<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
TO
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
Commission file number 0-14016
MAXTOR CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0123732
(State of incorporation) (IRS Employer Identification Number)
</TABLE>
510 Cottonwood Drive
Milpitas, California 95035
(408) 432-1700
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE
Securities registered pursuant to Section 12(g) of the Act: 5.75% CONVERTIBLE
SUBORDINATED
DEBENTURES, DUE
MARCH 1, 2012
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of June 27, 1998, 88,059,701 shares of the registrant's Series A
Preferred Stock, $.01 par value, and 445,148 shares of the registrant's Common
Stock, $.01 par value, were outstanding, respectively. As of such date, all of
the outstanding shares of Series A Preferred Stock were held by the parent of
the registrant, all outstanding shares of Common Stock were issued to employees
of registrant pursuant to either its stock option plan or its restricted stock
plan, and there was no public market for the Company's equity securities.
<PAGE> 2
MAXTOR CORPORATION
FORM 10-Q/A
MARCH 28, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <C> <C>
Condensed Consolidated Balance Sheets -
March 28, 1998 and December 27, 1997 3
Condensed Consolidated Statements of Operations -
Three months ended March 28, 1998, and March 29, 1997 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 28, 1998, and March 29, 1997 5-6
Notes to Condensed Consolidated Financial Statements 7-10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
2
<PAGE> 3
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 27, MARCH 28,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,925 $ 13,305
Accounts receivable, net of allowance for doubtful
accounts of $3,573 at December 27, 1997 and $3,238 at
March 28, 1998......................................... 241,777 312,978
Accounts receivable from affiliates....................... 5,870 5,417
Inventories............................................... 155,312 163,974
Prepaid expenses and other................................ 20,814 34,466
--------- ---------
Total current assets.............................. 440,698 530,140
Net property, plant and equipment........................... 99,336 96,547
Other assets................................................ 15,438 7,881
--------- ---------
$ 555,472 $ 634,568
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings, including current portion of
long-term debt......................................... $ 100,057 $ 76,159
Short-term borrowings due to affiliates................... 65,000 55,000
Accounts payable.......................................... 206,563 291,393
Accounts payable to affiliates............................ 25,022 39,110
Accrued and other liabilities............................. 155,563 173,502
--------- ---------
Total current liabilities......................... 552,205 635,164
Long-term debt and capital lease obligations due after one
year...................................................... 224,313 219,320
--------- ---------
Total liabilities........................................... 776,518 854,484
Commitments and contingencies (Note 8)
Stockholders' deficit:
Series A Preferred Stock, $0.01 par value, 95,000,000
shares authorized; 88,059,701 issued and
outstanding at December 27, 1997 and March 28, 1998;
aggregate liquidation value $590,000 at December 27,
1997, and March 28, 1998............................... 880 880
Common Stock, $0.01 par value, 250,000,000 shares
authorized; 7,563 shares issued and outstanding
at December 27, 1997 and March 28, 1998................ -- --
Additional paid-in capital.................................. 534,765 537,090
Cumulative other comprehensive income -- unrealized gain on
investments in equity securities.......................... 16,262 25,386
Accumulated deficit......................................... (772,953) (783,272)
--------- ---------
Total stockholders' deficit....................... (221,046) (219,916)
--------- ---------
$ 555,472 $ 634,568
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 29, MARCH 28,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenue........................... $238,042 $ 545,231
Revenue from affiliates........... 8,966 4,386
-------- ----------
Total revenue................ 247,008 549,617
Cost of revenue................... 245,862 483,798
Cost of revenue from affiliates... 8,254 3,564
-------- ----------
Total cost of revenue........ 254,116 487,362
Gross profit (loss)............... (7,108) 62,255
-------- ----------
Operating expenses:
Research and development........ 26,394 33,372
Selling, general and
administrative............... 15,061 15,923
Stock compensation expense...... -- 14,696
-------- ----------
Total operating expenses..... 41,455 63,991
-------- ----------
Loss from operations.............. (48,563) (1,736)
Interest expense.................. (7,927) (8,768)
Interest and other income......... 1,781 274
-------- ----------
Loss before income taxes.......... (54,709) (10,230)
Provision for income taxes........ 277 89
-------- ----------
Net loss.......................... (54,986) (10,319)
-------- ----------
Other comprehensive income:
Unrealized gain on investments in
equity securities............... -- 9,124
-------- ----------
Comprehensive loss................ $(54,986) $ (1,195)
======== ==========
Net loss per share -- basic and
diluted (Note 1)................ $ -- $(1,364.41)
Shares used in per share
calculation -- basic and
diluted......................... -- 7,563
</TABLE>
See accompanying notes.
4
<PAGE> 5
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
MARCH 29, MARCH 28,
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(54,986) $(10,319)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 11,736 15,756
Stock compensation expense................................ -- 14,696
Loss (gain) on disposal of property, plant and
equipment............................................... (492) 1,312
Other..................................................... (215) --
Changes in assets and liabilities:
Accounts receivable..................................... (43,873) (64,909)
Accounts receivable from affiliates..................... 2,687 2,778
Inventories............................................. (6,926) (8,662)
Prepaid expenses and other assets....................... 950 (4,528)
Accounts payable........................................ 7,525 75,911
Accounts payable to affiliates.......................... 2,968 14,088
Accrued and other liabilities........................... (1,968) (2,482)
-------- --------
Total adjustments........................................... (27,608) 43,960
-------- --------
Net cash provided by (used in) operating activities......... (82,594) 33,641
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment................. (8,789) (8,332)
Proceeds from disposals of property, plant and
equipment............................................... -- 2,972
Other assets.............................................. (2,729) 7,038
-------- --------
Net cash provided by (used in) investing activities....... (11,518) 1,678
-------- --------
Cash flows from financing activities:
Proceeds from issuance of debt, including short-term
borrowings.............................................. 120,000 29,904
Principal payments on debt, including short-term debt..... (34) (68,795)
Net payments under accounts receivable securitization..... (37,804) (48)
-------- --------
Net cash provided by (used in) financing activities....... 82,162 (38,939)
-------- --------
Net decrease in cash and cash equivalents................. (11,950) (3,620)
Cash and cash equivalents at beginning of period.......... 31,313 16,925
-------- --------
Cash and cash equivalents at end of period................ $ 19,363 $ 13,305
======== ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest.................................................. $ 5,512 $ 6,272
Income taxes.............................................. 153 298
Supplemental information on noncash investing and financing
activities:
Purchase of property, plant and equipment financed by
accounts payable.......................................... 17,275 8,919
Purchase of property, plant and equipment financed by
capital leases............................................ 142 13
Unrealized gain on equity securities........................ -- 9,124
Stock compensation reimbursement due from an affiliate...... -- 2,325
</TABLE>
See accompanying notes.
5
<PAGE> 6
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated financial
statements include the accounts of Maxtor Corporation (Maxtor or the Company)
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation. Maxtor Corporation operates as a
majority-owned subsidiary of Hyundai Electronics America ("HEA"). All
adjustments of a normal recurring nature which, in the opinion of management,
are necessary for a fair statement of the results for the interim periods have
been made. It is recommended that the interim financial statements be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended December 27, 1997 incorporated in the
Company's annual report on Form 10K/A. Interim results are not necessarily
indicative of the operating results expected for later quarters or the full
fiscal year.
NET LOSS PER SHARE
Net loss per share has been computed in accordance with SFAS 128. Basic net
loss per share is computed using the weighted average common shares outstanding
during the period. Diluted net 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 all periods presented since their effect
would be anti-dilutive due to the Company's net losses. Net loss per share
information presented for the year ended December 27, 1997 and three months
ended March 28, 1998 (unaudited) is not meaningful due to the very limited
number of common shares outstanding during such periods.
2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
December 27, 1997 March 28, 1998
----------------- --------------
Inventories:
Raw materials.......................... $ 48,834 $ 45,323
Work-in-process........................ 15,177 15,064
Finished goods......................... 91,301 103,587
------- -------
$155,312 $163,974
======= =======
6
<PAGE> 7
3. SHORT-TERM BORROWINGS
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. Under this program, the
Company could sell its qualified trade accounts receivable up to $100 million on
a non-recourse basis. The face amount of the eligible receivables are discounted
based on the Corporate Receivables Corporation commercial paper rate, 5.85% as
of December 27, 1997 and 5.60% as of March 28, 1998 (unaudited) plus commission
and is subject to a 10% retention. As of March 28, 1998, $86.6 million in sales
of accounts receivable were included in accounts receivable and $86.6 million in
collections of accounts receivable not yet remitted were included in accrued and
other liabilities (unaudited). 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. Continuance of the New Program is subject to certain
conditions, including a condition that all of the long-term public senior debt
securities of Hyundai Heavy Industries, Inc. ("HHI") 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 those conditions subsequent within 30 days of receiving
undertaking documents from Citicorp and presently believes that it will be able
to successfully satisfy these conditions. The Company has begun negotiations
with respect to a $200 million asset securitization program which does not
require any support from HEA or any of its affiliates. The Company believes it
will be able to close this program and terminate its existing program by July
31, 1998. In addition, the Company is exploring alternatives to establish a
replacement revolving credit facility which does not require any support from
HEA or any of its affiliates. Failure of the Company to close the replacement
asset securitization program or obtain alternative financing would have a
material adverse impact on the Company's business, financial condition and
results of operations.
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 its Singapore
facility. This credit facility is guaranteed by HEI and all outstanding amounts
of principal and accrued interest were payable on January 30, 1998. In January
1998, this facility was retired and all principal and interest owed under this
facility have been paid.
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. All outstanding amounts of principal and
accrued interest were due and payable on April 10, 1998. In March 1998 this line
was reduced to $100.0 million and as of March 28, 1998, $55.0 million was
outstanding under this facility (unaudited). The Company and HEA have agreed
to replace the Company's revolving line of credit from HEA, which has
the outstanding principal balance of $55 million, with a long-term,
subordinated rate in the same principal amount.
