<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1998
REGISTRATION NO. 333-56099
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3572 77-0123732
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
510 COTTONWOOD DRIVE
MILPITAS, CALIFORNIA 95035
(408) 432-1700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL R. CANNON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAXTOR CORPORATION
510 COTTONWOOD DRIVE
MILPITAS, CALIFORNIA 95035
(408) 432-1700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
GREGORY M. GALLO, ESQ. ALAN L. BELLER, ESQ.
DIANE HOLT FRANKLE, ESQ. RAYMOND B. CHECK, ESQ.
JOSEPH B. HERSHENSON, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON
GRAY CARY WARE & FREIDENRICH LLP ONE LIBERTY PLAZA
400 HAMILTON AVENUE NEW YORK, NEW YORK 10006
PALO ALTO, CALIFORNIA 94301-1825 (212) 225-2000
(650) 328-6561
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
47,500,000 SHARES
LOGO
COMMON STOCK
------------------------
Of the 47,500,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock"), of Maxtor Corporation ("Maxtor" or the "Company") offered
hereby, 38,000,000 shares are being offered by the U.S. Underwriters (as
defined) in the United States and Canada (the "U.S. Offering") and 9,500,000
shares are being offered by the International Underwriters (as defined) in a
concurrent offering outside the United States and Canada (the "International
Offering" and, together with the U.S. Offering, the "Offerings"), subject to
transfers between the U.S. Underwriters and the International Underwriters
(collectively the "Underwriters"). The initial public offering price and the
aggregate underwriting discount per share will be identical for the U.S.
Offering and the International Offering. See "Underwriting." The closing of the
International Offering is conditioned upon the closing of the U.S. Offering and
vice versa. See "Underwriting."
All of the shares of Common Stock offered hereby are being sold by the
Company. Upon completion of the Offerings, Hyundai Electronics America ("HEA"),
which is a majority-owned subsidiary of Hyundai Electronics Industries Co., Ltd.
("HEI"), a corporation organized under the laws of the Republic of Korea, will
own approximately 48% (approximately 44% if the Underwriters' over-allotment
options are exercised in full) of the outstanding shares of Common Stock. See
"Risk Factors -- Control by and Dependence on Hyundai."
Prior to the Offerings, there has not been a public market for the Common
Stock. It currently is estimated that the initial public offering price will be
between $8.50 and $10.50 per share. See "Underwriting" for information relating
to the factors considered in determining the initial public offering price. The
shares of Common Stock have been approved for quotation on the Nasdaq National
Market under the symbol "MXTR."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------
Per Share $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $1,500,000, payable by the
Company.
(3) The Company has granted the U.S. Underwriters and the International
Underwriters 30-day options to purchase up to 5,700,000 and 1,425,000
additional shares of Common Stock, respectively, solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are being offered by the several U.S.
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that certificates for the
shares of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001, or through the facilities of The Depository Trust Company.
------------------------
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
<PAGE> 3
Capitalized terms used in the summary on the following pages have the
meanings ascribed to such terms elsewhere in this Prospectus. References in this
Prospectus to "Korea" are to the Republic of Korea. Certain technical terms used
throughout this Prospectus are defined in the Glossary appearing immediately
prior to the Consolidated Financial Statements at the end of this Prospectus.
Maxtor(R) and No Quibble(R)are registered trademarks, and the Maxtor logo,
DiamondMax(TM) and Formula 4(TM) are trademarks, of the Company. All other brand
names and trademarks appearing in this Prospectus are the property of their
respective holders.
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING PURCHASES OF SUCH SECURITIES TO STABILIZE THEIR MARKET PRICE,
PURCHASES OF SUCH SECURITIES TO COVER SOME OR ALL OF A SHORT POSITION IN SUCH
SECURITIES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors." Unless otherwise
indicated herein, all information in this Prospectus: (i) assumes no exercise of
the Underwriters' over-allotment options; (ii) has been adjusted to reflect the
automatic conversion of each outstanding share of preferred stock of the Company
into 0.5 of a share of Common Stock upon the closing of the Offerings; and (iii)
reflects a 1 for 2 reverse stock split (the "Reverse Stock Split"), which
occurred on July 24, 1998.
Maxtor is a leading provider of hard disk drive ("HDD") storage products
for desktop PC systems. The Maxtor DiamondMax product family consists of
3.5-inch form factor HDDs with storage capacities which range from 2.1 GB to
13.6 GB. These products have high speed interfaces for greater data throughput,
a robust mechanical design for improved reliability, MR head technology and a
DSP-based electronic architecture that, when combined, provide industry-leading
benchmark performance. On June 15, 1998, Maxtor announced two new HDD products,
the DiamondMax 3400 and the DiamondMax Plus 2500. The DiamondMax 3400 is
Maxtor's fifth MR head HDD, its sixth HDD utilizing the Company's DSP-based
electronic architecture and its eighth HDD based on the Company's Formula 4
mechanical structure. The DiamondMax Plus 2500, which is designed for the
performance desktop PC market, is the Company's first HDD to feature a 7,200 RPM
spin speed, its sixth MR head HDD, its seventh HDD utilizing the Company's
DSP-based electronic architecture and its ninth HDD based on the Company's
Formula 4 mechanical structure. The Company's customers are leading PC OEMs,
including Compaq, Dell and IBM; distributors, including Ingram; and retailers,
including Best Buy and CompUSA.
During the mid-1980s, the Company was a leading technology innovator in the
HDD industry. Faced with intense competition, the Company pursued all major
product segments in the HDD market, which added significant complexity to the
business and caused the Company to delay or miss a number of key product
introductions. This strategy led to the deterioration of the Company's overall
financial condition which, in turn, led to the sale of a 40% stake in the
Company to HEI and certain of its affiliates in 1994. In early 1996, HEA
acquired all of the Company's outstanding Common Stock. Shortly thereafter, HEA
invested in renewed efforts to revitalize the Company. In July 1996, the Company
hired Michael R. Cannon, its current Chief Executive Officer and President and a
20 year veteran of the HDD industry, to lead Maxtor's turnaround. Mr. Cannon
immediately took a number of steps to position the Company to become a
significant provider of HDDs to leading PC OEMs, including improving product
performance, quality, time-to-market entry and time-to-volume manufacturing, and
refocusing the Company's sales and marketing efforts.
As a result, Maxtor's performance has improved significantly during a
period of severe fluctuations in the overall HDD market. The Company's
restructured manufacturing and product development processes as well as its cost
competitiveness initiatives resulted in the Company achieving one of the fastest
transitions in the industry from HDDs utilizing thin-film head technology to
100% use of MR head technology, while also achieving among the lowest selling,
general and administrative costs as a percentage of revenue in the industry for
1997 and the first six months of 1998. These manufacturing and development
processes also helped the Company increase its units shipped per quarter from
1.3 million units in the first quarter of 1997 to 3.7 million units in the
second quarter of 1998 and increase its market share of the desktop HDD market
in terms of quarterly unit shipments from 5.6% in the first quarter of 1997 to
13.4% in the first quarter of 1998, according to IDC. The Company's refocused
efforts on leading PC OEMs, including Compaq, Dell and IBM, resulted in an
increase in the Company's revenues from these PC OEMs from 6.5% of total revenue
in the second quarter of 1996 to 54.1% in the second quarter of 1998.
Cumulatively, these changes have led to significantly improved financial
results. The Company's revenues grew by 103.9% from $530.1 million to $1,080.9
million during the first six months of 1997 and 1998, respectively, while its
gross margins improved from (0.8)% to 11.5% during the same periods.
According to IDC, the desktop PC market is the largest segment of the
worldwide PC market, accounting for approximately 80% of global PC shipments in
1997. As a result, desktop PCs were the leading source of demand for HDDs,
accounting for more than 75% of all HDD units shipped worldwide in 1997. PC OEMs
compete in a consolidating market. The top ten PC OEMs accounted for greater
than 50% of all
3
<PAGE> 5
PC units shipped during 1997 and the first quarter of 1998. IDC forecasted, as
of May 1998, that the desktop HDD market will grow from approximately 100
million units in 1997 to approximately 174 million units in 2001, reflecting a
compound annual growth rate of approximately 15%.
