to the terms of the Contract, Hyundai Electronics America will be
obligated to deliver to DECS Trust IV at the Delivery Date of the DECS a number
of shares of common stock (or, at Hyundai Electronics America's option, the cash
equivalent) and/or such other consideration as permitted or required by the
terms of the Contract, that are expected to have the same value as the shares of
Maxtor common stock delivered pursuant to the DECS. The closing of the offering
of the DECS is conditioned upon execution of the Contract by Hyundai Electronics
America and DECS Trust IV. For further information, see the DECS prospectus.
In connection with the DECS offering and the stock offering,
, on behalf of the underwriters, may over-allot, or engage in
syndicate covering transactions, stabilizing transactions and penalty bids.
Over-allotment involves syndicate sales of DECS or Maxtor common stock in excess
of the number of DECS to be purchased by the underwriters in the offering, which
creates a syndicate short position. Syndicate covering transactions involve
purchases of the DECS or the Maxtor common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of certain bids or purchases of DECS or common
stock made for the purpose of preventing or retarding a decline in the market
price of the DECS or common stock while the offering is in progress. Penalty
bids permit the underwriters to reclaim a selling concession from a syndicate
member when , in covering syndicate short positions or making
stabilizing purchases, repurchases DECS or common stock originally sold by that
syndicate member. These activities may cause the price of DECS or common stock
to be higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the DECS or common stock on the Nasdaq National Market, prior to the pricing and
completion of the DECS offering. Passive market making consists of displaying
bids on the Nasdaq National Market no higher than the bid prices of independent
market makers and making purchases at prices no higher than those independent
bids and effected in response to order flow. Net purchases by a passive market
maker on each day are limited to a specified percentage of the passive market
maker's average daily trading volume in the common stock during a specified
period and must be discontinued when such limit is reached. Passive market
making may cause the price of the common stock to be higher than the price that
otherwise would exist in the open market in the absence of such transactions. If
passive market making is commenced, it may be discontinued at any time.
A-5
<PAGE> 107
Maxtor and Hyundai Electronics America, a majority holder of Maxtor's
common stock, have entered into a separate underwriting agreement for the offer
and sale of shares of common stock, plus up to an additional
shares of common stock solely to cover over-allotments. The
closings of the DECS offering and the stock offering are not conditioned upon
each other.
In the ordinary course of their respective businesses, the underwriters and
their affiliates have engaged in and may in the future engage in commercial and
investment banking transactions with Maxtor and its affiliates.
The representatives have performed certain investment banking and advisory
services for Maxtor from time to time for which they have received customary
fees and expenses. The representatives may, from time to time, engage in
transactions with and perform services for Maxtor in the ordinary course of
their business.
Maxtor and Hyundai Electronics America have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
A-6
<PAGE> 108
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
MAXTOR CORPORATION
COMMON STOCK
LOGO
------------
PROSPECTUS
, 1999
------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions payable by the Registrant in connection with the sale
of the Common Stock being registered. All amounts shown are estimates except for
the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
Registration fee............................................ $125,100
NASD filing fee............................................. 45,500
Nasdaq National Market application fee...................... *
Blue sky qualification fees and expenses.................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous expenses...................................... *
--------
Total............................................. $ *
========
</TABLE>
- -------------------------
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to the provisions of the Delaware General Corporation Law, the
Registrant has adopted provisions in its Amended and Restated Certificate of
Incorporation which provide that members of its board of directors shall not be
personally liable for monetary damages to the Registrant or its stockholders for
a breach of fiduciary duty as a director, except for liability as a result of:
(i) a breach of the director's duty of loyalty to the Registrant or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) an act related to
the unlawful stock repurchase or payment of a dividend under Section 174 of the
Delaware General Corporation Law; and (iv) transactions from which the director
derived an improper personal benefit. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Amended and Restated Certificate of Incorporation also authorizes the
Registrant to indemnify its officers, directors and other agents, by bylaws,
agreements or otherwise, to the full extent permitted under Delaware law. The
Registrant has and intends to continue to enter into separate indemnification
agreements with each of its directors and officers which may, in some cases, be
broader than the specific indemnification provisions contained in the Delaware
General Corporation Law. The indemnification agreements may require the
Registrant, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could
II-1
<PAGE> 110
be indemnified and to obtain directors' and officers' insurance if available on
reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The underwriting agreements filed as Exhibits 1.1 and 1.2 to this
Registration Statement provide for indemnification by the underwriters of the
Registrant and its officers and directors for certain liabilities arising under
the Securities Act, or otherwise.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.+
4.1(14) Stockholder Agreement dated June 25, 1998.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.+
10.1(14) Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.