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 percent. As of March 28,
1998, $129.0 million of borrowings under this line were outstanding (unaudited).
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 29, 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 percent. As of March 28, 1998, $31.0 million of borrowings under
this line of credit were outstanding (unaudited).
The Company has credit facilities amounting to $50.8 million in the aggregate
from three banks. The facilities, which are guaranteed by HEI, are used
primarily for general operating purposes and bear interest at rates ranging from
6.27 percent to 7.88 percent. In January 1998 one $10.0 million facility was
retired and all principal owing has been paid. As of March 28, 1998, $40.0
million of borrowings under these lines of credit were outstanding (unaudited).
HEI is the guarantor of $170.0 million outstanding under the Company's credit
facilities as of December 27, 1997, and March 28, 1998 (as amended). 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 will
constitute 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 March 28, 1998 (unaudited) not guaranteed by HEI.
The Company has requested any necessary waivers and although there can be no
such assurance, the Company believes that such waivers can be obtained. The
Company has a commitment from an affiliated company to provide a long-term
facility in the event the waivers are not successfully obtained. Consequently,
the Company has not reclassified 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. As of June 27, 1998, aggregate
indebtedness of $170.0 million under the revolving credit facilities was
guaranteed by HHI (unaudited).
Under the terms of the Company's lines of credit facilities, the Company may not
declare or pay any dividends without the prior consent of its lenders.
7
<PAGE> 8
4. CONTINGENCIES
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 then President of the Company 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 Defendants and
negligent misrepresentation against HEI and the Company (the "California Suit").
On May 18, 1998, the stay on the Colorado Suit was lifted by the Colorado state
court. The Company's motion to dismiss, or in the alternative, stay the
California Suit, is pending.
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 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
condition 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 adverse effect on the Company's
business, financial condition or results of operations. No amounts related to
any claims or actions have been reserved in the Company's financial statements.
8
<PAGE> 9
5. ADOPTION OF ACCOUNTING PRONOUNCEMENT
During the quarter ended March 28, 1998 the Company adopted the Financial
Accounting Standards Board Statement SFAS No. 130, "Reporting Comprehensive
Income." In accordance with SFAS No. 130 the Company has disclosed
comprehensive income and restated the prior periods. Comprehensive income
generally represents all changes in stockholders' equity except those resulting
from investments or contributions by stockholders.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial accounting Standards Board issued Statement
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. The Company is evaluating the
requirements of SFAS No. 131 and the effects, if any on the Company's current
reporting and disclosure.
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 of operations, financial position or cash
flows.
7. RELATED PARTY TRANSACTIONS
HEI has guaranteed certain debts of the Company (Note 3) and has committed
to provide the 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 $27.6 million during the three months ended
March 28, 1998(unaudited).
9
<PAGE> 10
8. STOCK COMPENSATION
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
period with 25% vesting on 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
certain features 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
recorded compensation expense related to the difference between the estimated
fair market value of its stock as of March 28, 1998 (unaudited) and the stated
value 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."
PART II - OTHER INFORMATION
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future, are forward-looking statements
including those discussed in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Results of Operations",
"Liquidity and Capital Resources" and "Certain Factors Affecting Future
Performance"; and elsewhere in this report. In this report, the words
"anticipates," "believes," "expects," "intends," "future" and similar
expressions also identify forward-looking statements. The Company makes these
forward-looking statements based upon information available on the date hereof,
and assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from those anticipated in this
report as a result of certain factors including those set forth in this report.
Maxtor-Registered Trademark-is a registered trademark and DiamondMax-TM-,
and Formula 4-TM- are trademarks of Maxtor Corporation. All other brand names
and trademarks appearing in this Report are the property of their respective
holders.
ITEM 1. LEGAL PROCEEDINGS
STORMEDIA LITIGATION
(PLEASE REFER TO NOTE 3 TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINGENCIES)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH PART I - FINANCIAL
INFORMATION.
11
<PAGE> 11
Three months ended March 29, 1997 compared to three months ended March 28, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 29, MARCH 28,
1997 1998
------------ -------------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 247.0 $ 549.6
Cost of revenue............................................. 254.1 487.3
------------ -------------
Gross profit (loss).................................... (7.1) 62.3
------------ -------------
Operating expenses:
Research and development.................................. 26.4 33.4
Selling, general and administrative....................... 15.1 15.9
Stock compensation expense................................ -- 14.7(1)
------------ -------------
Total operating expenses............................... 41.5 64.0(1)
------------ -------------
Loss from operations........................................ (48.6) (1.7)(1)
Interest expense............................................ (7.9) (8.8)
Interest and other income................................... 1.8 0.3
Loss before income taxes.................................... (54.7) (10.2)(1)
Provision for income taxes.................................. 0.3 0.1
------------ -------------
Net loss.................................................... $ (55.0) $ (10.3)(1)
============ =============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 29, MARCH 28,
1997 1998
------------ -------------
<S> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue..................................................... 100.0% 100.0%
Cost of revenue............................................. 102.9 88.7
------------ -------------
Gross profit (loss).................................... (2.9) 11.3
------------ -------------
Operating expenses:
Research and development.................................. 10.7 6.0
Selling, general and administrative....................... 6.1 2.9
Stock compensation expense................................ -- 2.7(1)
------------ -------------
Total operating expenses............................... 16.8 11.6(1)
------------ -------------
Loss from operations........................................ (19.7) (0.3)(1)
Interest expense............................................ (3.2) (1.7)
Interest and other income................................... 0.7 0.1
------------ -------------
Loss before income taxes.................................... (22.2) (1.9)(1)
Provision for income taxes.................................. 0.1 --
------------ -------------
Net loss.................................................... (22.3) (1.9)(1)
============ =============
</TABLE>
- ---------------
(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 the variable accounting features of the
Company's Option Plan. Without such charge, the Company 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. The Option Plan has been amended and restated to remove the
variable features and provide for fixed award options.
Revenue. Between the first quarter of 1997 and the first quarter of 1998,
the Company's revenue grew by 122.5%, increasing from $247.0 million in the
first quarter of 1997 to $549.6 million the first quarter of 1998. This increase
in revenue is attributable primarily to an increase in unit shipments arising
from improved time-to-market entry and time-to-volume production and a shift in
the Company's customer base to PC OEMs. Revenue growth from increased unit
shipments was partially offset by continued rapid price erosion in the
12
<PAGE> 12
HDD market as a whole, which resulted in declining ASPs throughout the period.
The Company believes that the effect of HDD market ASP declines on the Company's
ASPs was contained partially by the Company's improved time-to-market entry and
time-to-volume production and by a Company trend toward shipping higher-capacity
HDDs, which tend to have higher initial ASPs.
From the first quarter of 1997 to the first quarter of 1998, revenue from
sales to PC OEMs increased from 54.5% to 75.8% of the Company's revenue. During
this period, sales to three of the largest PC OEMs, Compaq, Dell and IBM,
increased from 24.0% to 51.8% of the Company's revenue.
Gross Profit (Loss). Gross profit (loss) improved from a loss of $7.1
million in the first quarter of 1997 to a profit of $62.3 million in the first
quarter of 1998. Gross margin increased from (2.9)% in the first quarter of 1997
to 11.3% in the first quarter of 1998. The improvement in gross margin is due to
the timely introduction of new, higher 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 the Company's gross margin, however, was
constrained partially by continued rapid price erosion in the HDD market as a
whole, which resulted in declining ASPs for the Company's products. See
"Relationship Between the Company and Hyundai -- Purchases from Affiliates."
Operating Expenses.
Research and Development Expense. R&D expense as a percentage of revenue
decreased from 10.7% in the first quarter of 1997 to 6.0% in the first quarter
of 1998, while the absolute dollar level of R&D spending during the same periods
increased from $26.4 million to $33.4 million. This increase was due to the
Company's efforts to develop new products for the desktop PC market and future
products in other HDD market segments.
Selling, General and Administrative Expense. SG&A expense as a
percentage of revenue declined from 6.1% in the first quarter of 1997 to 2.9%
during the first quarter of 1998, while the absolute dollar level of SG&A
expenses was relatively flat at $15.1 million and $15.9 million, respectively.
The decrease in SG&A expenses as a percentage of revenue between these periods
was due to the increase in the Company's revenues combined with the Company's
ongoing cost control efforts.
Stock Compensation Expense. In 1996 the Company adopted the Option Plan,
pursuant to which substantially all of the Company's domestic employees and
certain international employees received options which were required to be
accounted for as variable options. As a consequence, the Company recorded a non-
cash compensation expense of $14.7 million in the first quarter of 1998, related
to the difference between the estimated fair market value of its stock as of
March 28, 1998 and the exercise price of the options granted under the Option
Plan between May 1996 and October 1997. If this expense were not incurred in the
first quarter of 1998, the Company would have realized net income of $4.4
million for the first quarter. In the second quarter of 1998, the Company
amended and restated the Option Plan to remove the features which resulted in
variable accounting.
Interest Expense. Interest expense as a percentage of revenue declined from
3.2% in the first quarter of 1997 to 1.7% in the first quarter of 1998, while
the absolute dollar level of interest expense increased from $7.9 million in the
first quarter of 1997 to $8.8 million in the first quarter of 1998. The increase
in the absolute dollar amount of the Company's interest expense between the
first quarter of 1997 and the first quarter of 1998 was, due, in part, to higher
interest rates applied to the Company's intercompany loan from HEA and bank
credit facilities, in each case as a result of the higher cost of borrowing
resulting from changes in the economic environment in Korea. The Company had
$274.8 million of short-term and $224.1 million of long-term credit borrowings
outstanding at March 29, 1997, as compared to $130.9 million of short-term and
$219.0 million of long-term credit borrowings outstanding at March 28, 1998.
Interest and Other Income. Interest and other income declined from $1.8
million to $0.3 million between the first quarter of 1997 and the first quarter
of 1998. The higher rate of interest income in the first quarter of 1997
resulted from the recovery of a $1.3 million fully-reserved note issued to the
Company by SDI.
