<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the 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)
Delaware 77-0123732
------------------------------ -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 Cottonwood Drive, Milpitas, CA 95035
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (408) 432-1700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: 5.75% CONVERTIBLE
SUBORDINATED
DEBENTURES, DUE
MARCH 1, 2012
Indicate by checkmark whether the 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 May 3, 1998, 88,059,701 shares of the registrant's Series A Preferred
Stock, $.01 par value, and 24,500 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 its stock option plan, and there was no public
market for the Company's equity securities.
1
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MAXTOR CORPORATION
FORM 10-Q
MARCH 28, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <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
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
------------------------------
March 28, December 27,
1998 1997
------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,305 $ 16,925
Accounts receivable, net of allowance for doubtful
accounts of $3,238 at March 28, 1998 and $3,573 at
December 27, 1997 312,978 241,777
Accounts receivable from affiliates 5,417 5,870
Inventories
Raw materials 45,323 48,834
Work in progress 15,064 15,177
Finished goods 103,587 91,301
------------------------------
163,974 155,312
Prepaid expenses and other 34,466 20,814
------------------------------
Total current assets 530,140 440,698
Net property, plant and equipment 96,547 99,336
Other assets 7,881 15,438
------------------------------
$ 634,568 $ 555,472
------------------------------
------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings $ 76,159 $ 100,057
Short-term borrowings due to affiliates 55,000 65,000
Accounts payable 291,393 206,563
Accounts payable to affiliates 39,110 25,022
Accrued and other liabilities 173,502 155,563
------------------------------
Total current liabilities 635,164 552,205
Long-term debt and capital lease obligations due
after one year 219,320 224,313
Commitments and contingencies (note 8) - -
Stockholders' deficit:
Series A Preferred Stock, $0.01 par value, 95,000,000
shares authorized; 88,059,701 shares issued and
outstanding at March 28, 1998, and outstanding at
December 27, 1997; aggregate liquidation value
$590,000 at March 28, 1998 and at December 27, 1997 880 880
Common Stock, $0.01 par value, 110,000,000 shares
authorized; 15,125 shares issued and outstanding
at March 28, 1998, and outstanding at December 27, 1997 - -
Additional paid-in capital 537,090 534,765
Unrealized gain on investments in equity securities 25,386 16,262
Accumulated deficit (783,272) (772,953)
------------------------------
Total stockholders' deficit (219,916) (221,046)
------------------------------
$ 634,568 $ 555,472
------------------------------
------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months
ended
------------------------
March 28, March 29,
1998 1997
------------------------
<S> <C> <C>
Revenue $545,231 $238,042
Revenue from affiliates 4,386 8,966
------------------------
Total revenue 549,617 247,008
------------------------
Cost of revenue 483,798 245,862
Cost of revenue from affiliates 3,564 8,254
------------------------
Total cost of revenue 487,362 254,116
------------------------
Gross profit (loss) 62,255 (7,108)
------------------------
Operating expenses:
Research and development 33,372 26,394
Selling, general and administrative 15,923 15,061
Stock compensation expenses 14,696 -
------------------------
Total operating expenses 63,991 41,455
------------------------
(Loss) from operations (1,736) (48,563)
Interest expense (8,768) (7,927)
Interest and other income 274 1,781
------------------------
(Loss) before provision for income taxes (10,230) (54,709)
Provision for income taxes 89 277
------------------------
Net (Loss) (10,319) (54,986)
------------------------
Other comprehensive income:
Unrealized gain on investments in equity securities 9,124 -
------------------------
Comprehensive income (loss) $ (1,195) $ (54,986)
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months
ended
-----------------------
March 28, March 29,
1998 1997
-----------------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $(10,319) $(54,986)
-----------------------
Adjustments to reconcile net (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 15,756 11,736
Loss (gain) on disposal of property, plant and equipment 1,312 (492)
Other - (215)
Changes in assets and liabilities:
Accounts receivable (64,909) (43,873)
Accounts receivable from affiliates 2,778 2,687
Inventories (8,662) (6,926)
Prepaid expenses and other (4,528) 950
Accounts payable 75,911 7,525
Accounts payable to affiliates 14,088 2,968
Accrued and other liabilities (12,214) (1,968)
-----------------------
Total adjustments 43,960 (27,608)
-----------------------
Net cash provided by (used in) operating activities 33,641 (82,594)
-----------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 2,972 -
Purchase of property, plant and equipment (8,332) (8,789)