10.2(14) Indenture dated as of March 1, 1987 between Registrant and
Security Pacific National Bank, as Trustee.
10.3(2) Lease Agreement for Premises Located at 1821 Lefthand
Circle, Suite D, between Registrant and Pratt Land Limited
Liability Company, dated October 19, 1994.
10.4(2) Lease Agreement for Premises Located at 1841 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.5(2) Lease Agreement for Premises Located at 1851 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.6(2) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.7(2) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.8(3) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995.
10.9(3) Lease Agreement for Premises Located at 1900 Pike Road,
Suite A Longmont, CO, between Registrant as Tenant and Pratt
Land Limited Liability Company as Landlord, dated February
24, 1995.
10.10(3) Lease Agreement for Premises Located at 2040 Miller Drive
Suite A, B, & C between Registrant as Tenant and Pratt Land
Limited Liability Company as Landlord, dated February 24,
1995.
10.11(3) Manufacturing and Purchase Agreement by and Between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995.
</TABLE>
II-2
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.12(3) Lease Agreement for Premises Located at 2040 Miller Drive,
Suites D, E, & F, Longmont, CO, between Registrant as Tenant
and Pratt Management Company, LLC as Landlord.
10.13(5) Credit Agreement among Registrant and The Initial Lenders
and the Issuing Bank and Citibank, N.A., dated August 31,
1995.
10.14(5) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995.
10.15(5) Amendment to the Financing Agreement among Registrant and
the CIT Group/Business Credit, Inc., dated October 17, 1995.
10.16(6) First Supplemental Indenture, dated as of January 11, 1996,
between Registrant and State Street Bank and Trust Company.
10.17(6) Credit Agreement, dated as of December 29, 1995 between
Registrant and Hyundai Electronics America.
10.18(12) Maxtor Corporation 1996 Stock Option Plan.**
10.19(12) Intercompany Loan Agreement, dated as of April 10, 1996,
between Registrant and Hyundai Electronics America.
10.20(12) Receivables Purchase and Sale Agreement, dated as of March
30, 1996, among Registrant and Corporate Receivables
Corporation and Citicorp North America, Incorporated.
10.21(7) Recapitalization Agreement among the Registrant,
International Manufacturing Services, Incorporated and
certain investors, dated as of May 21, 1996.
10.22(7) Redemption Agreement between Registrant and International
Manufacturing Services, Incorporated, dated as of May 21,
1996.
10.23(7) Manufacturing Services Agreement between Registrant and
International Manufacturing Services, Incorporated, dated
June 13, 1996.*
10.24(8) Credit Facility, dated as of July 31, 1996, between
Registrant and Hyundai Electronics America.
10.25(9) Exchange Agreement effective June 18, 1996, between Maxtor
Corporation and Hyundai Electronics America.
10.26(10) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
10.27(10) Credit Agreement, dated August 29, 1996, among Registrant,
Citibank, N.A., and Syndicate Banks.
10.28(11) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996.**
10.29(11) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996.**
10.30(11) Employment Agreement between William Roach and Registrant,
dated December 13, 1996.**
10.31(12) Intercompany Loan Agreement, dated as of April 10, 1997,
between Registrant and Hyundai Electronics America.
10.32(14) 364-Day Credit Agreement dated as of October 31, 1997
between Registrant and Nomura Bank International.
10.33(13) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Registrant and Hyundai
Electronics America.
</TABLE>
II-3
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.34(13) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.35(14) Employment Agreement between Philip Duncan and Registrant
dated July 15, 1996.**
10.36(14) Receivables Purchase and Sale Agreement dated as of April 8,
1998, among Maxtor Receivables Corporation, Registrant,
Corporate Receivables Corporation, Citicorp North America
and Bankers Trust Company.
10.37(14) Intercompany Loan Agreement dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.