13
<PAGE> 13
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
HISTORY OF OPERATING AND NET LOSSES; ACCUMULATED DEFICIT
During each of the 19 consecutive quarters ended September 27, 1997, the
Company 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, primarily as a result of delayed product introductions, product
performance and quality problems, low manufacturing yields and under-utilization
of manufacturing capacity, high operating expenses and overall market conditions
in the HDD industry, including fluctuations in demand and declining average
selling prices ("ASPs"). As of December 27, 1997, the Company had a
stockholders' deficit of approximately $663.1 and as of June 27, 1998, the
Company had a stockholders' deficit of approximately $777.9 million. While the
Company achieved operating profits and positive net income for the quarter ended
December 27, 1997, it recorded operating and net losses for the fiscal year
ended December 27, 1997. There can be no assurance that the factors that led to
the Company's history of operating losses have been overcome or that the Company
will achieve profitability on either an operating or net income basis in any
future quarterly or annual periods. Consequently, recent operating results
should not be considered indicative of future financial performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; AVERAGE SELLING PRICE EROSION;
MANAGEMENT OF GROWTH
The Company has experienced, and expects to continue to experience,
fluctuations in sales and operating results from quarter-to-quarter. As a
result, the Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful, and that such comparisons cannot be
relied upon as indicators of future performance. The Company's operating results
may be subject to significant quarterly fluctuations as a result of a number of
factors, including: (i) the Company's ability to be among the first-to-volume
production with competitive products; (ii) fluctuations in HDD product demand as
a result of the cyclical and seasonal nature of the personal computer ("PC")
industry; (iii) the availability and extent of utilization of manufacturing
capacity; (iv) changes in product or customer mix; (v) entry of new competitors;
(vi) the complex and difficult process of qualifying the Company's products with
its customers; (vii) cancellation or rescheduling of significant orders; (viii)
deferrals of customer orders in anticipation of new products or enhancements;
(ix) the impact of price protection measures and return privileges granted by
the Company to certain distributors and retailers; (x) component and raw
material costs and availability, particularly with respect to components
obtained from sole or limited sources; (xi) the availability of adequate capital
resources; (xii) increases in research and development expenditures to maintain
the Company's competitive position; (xiii) changes in the Company's strategy;
(xiv) personnel changes; and (xv) other general economic and competitive
factors. Moreover, since a large portion of the Company's operating expenses,
including rent, salaries, capital lease and debt payments and equipment
depreciation, are relatively fixed and difficult to reduce or modify, the
adverse effect of any decrease in revenue as a result of fluctuations in product
demand or
<PAGE> 14
otherwise will be magnified by the fixed nature of such operating expenses and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the HDD industry is characterized by rapidly declining ASPs
over the life of a product even for those products which are competitive and
timely-to-market. The Company anticipates that this market characteristic will
continue for the foreseeable future. In general, the ASP for a given product in
the desktop HDD market decreases over time as increases in the supply of
competitive products and cost reductions occur and as technological advancements
are achieved. The rate of ASP decline accelerates when, as is currently the case
in the HDD industry, some competitors lower prices to absorb excess capacity,
liquidate excess inventories, restructure or attempt to gain market share. The
Company expects ASPs to continue to decline for the second quarter of 1998 and
the remainder of the year. This continuing price erosion could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In July 1996, the Company began to modify its management and operational
structures. From the first quarter of 1997 to the first quarter of 1998, the
Company's timely introduction and volume production of competitive products
resulted in quarterly revenue growth. Such restructuring activities and revenue
growth placed and are expected in the future to place a significant strain on
the Company's personnel and resources. The Company's ability to maintain the
advantages of the restructuring and to manage future growth, if any, will depend
on its ability to: (i) continue to implement and improve its operational,
financial and management information and control systems on a timely basis; (ii)
hire, train, retain and manage an expanding employee base; and (iii) maintain
effective cost controls, all while being among the first-to-volume production
with competitive products. The inability of the Company's management to maintain
the advantages of the restructuring, to manage future growth effectively and to
continue to be among the first-to-volume production with competitive products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
See "-- Risks of Failed Execution; Changing Customer Business Models" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS OF FAILED EXECUTION; CHANGING CUSTOMER BUSINESS MODELS
PC original equipment manufacturers ("OEMs") compete in a market that is
consolidating market share among the top ten PC OEMs, which accounted for
greater than 50% of all PC units shipped during 1997 and the first six months of
1998. A majority of the Company's HDDs are sold to PC OEMs, which accounted for
72.2% of the Company's revenues for the second quarter of 1998. The process of
qualifying the Company's products with these PC OEM customers can be complex and
difficult. These PC OEMs use the quality, storage capacity and performance
characteristics of HDDs to select their HDD providers. PC OEMs typically seek to
qualify three or four providers for a given HDD product generation. To qualify
consistently with PC OEMs and thus succeed in the desktop HDD industry, an HDD
provider must consistently execute on its product development and manufacturing
processes in order to be among the first-to-market entry and first-to-volume
production at leading storage capacity per disk with competitive prices. Once a
PC OEM has chosen its qualified HDD vendors for a given PC product, it generally
will purchase HDDs from those vendors for the life of that product. If a
qualification opportunity is missed, the Company may not have another
opportunity to do business with that PC OEM until the next generation of the
Company's products is introduced. The effect of missing a product qualification
opportunity is magnified by the limited number of high volume PC OEMs. Failure
to reach the market on time or to deliver timely volume production usually
results in significantly decreased gross margins due to rapidly declining ASPs
and dramatic losses in market share. Failure to obtain significant PC OEM
customer qualifications for new or existing products in a timely manner would
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition to developing and qualifying new products, the Company must
address the increasingly changing and sophisticated business needs of its
customers. For example, PC OEMs and other PC suppliers are starting to adopt
build-to-order manufacturing models which reduce their component inventories and
related costs and enable them to tailor their products more specifically to the
needs of their customers. Various PC OEM customers also are considering or have
implemented a "channel assembly" model in which the PC OEM ships a minimal
computer system to the dealer or other assembler, and component suppliers
(including
<PAGE> 15
HDD manufacturers such as the Company) ship parts directly to the dealer or
other assembler for installation at its location. Finally, certain PC suppliers
have adopted just-in-time inventory management processes which require component
suppliers to maintain inventory at or near the PC supplier's production
facility. Together, these changing models increase the Company's capital
requirements and costs, complicate the Company's inventory management
strategies, and make it more difficult to match manufacturing plans with
projected customer demand, thereby increasing the risk of inventory obsolescence
and ASP erosion as a result of later shipments to customers. The Company's
failure to manage its manufacturing output or inventory in response to these new
customer demands and other similar demands that may arise in the future as
customers further change their ordering and assembly models could lead to a
decline in the demand for the Company's products and a loss of existing or
potential new customers and could have a material adverse effect on the
Company's business, financial condition and results of operations.
See "-- Customer Concentration" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
HIGHLY COMPETITIVE INDUSTRY
Although the Company's share of the desktop HDD market has increased
steadily since the first quarter of 1997, this market segment and the HDD market
in general are 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 ASPs.
Consequently, there can be no assurance that the Company will be able to improve
on, or prevent the erosion of, the Company's present share of the desktop HDD
market.
The Company competes primarily with manufacturers of 3.5-inch HDDs,
including Fujitsu Limited ("Fujitsu"), Quantum Corporation ("Quantum"), Samsung
Company Limited ("Samsung"), Seagate Technology, Inc. ("Seagate") and Western
Digital Corporation ("Western Digital"), many of which have a larger share of
the desktop HDD market than the Company. Other companies, such as International
Business Machines Corporation ("IBM"), will be significant competitors of the
Company in one or more of the markets into which the Company plans to expand its
product portfolio, and could be significant competitors of the Company in its
current market should they choose to commit significant resources to providing
desktop HDDs.
Most of the Company's competitors offer a broader array of product lines
and have significantly greater financial, technical, manufacturing and marketing
resources than the Company. Unlike the Company, certain of the Company's
competitors manufacture a significant number of the components used in their
HDDs and thus may be able to achieve significant cost advantages over the
Company. Certain competitors have preferred vendor status with many of the
Company's customers, extensive marketing power and name recognition, and other
significant advantages over the Company. In addition, such competitors may
determine, for strategic reasons or otherwise, to consolidate, lower the prices
of their products or bundle their products with other products. The Company's
competitors have established and may in the future establish financial or
strategic relationships among themselves or with existing customers, resellers
or other third parties. New competitors or alliances could emerge and rapidly
acquire significant market share.
The Company believes that important competitive factors in the HDD market
are quality, storage capacity, performance, price, time-to-market entry,
time-to-volume production, PC OEM product qualifications, breadth of product
lines, reliability, and technical service and support. The Company believes it
generally competes favorably with respect to these factors. The failure of the
Company to develop and market products that compete successfully with those of
other suppliers in the HDD market would have a material adverse effect on the
Company's business, financial condition and results of operations.
FLUCTUATION IN PRODUCT DEMAND; FOCUS ON SINGLE MARKET
The Company presently offers a single product family which is designed for
the desktop PC segment of the HDD industry. The demand for the Company's HDD
products is therefore dependent to a large extent on
<PAGE> 16
the overall market for desktop PCs which, in turn, is dependent on PC life
cycles, demand by end-users for increased PC performance and functionality at
lower prices (including increased storage capacity), availability of substitute
products, including laptop PCs, and overall foreign and domestic economic
conditions. The desktop PC and HDD markets are characterized by periods of rapid
growth followed by periods of oversupply, and by rapid price and gross margin
erosion. This environment makes it difficult for the Company and its PC OEM
customers to reliably forecast demand for the Company's products. The Company
does not enter into long-term supply contracts with its PC OEM customers, and
such customers often have the right to defer or cancel orders with limited
notice and without significant penalty. If demand for desktop PCs falls below
the customers' forecasts, or if customers do not manage inventories effectively,
they may cancel or defer shipments previously ordered from the Company.