Other assets 7,038 (2,729)
-----------------------
Net cash provided by (used in) investing activities 1,678 (11,518)
-----------------------
Cash flows from financing activities:
Proceeds from issuance of debt, including short-term borrowings 29,904 120,000
Principal payments on debt, including short-term borrowings (68,795) (34)
Net payments under accounts receivable securitization (48) (37,804)
-----------------------
Net cash provided by (used in) financing activities (38,939) 82,162
-----------------------
Net decrease in cash and cash equivalents (3,620) (11,950)
Cash and cash equivalents at beginning of period 16,925 31,313
-----------------------
Cash and cash equivalents at end of period $ 13,305 $ 19,363
-----------------------
-----------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months
ended
- -----------------------------------------------------------------------------------------------------------
March 28, March 29,
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,272 $ 5,512
Income taxes 298 153
Supplemental information on noncash investing and financing activities:
Purchase of property, plant and equipment financed by accounts payable 8,919 17,275
Purchase of property, plant and equipment financed by capital leases 13 142
Increase in unrealized gain on investments in equity securities 9,124 -
Increase in receivable from an affiliate 2,325 -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
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).
Accordingly, no earnings per share information is disclosed. All
adjustments of a normal recurring nature which, in the opinion of management,
are necessary for a fair statement of the results for the interim periods
have been made. It is recommended that the interim financial statements be
read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the fiscal year ended December 27, 1997
incorporated in the Company's annual report on Form 10K. Interim results are
not necessarily indicative of the operating results expected for later
quarters or the full fiscal year.
2. SHORT-TERM BORROWINGS
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. Under this program,
the Company could sell its qualified trade accounts receivable up to $100
million on a non-recourse basis. The face amount of the eligible receivables
were discounted based on the Corporate Receivables Corporation commercial
paper rate (5.60% as of March 28, 1998) plus commission and were subject to a
10% retention. As of March 28, 1998, $86.0 million in sales of accounts
receivable were included in accounts receivable and $86.0 million in
collections of accounts receivable not yet remitted were included in accrued
and other liabilities. The Company's asset securitization program was
subject to certain conditions, among which was a condition that all of HEI's
long-term public senior debt securities achieve a specified rating. This
condition was not met in February 1998, and the Company obtained waivers of
this condition through April 8, 1998.
The Company completed a new asset securitization program dated as of April 8,
1998 (the "New Program") arranged by Citicorp to replace the existing
program. Under the New Program, the Company sells all of its trade accounts
receivable through a special purpose vehicle with a purchase limit of $100
million on a non-recourse basis, subject to increase to $150 million, upon
the fulfillment of the conditions subsequent described below. On April 8,
1998, the uncollected purchase price under the existing program, in the
amount of approximately $100 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 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
and Maxtor Receivables Corporation under the New Program. The Company must
satisfy these conditions subsequent within 30 days of receiving undertaking
documents from Citicorp and presently believes that it will be able to
successfully satisfy these conditions.
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 million intercompany line of
credit from HEA. This line of credit allows for draw downs up to $150
million and interest is payable quarterly. All outstanding amounts of
principal and accrued interest were due and payable on April 10, 1998. As of
March 28, 1998, $55 million was outstanding under this facility. This line
was reduced to $100 million and extended to April 10, 1999.
On August 29,1996, the Company established two uncollateralized, revolving
lines of credit totaling $215 million (the Facilities) through Citibank, N.A.
and syndicated among fifteen banks. In September 1996, the Facilities were
increased $10 million to a total of $225 million. The Facilities are
guaranteed by HEI and a total of $129 million of
7
<PAGE>
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 million of borrowings under this
line were outstanding. A total of $96 million of the Facility is a 364-day
committed facility, renewable annually at the option of the syndicate banks.
On August 28, 1997, this Facility was amended and reduced to $31 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 million
of borrowings under this line of credit were outstanding.