10.38(14) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.
10.39(14) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**
10.40(14) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.
10.41(14) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*
10.42(14) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*
10.43(14) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.
10.44(14) R/3 Software End-User Value License Agreement between SAP
Korea Ltd. and Hyundai Information Technology Co. Ltd. dated
as of June 30, 1996.
10.45(14) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.
10.46(14) Tax Allocation Agreement dated as of July 21, 1995 among
Hyundai Electronics America, registrant and certain other
subsidiaries.
10.47(4) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
10.48(14) Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.
10.49(14) Indemnity Agreement between Hyundai Electronics Industries
Co., Ltd. and Registrant dated June 25, 1998.
10.50(14) License Agreement between Registrant and Hyundai Electronics
Industries Co., Ltd. dated June 25, 1998.
10.51(1) Stock Purchase Agreement between Registrant and Hyundai
Electronics Industries Co., Ltd., Hyundai Heavy Industries
Co., Ltd., Hyundai Corporation, and Hyundai Merchant Marine
Co., Ltd., dated September 10, 1993.
10.52(15) Supply Agreement between Registrant and MMC Technology dated
August 18, 1998.*
10.53(14) 1998 Restricted Stock Plan.**
10.54(14) Form of Restricted Stock Grant Agreement.**
10.55(14) Second Amended and Restated 1996 Stock Option Plan.**
10.56(14) Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael Cannon.**
</TABLE>
II-4
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.57(14) Retention Agreement dated as of May 29, 1998 between
Registrant and Paul Tufano.**
10.58(14) Form of Retention Agreement between Registrant and Executive
Officers.**
10.59(14) Letter Agreement between Victor B. Jipson and Registrant
dated as of June 12, 1998.**
10.60(14) Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.
10.61(14) Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.
10.62(14) Letter Agreement setting forth terms and conditions of Loan
Agreement between Registrant and the Bank of New York dated
as of December 27, 1997.
10.63(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.64(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of October 31, 1997 between
Registrant and Nomura Bank International plc.
10.65(14) Waiver and Amendment dated as of May 22, 1998 to Three-Year
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.66(15) Purchase and Sale Agreement between Registrant and Maxtor
Receivables Corporation dated as of July 31, 1998.
10.67(15) Receivables Purchase Agreement Among Maxtor Receivables
Corporation, The Registrant, BlueKeel Funding LLC and Fleet
National Bank.
10.68 Letter Agreement between Registrant and MMC Technology dated
May 18, 1998.
10.69 Mutual Release and Termination Agreement by and among
Hyundai Electronics America, Axil Computers, Inc., Image
Quest Technologies, Inc., Registrant, Odeum Microsystems,
TV/COM International, Inc. dated November 1998.+
10.70 Letter Agreement between Hyundai Electronics America and
Registrant.+
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- -------------------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
+ To be filed by amendment.
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993.
(2) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
II-5
<PAGE> 114
(3) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995.
(4) Incorporated by reference to exhibit III of Schedule 14D-9 filed November
9, 1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed November 14, 1996.
(6) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(7) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
(8) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(9) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(10) Incorporated by reference to exhibits of Form 8-K filed September 13, 1996.
(11) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997.
(12) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997.
(13) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(14) Incorporated by reference to exhibits of Form S-1 filed July 30, 1998.
(15) Incorporated by reference to exhibits of Form 10-Q filed November 10, 1998.
(b) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of Maxtor is filed
as part of this Registration Statement and should be read in conjunction with
the consolidated financial statements of Maxtor.
SCHEDULE II
<TABLE>
<S> <C>
Valuation and Qualifying Accounts -- Allowance for Doubtful
Accounts.................................................. S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in
II-6
<PAGE> 115
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
- For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
- For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Milpitas,
County of Santa Clara, State of California, on the 18th day of December 1998.
MAXTOR CORPORATION
By: /s/ MICHAEL R. CANNON
-----------------------------------
Michael R. Cannon
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Dr. Chong Sup Park and Michael R.