Moreover, while there has been significant growth in the demand for desktop PCs
over the past several years, according to International Data Corporation
("IDC"), the growth rate in the desktop PC market has slowed in recent quarters.
Because of the Company's reliance on the desktop segment of the PC market, the
Company will be more strongly affected by changes in market conditions for
desktop PCs than would a company with a broader range of products. Any decrease
in the demand for desktop PCs could lead in turn to a decrease in the demand for
the Company's HDD products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Although the desktop PC segment is currently the largest segment of the HDD
market, the Company believes that over time, market demand may shift to other
market segments that may experience significantly faster growth. In addition,
the Company believes that to remain a significant provider of HDDs to major PC
OEMs, the Company will need to offer a broader range of HDD products for the
existing and new product categories of its PC OEM customers. For these reasons,
the Company will need to develop and manufacture new products which address
additional HDD market segments and emerging technologies to remain competitive
in the HDD industry. Examples of potentially important market segments that the
Company's current products are not positioned to address include: (i) the
client-server market, which may continue to grow in part as a result of the
emerging market trend toward "network computers" (which utilize central servers
for data storage and thereby reduce the need for desktop storage); (ii) lower
cost (typically below $1,000), lower performance PC systems principally for the
consumer marketplace; and (iii) laptop PCs. Significant technological innovation
and re-engineering will be required for the Company to produce products that
effectively compete in these and other new or growing segments of the HDD
market, and there can be no assurance that the Company will be able to design or
produce such new products on a timely or cost-effective basis, if at all, while
maintaining the required product quality or that such products or other future
products will attain market acceptance. Certain of the Company's competitors
have significant advantages over the Company in one or more of these and other
potentially significant new or growing market segments.
See "-- Highly Competitive Industry," "-- Customer Concentration" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT
The HDD industry is characterized by rapid technological change, rapid
rates of product and technology obsolescence, changing customer requirements,
dramatic shifts in market share and significant erosion of ASPs, any of which
may render the Company's products obsolete. The Company's future results of
operations will depend on its ability to enhance current products and to develop
and introduce volume production of new competitive products on a timely and
cost-effective basis. To succeed, the Company also must keep pace with and
correctly anticipate technological developments and evolving industry standards
and methodologies.
Both in the desktop HDD market for which the Company's current products are
designed and in any other HDD market segments in which the Company may compete
in the future, advances in magnetic, optical or other technologies, or the
development of entirely new technologies, could result in the creation of
competitive products that have better performance and/or lower prices than the
Company's products. Examples of such new technologies include "giant
magneto-resistive" ("GMR") head technology (which already has been introduced by
IBM and which Western Digital reportedly will use in its products pursuant to an
agreement with IBM) and optically-assisted recording technologies (which
currently are being developed by companies such as TeraStor Corporation and
Seagate). Currently, the Company intends to incorporate
<PAGE> 17
GMR head technology into future products and is evaluating the various
approaches to and timing of such a transition. The Company has decided not to
pursue optically-assisted recording technologies at this time.
There can be no assurance that the Company's existing markets will not be
eroded by technological developments; that the Company will be successful in
developing, manufacturing and marketing product enhancements or new products
that respond to and anticipate technological change, such as the transition to
GMR head technology and changing customer requirements; or that its new products
and product enhancements will be introduced or manufactured in volume on a
timely basis and will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. Inability to introduce or
achieve volume production of competitive products on a timely basis has in the
past and could in the future have a material adverse effect on the Company's
business, financial condition and results of operations.
Unlike some of its competitors, the Company does not manufacture any of the
components used in its HDDs, including key components such as heads, disks and
PCBs. The Company's product development process therefore involves incorporating
components designed by and purchased from third party suppliers. As a
consequence, the success of the Company's products is in great part dependent on
the Company's ability to gain access to and integrate components which utilize
leading-edge technology. The successful management of these integration projects
depends on the timely availability and quality of key components, the
availability of appropriately skilled personnel, the ability to integrate
different products from a variety of vendors effectively, and the management of
difficult scheduling and delivery problems. There can be no assurance that the
Company will be able to manage successfully the various complexities encountered
in integration projects. The Company's success will depend in part on its
relationships with key component suppliers, and there can be no assurance that
such relationships will develop, that the Company will identify the most
advantageous suppliers with which to establish such relationships, or that
existing or future relationships with component suppliers will continue for any
significant time period.
See "-- Dependence on Suppliers of Components and Sub-Assemblies" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
TRANSITION TO AND DEPENDENCE ON INFORMATION SYSTEMS; YEAR 2000 PROBLEM
The Company is preparing to implement the SAP System provided by SAP, AG
("SAP"), in the fourth quarter of 1998. The SAP System is designed to automate
more fully the Company's business processes and will affect most of the
Company's functional areas including, without limitation, finance, procurement,
inventory control, collections, order processing and manufacturing, and its
implementation will require certain upgrades in the Company's existing computer
hardware systems. Historically, there have been substantial delays in the
implementation of such systems at other companies. Unlike most companies, which
implement new information systems in stages over time, the Company has chosen to
install and activate the SAP System across most functional areas of the Company
simultaneously. The Company believes it is among the first to undertake such a
broad, simultaneous implementation of the SAP System. This approach may
substantially increase the risk of delay or failure in the SAP System's
implementation.
Implementation of the SAP System will be complex, expensive and time
intensive and its successful implementation could be adversely affected by
various factors including: (i) any failure to provide adequate training to
employees; (ii) any failure to retain skilled members of the implementation team
or to find suitable replacements for such personnel; (iii) the scope of the
implementation plan being expanded by unanticipated changes in the Company's
business; (iv) any inability to extract data from the Company's existing
information system and convert that data into a format that can be accepted by
the SAP System; (v) any failure to devise and run appropriate testing procedures
that accurately reflect the demands that will be placed on the SAP System
following its implementation; and (vi) any failure to develop and implement
adequate fall-back procedures in the event that difficulties or delays arise
during the initial start-up phase of the SAP System.
In connection with the implementation of the SAP System, the Company may
experience functional and performance problems, including problems relating to
the SAP System's response time and data integrity. In
<PAGE> 18
addition, resolution of any such problems could entail additional costs.
Moreover, as a result of the Company's simultaneous implementation approach, the
Company will not have an operational backup information system in the event of a
failure of the SAP System. There can be no assurance that the Company will be
able to implement the SAP System successfully on a timely and cost effective
basis or that the SAP System will not fail or prove to be unsuitable for the
Company's needs. The inability of the Company to implement or resolve problems
with the SAP System in a timely manner could have a material adverse effect on
the Company's business, financial condition and results of operations. No
amounts have been accrued in the Company's consolidated financial statements
included elsewhere in this Prospectus for any probable expenses or lost revenue
that could result from problems in implementing the SAP System.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. 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. As a result, in less
than two years, computer systems and/or software used by many companies,
including Maxtor, will need to be upgraded to comply with such "Year 2000"
requirements. Because of the Company's change in its fiscal year end in 1996,
the Company's current information systems will need to be upgraded by January
1999 to avoid Year 2000 problems. While the SAP System is expected to resolve
this potential problem, there can be no assurance that the SAP System can be
implemented successfully and on a timely basis. Moreover, the Company could be
adversely impacted by Year 2000 issues faced by major distributors, suppliers,
customers, vendors and financial service organizations with which the Company
interacts. Any disruption in the Company's operations as a result of Year 2000
noncompliance, whether by the Company or a third party, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
See "-- Control by and Dependence on Hyundai" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON AND INTEGRATION OF KEY PERSONNEL; HIRING ADDITIONAL SKILLED
PERSONNEL
The Company's success depends upon the continued contributions of its key
management, engineering and other technical personnel many of whom, and in
particular Michael R. Cannon, the Company's President and Chief Executive
Officer, would be extremely difficult to replace. The Company does not have
employment contracts with any of its key personnel other than Mr. Cannon; Paul
J. Tufano, its Vice President, Finance and Chief Financial Officer; William F.
Roach, its Senior Vice President, Worldwide Sales and Marketing; Dr. Victor B.
Jipson, its Senior Vice President, Engineering; Phillip C. Duncan, its Vice
President, Human Resources; and K.H. Teh, its Vice President, Worldwide
Manufacturing. Furthermore, the Company does not maintain key person life
insurance on any of its personnel. In addition, the majority of the Company's
senior management and a significant number of its other employees have been with
the Company for less than two years. The Company's inability to retain its
existing personnel and effectively manage the integration of new personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
To maintain its current market position and support future growth, the
Company will need to hire, train, integrate and retain significant numbers of
additional highly skilled managerial, engineering, manufacturing, sales,
marketing, support and administrative personnel. Competition worldwide for such
personnel is extremely intense, and there can be no assurance that the Company
will be able to attract and retain such additional personnel. The Company
believes that certain competitors recently have made targeted efforts to recruit
personnel from the Company, and such efforts have resulted in the Company losing
some skilled managers. There can be no assurance that such personnel losses will
not continue or increase in the future. Delays in hiring or the inability to
hire, train, integrate or retain required personnel, particularly engineers,
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, companies in the HDD industry
whose employees accept positions with competitive companies frequently claim
that their competitors have engaged in unfair hiring practices. There can be no
assurance that the Company will not receive such claims in the future as it
seeks to hire qualified personnel or that such claims will not involve the
Company in litigation. Consequently, the Company could incur substantial costs
in defending itself against any such claims, regardless of their merits.
<PAGE> 19
CONTROL BY AND DEPENDENCE ON HYUNDAI
HEA owns approximately 99.8% of the shares of the outstanding Common Stock.