Maxtor seeks to be the dominant provider of HDDs to leading PC OEMs,
distributors and retailers. Maxtor's strategy to achieve this goal includes the
following elements: (i) effectively integrating new technology; (ii) leveraging
design excellence; (iii) capitalizing on flexible manufacturing; (iv) increasing
market share with leading PC OEMs; (v) maintaining customer satisfaction; and
(vi) broadening the Company's product portfolio.
HEA owns all of the Company's Series A Preferred Stock and 99.0% of the
total capital stock outstanding immediately prior to the Offerings. Immediately
following the Offerings HEA will own approximately 48% of the outstanding Common
Stock (approximately 44% if the Underwriters' overallotment options are
exercised in full). As a subsidiary of HEA, Maxtor has received financial
support from HEA and HEI (including credit guarantees and direct advances) and
has received the benefit of various contractual relationships. The Company
intends to use a portion of the proceeds of the Offerings to repay all
outstanding amounts guaranteed by Hyundai entities and all outstanding advances
to the Company from Hyundai entities. Conflicts of interest may arise from time
to time in the future between the Company and HEA or its affiliates in a number
of areas relating to their past and ongoing relationships. In contemplation of
the Offerings, Maxtor, HEA and HEI have entered into certain agreements
governing certain ongoing relationships between them that are intended in part
to address such conflicts. See "Risk Factors -- Control by and Dependence on
Hyundai" and "Relationship Between the Company and Hyundai."
4
<PAGE> 6
THE OFFERINGS
<TABLE>
<S> <C> <C>
U.S. Offering............................................... 38,000,000 shares
International Offering...................................... 9,500,000 shares
----------
Total............................................. 47,500,000 shares
Common Stock outstanding after the Offerings(1)(2).......... 91,974,998 shares
Common Stock held by HEA immediately after the Offerings.... 44,029,850 shares
Nasdaq National Market symbol............................... "MXTR"
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of June 27, 1998. Excludes
5,183,129 shares of Common Stock issuable upon the exercise of options
outstanding under the Company's 1996 Amended and Restated Stock Option Plan
with a weighted average exercise price of $6.06 per share. See
"Management -- Benefit Plans," "Description of Capital Stock" and Notes 1
and 10 of notes to consolidated financial statements.
(2) Assumes no exercise of the Underwriters' over-allotment options.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $427.2 million (approximately $491.5
million if the Underwriters' over-allotment options are exercised in full),
assuming an initial public offering price of $9.50 per share of Common Stock and
after deducting the estimated underwriting discounts and estimated offering
expenses payable by the Company. Approximately $255.0 million of the net
proceeds from the Offerings will be used to repay certain outstanding
indebtedness of the Company, including accrued interest and monies owed to HEA.
The remaining approximately $172.2 million of such net proceeds (approximately
$236.5 million if the Underwriters' over-allotment options are exercised in
full) will be available for capital expenditures, working capital and general
corporate purposes. Pending such uses, the net proceeds to the Company of the
Offerings will be invested in investment-grade, interest-bearing securities. See
"Use of Proceeds."
RISK FACTORS
See "Risk Factors" beginning on page 7 for a discussion of certain factors
that should be considered by potential investors.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED -------------------------
MARCH 30, DECEMBER 28, DECEMBER 27, JUNE 28, JUNE 27,
1996 1996(1) 1997 1997 1998
---------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $ 1,269.0 $ 798.9 $ 1,424.3 $ 530.1 $ 1,080.9
Gross profit (loss)........................... 72.7 (90.0) 71.4 (4.3) 124.7
Total operating expenses...................... 182.0 148.5 168.8 82.4 114.3(2)
Income (loss) from operations................. (109.3) (238.5) (97.4) (86.7) 10.4(2)
Interest expense.............................. (11.8) (18.1) (36.5) (16.6) (17.5)
Net loss...................................... (122.8) (256.3) (109.9)(3) (101.6) (4.9)(2)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27,
1997 1997 1997 1997 1998 1998
----------- ----------- ------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF OPERATIONS
DATA:
Revenue............................ $ 247.0 $ 283.1 $ 392.2 $ 502.0 $ 549.6 $ 531.3
Gross profit (loss)................ (7.1) 2.8 21.5 54.2 62.3 62.4
Total operating expenses........... 41.5 40.9 42.2 44.2 64.0 50.3
Income (loss) from operations...... (48.6) (38.1) (20.7) 10.0 (1.7) 12.1
Interest expense................... (7.9) (8.7) (10.9) (9.0) (8.8) (8.7)
Net income (loss).................. (55.0) (46.6) (31.4) 23.1(3) (10.3) 5.4
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 27, 1998
----------------------------
ACTUAL AS ADJUSTED(4)
----------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 15.0 $ 187.2
Total assets................................................ 545.6 717.8
Short-term borrowings, including current portion of
long-term debt............................................ 131.2(5) 5.2
Total current liabilities................................... 541.0 415.0
Long-term debt and capital lease obligations due after one
year...................................................... 219.3 90.3
Total stockholders' equity (deficit)........................ (214.7) 212.5
</TABLE>
- ---------------
(1) The Company changed its fiscal year during the period ended December 28,
1996 to conform its fiscal year to that of its parent, HEA.
(2) Total operating expenses, income (loss) from operations and net loss for the
six months ended June 27, 1998 reflect a $9.9 million compensation charge
related to the variable accounting features of the Company's 1996 Stock
Option Plan (the "Option Plan"). Without such charge, the Company would have
had total operating expenses of $104.4 million, income from operations of
$20.3 million and net income of $5.0 million. The Option Plan has been
amended and restated (referred to herein as the "Amended Plan") to remove
the variable features and provide for fixed award options. See
"Management -- Benefit Plans" and Note 10 of notes to consolidated financial
statements.
(3) Includes recovery of a $20.0 million fully-reserved note from International
Manufacturing Services, Inc. ("IMS"). See "Certain Transactions."
(4) As adjusted to reflect the sale of 47,500,000 shares of Common Stock offered
hereby, after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company and repayment of approximately
$255.0 million of the Company's outstanding debt.
(5) Includes $55.0 million of short-term borrowings due to its parent, HEA.
6
<PAGE> 8
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
the U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this Prospectus 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. In this Prospectus, 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 Prospectus as a result of certain
factors including, but not limited to, those set forth in the following risk
factors and elsewhere in this Prospectus. In addition to the other information
in this Prospectus, prospective investors should consider carefully the
following risk factors in evaluating the Company and its business before
purchasing shares of Common Stock in the Offerings.
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 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.
The Company also recorded operating and net losses in the six months ended June
27, 1998 due to a $9.9 million compensation expense related to variable features
of the Option Plan. The Option Plan has been amended and restated to remove the
variable features and provide for fixed award options. 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 "-- Expected Volatility of Stock Price; Absence of Current
Trading Market for the Common Stock" and "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
7
<PAGE> 9
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 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
8
<PAGE> 10
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," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Industry
Background -- HDD Market Challenges," "-- Customers and Sales Channels" and
"-- Sales and Marketing."
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.
See "Business -- Competition."
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
9
<PAGE> 11
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,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Competition."
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
10
<PAGE> 12
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
printed circuit boards ("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,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview," "Business -- Product Development/ Technology" and
"-- Products."
TRANSITION TO AND DEPENDENCE ON INFORMATION SYSTEMS; YEAR 2000 PROBLEM
The Company is preparing to implement a new enterprise-wide information
system (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
11
<PAGE> 13
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," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
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.
See "Business -- Employees" and "Management -- Directors and Executive
Officers."