Cannon, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DR. CHONG SUP PARK Chairman of the Board December 18, 1998
- ---------------------------------------------
Dr. Chong Sup Park
/s/ MICHAEL R. CANNON President, Chief December 18, 1998
- --------------------------------------------- Executive Officer and
Michael R. Cannon Director
/s/ PAUL J. TUFANO Senior Vice President, December 18, 1998
- --------------------------------------------- Finance, Chief
Paul J. Tufano Financial Officer and
Principal Accounting
Officer
</TABLE>
II-8
<PAGE> 117
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CHANG SEE CHUNG Director December 18, 1998
- ---------------------------------------------
Chang See Chung
/s/ CHARLES HILL Director December 18, 1998
- ---------------------------------------------
Charles Hill
/s/ CHARLES F. CHRIST Director December 18, 1998
- ---------------------------------------------
Charles F. Christ
/s/ Y.H. KIM Director December 18, 1998
- ---------------------------------------------
Y.H. Kim
/s/ PHILIP S. PAUL Director December 18, 1998
- ---------------------------------------------
Philip S. Paul
/s/ THOMAS CHUN Director December 18, 1998
- ---------------------------------------------
Thomas Chun
</TABLE>
II-9
<PAGE> 118
MAXTOR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS CHARGED
BALANCE AT TO COST DEDUCTIONS/ BALANCE AT
PERIOD ENDED BEGINNING OF PERIOD AND EXPENSES (RECOVERIES(1)) END OF PERIOD
------------ ------------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C>
March 30, 1996....... $3,850 $1,232 $ (114) $5,196
December 28, 1996.... $5,196 $1,355 $1,296 $5,255
December 27, 1997.... $5,255 $1,000 $2,682 $3,573
</TABLE>
- -------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 119
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.+
4.1(14) Stockholder Agreement dated June 25, 1998.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.+
10.1(14) Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.
10.2(14) Indenture dated as of March 1, 1987 between Registrant and
Security Pacific National Bank, as Trustee.
10.3(2) Lease Agreement for Premises Located at 1821 Lefthand
Circle, Suite D, between Registrant and Pratt Land Limited
Liability Company, dated October 19, 1994.
10.4(2) Lease Agreement for Premises Located at 1841 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.5(2) Lease Agreement for Premises Located at 1851 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.6(2) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.7(2) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.8(3) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995.
10.9(3) Lease Agreement for Premises Located at 1900 Pike Road,
Suite A Longmont, CO, between Registrant as Tenant and Pratt
Land Limited Liability Company as Landlord, dated February
24, 1995.
10.10(3) Lease Agreement for Premises Located at 2040 Miller Drive
Suite A, B, & C between Registrant as Tenant and Pratt Land
Limited Liability Company as Landlord, dated February 24,
1995.
10.11(3) Manufacturing and Purchase Agreement by and Between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995.
10.12(3) Lease Agreement for Premises Located at 2040 Miller Drive,
Suites D, E, & F, Longmont, CO, between Registrant as Tenant
and Pratt Management Company, LLC as Landlord.
10.13(5) Credit Agreement among Registrant and The Initial Lenders
and the Issuing Bank and Citibank, N.A., dated August 31,
1995.
10.14(5) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995.
10.15(5) Amendment to the Financing Agreement among Registrant and
the CIT Group/ Business Credit, Inc., dated October 17,
1995.
10.16(6) First Supplemental Indenture, dated as of January 11, 1996,
between Registrant and State Street Bank and Trust Company.
10.17(6) Credit Agreement, dated as of December 29, 1995 between
Registrant and Hyundai Electronics America.
10.18(12) Maxtor Corporation 1996 Stock Option Plan.**
</TABLE>
E-1
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.19(12) Intercompany Loan Agreement, dated as of April 10, 1996,
between Registrant and Hyundai Electronics America.
10.20(12) Receivables Purchase and Sale Agreement, dated as of March
30, 1996, among Registrant and Corporate Receivables
Corporation and Citicorp North America, Incorporated.
10.21(7) Recapitalization Agreement among the Registrant,
International Manufacturing Services, Incorporated and
certain investors, dated as of May 21, 1996.
10.22(7) Redemption Agreement between Registrant and International
Manufacturing Services, Incorporated, dated as of May 21,
1996.
10.23(7) Manufacturing Services Agreement between Registrant and
International Manufacturing Services, Incorporated, dated
June 13, 1996.*
10.24(8) Credit Facility, dated as of July 31, 1996, between
Registrant and Hyundai Electronics America.