The Company has credit facilities amounting to $50 million in the aggregate
from three banks. The facilities, which are guaranteed by HEI, are used
primarily for general operating purposes and bear interest at rates ranging
from 6.61 percent to 8.13 percent. In January 1998 one $10 million facility
was retired and all principal owing has been paid. As of March 28, 1998, $40
million of borrowings under these lines of credit were outstanding.
HEI is the guarantor of a $160 million outstanding under the Company's
Facilities and a $10 million bilateral facility as of March 28, 1998. HEI
has various obligations as guarantor, including the satisfaction of certain
financial covenants. As a result of 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 constitutes a default under the
Company's credit facilities guaranteed by HEI and due to certain cross
default provisions, a default under a credit facility with $30 million
outstanding as of March 28, 1998 not guaranteed by HEI. The Company has
requested any necessary waivers; 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.
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.
8
<PAGE>
3. CONTINGENCIES
STORMEDIA LITIGATION
The dispute between StorMedia and the Company arises out of the Purchase
Agreement between the Company and StorMedia which became effective on
November 17, 1995 ("Agreement"), under which StorMedia agreed to supply disk
media, a key component of hard disk drives, to the Company. StorMedia's
supply of disk media did not meet the Company's specifications and functional
requirements and, as a result, after negotiations, the Company terminated the
Agreement.
On September 18, 1996 a class action securities lawsuit was filed
against StorMedia Incorporated ("StorMedia") and certain of its officers in
Superior Court of the State of California, County of Santa Clara. Among the
allegations against StorMedia was the assertion that StorMedia failed to
perform under the Agreement and that StorMedia's failure to sue the Company
for breach of the Agreement was evidence that StorMedia had breached the
Agreement. (A concurrent class action was later filed in the U.S. District
Court for the Northern District of California by the same parties.)
One week later, on September 25, 1996, StorMedia commenced an action in
the U.S. District Court for the Northern District of California entitled,
STORMEDIA INCORPORATED V. HYUNDAI ELECTRONICS INDUSTRIES CO., LTD., ET AL.,
U.S. District Court, Northern District, No. C-96 20805 RMW (EAI) (the
"Federal Action"), against Hyundai Electronics Industries Co., Ltd. ("HEI")
- -- the Company's Korean grandparent -- which also signed the Agreement.
StorMedia also sued M.H. Chung, HEI's chairman; K.S. Yoo, the individual who
signed the Agreement on behalf of HEI; and Dr. C.S. Park, the individual who
signed the Agreement on behalf of the Company. StorMedia, however, did not
sue the Company.
StorMedia filed an Amended Complaint on February 14, 1997 in the Federal
Action. The Amended Complaint alleged Fraud and Deceit (against all
Defendants); Negligent Misrepresentation (against all Defendants); Breach of
Contract (against HEI); Breach of Contract -- Covenant Not to Compete
(against HEI); Breach of the Implied Covenant of Good Faith and Fair Dealing
(against HEI); and Unlawful, Unfair or Fraudulent Business Practices (Against
HEI). The plaintiff alleged that HEI entered into a volume purchase
agreement with StorMedia pursuant to which HEI and the Company committed to
purchase rigid discs for use in the Company's drives. At the time HEI
entered the Agreement, plaintiff contends that HEI knew that it could not and
would not purchase the volume of products which it committed to purchase.
Plaintiff further contends that HEI entered into the contract in order to
secure a source of components for the Company only long enough for HEI to
develop its own internal disc manufacturing capacity and that it and the
other defendants never intended to fully perform the Agreement. Plaintiff
sought damages in excess of $206 million dollars, punitive damages,
injunctive relief, attorneys' fees, pre-judgment and post-judgment interest,
and costs.
On December 20, 1996, the Company filed a Complaint in Colorado state
court entitled MAXTOR CORPORATION V. STORMEDIA INC. ET AL., District Court,
County of Boulder, Colorado, No. 96 CV 161 ("Colorado Action"), against
StorMedia Incorporated, StorMedia International Ltd., and William J. Almon,
StorMedia's CEO. The complaint alleges Breach of Contract (against all
Defendants except Almon), Breach of the Implied Warranty of Fitness (against
all Defendants except Almon), Breach of the Implied Warranty of
Merchantability (against all Defendants except Almon), Fraud (against all
Defendants), and Negligent Misrepresentation (against all Defendants). The
Company seeks damages in excess of $100 million dollars, punitive damages,
reasonable attorneys' fees, and costs. In March, 1997, the Colorado Action
was stayed.