12
<PAGE> 14
CONTROL BY AND DEPENDENCE ON HYUNDAI
Upon completion of the Offerings, HEA will own approximately 48%
(approximately 44% if the Underwriters' over-allotment options are exercised in
full) 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. Immediately following the Offerings,
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 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 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 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 June 27, 1998. 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. The Company intends to use a portion of the proceeds of the Offerings
to pay down in full all outstanding amounts
13
<PAGE> 15
under each of its revolving credit facilities and any amounts then outstanding
under the demand facility as well as the $55.0 million owed to HEA, and
thereafter to terminate the revolving credit facilities. The Company intends to
obtain replacement revolving credit facilities following the Offerings that do
not depend on any Hyundai entity 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 any such replacement facility
or as to the terms and amount of any such facility that it is able to obtain.
Any failure to obtain 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 has the benefit of a letter of support from HEI under which HEI agrees
to provide sufficient financial support to ensure that the Company will continue
as a going concern. Following the Offerings, 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, as expected,
following the Offerings 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,"
"-- Single Manufacturing Facility; Future Need for
14
<PAGE> 16
Additional Capacity," "-- Expected Volatility of Stock Price; Absence of Current
Trading Market for the Common Stock," "-- Shares Eligible for Future Sale,"
"Relationship Between the Company and Hyundai," "Business -- Intellectual
Property," "Certain Transactions" and "Shares Eligible for Future Sale."
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 the Company's Singapore subsidiary, Maxtor Peripherals (S)
Pte. Ltd ("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 U.S. consolidated tax
group for U.S. federal income tax purposes (the "HEA Tax Group"). 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 million 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 a Tax Allocation Agreement
among the Company, HEA and certain other affiliates of HEA, as amended (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, as is expected,
investors acquire more than 50% of the Company's outstanding Common Stock in the
Offerings, then the amount of the Company's U.S. federal taxable income for any
tax year ending after the date of the Offerings 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. After the Offerings, 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
15
<PAGE> 17
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 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. Following the expected application of the estimated net proceeds to
the Company of the Offerings to repay a portion of the Company's debt and
planned repayments of debt after June 27, 1998 as well as prior to the
Offerings, the Company will continue to have at least $95.5 million in principal
amount of indebtedness outstanding, including $5.2 million of short-term
borrowings and current portions of long-term debt. 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.
Following the Offerings, 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," "Relationship Between the Company and Hyundai," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions."
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.
16
<PAGE> 18
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 a lease for a facility 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," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Business -- Manufacturing" and "-- Facilities."
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.
Upon the closing of the Offerings, the Company intends to terminate its
existing revolving lines of credit and to seek a new line of credit which may be
used from time-to-time to fund the Company's working capital requirements. The
Company also plans to replace its existing receivables securitization facility
with a new $200 million facility, and has begun negotiations with respect to
such new facility. There can be no assurance that any required financing of the
Company will be available on acceptable terms, when needed, if at all. 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
17
<PAGE> 19
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.
See "-- Control by and Dependence on Hyundai," "-- Risks Associated with
Leverage," "-- Single Manufacturing Facility; Future Need for Additional
Capacity," "Relationship Between the Company and Hyundai," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Description of Capital Stock -- Preferred
Stock" and "Certain Transactions."
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 Computer Corporation ("Dell") and IBM,
accounted for approximately 27% and 17%, respectively, of the Company's revenue,
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 Computer Corporation ("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," "-- Dependence on
International Operations; Risks from International Sales," "- Expected
Volatility of Stock Price; Absence of Current Trading Market for the Common
Stock," and "Business -- Customers and Sales Channels."
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,
18
<PAGE> 20
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
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,"
"Business -- Product Development/ Technology" and "Business -- Products."
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
19
<PAGE> 21
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.
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," "Relationship Between the Company and Hyundai,"
"Business -- Intellectual Property" and "-- Legal Proceedings."
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.
20
<PAGE> 22
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 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," "-- Limited
Protection of Intellectual Property; Risk of Third Party Claims of
Infringement," "Relationship Between the Company and Hyundai," "Business --
Manufacturing/Quality" and "-- Materials and Supplies."
STORMEDIA; LEGAL PROCEEDINGS
The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
HEI which became effective on November 17, 1995 (the "StorMedia Agreement").
Pursuant to the StorMedia Agreement, StorMedia agreed to supply disk media to
the Company. StorMedia's disk media did not meet the Company's specifications
and functional requirements as required by the StorMedia Agreement and the
Company ultimately terminated the StorMedia Agreement. After a class action
securities lawsuit was filed against StorMedia by certain of its shareholders in
September 1996 which alleged, in part, that StorMedia failed to perform under
the StorMedia Agreement, StorMedia sued HEI, Mong Hun Chung (HEI's chairman),
Dr. Chong Sup Park (HEA's President and 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.
21
<PAGE> 23
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.
See "-- Limited Protection of Intellectual Property; Risk of Third Party
Claims of Infringement" and "Business -- Legal Proceedings."
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.
EXPECTED VOLATILITY OF STOCK PRICE; ABSENCE OF CURRENT TRADING MARKET FOR THE
COMMON STOCK
In recent years the stock market in general, and the market for shares of
high technology and HDD companies in particular, have experienced extreme price
fluctuations which have often been unrelated to the operating performance of the
affected companies. The trading price of the Common Stock may be subject to
extreme fluctuations both in response to business-related issues (e.g.,
quarterly fluctuations in operating results, announcements of new products by
the Company or its competitors, and the gain or loss of significant PC OEM or
other customers) and in response to stock market-related influences (e.g.,
changes in analysts' estimates, the presence or absence of short-selling of the
Common Stock and events affecting other companies that the market deems
comparable to the Company). The trading price of the Common Stock also may be
affected by events relating to HEA and HEI, including sales of Common Stock by
HEA or the perception that such sales may occur (due to the financial condition
of HEA or otherwise). Further, the trading price of the Common Stock may be
subject to extreme fluctuations in response to general economic conditions in
the U.S., Korea, Southeast Asia and elsewhere, such as interest rates, inflation
rates, exchange rates, unemployment rates, and trade surpluses and deficits.
There can be no assurance that the trading price of the Common Stock will not
decline below its initial offering price to the public. Immediately prior to the
Offerings there was no public market for the Common Stock and there can be no
assurance that following the Offerings an active trading market will develop or
be maintained. The public offering price will be determined by negotiations
among the Company and the Representatives and may not be indicative of prices
that will prevail in the trading market following the Offerings.
In addition, due to the factors described above in "-- Potential
Fluctuation in Quarterly Results; Average Selling Price Erosion," as well as
other unanticipated factors, it is likely that in some future quarter or
quarters the Company's operating results will be below the expectations of
public market analysts or investors. In such event, the trading price of the
Common Stock could be materially and adversely affected.
See "-- History of Operating and Net Losses; Accumulated Deficit,"
"-- Control by and Dependence on Hyundai," "-- Customer Concentration,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Underwriting."
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
22
<PAGE> 24
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 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.
23
<PAGE> 25
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.
See "-- Control by and Dependence on Hyundai," "Relationship Between the
Company and Hyundai" and "Description of Capital Stock -- Delaware Anti-Takeover
Law and Certain Charter Provisions."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock in the public market after the Offerings
could adversely affect the market price of the Common Stock. Upon completion of
the Offerings, the Company will have approximately 91,974,998 shares of Common
Stock outstanding, of which 47,500,000 shares (54,625,000 shares if the
Underwriters' over-allotment options are exercised in full) will be freely
transferable without restriction or registration under the Securities Act of
1933, as amended (the "Securities Act"), unless such shares are held by
affiliates of the Company, as that term is defined in Rule 144 under the
Securities Act, and assuming no exercise of options to purchase Common Stock
after June 27, 1998. The Company and its officers, directors and certain
stockholders have agreed that, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the Common Stock or which are convertible into or
exchangeable for securities which are substantially similar to the shares of the
Common Stock without the prior written consent of Smith Barney Inc., except for
the Common Stock offered in connection with the Offerings.