Five out of the seven members of the Company's Board of Directors (the "Board")
are currently employees of HEA or one of its affiliates. After HEA owns less
than a majority of the Company's voting stock, HEA will have the contractual
right to designate one person for nomination to serve as a director in each of
the three classes of the Board. Accordingly, HEA will be able to influence or
control major decisions of corporate policy and to determine the outcome of any
major transaction or other matter submitted to the Company's stockholders or
directors, including borrowings, issuances of additional Common Stock and other
securities of the Company, the declaration and payment of any dividends on
Common Stock, potential mergers or acquisitions involving the Company,
amendments to the Company's Amended and Restated Certificate of Incorporation
(the "Amended and Restated Certificate of Incorporation") and Bylaws (the
"Bylaws") and other corporate governance issues. In particular, the affirmative
vote of two-thirds of the outstanding voting stock is required to approve
certain types of amendments to the Amended and Restated Certificate of
Incorporation. Consequently, HEA will be able to block approval of any such
amendments that may be proposed in the future as long as it owns at least
one-third of the Common Stock and may be able to make it difficult to achieve
approval of any such amendment for as long as it owns a significant amount of
Common Stock even if its ownership falls below one-third. The Company has
granted HEA the contractual right to maintain its ownership interest at 30%
through 2000. Stockholders other than HEA therefore are likely to have little or
no influence on decisions regarding such matters. HEA and the Company have
entered into a Stockholder Agreement under which the Company has granted HEA
certain rights to require the Company to register HEA's shares of Common Stock
and the right to designate for nomination up to three members of the Board so
long as ownership by HEA and certain of its affiliates is between 50% and 10% of
the outstanding voting securities of the Company. In a Stockholder Agreement by
and among HEI, HEA and the Company (the "Stockholder Agreement"), HEA has
agreed to certain restrictions on its rights to solicit proxies, to acquire
additional shares of Common Stock and to compete with the Company.
Conflicts of interest may arise from time to time between the Company and
HEA 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 HEA of all or any portion of its
ownership interest in the Company or HEA's ability to control the management and
affairs of the Company. There can be no assurance that HEA and the Company will
be able to resolve any potential conflict or that, if resolved, the Company
would not receive more favorable resolution if it were dealing with an
unaffiliated party. The Amended and Restated Certificate of Incorporation
specifies certain circumstances in which a transaction between the Company and
HEA or an affiliated entity will be deemed fair to the Company and its
stockholders, and prescribes guidelines under which HEA and its affiliates will
be deemed not to have breached any fiduciary duty or duty of loyalty to the
Company, or to have usurped a corporate opportunity available to the Company, if
specified conditions are met.
HEI served as guarantor for the Company's borrowings under various
revolving bank credit facilities from August 1995 through June 1998. At December
27, 1997, aggregate indebtedness of the Company guaranteed by HEI under such
facilities was $170.0 million. Due to the economic conditions in Korea and
significant recent devaluations of the Korean won versus the U.S. dollar, HEI's
reported financial condition as of year-end 1997 was not in compliance with
certain financial covenants applicable to HEI as guarantor under such revolving
credit facilities, and such non-compliance constituted a default by the Company
under such revolving credit facilities and also a default (through a
cross-default clause) under an uncommitted credit facility of the Company that
is repayable on demand of the lender, is not guaranteed and had an outstanding
principal amount of $30.0 million as of December 27, 1997. The default under the
revolving credit facilities was waived by the lending banks in June 1998 in
exchange for Hyundai Heavy Industries Co., Ltd. ("HHI"), a partial owner of HEA,
becoming the guarantor under such facilities in place of HEI and an increase in
pricing to reflect borrowing rates based on HHI's current credit rating. As of
June 27, 1998, aggregate indebtedness of $170.0 million under the revolving
credit facilities was guaranteed by HHI. To date, the lender under the demand
facility has not demanded repayment of the $30.0 million outstanding under that
facility.
<PAGE> 20
The Company intends to obtain replacement credit facilities that do not depend
on any Hyundai guarantees. However, the Company believes that current market
conditions for such facilities are not as favorable as they have been at certain
times in the past, 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, there can be no assurance that the
Company will be able to obtain or retain adequate credit facilities or as to the
terms and amount of any such facilities. Any failure to obtain or retain
adequate credit facilities on acceptable terms would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, as a majority-owned subsidiary of HEA, the Company had the benefit
of a letter of support from HEI under which HEI agreed to provide sufficient
financial support to ensure that the Company would continue as a going concern.
The Company believes that it will no longer have the benefit of the support
letter.
HEA could decide to sell or otherwise dispose of all or a portion of its
shares of Common Stock at some future date, and there can be no assurance that
HEI or HEA will maintain any past or future relationships or arrangements with
the Company following any transfer by HEA of a controlling or substantial
interest in the Company or that other holders of Common Stock will be allowed to
participate in such transaction. Sales by HEA of substantial amounts of Common
Stock in the public market could adversely affect prevailing market prices for
the Common Stock.
Since 1996, the Company has been a member of the HEA U.S. consolidated tax
group for U.S. federal income tax purposes. Certain material tax consequences
result from such affiliation.
HEI and IBM are parties to a patent cross license agreement (the "IBM
License Agreement"), under which HEI and its subsidiaries, including the
Company, are licensed with respect to certain IBM patents. HEI is required under
the IBM License Agreement to pay IBM a license fee, payable in installments
through 2007. HEI has entered into a sublicense with the Company (the
"Sublicense Agreement") pursuant to which the Company is obligated to pay IBM a
portion of the license fee otherwise due from HEI under the IBM License
Agreement, payable in annual installments, when such amounts are due from HEI to
IBM. Under the IBM License Agreement, if Maxtor ceases to be a majority-owned
subsidiary of HEA, the Company can obtain a royalty-free license under the same
terms from IBM upon the joint request of HEI and the Company and the fulfillment
of certain conditions. Pursuant to the Sublicense Agreement, HEI has agreed to
cooperate to obtain such a license for the Company once the Company ceases to be
a majority-owned subsidiary, and the Company has agreed to continue to pay IBM
the Company's allocated portion of the license fee following the grant of such a
license from IBM. The Company intends to obtain such a license if the Company no
longer is a majority owned subsidiary of HEA. HEI and the Company have
indemnified each other for certain liabilities arising from their acts or
omissions relating to the IBM License Agreement.
As discussed more fully above in "-- Transition to and Dependence on
Information Systems; Year 2000 Problem," the Company is preparing to implement
the SAP System. The Company's rights to the SAP System are governed by a license
agreement between Hyundai Information Technology Co., Ltd. ("HIT"), an affiliate
of HEI, and SAP, which provides that the Company will have the right to use
existing software releases so long as the Company remains an affiliate of HIT.
The Company currently is discussing with SAP the terms under which the Company
could obtain a direct license with SAP. In the event the Company is no longer a
majority-owned subsidiary of HEA and is not able to obtain a direct license with
SAP, the Company will not be entitled to receive new releases of SAP's
information system software or expand the system for other functions. As a
result, the Company would not be able to effectively utilize its new information
system in the future, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
See "-- Transition to and Dependence on Information Systems; Year 2000
Problem," "-- Risks Associated with Leverage," "-- Certain Tax Risks" and
"-- Single Manufacturing Facility; Future Need for Additional Capacity."
<PAGE> 21
CERTAIN TAX RISKS
Due to the Company's operating losses, its net operating loss ("NOL")
carryforwards and its favorable tax status in Singapore, the Company's tax
expense historically has represented only a small percentage of the Company's
expenses. The Company's foreign and U.S. tax liability will increase
substantially in future periods if the Company attains profitability.
In December 1997, Maxtor Singapore 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. There can be no assurance that Maxtor Singapore will 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 the Company's business, financial
condition and results of operations.
Since 1996, the Company has been a member of the HEA Tax Group for U.S.
federal income tax purposes. On December 27, 1997, for federal income tax
purposes, the Company had NOL carryforwards of approximately $616.7 million and
tax credit carryforwards of approximately $18.8 million which will expire
beginning in fiscal year 1999. In June, 1998 the Company caused Maxtor Singapore
to pay a $400.0 dividend which will utilize a substantial portion of the
Company's NOL carryforwards. In addition, a substantial portion of the remaining
NOL carryforwards likely will be utilized by the HEA Tax Group for the 1998 tax
year and in connection with amendments to returns for prior years. As a result,
there will be a significant reduction in the NOL carryforwards available to the
Company for federal income tax purposes for subsequent tax years. Utilization
and payment for the Company's NOL carryforwards by the HEA Tax Group is governed
by the Tax Allocation Agreement. Under the Tax Allocation Agreement, neither HEA
nor the Company shall reimburse the other for any utilization of the other
member's NOLs or other tax attributes in the consolidated or combined income tax
returns, except that each party shall reimburse the other for any use of the
other party's tax attributes as a result of any return or amended return filed
after September 15, 1999 or by a taxing authority adjustment after September 15,
1999.
As a result of the Company's acquisition by HEA, utilization of
approximately $253.0 million of the Company's NOL carryforwards and the
deduction equivalent of approximately $18.3 million of tax credit carryforwards
is limited to approximately $22.4 million per year. If more than 50% of the
Company's outstanding capital stock is acquired, then the amount of the
Company's U.S. federal taxable income for any tax year ending after the date of
such acquisition which may be offset by the Company's NOL carryforwards
remaining after deconsolidation from the HEA Tax Group will be limited to an
amount equal to the aggregate value of the Common Stock and the Series A
Preferred Stock immediately before the ownership change multiplied by the
long-term tax exempt rate then in effect (e.g., 5.15% for ownership changes
occurring during July 1998).
For periods during which the Company is or was a member of the HEA Tax
Group, the Company and its subsidiaries have filed or will file tax returns as
part of the HEA Tax Group. At such time as HEA ceases to own at least 80% of the
total voting power and at least 80% of the total value of the Company's capital
stock, the Company will cease to be a member of the HEA Tax Group; however, the
Company will remain liable for its allocable share of the consolidated or
combined tax return liability and for tax deficiencies of the entire HEA Tax
Group which relate to the period during which the Company was a member of the
HEA Tax Group. There can be no assurance that the HEA Tax Group will satisfy all
tax obligations for such periods or that additional liabilities will not be
assessed for such periods. In addition, there can be no assurance that the
Company's 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 the Company's
items of gain, income, loss, deduction or credit or another member's items of
gain, income, loss, deduction or credit. The Company has agreed to indemnify and
reimburse HEA if any member of the HEA Tax Group is required
<PAGE> 22
to pay any tax, interest or penalty to any taxing authority related to any
additional Company separate tax return liability and if there is any increase in
the consolidated or combined tax return liability resulting from revisions to
the Company's taxable income or revisions to another HEA Tax Group Member's
taxable income, except to the extent such revisions to another HEA Tax Group
Member's taxable income are made after September 15, 1999. HEA has agreed to
indemnify and reimburse the Company if the Company or any of its subsidiaries is
required to pay any tax, interest or penalty to any taxing authority related to
any separate tax return of any member of the HEA Tax Group other than the
Company or its subsidiaries, and if the Company or any of its subsidiaries is
required to pay to any taxing authority any amount in excess of the Company's
share of the consolidated or combined tax return liability.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Tax Matters."