On October 24, 1997, the Company filed a Motion to Intervene in the
Federal Action. HEI moved to dismiss the action for failure to join the
Company as a party. On February 18, 1998, the U.S. District dismissed the
Federal Action in its entirety. Accordingly, on February 20, 1998, the
Company filed a Motion for Relief from Stay in the Colorado action. On
February 24, 1998, the Company was served with a new complaint by StorMedia
entitled STORMEDIA, INC. AND STORMEDIA INTERNATIONAL LTD. V. HYUNDAI
ELECTRONICS INDUSTRIES CO., LTD., ET AL., in the Superior Court of
California, County of Santa Clara, Case No. CV 772103 ("California Action").
This new complaint alleges Fraud and Deceit (against all Defendants),
Negligent Misrepresentation (against all Defendants), Breach of Contract
(against HEI and the Company), Breach of Contract -- Covenant not to Compete
(against HEI), Unlawful, Unfair, or Fraudulent Business Practices (against
HEI and the Company). Plaintiff seeks damages in excess of $206 million
dollars, punitive damages, injunctive relief, attorneys' fees, pre-judgment
and post-judgment interest, and costs. On
9
<PAGE>
March 26, 1998, the Company moved to stay the California Action in light of
the substantially identical action pending in Colorado.
The Company believes that any demand for damages at trial would be
substantial. There has been no discovery in the Colorado Action or the
recently filed California Action. There has been some initial discovery
exchanged in the now dismissed Federal Action. No depositions on the merits
of the claims have been taken. The Company believes that it has meritorious
defenses to such claims and intends to defend the litigation vigorously.
However, due to the nature of the litigation and because the pending lawsuits
are in the very early pre-trial stages, the Company cannot determine the
possible loss, if any, that may ultimately be incurred either in the context
of a trial or as a result of a negotiated settlement. The two pending
litigations could result in significant diversion of time by the Company's
technical personnel. While after consideration of the nature of the claims
and facts relating to the litigation, including the results of preliminary
discovery, management believes that the resolution of this matter will not
have a material adverse effect on the Company's business, operating results
and financial conditions, 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, operating
results, and financial condition.
The Company has been notified of certain other claims, including claims of
patent infringement. While the ultimate outcome of such claims is not
determinable, the Company does not believe that resolution of these matters
will have a material impact on the financial condition or results of
operations of the Company. This statement should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 27, 1997.
4. 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.
5. 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 requirement of SFAS No. 131 and the effects, if
any on the Company's current reporting and disclosures.
6. RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform to
current classifications.
7. RELATED PARTY TRANSACTION
During the quarter ended March 28, 1998 the Company purchased certain
component parts from an affiliate of its parent, Hyundai Electronics America,
Inc. amounting to $27.6 million.
8. STOCK COMPENSATION
The Company adopted an Amended and Restated 1996 Option Plan in February 1998
to remove the variable features, and offered and re-issued new fixed-award
options in April 1998 for the majority of employees which had previously held
variable options. In connection therewith, the Company recorded compensation
expense related to the difference between the estimated fair market value of
its stock as of March 28, 1998 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."
10
<PAGE>
This report includes forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those discussed in Item 2. Management's Discussion and Analysis of
Financial Condition and "Results of Operations" and "Liquidity and Capital
Resources;" and elsewhere in this report, that could cause actual results to
differ materially from historical results or those anticipated. In this
report, the words "anticipates," "believes," "expects," "intends," "future"
and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof.