Smith Barney Inc. may, however, in its sole discretion, at any time without
notice, release all or any portion of the shares of Common Stock subject to such
lock-up agreements. Sales of shares of Common Stock by existing stockholders in
the public market, or the availability of such shares for sale, could adversely
affect the market price of the Common Stock. HEA, which upon the closing of the
Offerings, will own approximately 44,029,850 shares of Common Stock, has certain
rights with respect to registration of such shares of Common Stock for sale to
the public. As has been publicly reported, many Korean companies have been
affected adversely by recent economic conditions in Korea. The financial
condition of HEA or its affiliates could influence any decision concerning HEA's
disposition of Common Stock after the Offerings. Sales of Common Stock by HEA or
the perception that such sales may occur could adversely affect the trading
price of the Common Stock. In addition, approximately 1,947,171 shares of Common
Stock are issuable upon exercise of outstanding options granted under the
Amended Plan as of the date of this Prospectus. The Company intends to file a
registration statement immediately after the closing of the Offerings to allow
resale of such option shares.
See "-- Control by and Dependence on Hyundai," "Management -- Benefit
Plans," "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."
24
<PAGE> 26
THE COMPANY
Maxtor is a leading provider of HDD storage products for desktop PC
systems. The Maxtor DiamondMax product family consists of 3.5-inch form factor
HDDs with storage capacities which range from 2.1 GB to 13.6 GB. These products
have high speed interfaces for greater data throughput, a robust mechanical
design for improved reliability, MR head technology and a DSP-based electronic
architecture that, when combined, provide industry-leading benchmark
performance. On June 15, 1998, Maxtor announced two new HDD products, the
DiamondMax 3400 and the DiamondMax Plus 2500. The DiamondMax 3400 is Maxtor's
fifth MR head HDD, its sixth HDD utilizing the Company's DSP-based electronic
architecture and its eighth HDD based on the Company's Formula 4 mechanical
structure. The DiamondMax Plus 2500, which is designed for the performance
desktop PC market, is the Company's first HDD to feature a 7,200 RPM spin speed,
its sixth MR head HDD, its seventh HDD utilizing the Company's DSP-based
electronic architecture and its ninth HDD based on the Company's Formula 4
mechanical structure. The Company's customers are PC OEMs, including Compaq,
Dell and IBM; distributors, including Ingram; and retailers, including Best Buy
and CompUSA.
The Company was organized in 1982 and completed an initial public offering
of common stock in 1986. In the mid-1980's, the Company was a leading technology
innovator in the HDD industry. As is true today, the HDD industry during the
1980's was characterized by intense competition, rapidly changing technology,
frequent product introductions, short product life cycles and rapid erosion of
ASPs. In an effort to mitigate the risks associated with these factors, the
Company pursued all major product segments in the HDD marketplace utilizing
multiple product families and technology platforms. This costly strategy added
significant complexity to the Company's operations, thereby causing the Company
to delay or miss a number of key product introductions, and ultimately led to
the deterioration of the Company's overall financial condition which, in turn,
led to the sale of a 40% stake in the Company to HEI and certain of its
affiliates in 1994. In early 1996, HEA acquired all of the remaining
publicly-held shares of the Common Stock in a tender offer and merger as well as
the 40% equity stake previously acquired by HEI and its affiliates. Shortly
thereafter, HEA invested in renewed efforts to revitalize the Company.
In July 1996, the Company hired Michael R. Cannon, its current Chief
Executive Officer and President and a 20 year veteran of the HDD industry, to
lead Maxtor's turnaround. Mr. Cannon immediately took a number of steps to
position the Company to become a significant provider of HDDs to leading PC OEMs
by improving product performance, quality, time-to-market entry and
time-to-volume manufacturing and by refocusing the Company's sales and marketing
efforts. These steps included: (i) providing a strong management team; (ii)
reducing Maxtor's overall cost structure; (iii) rationalizing the Company's
product and technology roadmap; and (iv) restructuring the Company's product
development process.
As a result of these actions, Maxtor's performance has improved
significantly during a period of severe fluctuations in the overall HDD market.
The Company's restructured manufacturing and product development processes as
well as its cost competitiveness initiatives resulted in the Company achieving
one of the fastest transitions in the industry from HDDs utilizing thin-film
head technology to 100% use of MR head technology, while also achieving among
the lowest selling, general and administrative costs as a percentage of revenue
in the industry for the 1997 fiscal year and the first six months of 1998. With
its DiamondMax 2160 and DiamondMax 2880, the Company has demonstrated
significantly improved time-to-volume production results, manufacturing 1.4
million and 1.3 million units during the first full quarters of production,
respectively. In the first quarter of 1998, the Company established itself as a
time-to-market entry leader with a 2.8 GB per disk HDD, the DiamondMax 2880.
This trend continued in the second quarter of 1998 with the Company's
introductions of the DiamondMax 3400, a 3.4 GB per disk HDD, and the DiamondMax
Plus 2500, the Company's first 7,200 RPM HDD. These improvements helped the
Company increase its units shipped per quarter from 1.3 million units in the
first quarter of 1997 to 3.7 million units in the second quarter of 1998, and
increase its market share of the desktop HDD market in terms of quarterly units
shipped from 5.6% in the first quarter of 1997 to 13.4% in the first quarter of
1998 according to IDC. The Company's refocused efforts on leading PC OEMs,
including Compaq, Dell and IBM, resulted in an increase in the Company's
revenues from these PC OEMs from 6.5% of total revenue in the second quarter of
1996 to 54.1% of total revenue in the second quarter of 1998. Cumulatively,
these changes have led to significantly improved financial results. The
25
<PAGE> 27
Company's revenue grew by 103.9% from $530.1 million to $1,080.9 million during
the first six months of 1997 and 1998, respectively, while its gross margins
improved from (0.8%) to 11.5% during the same periods.
The Company is incorporated in the state of Delaware. The Company's
principal executive offices are located at 510 Cottonwood Drive, Milpitas,
California 95035 and the telephone number at that address is (408) 432-1700.
RELATIONSHIP BETWEEN THE COMPANY AND HYUNDAI
In 1994, HEI and certain of its affiliates purchased 40% of the Company's
outstanding Common Stock for an aggregate cash purchase price of $150.0 million
pursuant to a Stock Purchase Agreement dated September 10, 1993 (the "Stock
Purchase Agreement"). In early 1996, HEA acquired all of the remaining shares of
the publicly-held Common Stock in a tender offer and merger for an aggregate
purchase price of $215.0 million and also acquired all of the Common Stock held
by HEI and its affiliates. In June 1996 HEA exchanged its Common Stock in the
Company for 58,208,955 shares of Series A Preferred Stock of the Company (the
"Series A Preferred Stock"). From time to time HEA also made advances to the
Company for working capital. In December 1997, HEA purchased an additional
29,850,746 shares of Series A Preferred Stock in exchange for the cancellation
of $200 million of indebtedness owed to HEA by the Company. The Company had
outstanding aggregate principal indebtedness of $55.0 million owing to HEA as of
June 27, 1998. HEA currently owns all of the Company's Series A Preferred Stock,
each share of which is currently entitled to one vote, and 99.0% of the total
capital stock outstanding immediately prior to the Offerings. See "Principal
Stockholders." Pursuant to the Amended and Restated Certificate of
Incorporation, HEA's shares of Series A Preferred Stock will convert
automatically into 44,029,850 shares of Common Stock upon the closing of the
Offerings, and immediately following the Offerings HEA will own approximately
48% of the outstanding Common Stock (approximately 44% if the Underwriters'
overallotment options are exercised in full).
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 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 June 27, 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. 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. The Company intends to use a portion of the
proceeds of the Offerings to pay down in full all outstanding amounts under each
of its revolving credit facilities and any amounts then outstanding under the
demand facility as well as the $55.0 million owed to HEA, and thereafter to
terminate the revolving credit facilities. In addition, as a majority-owned
subsidiary of HEA, the Company has the benefit of a letter of support from HEI
under which HEI agrees to provide sufficient financial support to ensure that
the Company will continue as a going concern. Following the Offerings, the
Company believes that it will no longer have the benefit of the support letter.