10.25(9) Exchange Agreement effective June 18, 1996, between Maxtor
Corporation and Hyundai Electronics America.
10.26(10) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
10.27(10) Credit Agreement, dated August 29, 1996, among Registrant,
Citibank, N.A., and Syndicate Banks.
10.28(11) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996.**
10.29(11) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996.**
10.30(11) Employment Agreement between William Roach and Registrant,
dated December 13, 1996.**
10.31(12) Intercompany Loan Agreement, dated as of April 10, 1997,
between Registrant and Hyundai Electronics America.
10.32(14) 364-Day Credit Agreement dated as of October 31, 1997
between Registrant and Nomura Bank International.
10.33(13) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Registrant and Hyundai
Electronics America.
10.34(13) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.35(14) Employment Agreement between Philip Duncan and Registrant
dated July 15, 1996.**
10.36(14) Receivables Purchase and Sale Agreement dated as of April 8,
1998, among Maxtor Receivables Corporation, Registrant,
Corporate Receivables Corporation, Citicorp North America
and Bankers Trust Company.
10.37(14) Intercompany Loan Agreement dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.
10.38(14) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.
10.39(14) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**
10.40(14) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.
</TABLE>
E-2
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.41(14) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*
10.42(14) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*
10.43(14) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.
10.44(14) R/3 Software End-User Value License Agreement between SAP
Korea Ltd. and Hyundai Information Technology Co. Ltd. dated
as of June 30, 1996.
10.45(14) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.
10.46(14) Tax Allocation Agreement dated as of July 21, 1995 among
Hyundai Electronics America, registrant and certain other
subsidiaries.
10.47(4) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
10.48(14) Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.
10.49(14) Indemnity Agreement between Hyundai Electronics Industries
Co., Ltd., and Registrant dated June 25, 1998.
10.50(14) License Agreement between Registrant and Hyundai Electronics
Industries Co., Ltd., dated June 25, 1998.
10.51(1) Stock Purchase Agreement between Registrant and Hyundai
Electronics Industries Co., Ltd., Hyundai Heavy Industries
Co., Ltd., Hyundai Corporation, and Hyundai Merchant Marine
Co., Ltd., dated September 10, 1993.
10.52(15) Supply Agreement between Registrant and MMC Technology dated
August 18, 1998.*
10.53(14) 1998 Restricted Stock Plan.**
10.54(14) Form of Restricted Stock Grant Agreement.**
10.55(14) Second Amended and Restated 1996 Stock Option Plan.**
10.56(14) Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael Cannon.**
10.57(14) Retention Agreement dated as of May 29, 1998 between
Registrant and Paul Tufano.**
10.58(14) Form of Retention Agreement between Registrant and Executive
Officers.**
10.59(14) Letter Agreement between Victor B. Jipson and Registrant
dated as of June 12, 1998.**
10.60(14) Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.
10.61(14) Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.
10.62(14) Letter Agreement setting forth terms and conditions of Loan
Agreement between Registrant and the Bank of New York dated
as of December 27, 1997.
10.63(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
</TABLE>
E-3
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.64(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of October 31, 1997 between
Registrant and Nomura Bank International plc.
10.65(14) Waiver and Amendment dated as of May 22, 1998 to Three-Year
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.66(15) Purchase and Sale Agreement between Registrant and Maxtor
Receivables Corporation dated as of July 31, 1998.
10.67(15) Receivables Purchase Agreement Among Maxtor Receivables
Corporation, The Registrant, BlueKeel Funding LLC and Fleet
National Bank.
10.68 Letter Agreement between Registrant and MMC Technology dated
May 18, 1998.
10.69 Mutual Release and Termination Agreement by and among
Hyundai Electronics America, Axil Computers, Inc., Image
Quest Technologies, Inc., Registrant, Odeum Microsystems,
TV/COM International, Inc. dated November 1998.+
10.70 Letter Agreement between Hyundai Electronics America and
Registrant.+
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- -------------------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
+ To be filed by amendment.
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993.
(2) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
(3) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995.
(4) Incorporated by reference to exhibit III of Schedule 14D-9 filed November
9, 1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed November 14, 1996.