Maxtor-Registered Trademark- is a registered trademark and DiamondMax-TM-,
CrystalMax-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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ITEM 1:
BUSINESS, ITEM 6: SELECTED FINANCIAL INFORMATION AND ITEM 8: CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
RESULTS OF OPERATIONS
QUARTER ENDED March 28, 1998 COMPARED TO QUARTER ENDED March 29, 1997
REVENUE AND GROSS PROFIT (LOSS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(IN MILLIONS) March 28, March 29,
THREE MONTHS ENDED 1998 1997 Change
- -----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Revenue $ 549.6 $ 247.0 $ 302.6
Gross profit (loss) $ 62.3 $ (7.1) $ 69.4
As a percentage of revenue 11.3% (2.9%)
Net (loss) $ (10.3) $ (55.0) $ 44.7
As a percentage of revenue (1.9%) (22.3%)
- -----------------------------------------------------------------------------------------
</TABLE>
REVENUE
Revenue increased 123% in the quarter ended March 28,1998 compared to the
quarter ended March 29, 1997 primarily due to an increase in unit shipments
of approximately 171%, partially offset by average unit prices which were
lower by 18%. Revenue from the OEM channel increased 210%. The increase in
OEM revenues was partially offset by a 18% decline in revenues from the
Company's Distributor Channel. Revenue and unit volume growth in 1998 were
favorably impacted by better time to market performance, strengthening of the
customer base and a continued trend to shipping higher capacity drives. This
was offset somewhat by continued pricing pressures which resulted in lower
average unit selling prices.
GROSS PROFIT (LOSS)
Gross profit as a percentage of revenue improved consistently, throughout
1997 and first quarter of 1998. The increase in gross profit is due mainly
to the increase in unit volumes and the introduction of new products which
achieved market acceptance due to a return to competitive aerial density. As
mentioned above, the increase in revenues and profits due to increased
shipment volumes was somewhat offset by continued pricing pressures which
resulted in lower average unit selling prices.
The Company will continue its efforts to increase gross profit by reducing
its average unit manufacturing costs. However, there can be no assurance
that average unit selling prices will not decline at a more rapid rate or
that the Company will be successful in its efforts to continue to gain
improvements in gross profit percentages.
11
<PAGE>
OPERATING EXPENSES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(IN MILLIONS) March 28, March 29,
THREE MONTHS ENDED 1998 1997 Change
- -----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Research and development $ 33.4 $ 26.4 $ 7.0
As a percentage of revenue 6.1% 10.7%
Selling, general and administrative $ 15.9 $ 15.1 $ 0.8
As a percentage of revenue 2.9% 6.1%
Stock compensation expense $ 14.7 $ - $14.7
As a percentage of revenue 2.7% -
- -----------------------------------------------------------------------------------------
</TABLE>
Although R&D as a percentage of revenue decreased from 1997, the absolute
dollar level of investment in R&D increased from 1997. The increase in dollar
level of R&D expenditures compared to 1997 was expected partly because the
Company redefined its product and technology road map to focus on its core
desk top business.
During 1998, the Company will focus on controlling spending while continuing
R&D activities that support timely product introduction and transition to
volume production. There can be no assurances that the Company will be
successful in its effort to control spending.
Selling, general and administrative expenses (SG&A) decreased as a percentage
of revenue while increasing in absolute dollars, due to the Company's ongoing
efforts to control costs. Controlled marketing, general and administrative
expenses contributed to lower SG&A expenses as a percentage of revenue in
first quarter of 1998.
INTEREST EXPENSE AND INTEREST INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(IN MILLIONS) March 28, March 29,
THREE MONTHS ENDED 1998 1997 Change
- -----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Interest expense $ 8.8 $ 7.9 $ 0.9
Interest and other income $ 0.3 $ 1.8 $ (1.5)
- -----------------------------------------------------------------------------------------
</TABLE>
Interest expense increased due to higher average cost of borrowings.
Maxtor's borrowing cost is being adversely impacted due to changes in the
economic environment in Korea and its impact on Hyundai Electronics America
(Maxtor's parent company).
Interest and other income decreased due to payment received on a note
receivable accounted for on a recovery basis in the first quarter of 1997.
12
<PAGE>
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(IN MILLIONS) March 28, March 29,
THREE MONTHS ENDED 1998 1997 Change
- -----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Provision for income taxes $ 0.1 $ 0.3 $ (0.2)
- -----------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes consists primarily of foreign taxes. The
decrease of $0.2 million is due to lower Korean taxes as a result of
implementing certain tax planning strategies in 1998.