In contemplation of the Offerings, HEI, HEA and the Company have entered
into certain agreements described below governing certain relationships between
the parties following the Offerings. Because HEA controls the Company, these
agreements did not result from "arms' length" negotiations. In addition, many of
the agreements relate to matters that inherently arise only between a company
and its parent or affiliated companies, and so are not susceptible of comparison
to similar agreements negotiated at arms' length. These agreements resulted from
negotiations between representatives of the Company's management and represent-
26
<PAGE> 28
atives of HEA and HEI, with the participation of their respective legal counsel
and other advisors, and were intended, when taken together, to reflect
reasonable tradeoffs and benefits for all parties. In negotiating these
agreements the parties sought to take into account, to the extent available,
both market-based agreements and similar terms that were negotiated between HEI
and its affiliates and the Company as part of the Stock Purchase Agreement.
There can be no assurance that the Company would not have received more
favorable terms from an unaffiliated party in some or all of the agreements,
although management believes some of the agreements may have more favorable
terms than those available from unaffiliated parties.
Conflicts of interest may arise from time to time in the future between 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 attempt to assert
control over 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 Board has established an Affiliated Transactions Committee which is
comprised entirely of directors who are not employed by HEA, any affiliate
thereof or the Company. The Board has adopted resolutions requiring this
Affiliated Transactions Committee to review any material transactions between
the Company on the one hand, and HEA or its affiliates on the other, following
the Offerings. The Company also has certain provisions in its Amended and
Restated Certificate of Incorporation concerning the conduct of certain affairs
of the Company as they may involve HEA and its affiliates on the one hand and
the Company on the other.
HEA could decide to sell or otherwise dispose of all or a portion of its
holdings of the Company's Common Stock at some future date following the
Offerings, subject to certain agreements between HEA and the Underwriters. There
can be no assurance that any holders of the Common Stock other than HEA would be
allowed to participate in any transaction involving a transfer of a controlling
interest in the Company by HEA, or that any such transaction would not adversely
affect the trading price of the Common Stock or the interests of the holders of
the Common Stock who do not participate in such transaction.
Certain of the agreements and documents summarized below have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part,
and the summaries of such agreements and documents are qualified in their
entirety by reference to the full text of such agreements and other documents.
See "Risk Factors -- Shares Eligible for Future Sale," "Certain
Transactions," "Management -- Board Committees," "Description of Capital
Stock -- Amended and Restated Certificate of Incorporation Provisions Relating
to Conflicts of Interest and Corporate Opportunities" and "Available
Information."
PURCHASES FROM AFFILIATE
HEA formed a division in May 1996 to provide a supply of hard disk media to
the Company. This division of HEA was incorporated as MMC Technology, Inc.
("MMC") in December 1997 and is currently a wholly-owned subsidiary of HEA.
During the quarter ended December 27, 1997, the quarter in which the Company
first began to purchase media from MMC, and the six months ended June 27, 1998,
MMC supplied 18.0% and 41.0%, respectively, of media purchased by the Company
for an aggregate purchase price of $13.2 million and $61.2 million,
respectively. During 1997, MMC's media price to the Company was 2% below the
best price for media available to the Company from any of its qualified merchant
vendors. For the six months ended June 27, 1998, the actual price for media
supplied by MMC for each family of Maxtor products was based on a discount from
weighted average prices of media purchased by the Company from qualified
merchant vendors for such Maxtor products, resulting in an aggregate 2.5%
discount. The Company currently is negotiating an agreement with MMC with
respect to pricing of future purchases and expects that such agreement will be a
multi-year contract providing for pricing discounts in return for a minimum
purchase volume commitment based on a percentage of Maxtor's total media
purchases. See "Risk Factors -- Control by and Dependence on Hyundai,"
"-- Dependence on Suppliers of Components and Sub-Assemblies," "-- Dependence on
International Operations; Risks from International Sales," "Management's
Discussion
27
<PAGE> 29
and Analysis of Financial Condition and Results of Operations,"
"Business -- Materials and Supplies" and "Certain Transactions."
DALIAN MANUFACTURING FACILITY
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 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 concessions and the applicable business license and
other regulatory concessions, 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. See "Risk
Factors -- Need for Additional Capital," "-- Single Manufacturing Facility;
Future Need for Additional Capacity," "-- Dependance on International Operation;
Risks from International Sales," "Management Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Manufacturing."
MAXTOR RIGHTS UNDER IBM LICENSE AGREEMENT
HEI and IBM are parties to 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 the
Sublicense Agreement with the Company 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 HEI license fee
following the grant of such a license from IBM. HEI and the Company have agreed
to indemnify each other for certain liabilities arising from their acts or
omissions relating to the IBM License Agreement as described below. See
"-- Certain Intellectual Property Indemnification and Patent Cross License
Between HEI and the Company," "Risk Factors -- Limited Protection of
Intellectual Property; Risk of Third Party Claims of Infringement," "-- Control
by and Dependence on Hyundai" and "Certain Transactions."
28
<PAGE> 30
CERTAIN INTELLECTUAL PROPERTY INDEMNIFICATION AND PATENT CROSS LICENSE BETWEEN
HEI AND THE COMPANY
HEI has agreed to indemnify the Company for any losses from third party
claims arising after the Company ceases to be a majority-owned subsidiary of HEI
which would have been covered under patent license agreements between HEI or its
affiliates other than Maxtor and such third party, and which were in existence
at the time the Company was a majority-owned subsidiary of HEA. These
indemnifications survive for three years after Maxtor ceases to be a
majority-owned subsidiary, and the maximum liability for which HEI is liable
under the indemnification provisions is $25.0 million. In addition, HEI and the
Company have granted each other royalty-free patent licenses covering patents
owned, or licensable without the payment of royalties or other consideration to
third parties, by each party through August 31, 2003 relating to certain fields
of use. The Company and HEI also have agreed to indemnify each other for any
losses or liabilities arising from any action or failure to take action related
to the IBM License Agreement, including any nonpayment of license fees. The
Company's maximum liability under this indemnity agreement is the total amount
of money due to IBM under the Sublicense Agreement and actual interest costs
and/or exchange rate losses incurred by HEI. See "Risk Factors -- Limited
Protection of Intellectual Property; Risk of Third Party Claims of
Infringement;" "Business -- Intellectual Property" and "Certain Transactions."
TAX ALLOCATION AGREEMENT; TAX INDEMNIFICATION
Since 1996, the Company has been a member of the HEA Tax Group. 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 million 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 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, as is expected,
investors acquire more than 50% of the Company's outstanding Common Stock in the
Offerings, then the amount of the Company's U.S. federal taxable income for any
tax year ending after the date of the Offerings 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. After the Offerings, 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 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 to
29
<PAGE> 31
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 "Risk Factors -- Certain Tax Risks" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Tax Matters."
STOCKHOLDER AGREEMENT
HEA, HEI and the Company have entered into a Stockholder Agreement which
clarifies and establishes certain rights and obligations of the Hyundai
Affiliates and the Company regarding the Company's capital stock and related
matters. For purposes of the following discussion, "Hyundai Affiliates" means
HEA, HEI, any of their successors, and all corporations, partnerships, joint
ventures, associations and other entities that directly or indirectly through
one or more intermediaries is controlled by HEA or HEI (other than the Company
and its subsidiaries and such other entities controlled by the Company). The
Stockholder Agreement does not bind any other Hyundai entity.
Registration Rights. Pursuant to the Stockholder Agreement, HEA has certain
registration rights regarding shares of Common Stock held by HEA which are
described under "Description of Capital Stock -- Registration Rights."
Rights Regarding Board of Directors. The Stockholder Agreement also
provides that so long as Hyundai Affiliates beneficially own at least a majority
of the Company's outstanding Voting Stock, HEA will maintain at least two
Disinterested Directors on the Board. "Disinterested Directors" are those
directors not employed by, or serving as paid consultants for HEA or its
affiliates (including the Company). "Voting Stock" for purposes of the
Stockholder Agreement means capital stock which votes generally in the election
of directors.