(6) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(7) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
(8) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(9) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(10) Incorporated by reference to exhibits of Form 8-K filed September 13, 1996.
(11) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997.
(12) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997.
(13) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(14) Incorporated by reference to exhibits of Form S-1 filed July 30, 1998.
(15) Incorporated by reference to exhibits of Form 10-Q filed November 10, 1998.
E-4
<PAGE> 1
Exhibit 10.68
[LETTERHEAD FOR MMC TECHNOLOGY]
May 18, 1998
Maxtor Corporation
Gentlemen:
In connection with the hiring of employees by MMC Technology, Inc., A Hyundai
Electronics Company "MMC"), Maxtor extended stock options to certain employees
with the goal of assisting MMC in its employee retention strategies. While
grants to employees of MMC are permitted under Maxtor's stock option plan, these
options are considered non-employee options under current accounting standards.
As such, Maxtor is required to compute the fair value of these options, and
would have to reflect an expense related to these options absent an agreement
between Maxtor and MMC to reimburse for the related cost.
This will confirm that MMC agrees to reimburse Maxtor for the financial
statement expense related to options granted by Maxtor for MMC employees. This
agreement covers the Maxtor options granted to existing MMC employees, and
includes the period from January 1, 1998 to the expiration, cancellation or
exercise of all of the related Maxtor options granted to MMC employees. Expense
related to the options will be computed in accordance with generally accepted
accounting principles, and will be computed on a quarterly basis. Expense and
reimbursement for the first quarter of 1998 approximate $2.3 million.
Thank you.
/s/ NIC PIGNATI
- -----------------------------------
Nic Pignati
President and CEO
MMC Technology, Inc.
Accepted:
2001 Fortune Drive San Jose, CA 95131 -- 408-232-8800
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of Maxtor
Corporation on Form S-3 of our report dated February 3, 1998, except for Notes 7
and 10 for which the date is April 9, 1998, the ninth paragraph of Note 1 and
tenth paragraph of Note 7, for which the date is June 3, 1998, and the second
paragraph of Note 1, for which the date is July 24, 1998, which includes an
emphasis of a matter related to the Company's ultimate parent; Hyundai
Electronics Industries, Co., Ltd., on our audits of the consolidated financial
statements and schedule of Maxtor Corporation. We also consent to the references
to our firm under the captions "Experts" and "Selected Financial Data."
San Jose, California
December 18, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
April 25, 1996, except for the second paragraph of Note 1 as to which the date
is July 24, 1998, with respect to the financial statements and schedule of
Maxtor Corporation included in the Registration Statement (Form S-3) and related
Prospectus of Maxtor Corporation for the registration of shares its common
stock.
/s/ Ernst & Young LLP
San Jose, California
December 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> SEP-26-1998
<CASH> 162,225
<SECURITIES> 0
<RECEIVABLES> 289,472
<ALLOWANCES> 5,935
<INVENTORY> 151,952
<CURRENT-ASSETS> 619,959
<PP&E> 311,308
<DEPRECIATION> 199,300
<TOTAL-ASSETS> 743,168
<CURRENT-LIABILITIES> 477,699
<BONDS> 95,000
0
0
<COMMON> 943
<OTHER-SE> 119,475<F1>
<TOTAL-LIABILITY-AND-EQUITY> 743,168
<SALES> 1,680,679
<TOTAL-REVENUES> 1,680,679
<CGS> 1,482,751
<TOTAL-COSTS> 1,482,751
<OTHER-EXPENSES> 174,311<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,109
<INCOME-PRETAX> 3,444
<INCOME-TAX> 2,269
<INCOME-CONTINUING> 1,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,175
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.02
<FN>
<F1>OTHER SE INCLUDES ADDITIONAL PAID-IN CAPITAL OF $878,019 UNREALIZED GAIN ON
INVESTMENTS IN EQUITY SECURITIES OF $13,234, AND ACCUMULATED DEFICIT OF
$771,778.
<F2>OTHER EXPENSES INCLUDE RESEARCH AND DEVELOPMENT OF $110,285 AND SELLING,
GENERAL AND ADMINISTRATIVE COSTS OF $52,958, AND STOCK COMPENSATION EXPENSE OF
$11,068.
</FN>
</TABLE>