RISKS ASSOCIATED WITH LEVERAGE
The Company historically has operated with significant amounts of debt as
compared to its equity. At June 27, 1998, the Company had outstanding
approximately $350.5 million in principal amount of indebtedness. In the first
six months of 1998 and for the fiscal year ended December 31, 1997 and nine
months ended December 28, 1996, the Company's interest payments were $10.0
million, $26.5 million and $13.4 million, respectively. During the first quarter
of 1998, the Company repaid $5.0 million of principal under long term debt
agreements. The Company also has an asset securitization program under which the
Company sells its accounts receivable on a non-recourse basis. At June 27, 1998,
$100.0 million of accounts receivable was securitized under the program.
Continuance of the program is subject to certain conditions, including a
condition that all of the long-term public senior debt securities of HHI not
fall below a specified rating. The Company has begun negotiations with respect
to a $200 million asset securitization program which does not require any
support from HEA or any of its affiliates and the Company believes it will be
able to close this program and terminate its existing securitization program by
July 31, 1998. However, there can be no assurance that the Company will be able
to obtain commitments to enter into such a program or will be able to implement
successfully the new securitization program. Failure of the Company to close the
replacement asset securitization program or to obtain alternative financing
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company will continue to be subject to the risks associated with
leverage, which include: (i) principal and interest repayment obligations which
require the expenditure of substantial amounts of cash, the availability of
which will be dependent on the Company's future performance; (ii) the inability
to repay principal or interest when due or violation of loan covenants, which
could result in a default on the debt, acceleration of its principal amount and
legal actions against the Company; and (iii) adverse effects of interest
expense on the Company's business, financial condition and results of
operations.
See "-- Control By and Dependence on Hyundai," "-- Single Manufacturing
Facility; Future Need for Additional Capacity," "-- Need for Additional Capital"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
SINGLE MANUFACTURING FACILITY; FUTURE NEED FOR ADDITIONAL CAPACITY
The Company's volume manufacturing operations currently are based in a
single facility in Singapore. A fire, flood, earthquake or other disaster or
condition affecting the Company's facility could disable such facility. Any
damage to, or condition interfering with the operation of, the Company's
manufacturing facility could have a material adverse effect on the Company's
business, financial condition and results of operations.
<PAGE> 23
The Company anticipates that it may need additional manufacturing capacity
as early as the beginning of the year 2000. In anticipation of that need, in the
summer of 1997, HEI began construction of a 450,000 square foot manufacturing
facility in Dalian, China (the "Dalian Facility") for the purpose of making
additional manufacturing capacity available to Maxtor. The Dalian Facility is
only partially completed and construction is continuing at a reduced pace. HEI
has expended approximately $23.0 million on the construction to date. An
additional estimated $60.0 million investment will be required to complete the
Dalian Facility to the point where manufacturing lines can be installed, and an
estimated additional $25.0 million of machinery and equipment will be required
to make the facility ready for its initial phase of operation. The Company and
HEI have agreed to discuss the terms under which the Dalian Facility will be
completed and by which the Company would either buy or lease the Dalian Facility
from HEI, and the Company intends to utilize the Dalian Facility if acceptable
terms can be agreed upon. There can be no assurance that the Company will be
able to successfully negotiate any such agreement with HEI or that the Dalian
Facility will be completed by the time Maxtor requires additional capacity. The
terms of any agreement with regard to the Dalian Facility are subject to the
approval of the Affiliated Transactions Committee of the Board. Moreover, any
such agreement would be conditioned on the transfer of HEI's business license
for the Dalian Facility and the transfer of HEI's tax holiday status and other
regulatory concessions in Dalian to the Company. If the Company is unable to
reach agreement with HEI on acceptable terms or obtain the tax holiday status
and other regulatory concessions and the applicable business license, the
Company may need to acquire additional manufacturing capacity at other sites. In
addition to the Dalian Facility, the Company currently is investigating other
manufacturing facilities within Asia. Although the Company believes that
alternative manufacturing facilities will be available, a failure by the Company
to obtain, on a timely basis, a facility or facilities which allow the Company
to meet its customers' demands will limit the Company's growth and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is experiencing space constraints at its Longmont, Colorado
facility and is exploring opportunities to obtain additional space at a new
facility in the Longmont area. There can be no assurance that the Company will
be able to obtain additional space that can accommodate its needs or that,
if obtained, such additional space will be available to the Company on terms at
least as favorable as the terms governing its current lease.
See "-- Need for Additional Capital," "-- Dependance on International
Operation; Risks from International Sales" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
NEED FOR ADDITIONAL CAPITAL
The HDD industry is capital intensive. The Company will require substantial
additional working capital to fund its business. The Company's future capital
requirements will depend on many factors, including the rate of sales growth, if
any, the level of profitability, if any, the timing and extent of spending to
support facilities upgrades and product development efforts, the timing and size
of business or technology acquisitions, the timing of introductions of new
products and enhancements to existing products. 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. Moreover, in connection with future equity
offerings, the Company may issue preferred stock with rights, preferences or
privileges senior to those of the Common Stock. Pursuant to the Amended and
Restated Certificate of Incorporation, the Board has authority to issue up to 95
million shares of preferred stock and to fix the rights, preferences and
privileges of such shares (including voting rights) without any further action
or vote by the stockholders.
In the future the Company may require alternative sources of liquidity. The
unavailability of, or delays in obtaining, any necessary financing could prevent
or delay the continued development and marketing of the Company's products and
may require curtailment of various operations of the Company and, if adequate
funds were not available from operating profits, would have a material adverse
effect on the Company's business, financial condition and results of operations.
<PAGE> 24
See "-- Control by and Dependence on Hyundai," "-- Risks Associated with
Leverage," "-- Single Manufacturing Facility; Future Need for Additional
Capacity" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
CUSTOMER CONCENTRATION
The Company focuses its marketing efforts on and sells its HDDs to a
limited number of PC OEMs, distributors and retailers. During the six months
ended June 27, 1998, two customers, Dell and IBM, accounted for approximately
27% and 17% respectively, of the Company's revenues, and the Company's top ten
customers accounted for approximately 74% of the Company's revenue. During the
fiscal year ended December 27, 1997, two PC OEM customers, Compaq and Dell,
accounted for approximately 21% and 10%, respectively, of the Company's revenue,
and the Company's top ten customers accounted for approximately 60% of the
Company's revenue. During the fiscal year ended December 28, 1996, one customer,
SED International Holdings, Inc. ("SED"), a distributor, accounted for
approximately 11% of the Company's revenue and the Company's top ten customers
accounted for approximately 68% of the Company's revenue. During the fiscal year
ended March 30, 1996, while no customer accounted for more than 10% of the
Company's revenue, the Company's top ten customers accounted for approximately
51% of the Company's revenue.
The Company anticipates that a relatively small number of customers will
continue to account for a significant portion of its revenue for the foreseeable
future, and that the proportion of its revenue derived from such customers may
continue to increase in the future. The ability of the Company to maintain
strong relationships with its principal customers, including in particular its
PC OEM customers, is essential to the ongoing success and profitability of the
Company. Although the Company believes its relationships with key customers
generally are good, in order to maintain its customer relationships,
particularly with PC OEMs, the Company must be among the first-to-volume
production with competitive products. The concentration of sales in a relatively
small number of major customers represents a business risk that loss of one or
more accounts, or a decrease in the volume of products sold to such accounts,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Due to the intense competition in the HDD market, customers may choose from
various suppliers and therefore can make substantial demands on their chosen
suppliers. The Company's customers generally are not obligated to purchase any
minimum volume and generally are able to terminate their relationship with the
Company at will. Consequently, major customers have significant leverage over
the Company and may attempt to change the terms, including pricing and delivery
terms, upon which the Company sells its products. Moreover, as the Company's PC
OEM, distributor and retail customers are pressured to reduce prices in response
to competitive factors, the Company may be required to reduce the prices of its
products before it knows how, or if, internal cost reductions can be obtained.
If the Company is forced to change the terms, including pricing, upon which the
Company sells its products or is unable to achieve required cost reductions in
connection with reductions in the prices of its products, the Company's
operating margins could decline and such decline could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Risks of Failed Execution; Changing Customer Business Models," "-
Fluctuation in Product Demand; Focus on a Single Market" and "-- Dependence on
International Operations; Risks from International Sales."