At any time when the Hyundai Affiliates beneficially own less than a
majority but at least 30% of the Company's outstanding Voting Stock, HEA has the
right to designate for Board nomination and stockholder election one director in
each of the three classes of the Board, provided such designee is reasonably
satisfactory to the Nominating Committee of the Board, and the remaining
directors are to be nominated by the Nominating Committee subject to the
approval of a majority of the Disinterested Directors. HEA has the right to
designate for nomination one director in each of two classes at any time when
the Hyundai Affiliates beneficially own less than 30% but at least 20% of the
Company's outstanding Voting Stock, and one director if the Hyundai Affiliates
beneficially own less than 20% but at least 10% of the Company's outstanding
Voting Stock, provided that each such designee must be reasonably satisfactory
to the Nominating Committee. If a vacancy occurs with respect to a director
which HEA had the right to designate initially, and HEA has the right at such
time to designate a director for nomination in such director's class, HEA is
entitled to designate a director to fill the vacancy. If the Company complies
with its obligation to nominate for election those persons designated by HEA in
accordance with the Stockholder Agreement, the Hyundai Affiliates are required
to vote their shares of Common Stock in favor of all directors nominated in
accordance with the Stockholder Agreement. HEA's right to designate directors
for nomination terminates when the Hyundai Affiliates beneficially own less than
10% of the outstanding Voting Stock.
See "Risk Factors -- Control By and Dependence On Hyundai," "-- Effect of
Antitakeover Provisions," "Management -- Directors and Executive Officers,"
"-- Board Committees" and "Principal Stockholders."
Prohibition on Certain Proxy Solicitations. From such time after the
closing of the Offerings as HEA beneficially owns less than a majority of the
Company's outstanding Voting Stock, the Hyundai Affiliates are not permitted to
make any solicitation of proxies either with regard to the election of directors
or other
30
<PAGE> 32
proposals, except in response to a solicitation of proxies by a person other
than Company management in an election contest or otherwise. This prohibition on
proxy solicitation terminates when the Hyundai Affiliates beneficially own less
than 20% of the outstanding Voting Stock. See "Risk Factors -- Control By and
Dependence On Hyundai" and "-- Effect of Antitakeover Provisions."
Standstill and Right to Maintain Ownership. From such time as HEA
beneficially owns less than a majority of the Company's outstanding Voting
Stock, Hyundai Affiliates are not permitted to acquire additional shares of the
Company's Voting Stock except (i) in the event a third party makes a tender
offer or exchange offer for at least 20% of the Company's Voting Stock that has
not been approved by a majority of the Company's Disinterested Directors, unless
the acquisition of Common Stock by such Hyundai Affiliate is approved by a
majority of the Disinterested Directors or (ii) through December 31, 2000, in
the event as a result of an issuance of Common Stock or other equity securities
by the Company, Hyundai Affiliates will own in the aggregate less than 30% of
the outstanding Voting Stock, plus one share (the "Minimum Ownership") following
such issuance, in which case HEA is permitted to purchase shares of Common Stock
in the open market, subject to the Company's trading window policies, only to
the extent necessary to maintain the Minimum Ownership, and unless such
purchases are made or HEA otherwise directs, the Company will automatically sell
HEA the number of shares of Common Stock necessary to allow Hyundai Affiliates
in the aggregate to maintain the Minimum Ownership, at fair market value as
determined under the Stockholder Agreement. The prohibition on Hyundai
Affiliates' acquisition of the Company's Voting Stock terminates on the earlier
of December 31, 2001 and such time as the Hyundai Affiliates beneficially own
less than 20% of the outstanding Voting Stock.
Agreement Not to Compete. The Hyundai Affiliates also have agreed for a
period of five years from the closing of the Offerings not to compete with the
Company by means of the ownership, management, operation, or control of any
business engaged primarily in the design, development, manufacture, marketing or
sale of HDDs, provided that Hyundai Affiliates are permitted to make investments
in publicly traded corporations, regardless of the business such corporations
are engaged in, so long as the aggregate ownership by Hyundai Affiliates does
not exceed 3% of the issued and outstanding capital stock of any such publicly
traded corporation.
CERTIFICATE OF INCORPORATION PROVISIONS
In order to address certain potential conflicts of interest between HEA and
the Company, the Amended and Restated Certificate of Incorporation contains
provisions concerning the conduct of certain affairs of the Company as they may
involve HEA and its affiliates (other than the Company) and their respective
officers and directors, and the powers, rights, duties and liabilities of the
Company and its officers, directors and stockholders in connection therewith. In
general, these provisions recognize that the Company and HEA and their
respective affiliates may engage in the same or similar business activities and
lines of business and may have an interest in the same areas of corporate
opportunities and that the Company and HEA and their respective affiliates will
continue to have contractual and business relations with each other (including
service of officers and directors of HEA as directors of the Company). These
provisions are described below in the section entitled "Description of Capital
Stock -- Certificate of Incorporation Provisions Relating to Conflicts of
Interest and Corporate Opportunities."
The Amended and Restated Certificate of Incorporation provides that any
person purchasing or otherwise acquiring any interest in any shares of capital
stock of the Company shall be deemed to have notice of and to have consented to
these provisions.
See "Risk Factors -- Control By and Dependence on Hyundai," "-- Effect of
Antitakeover Provisions" and "Management -- Directors and Executive Officers."
31
<PAGE> 33
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $427.2 million (approximately $491.5
million if the Underwriters' over-allotment options are exercised in full),
assuming an initial public offering price of $9.50 per share of Common Stock and
after deducting the estimated underwriting discounts and estimated offering
expenses payable by the Company.
Approximately $255.0 million of the net proceeds from the Offerings will be
used to repay certain outstanding indebtedness, including approximately $200.0
million outstanding under certain credit facilities due to various banks and
approximately $55.0 million due to HEA. One of the credit facilities is payable
upon demand and bears interest at variable rates ranging from 6.2% to 7.9%. The
other credit facilities mature in August 1998, October 1998, and August 1999,
respectively, and bear interest annually at variable rates ranging from 6.2% to
7.9%. The intercompany loan due to HEA is due in April 1999 and bears interest
at a variable rate which was 11.1% as of June 27, 1998.
The remaining approximately $172.2 million of such net proceeds
(approximately $236.5 million if the Underwriters' over-allotment options are
exercised in full) will be used for capital expenditures, working capital and
general corporate purposes. Pending such uses, the net proceeds of the Offerings
will be invested in investment grade, interest-bearing securities.
See "Risk Factors -- Risks Associated with Leverage" and "-- Need for
Additional Capital."
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The Company
does not anticipate paying cash dividends on its capital stock, including Common
Stock being offered hereby, in the near future.