The Company's effective tax rate for the periods 1998 and 1997 differs from
the combined federal and state rates due to the repatriation of foreign
earnings absorbed by current year domestic losses, and the Company's U.S.
operating losses not providing current tax benefits, offset in part by the
tax savings associated with the Company's Singapore operations and valuation
of temporary differences. Income from the Singapore operation is not taxable
as a result of the Company's pioneer tax status in Singapore.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
As of and for
the three months ended
March 28,
(IN MILLIONS) 1998
- ------------------------------------------------------------------------------
<S> <C>
Cash and cash equivalents $ 13.3
Net cash provided by operating activities $ 33.7
Net cash provided by investing activities $ 1.7
Net cash used in financing activities $ (38.9)
Short-term credit borrowings $ 131.1
Long-term credit borrowings $ 219.3
- ------------------------------------------------------------------------------
</TABLE>
At March 28, 1998, the Company had $13.3 million in cash and cash equivalents
as compared to the $16.9 million at December 27, 1997. Net cash provided by
operating activities was $33.7 million for the three month period ended March
28, 1998 as compared to the ($82.6) million for the three month period ended
March 30, 1997. Cash generated in the three months ended March 28, 1998
reflected net income plus depreciation and amortization and an increase in
accounts payable partially offset by increases in inventory and accounts
receivable. The cash generated from operations was primarily due to
increased sales and improved margins. This cash combined with $1.7 million in
cash provided by investing activities was used to pay down debt of $(38.9)
million during first quarter of 1998.
At March 28, 1998, the Company had $350 million of short-term and long-term
unsecured debt comprised of $200 million of credit facilities from various
banks (Bank Debt), $55 million of inter-company debt from HEA and $95 million
of publicly-traded Subordinate convertible debt. The $200 million Bank Debt
consists of two lines of credit totaling $160 million syndicated by Citibank,
N.A. and two bilateral lines of credit borrowings of $30 million and $10
million respectively.
HEI is the guarantor of a $160 million outstanding under the Company's
Facilities and a $10 million bilateral facility as of March 28, 1998. 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, HEI has been found not to be
13
<PAGE>
in technical compliance with certain financial covenants. Consequently, if
this technical default is not waived, there will be a default under the terms
of the guaranty which may constitute a default under the Company's credit
facilities guaranteed by HEI and a default under a credit facility with $30
million outstanding as of March 28, 1998 not guaranteed by HEI. The Company
has requested any necessary waivers; although there can be no such assurance,
the Company believes that such waivers can be obtained.
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
million on a non-recourse basis, subject to increase to $150 million, upon
the fulfillment of the conditions subsequent described below. On April 8,
1998, the uncollected purchase price under the existing program, in the
amount of approximately $100 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 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
and Maxtor Receivables Corporation under the New Program. This performance
guarantee is similar to the arrangement that HEI provided under the Original
Program. The Company must satisfy these conditions subsequent within 30 days
of receiving undertaking documents from Citicorp and presently believes that
it will be able to successfully satisfy these conditions.
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 months ended December 27, 1997, nine months ended
December 28, 1996 and twelve months ended March 30, 1996, the Company made
capital expenditures, net of disposals, of $76.7 million, $53.4 million and
$72.3 million, respectively. During 1998, capital expenditures are expected
to be approximately $100 million. To accommodate anticipated growth, the
Company is investigating a number of options with regard to expanding its
manufacturing capabilities either in Singapore or at an alternative location.
The Company believes that the Singapore manufacturing capability, after
executing current expansion plans, will allow it to sustain growth through
the fourth quarter of 1999.
The Company requires substantial working capital to fund its business,
particularly to finance accounts receivable and inventory and investments in
property and equipment. Since 1995 the Company has obtained additional
liquidity from or with the assistance of HEA and HHI, and its affiliates.
The Company does not expect to be able to rely on HEA or its affiliates for
future liquidity needs. Accordingly, the Company is currently exploring
other avenues of liquidity. There can be no assurance that any financing
will be available on terms which are favorable to the Company. Assuming the
current bank lines remain in place, the Company believes that the combination
of the measures described above, together with its cash and cash equivalents,
should be sufficient to fund the Company's working capital and capital
expenditure requirements at current operating levels through fiscal year 1998
but may not be adequate to support anticipated future growth.