DEPENDENCE ON SUPPLIERS OF COMPONENTS AND SUB-ASSEMBLIES
The Company does not manufacture any of the components used in its HDDs and
therefore is dependent on qualified suppliers for the components that are
essential for manufacturing the Company's products, including heads, head stack
assemblies, media and integrated circuits. A number of the key components used
by the Company in its products are available from only one or a limited number
of outside suppliers. Currently, the Company purchases DSP/controller and
spin/servo integrated circuits only from Texas
<PAGE> 25
Instruments, Inc. ("TI") and purchases channel integrated circuits only from
Lucent Technologies, Inc. ("Lucent"). Some of the components required by the
Company may periodically be in short supply, and the Company has, on occasion,
experienced temporary delays or increased costs in obtaining components. As a
result, the Company must allow for significant lead times when procuring certain
components. In addition, cancellation by the Company of orders for components
due to cut-backs in production precipitated by market oversupply, reduced
demand, transition to new products or technologies or otherwise can result in
payment by the Company of significant cancellation charges to suppliers. The
Company orders the majority of its components on a purchase order basis and only
has limited long-term volume purchase agreements with certain existing
suppliers. Any inability of the Company to obtain sufficient quantities of
components meeting the Company's specifications, or to develop in a timely
manner alternative sources of component supply if and as required in the future,
could adversely affect the Company's ability to manufacture its products and
deliver them on a timely basis, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Because the Company does not manufacture any of the components used in its
HDDs, the Company's product development process involves incorporating
components designed by and purchased from third party suppliers. As a
consequence, the success of the Company's products is in great part dependent on
the Company's ability to gain access to and integrate components which utilize
leading-edge technology. The successful management of these integration projects
depends on the timely availability and quality of key components, the
availability of appropriately skilled personnel, the ability to integrate
different products from a variety of vendors effectively, and the management of
difficult scheduling and delivery problems. There can be no assurance that the
Company will be able to manage successfully the various complexities encountered
in integration projects. The Company's success will depend in part on its
relationships with key component suppliers, and there can be no assurance that
such relationships will develop, that the Company will identify the most
advantageous suppliers with which to establish such relationships, or that
existing or future relationships with component suppliers will continue for any
significant time period.
See "-- Rapid Technological Change and Product Development."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY; RISK OF THIRD PARTY CLAIMS OF
INFRINGEMENT
The Company has patent protection on certain aspects of its technology and
also relies on trade secret, copyright and trademark laws, as well as
contractual provisions to protect its proprietary rights. There can be no
assurance that the Company's protective measures will be adequate to protect the
Company's proprietary rights; that others, including competitors with
substantially greater resources, have not developed or will not independently
develop or otherwise acquire equivalent or superior technology; or that the
Company will not be required to obtain licenses requiring it to pay royalties to
the extent that the Company's products may use the intellectual property of
others, including, without limitation, Company products that may also be subject
to patents licensed by the Company. There can be no assurance that any patents
will be issued pursuant to the Company's current or future patent applications,
or that patents issued pursuant to such applications or any patents the Company
owns or has licenses to use will not be invalidated, circumvented or challenged.
Moreover, there can be no assurance that the rights granted under any such
patents will provide competitive advantages to the Company or be adequate to
safeguard and maintain the Company's proprietary rights. Litigation may be
necessary to enforce patents issued or licensed to the Company, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of the Company or others. The
Company could incur substantial costs in seeking enforcement of its issued or
licensed patents against infringement or the unauthorized use of its trade
secrets and proprietary know-how by others or in defending itself against claims
of infringement by others, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the laws of certain countries in which the Company's products are manufactured
and sold, including various countries in Asia, may not protect the Company's
products and intellectual property rights to the same extent as the laws of the
United States, and there can be no assurance that such laws will be enforced in
an effective manner. The failure of the Company to enforce and protect its
intellectual property rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
<PAGE> 26
As a majority-owned subsidiary of HEA, the Company has had the benefit of
certain third party intellectual property rights on terms that may have been
more favorable than would have been available to the Company if it were not a
majority-owned subsidiary of HEA. There can be no assurance that the Company
will be able to obtain similar rights in the future on terms as favorable as
those currently available to it.
The HDD industry, like many technology-based industries, is characterized
by frequent claims and litigation involving patent and other intellectual
property rights. The Company, its component suppliers and certain users of the
Company's products have from time to time received, and may in the future
receive, communications from third parties asserting patent infringement against
the Company, its component suppliers or its customers which may relate to
certain of the Company's products. If the Company is notified of such a claim,
it may have to obtain appropriate licenses or cross-licenses, modify its
existing technology or design non-infringing technology. There can be no
assurance that the Company can obtain adequate licenses or cross-licenses on
favorable terms or that it could modify its existing technology or design
non-infringing technology and, in either case, the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company to date has not been a party to any
material intellectual property litigation, certain of its competitors have been
sued on patents having claims related to HDDs and there can be no assurance that
third parties will not initiate infringement actions against the Company or that
the Company could defend itself against such claims. If there is an adverse
ruling against the Company in an infringement lawsuit, it could result in the
issuance of an injunction against the Company or its 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. Accordingly,
such an adverse ruling could have a material adverse effect on the Company's
business, financial condition and results of operations.
Similar to certain other providers of HDDs, the Company has received
correspondence from Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of at least 13 HDD motor patents. The patents
relate to motors that the Company purchases from motor vendors and the use of
such motors in HDDs. While the Company believes that it has meritorious defenses
against a lawsuit if filed, the results of litigation are inherently uncertain
and there can be no assurance that Papst will not assert other infringement
claims relating to current patents, pending patent applications and future
patents or patent applications; will not initiate a lawsuit against the Company;
or that the Company will be able to successfully defend itself against such a
lawsuit. A favorable outcome for Papst in such a lawsuit could result in the
issuance of an injunction against the Company or its 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 the Company's business, financial condition
and results of operations.
See "-- Dependence on International Operations; Risks of International
Sales."
DEPENDENCE ON INTERNATIONAL OPERATIONS; RISKS FROM INTERNATIONAL SALES
The Company conducts all of its volume manufacturing and testing operations
and purchases a substantial portion of its key components outside of the U.S. In
addition, the Company derives a significant portion of its revenue from sales of
its products to foreign distributors and retailers. Dependence on revenue from
international sales and managing international operations each involve 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 receivables collection
periods, unexpected changes in or impositions of legislative or regulatory
requirements, reduced protection for intellectual property rights in some
countries, potentially adverse taxes, delays resulting from difficulty in
obtaining export licenses for certain technology and other trade barriers.
International sales also will be impacted by the specific economic conditions in
each country. For example, the Company's international contracts are denominated
primarily in U.S. dollars. Significant fluctuations in currency exchange rates
against the U.S. dollar, particularly the recent significant depreciation in the
currencies of Japan, Korea, Taiwan and Singapore relative to the U.S. dollar,
have caused the Company's products to become relatively more expensive to
distributors and retailers in those countries, and
<PAGE> 27
thus have caused, and may continue to cause, deferrals, delays and cancellations
of orders. 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. There can be no assurance that all foreign currency exposures will be
adequately covered, and these factors, as well as other unanticipated factors,
could have a material adverse effect on future international sales of the
Company's products and consequently, on the Company's business, financial
condition and results of operations. See "-- Dependence on Suppliers of
Components and Sub-Assemblies" and "-- Limited Protection of Intellectual
Property; Risk of Third Party Claims of Infringement."
STORMEDIA; LEGAL PROCEEDINGS
The Company currently is involved in a dispute with StorMedia, which arises
out of an agreement among the Company, StorMedia and HEI which became effective
on November 17, 1995. 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 the
Original Defendants in the U.S. District Court for the Northern District of
California. 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. 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 Defendants and negligent
misrepresentation against HEI and the Company. On May 18, 1998, the stay on the
Colorado Suit was lifted by the Colorado state court. The Company's motion to
dismiss, or in the alternative, stay the California Suit, is pending.
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 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
condition 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 adverse effect on the Company's
business, financial condition and results of operations. No amounts related to
any claims or actions have been reserved in the Company's financial statements.
<PAGE> 28
See "-- Limited Protection of Intellectual Property; Risk of Third Party
Claims of Infringement."
WARRANTY EXPOSURE
Products offered by the Company may contain defects in hardware, firmware
or workmanship that may remain undetected or that may not become apparent until
after commercial shipment. The Company generally provides a standard three year
warranty on its products. This standard warranty contains a limit on damages and
an exclusion of liability for consequential damages and for negligent or
improper use of the product. The Company establishes a reserve, at the time of
product shipment, in an amount equal to its estimated warranty expenses. The
Company had warranty reserves of $22.7 million and $26.2 million as of December
27, 1997 and June 27, 1998, respectively. While the Company believes that its
warranty reserves will be sufficient to cover its warranty expenses, there can
be no assurance that such reserves will be sufficient or that the limitations on
liability contained in the Company's warranty will be enforceable. The Company's
failure to maintain sufficient warranty reserves or the unenforceability of such
liability limitations could have a material adverse effect on the Company's
business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
Although the Company uses only a limited variety of chemicals in its
manufacturing and research operations, the Company is still subject to a wide
range of environmental protection regulations in the U.S. and Singapore. While
the Company has not experienced any material adverse effect on its operations as
a result of such laws, there can be no assurance that future regulations would
not have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its activities
conform to all present environmental regulations in all material aspects. In the
U.S., environmental regulations often require parties to fund remedial action
regardless of fault. As a consequence, it is often difficult to estimate the
future impact of environmental matters, including potential liabilities. There
can be no
<PAGE> 29
assurance that the amount of capital expenditures and other expenses which might
be required to complete remedial actions and to continue to comply with
applicable environmental laws will not have a material adverse effect on the
Company's business, financial condition and results of operations.
EFFECT OF ANTITAKEOVER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"), which prohibits a publicly held
Delaware corporation from engaging in any "business combination" with an
"interested stockholder" for three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the corporation's board of directors approved either the business combination or
the transaction that resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding shares owned by management directors and
certain employee stock plans); or (iii) on or subsequent to such date, the
business combination is approved by the corporation's board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years prior did own, 15% or more of the corporation's voting stock.
In addition, pursuant to the Amended and Restated Certificate of
Incorporation, the Board has authority 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 rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible 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 the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such preferred stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such preferred stock could have a material adverse effect on the market price of
the Common Stock. The Company has no present plan to issue shares of preferred
stock.
The Amended and Restated Certificate of Incorporation provides that the
Board will be divided into three classes of directors serving staggered
three-year terms. As a result, only one of the three classes of the Board will
be elected each year. The directors are removable only for cause upon the
affirmative vote of the holders of at least a majority of the voting power of
all outstanding shares of voting stock, voting as a single class. The Board has
the exclusive right to set the authorized number of directors and to fill
vacancies on the Board. The Amended and Restated Certificate of Incorporation
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing. In addition,
special meetings of the stockholders of the Company may be called only by the
Board, the Chairman of the Board, or the Chief Executive Officer of the Company.