32
<PAGE> 34
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
27, 1998, (i) on an actual basis, (ii) on a pro forma basis as of such date to
reflect the conversion upon the closing of the Offerings of all outstanding
shares of the Series A Preferred Stock into 44,029,850 shares of Common Stock
and (iii) on a pro forma basis as adjusted to reflect the sale of the Common
Stock offered hereby at an assumed initial public offering price of $9.50 per
share and the receipt and application of the proceeds therefrom, after deducting
the estimated underwriting discount and offering expenses payable by the
Company. This information should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Prospectus. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 27, 1998
------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- -------------- -----------
(UNAUDITED) (UNAUDITED)
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings:
Short-term borrowings, including current portion of
long-term debt...................................... $ 76,154 $ 76,154 $ 5,154
Short-term borrowings due to affiliate................. 55,000 55,000 --
---------- ---------- ----------
Total short-term borrowings......................... $ 131,154 $ 131,154 $ 5,154
========== ========== ==========
Long-term debt........................................... $ 219,314 $ 219,314 $ 90,314
Stockholders' equity (deficit):
Series A Preferred Stock, $0.01 par value, 95,000,000
shares authorized; 88,059,701 shares issued and
outstanding, actual; none issued and outstanding,
pro forma and as adjusted; aggregate liquidation
value $590,000,000 actual, and none pro forma and as
adjusted............................................ 880 -- --
Common Stock, $0.01 par value, 250,000,000 shares
authorized; 445,148 shares issued and outstanding,
actual; 44,474,998 shares issued and outstanding,
pro forma; 91,974,998 shares issued and outstanding,
as adjusted......................................... 4 444 919
Additional paid-in capital............................... 537,370 537,810 964,523
Unrealized gain on investments in equity securities...... 24,922 24,922 24,922
Accumulated deficit...................................... (777,856) (777,856) (777,856)
---------- ---------- ----------
Total stockholders' equity (deficit)................ (214,680) (214,680) 212,508
---------- ---------- ----------
Total capitalization.............................. $ 4,634 $ 4,634 $ 302,822
========== ========== ==========
</TABLE>
33
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus. The table below sets
forth selected consolidated financial data for the Company for, and as of the
end of, each of the fiscal periods indicated. The selected consolidated
financial data for the fiscal years ended March 26, 1994, March 25, 1995, and
March 30, 1996, have been derived from the consolidated financial statements of
the Company audited by Ernst & Young LLP. The selected consolidated financial
data for the nine month period ended December 28, 1996 and the fiscal year ended
December 27, 1997 have been derived from the consolidated financial statements
of the Company audited by PricewaterhouseCoopers LLP, included elsewhere in this
Prospectus. The selected consolidated financial data for the six-month period
ended June 27, 1998 is derived from unaudited financial statements of the
Company included elsewhere in this Prospectus. In the opinion of the Company's
management, such unaudited financial statements have been prepared on the same
basis as the audited financial statements referred to above and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position and results of operations
for the indicated period. Operating results for the six months ended June 27,
1998 are not necessarily indicative of the results that may be expected for the
full year.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR NINE MONTHS FISCAL YEAR SIX MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 26, MARCH 25, MARCH 30, DECEMBER 28, DECEMBER 27, JUNE 27,
1994 1995 1996 1996(1) 1997 1998
----------- ----------- ----------- ------------ ------------ -----------
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.................................... $1,152.6 $ 906.8 $1,269.0 $ 798.9 $1,424.3 $1,080.9
Cost of revenue............................ 1,205.0 850.7 1,196.3 888.9 1,352.9 956.2
-------- ------- -------- ------- -------- --------
Gross profit (loss).................... (52.4) 56.1 72.7 (90.0) 71.4 124.7
-------- ------- -------- ------- -------- --------
Operating expenses:
Research and development................. 97.2 60.7 94.7 87.8 106.2 70.1
Selling, general and administrative...... 78.9 81.6 82.8 60.7 62.6 34.3
Stock compensation expense............... -- -- -- -- -- 9.9(2)
Other.................................... 19.5 (10.2) 4.5 -- -- --
-------- ------- -------- ------- -------- --------
Total operating expenses............... 195.6 132.1 182.0 148.5 168.8 114.3(2)
-------- ------- -------- ------- -------- --------
Income (loss) from operations.............. (248.0) (76.0) (109.3) (238.5) (97.4) 10.4(2)
Interest expense........................... (10.0) (8.4) (11.8) (18.1) (36.5) (17.5)
Interest and other income.................. 2.3 4.2 1.1 1.0 25.0(3) 2.4
-------- ------- -------- ------- -------- --------
Loss before income taxes................... (255.7) (80.2) (120.0) (255.6) (108.9) (4.7)(2)
Provision for income taxes................. 1.9 2.0 2.8 0.8 1.0 0.2
-------- ------- -------- ------- -------- --------
Net loss................................... $ (257.6) $ (82.2) $ (122.8) $(256.4) $ (109.9)(3) $ (4.9)(2)
======== ======= ======== ======= ======== ========
Net loss per share -- basic and
diluted(4)............................... $ (16.00) $ (3.25) $ (5.94) $ -- $ -- $ --
======== ======= ======== ======= ======== ========
Shares used in per share calculation (in
thousands)............................... 16,102 25,292 20,677 -- 2 24.0
======== ======= ======== ======= ======== ========
Pro forma net loss per share(5)............ $ -- $ -- $ -- $(17.62) $ (3.62) $ (0.11)
======== ======= ======== ======= ======== ========
Shares used in pro forma share calculation
(in thousands)........................... -- -- -- 14,552 30,350 44,054
======== ======= ======== ======= ======== ========
BALANCE SHEET DATA:
Total assets............................... $ 492.4 $ 381.8 $ 442.5 $ 314.5 $ 555.5 $ 545.6
Total current liabilities.................. 265.7 236.0 413.1 412.9 552.2 541.0
Long-term debt and capital lease
obligations due after one year........... 107.4 102.0 100.2 229.1 224.3 219.3
Total stockholders' equity (deficit)....... 119.2 43.9 (71.1) (327.5) (221.0) (214.7)
</TABLE>
- ---------------
(1) The Company changed its fiscal year during the period ended December 28,
1996 to conform its fiscal year to that of its parent, HEA.
(2) Total operating expenses, income (loss) from operations, loss before income
taxes and net loss for the six months ended June 27, 1998 reflect a $9.9
million compensation charge related to the variable accounting features of
the Option Plan. Without such charge, the Company would have had total
operating expenses of $104.4 million, income from operations of $20.3
million, income before income taxes of $5.2 million and net income of $5.0
million. The Option Plan has been amended and restated to remove the
variable features and provide for fixed award options. See Note 10 of Notes
to Consolidated Financial Statements.
(3) Includes recovery of a $20.0 million fully-reserved note from IMS. See
"Certain Transactions."
(4) Net loss per share information for the fiscal periods ended December 28,
1996 and December 27, 1997 and the six months ended June 27, 1998 have not
been presented since such information is not meaningful due to the limited
number of shares of Common Stock outstanding.
(5) Pro forma net loss per share information assumes conversion of all
outstanding Series A Preferred Stock.
34
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements within the meaning of
the U.S. federal securities laws that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in this
Prospectus as a result of certain factors including, but not limited to, those
set forth in the following Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Prospectus. In
addition to the other information in this Prospectus, prospective investors
should consider carefully the following Management's Discussion and Analysis of
Financial Condition and Results of Operations and the information set forth
under the heading "Risk Factors" in evaluating the Company and its business
before purchasing Common Stock in the Offerings.
OVERVIEW
Maxtor is a leading provider of HDD storage products for desktop PC
systems. The Maxtor DiamondMax product family consists of 3.5-inch form factor
HDDs with storage capacities which range from 2.1 GB to 13.6 GB. These products
have high speed interfaces for greater data throughput, a robust mechanical
design for improved reliability, MR head technology and a DSP-based electronic
architecture that, when combined, provide industry-leading benchmark
performance. On June 15, 1998, Maxtor announced two new HDD products, the
DiamondMax 3400 and the DiamondMax Plus 2500. The DiamondMax 3400 is Maxtor's
fifth MR head HDD, its sixth HDD utilizing the Company's DSP-based electronic
architecture and its eighth HDD based on the Company's Formula 4 mechanical
structure. The DiamondMax Plus 2500, which is designed for the performance
desktop PC market, is the Company's first HDD to feature a 7,200 RPM spin speed,
its sixth MR head HDD, its seventh HDD utilizing the Company's DSP-based
electronic architecture and its ninth HDD based on the Company's Formula 4
mechanical structure. The Company's customers are leading PC OEMs, including
Compaq, Dell and IBM; distributors, including Ingram; and retailers, including
Best Buy and CompUSA.