14
<PAGE>
TRENDS AND UNCERTAINTIES
GENERAL
The Company competes in the highly cyclical disk drive industry and is
subject to a number of risks which have affected the Company's operating
results in the past and may affect its future operating results. The industry
is characterized by rapid technological change, intense competition, short
product life cycles, and significant price erosion during a product life
cycle. At times, the industry is also subject to excess production capacity
and component cost pressures as a result of key component shortages. Managing
product transitions and bringing products to market in a timely and cost
effective manner are critical to the success of industry participants,
including the Company. Many of the Company's competitors have broader
product lines which allow them to mitigate certain volatility in this
environment.
INDUSTRY CHARACTERISTICS
As with all companies in the disk drive industry, The Company's financial
results continue to be heavily dependent on the success of its products.
Competitive areal densities are continuing to increase dramatically. Data
storage manufacturers continually strive for larger storage capacities,
higher performance and lower cost.
Short product life cycles also increase the importance of the Company's
ability to successfully manage product transitions. Although the Company
successfully managed product transitions in the recent past, the Company has
historically experienced difficulties with some product transitions and there
can be no assurance that product transitions will be successfully managed in
the future. New products introduced by competitors, as well as those
introduced by the Company, tend to displace older products. The failure to
adequately manage product transitions could result in the loss of market
opportunities, decreased sales of existing products, cancellation of products
or product lines, the accumulation of obsolete and excess inventory, and
unanticipated charges related to obsolete inventories and capital equipment.
The Company's ability to anticipate market trends and to successfully
develop, manufacture in volume and sell new products in a timely manner and
at favorable gross margins will be important factors affecting the Company's
future results.
MANUFACTURING CHARACTERISTICS
The Company's manufacturing processes require large volumes of leading edge,
high-quality components supplied by outside vendors. Generally, the Company
does not have long-term supply agreements with its vendors. The Company has
qualified multiple vendors for components where practical. However, some
leading edge components for the Company's new generation of products may only
be available from a limited number of vendors. The Company has periodically
received notices from vendors that they are unable to supply required volumes
of certain key components. Vendor de-commitments can adversely impact the
Company's ability to ship products as scheduled to its customers. While the
Company has qualified and continues to qualify multiple vendors for many
components, it is reliant on, and will continue to be reliant on, the
availability of supply from its vendors for many semi-custom and custom
integrated circuits, heads, media and other key components. Because the
Company is less vertically integrated than its competitors, an extended
shortage of required materials and supplies could have a more severe effect
on the Company's revenues and earnings as compared to its competition. In
light of current industry conditions, the Company is focused on developing
good business relationships with its vendors and utilizing strategic
alliances for certain components where practical.
15
<PAGE>
COMPANY RELATED CHARACTERISTICS
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: fluctuations in Hard Disk Drive
(HDD) product demand as a result of the cyclical and seasonal nature of the
PC industry; the Company's inability to develop, manufacture and market
competitive products in a timely manner; the availability and extent of
utilization of manufacturing capacity; unanticipated changes in product mix;
entry of new competitors; exchange rate fluctuations; cancellation or
rescheduling of significant orders; the lengthy process of qualifying the
Company's products with its customers; deferrals of customer orders in
anticipation of new products or enhancements; the impact of price protection
measures and return privileges granted by the Company to certain of its
distributors; component and raw materials costs and availability,
particularly with respect to components obtained from sole or limited
sources; increases in research and development expenditures to maintain the
Company's competitive position; changes in the Company's strategy; personnel
changes; and 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 material adverse
effect of any revenue shortfall as a result of fluctuations in product demand
or otherwise will be magnified by the fixed nature of such operating expenses.
In addition, the HDD industry is characterized by rapidly declining
average selling prices (ASPs) over the life of a product. 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 industry supply and cost reductions occur
and as technological advancements are achieved. As is currently occurring in
the HDD industry, the rate of ASP decline accelerates when some competitors
lower prices to absorb excess capacity, liquidate excess inventories,
restructure or attempt to gain market share. This continuing price erosion
could materially adversely affect the Company's business, financial condition
and results of operations in any given quarter and such adverse effects often
cannot be anticipated until late in any given quarter.