Advance notice is required for stockholder proposals or director nominations by
stockholders. These provisions may be amended only by the affirmative vote of at
least two-thirds of the outstanding voting stock of the Company, voting as a
single class. In addition, the Company has entered into a Stockholder Agreement
with HEA which grants HEA certain rights to designate directors for nomination,
requires HEA to vote in favor of other Board nominees so long as HEA's rights to
designate nominees are honored, and restricts HEA's right to solicit proxies or
acquire additional shares of Common Stock.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control of the Company. Such provisions could
diminish the opportunities for a holder of Common Stock to participate in tender
offers, including tender offers at a price above the then current market price
of the Common Stock. Such provisions also may inhibit fluctuations in the market
price of the Common Stock that could result from takeover attempts.
<PAGE> 30
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 1998, the Company had $13.3 million in cash and cash
equivalents as compared to $16.9 million at December 27, 1997. Operating
activities provided net cash of $33.6 million for the three month period ended
March 28, 1998 as compared to utilizing net cash of $82.6 million for the three
month period ended March 29, 1997. Cash provided by operating activities for the
quarter ended March 28, 1998 was generated principally by operations and
supplemented by a decrease in working capital. The increase in cash generated
from operations was primarily due to increased sales and improved margins.
Investing activities provided $1.7 million. During the quarter, the Company paid
down debt of $38.9 million.
At March 28, 1998, the Company had $350.5 million of short-term and
long-term unsecured debt comprised of $200.5 million of credit facilities from
various banks, $55.0 million on an inter-company, revolving credit facility from
HEA and $95.0 million of publicly-traded convertible debt. The Company and HEA
have agreed that they will replace the Company's revolving line of credit from
HEA, which has the outstanding principal balance of $55 million, with a
long-term, subordinated note in the same principal amount.
The Company's outstanding 5.75% Convertible Subordinated Debentures due
March 1, 2012 are entitled to annual sinking fund payments of $5.0 million
beginning March 1, 1998.
HEI served as guarantor for the Company's borrowings under various
revolving bank credit facilities from August 1995 through June 1998. At March
28, 1998, aggregate indebtedness of the Company guaranteed by HEI under such
facilities was $170.0 million. Due to the economic conditions in Korea and
significant recent
31
<PAGE> 31
devaluations of the Korean won versus the U.S. dollar, HEI's reported financial
condition as of year-end 1997 was not in compliance with certain financial
covenants applicable to HEI as guarantor under such revolving credit facilities,
and such non-compliance constituted a default by the Company under such
revolving credit facilities and also a default (through a cross-default clause)
under an uncommitted credit facility of the Company that is repayable on demand
of the lender, is not guaranteed and had an outstanding principal amount of
$30.0 million as of March 28, 1998. The default under the revolving credit
facilities was waived by the lending banks in June 1998 in exchange for HHI
becoming the guarantor under such facilities in place of HEI and an increase in
pricing to reflect borrowing rates based on HHI's current credit rating. To
date, the lender under the demand facility has not demanded repayment of the
$30.0 million outstanding under that facility. The Company intends to obtain a
replacement credit facility that does not depend on any Hyundai guarantees. The
Company believes that current market conditions for credit 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, there can be no assurance that the Company will be able to obtain
or retain adequate credit facilities or as to the terms and amount of any such
facilities that it is able to obtain. Any failure to obtain or retain adequate
credit facilities on acceptable terms would have a material and adverse effect
on the Company's business, financial condition and results of operations. In
addition, as a majority-owned subsidiary of HEA, the Company had the benefit of
a letter of support from HEI under which HEI agreed to provide sufficient
financial support to ensure that the Company would continue as a going concern.
The Company believes that it will no longer have the benefit of the support
letter.
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 and 5.60% as of March 26, 1998 (unaudited) 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. As of March 28, 1998, this amount was $86.6
million (unaudited). 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 specific rating. Continuance of the
program is subject to certain conditions, including a condition that all of the
long-term public senior debt securities of HHI not fall below a specified
rating. The Company has begun negotiations with respect to a $200 million asset
securitization program which does not require any support from HEA or any of its
affiliates. The Company believes it will be able to close this program and
terminate its existing program by July 31, 1998. In addition, the Company is
exploring alternatives to establish a replacement revolving credit facility
which does not require any support from HEA or any of its affiliates. Failure of
the Company to close the replacement asset securitization program or obtain
alternative financing would have a material adverse impact on the Company's
business, financial condition and results of operations.
The Company has been investing significant amounts of capital to increase
the capacity and enhance the productivity of its Singapore manufacturing
facility. In the twelve month period ended December 27, 1997, the nine month
period ended December 28, 1996 and the twelve month period ended March 30, 1996,
the Company made capital expenditures, net of disposals, of $81.9 million, $53.4
million and $72.3 million, respectively. During 1998, capital expenditures are
expected to be approximately $100.0 million, to be used principally for adding
manufacturing capacity and implementing the SAP System and other related
information technology systems. The Company anticipates that it may need
additional manufacturing capacity as early as the beginning of the year 2000. In
anticipation of that need, in the summer of 1997, HEI began construction of the
Dalian Facility. The Dalian Facility is only partially completed and
construction is continuing at a reduced pace. HEI has expended approximately
$23.0 million on the construction to date. An estimated additional $60.0 million
investment will be required to complete the Dalian Facility to the point where
manufacturing lines can be installed, and an estimated additional $25.0 million
of machinery and equipment will be required to make the facility ready for its
initial phase of operations. The Company and HEI have agreed to discuss the
terms under which the Dalian Facility will be completed and by which the Company
would either buy or lease the Dalian Facility from HEI, and the Company intends
to utilize the Dalian Facility if acceptable terms can be agreed upon. There can
be no assurance that the Company will be able to successfully negotiate any such
agreement with HEI or that the Dalian Facility will be completed by
32
<PAGE> 32
the time Maxtor requires additional capacity. The terms of any agreement with
regard to the Dalian Facility are subject to the approval of the Affiliated
Transactions Committee of the Board. Moreover, any such agreement would be
conditioned on the transfer of HEI's business license for the Dalian Facility
and the transfer of HEI's tax holiday status and other regulatory concessions in
Dalian to the Company. If the Company is unable to reach agreement with HEI on
acceptable terms or obtain the tax holiday status and other regulatory
concessions and the applicable business license, the Company may need to acquire
additional manufacturing capacity at other sites. In addition to the Dalian
Facility, the Company currently is investigating other manufacturing facilities
within Asia. Although the Company believes that alternative manufacturing
facilities will be available, a failure by the Company to obtain, on a timely
basis, a facility or facilities which allow the Company to meet its customers'
demands will limit the Company's growth and could have a material adverse effect
on the Company's business, financial condition and results of operations.
At March 28, 1998 the Company expected that it would require alternative
sources of liquidity, including additional sources of financing in fiscal 1998.
The Company engaged in ongoing discussions with various parties regarding
additional sources of financing, including a contemplated public offering of the
Company's Common Stock (the "Offering") in connection with which the Company
filed a registration statement in Form S-1 with the Securities and Exchange
Commission (File No. 333-56099) (the "Offering").
The Company currently believes that the proceeds of the Offering, if
successfully completed, together with cash generated from operations and
borrowing capacity, will be sufficient to fund its operations through at least
the next 12 months from the date hereof. The Company requires substantial
working capital to fund its business, particularly to finance accounts
receivables and inventory, and to invest in property and equipment. The Company
may seek long-term financing arrangements, including a line of credit to fund
its future capacity expansion plans, as necessary. However, the Company's cash
needs will depend on, among other things, demand in the desktop HDD 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 the
Company to seek more capital, or to seek capital sooner than currently expected.
If the Company needs 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 the Company's ability to invest in capital
expenditures or in R&D and would have a material adverse effect on the Company's
business, financial condition and results of operations.
33
<PAGE> 33
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. 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. As a result, in less
than two years, computer systems and/or software used by many companies,
including Maxtor, will need to be upgraded to comply with such "Year 2000"
requirements. Because of the Company's change in its fiscal year end in 1996,
the Company's current information systems will need to be upgraded by January
1999 to avoid Year 2000 problems. While the SAP System is expected to resolve
this potential problem, there can be no assurance that the SAP System can be
implemented successfully and on a timely basis. Moreover, the Company could be
adversely impacted by Year 2000 issues faced by major distributors, suppliers,
customers, vendors and financial service organizations with which the Company
interacts. Any disruption in the Company's operations as a result of Year 2000
noncompliance, whether by the Company or a third party, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
34
<PAGE> 34
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(SEE INDEX TO EXHIBITS ON PAGE 20 OF THIS REPORT.)
There were no reports filed on Form 8-K during the reporting period ended March
28, 1998.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment no. 1 to report to be signed on its
behalf by the undersigned thereunto duly authorized in the City of Milpitas,
State of California, on the 30th day of July 1998.
MAXTOR CORPORATION
By: /s/ Paul J. Tufano
-------------------------------
Paul J. Tufano
Vice President, Finance and
Chief Financial Officer
5
<PAGE> 36
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
- ----------------------------------------------------------------------------------------------
Sequentially
Exhibit No. Description Numbered Pages
- ----------------- ----------------------------------------------------------- --------------
<S> <C> <C>
10.31 (12) Intercompany Loan Agreement, dated as of April 10, 1997,
between Maxtor Corporation and Hyundai Electronics America
10.33 (13) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Maxtor Corporation and Hyundai
Electronics America
10.34 (13) Amendment to August 29, 1996 364-Day Credit Agreement,
dated August 27, 1997, among Maxtor Corporation, Citibank,
N.A. and Syndicate Banks
10.166 (26) Second Amended and Restated 1996 Stock Option Plan
- ----------------- ----------------------------------------------------------- --------------
(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
(26) Incorporated by reference to Registration Statement on
Form S-1 (File No. 333-56099), as amended, originally
filed June 5, 1998
</TABLE>