The Company presently offers a single product family which is designed
for the desktop segment of the HDD industry. The demand for the Company's
HDD products is therefore dependent to a large extent on 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), and overall foreign and domestic
economic conditions. The desktop PC and related HDD markets historically
have been characterized by periods of rapid growth followed by periods of
oversupply, contraction, and rapid price and gross margin erosion which the
industry has experienced. This environment makes it very difficult for the
Company and its customers to reliably forecast demand for the Company's
products. The Company does not enter into long-term supply contracts with
its 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 PCs over the past several years, some industry analysts are
predicting a relatively slower future growth rate in the PC market. 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 PC's than would a company with a broader range of products. Any
actual or perceived slowdown in the demand for desktop PCs would lead in turn
to a slowdown in the growth of 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 will shift to
other market segments that will experience significantly faster growth. In
addition, the Company believes that to remain a significant provider of HDDs
to major OEMs, the Company will need to offer a broader range of HDD products
as those OEMs are driven by market conditions to offer
16
<PAGE>
new categories of products. For these reasons, in order to remain
competitive, the Company will need to develop and manufacture new products
which address different HDD market segments and emerging technologies. There
is no assurance that the Company will be able to develop or manufacture such
products or, if it is able to develop and manufacture such products, that it
will be able to do so in a timely manner, or that, if developed and
manufactured, such products will attain market acceptance.
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
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance. The Company has evaluated
its level of exposure to the risks and costs associated with Year 2000
problems and is currently in the process of updating it information systems
to be Year 2000 compliant. The Company expects its information systems to be
Year 2000 compliant by the end of fiscal 1999, and anticipates no disruptions
in the manufacturing services it provides to its customers as a result of
Year 2000 problems; however, no assurance can be given that such updates will
be fully completed in a timely manner or that such disruptions will not
occur. Any disruption in manufacturing services provided by the Company as a
result of Year 2000 noncompliance would materially adversely affect the
Company's business, financial condition and results of operations. 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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
STORMEDIA LITIGATION
(PLEASE REFER TO NOTE 3 TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINGENCIES)
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.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
MAXTOR CORPORATION
By /s/ Paul J. Tufano
--------------------------------
Paul J. Tufano
Vice President, Finance and
Chief Financial Officer
Date: May 18, 1998
19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit No Description Numbered Pages
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
10.163 (40) Intercompany Loan Agreement, dated as of April 10, 1997, between
Maxtor Corporation and Hyundai Electronics America
10.164 (41) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Maxtor Corporation and Hyundai
Electronics America
10.165 (41) Amendment to August 29, 1996 364-Day Credit Agreement,
dated August 27, 1997, among Maxtor Corporation,
Citibank, N.A. and Syndicate Banks
10.166 (41) Amended and Restated 1996 Stock Option Plan, effective October 1, 1997
27 Financial Data Schedule
- -----------------------------------------------------------------------------------------------------
</TABLE>
(40) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997
(41) Incorporated by reference to exhibits of Form 10K filed April 10, 1998
E-1
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> MAR-28-1998
<EXCHANGE-RATE> 1
<CASH> 13,305
<SECURITIES> 0
<RECEIVABLES> 321,633
<ALLOWANCES> 3,238
<INVENTORY> 163,974
<CURRENT-ASSETS> 530,140
<PP&E> 277,346
<DEPRECIATION> 180,799
<TOTAL-ASSETS> 634,568
<CURRENT-LIABILITIES> 635,164
<BONDS> 100,000
0
880
<COMMON> 0
<OTHER-SE> (219,916)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 634,568
<SALES> 549,617
<TOTAL-REVENUES> 549,617
<CGS> 487,362
<TOTAL-COSTS> 487,362
<OTHER-EXPENSES> 63,991<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,768
<INCOME-PRETAX> (10,230)
<INCOME-TAX> 89
<INCOME-CONTINUING> (10,319)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,319)
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0<F3>
<FN>
<F1>OTHER SE INCLUDES ADDITIONAL PAID-IN CAPITAL OF $537,090, UNREALIZED GAIN ON
INVESTMENTS IN EQUITY SECURITIES OF $25,386 AND ACCUMULATED DEFICIT OF
$783,272.
<F2>OTHER EXPENSES INCLUDE RESEARCH AND DEVELOPMENT OF $33,372 AND SELLING,
GENERAL AND ADMINISTRATIVE COSTS OF $15,923, AND STOCK COMPENSATION EXPENSE OF
$14,696.
<F3>EARNINGS PER SHARE IS NOT APPLICABLE.
</FN>
</TABLE>