In 1994, HEI and certain of its affiliates purchased 40% of the Company's
outstanding Common Stock for an aggregate cash purchase price of $150.0 million
pursuant to the Stock Purchase Agreement. In early 1996, HEA acquired all of the
remaining shares of the publicly-held Common Stock in a tender offer and merger
for an aggregate purchase price of $215.0 million and also acquired all of the
Company's Common Stock held by HEI and its affiliates. In June 1996 HEA
exchanged its Common Stock in the Company for 58,208,955 shares of the Series A
Preferred Stock. From time to time HEA also made advances to the Company for
working capital. In December 1997, HEA purchased an additional 29,850,746 shares
of Series A Preferred Stock in exchange for the cancellation of $200.0 million
of indebtedness owed to HEA by the Company. The Company had outstanding
aggregate principal indebtedness of $55.0 million owing to HEA as of June 27,
1998. HEA currently owns all of the Company's Series A Preferred Stock, each
share of which is currently entitled to one vote, and 99.0% of the total capital
stock outstanding immediately prior to the Offerings. Pursuant to the Amended
and Restated Certificate of Incorporation, HEA's shares of Series A Preferred
Stock will convert automatically into 44,029,850 shares of Common Stock upon the
closing of the Offerings, and immediately following the Offerings HEA will own
approximately 48% of the outstanding Common Stock (approximately 44% if the
Underwriters' overallotment options are exercised in full). See "Risk
Factors -- Control By and Dependence on Hyundai," "Relationship Between the
Company and Hyundai" and "Principal Stockholders."
The desktop HDD industry is intensely competitive and characterized by
dramatic shifts in market share among a limited number of HDD vendors and
significant erosion of ASPs for new products. PC OEMs compete in a consolidating
market. 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. The process of qualifying the Company's
products with these PC OEM customers can be lengthy, 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 process goals
in order to be among the first-to-market entry and first-to-volume production at
leading storage capacity
35
<PAGE> 37
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. Successful fulfillment of the
performance parameters, however, is only part of the competitive equation. As PC
OEMs seek to develop successful business models, they are requiring that their
HDD vendors maintain high levels of quality to enable low cost of ownership and
adapt their inventory management models to be compatible with the changing
business models in the PC industry.
In July 1996, the Company hired Michael R. Cannon, its current Chief
Executive Officer and President and a 20 year veteran of the HDD industry, to
lead Maxtor's turnaround. Mr. Cannon immediately took a number of steps to
position the Company to become a significant provider of HDDs to leading PC OEMs
by improving product performance and quality, time-to-market entry and
time-to-volume manufacturing, and by refocusing the Company's sales and
marketing efforts. These steps included: (i) providing a strong management team;
(ii) reducing Maxtor's overall cost structure; (iii) rationalizing the Company's
product and technology roadmap; and (iv) restructuring the Company's product
development process.
As a result of these steps, during the six quarter period ended June 27,
1998, the Company's quarterly revenue grew by 115.1%, increasing from $247.0
million in the first quarter of 1997 to $531.3 million in the second quarter of
1998. For the same period, gross margins increased from (2.9)% to 11.7%. The
Company's gains in profitability have been offset partially by the constant,
severe erosion in ASPs in the HDD industry. As indicated above, throughout the
HDD industry, the price points at which new products are introduced rapidly
erode as competitors begin to provide competitive products, costs decline, and
new technologies are introduced. The prices of the Company's products also are
influenced by the cyclical demand for desktop PCs. Consequently, in order to
remain competitive, the Company must be consistently among the first to
introduce new products and must attain volume production of those products in a
timely manner. There can be no assurance that the Company will be able to
introduce products in a timely manner or attain timely production of commercial
volumes. Failure of the Company to consistently achieve timely volume production
will result in lower ASPs which will have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Potential Fluctuations in Quarterly Results; Average Selling Price
Erosion" "-- Fluctuations in Product Demand; Focus on Single Market" and
"-- Rapid Technological Change and Product Development."
During the second half of 1996, the Company introduced a number of measures
to substantially reduce its operating expenses. These measures included the
consolidation of its volume manufacturing operations to a single facility in
Singapore and reductions in the Company's workforce. Additionally, during June
1996, the Company further reduced its expenses by selling its majority ownership
interest in IMS, a company which manufactures PCBs. During the second half of
1996, the Company also reduced its research and development ("R&D") expense by
rationalizing the Company's product and technology roadmap to focus on desktop
HDDs utilizing a single core technology platform and MR head technology. While
substantial expense reductions occurred in 1996, the Company focused on cost
containment in 1997 and the first six months of 1998. During each of the six
quarters in the six quarter period ended June 27, 1998 and despite continuous
revenue growth, operating expenses on an absolute dollar basis remained at a
relatively constant level and, as a percentage of total revenue, operating
expenses decreased from 16.8% in the first quarter of 1997 to 9.5% in the second
quarter of 1998, the latter of which included a benefit of 0.9% related to
accounting for variable features of the Option Plan. The Option Plan
subsequently was amended and restated to remove the variable features, and fixed
option awards were issued in replacement. The Company anticipates that in future
periods, operating expenses will grow in absolute dollars as a consequence of
supporting efforts to diversify the Company's product portfolio, expenses
related to expected increased sales activity and expenses related to increased
capacity. See "-- Results of Operations -- Quarterly Results of
Operations -- Operating Ex-
36
<PAGE> 38
penses -- Stock Compensation Expenses," "Risk Factors -- Dependence on Suppliers
of Components and Sub-Assemblies" and "-- Single Manufacturing Facility; Future
Need for Additional Capacity."
Many of the Company's customers use flexible supply chain management
models. These models, such as the just-in-time inventory model, require
component suppliers, including HDD manufacturers, to be able to supply
components on an as needed basis. To improve overall customer satisfaction and
to respond to this trend, component suppliers, such as the Company, have been
required to adopt supply models whereby they establish warehouses containing
adequate component supplies near their customers' manufacturing sites. These
supply models can result in higher working capital requirements and costs in
order to maintain higher levels of inventory and also may result in a longer
operating cycle. The Company has implemented a just-in-time supply model with
certain of its customers including a significant number of its principal PC OEM
customers. See "Risk Factors -- Risks of Failed Execution; Changing Customer
Business Models."
Intellectual Property
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. In connection with the Offerings, the Company
has agreed to pay an allocated share of the license fees associated with certain
third party rights in annual installments ranging from $1.0 million to $2.3
million through 2007. 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. See "Risk Factors -- Control By and Dependence On Hyundai,"
"-- Limited Protection of Intellectual Property; Risks of Third Party Claims of
Infringement," "Relationship Between the Company and Hyundai,"
"Business -- Intellectual Property" and "Certain Transactions."
Revenue Recognition
The Company generally recognizes revenue upon shipment to its customer.
Sales to certain distributors and retailers are governed by agreements providing
limited rights of return, as well as price protection on unsold merchandise.
Accordingly, the Company records reserves upon shipment for estimated returns,
exchanges and credits for price protection. The Company also records reserves
for the estimated cost to repair or replace products under warranty at the time
of sale. The Company warrants its products against defects in parts and labor
for a period of three years from the date of shipment with an additional three
months allowed for distributors to account for "shelf life."
Tax Matters
Due to the Company's operating losses, its NOL carryforwards and its
favorable tax status in Singapore, the Company's tax expense has historically
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 satisfaction of certain ongoing 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. Of the approximately $616.7 million federal
income tax NOL carryforwards, approximately $253.0 million were generated before
the Company became part of the HEA Tax Group (the "Pre-Affiliation NOL") and
approximately $363.7 million were generated after the Company became part of the
HEA Tax Group (the "Post-Affiliation NOL").
37
<PAGE> 39
Due to the Company's NOL carryforwards and operating losses, the Company
has not incurred any significant federal or state income taxes for any of the
Company's recent fiscal periods. In June 1998, the Company caused Maxtor
Singapore to pay a $400.0 million 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, and potential
elimination of, the NOL carryforwards available to the Company for federal
income tax purposes for subsequent tax years.
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, as is expected,
investors acquire more than 50% of the Company's outstanding Common Stock in the
Offerings, then the amount of the Company's U.S. federal taxable income for any
tax year ending after the date of the Offerings 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).
While, for financial reporting purposes, the Company's tax loss for the
period during which the Company was a member of the HEA Tax Group is computed on
a separate tax return basis, 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.
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 separate tax
returns and consolidated or combined tax returns as part of the HEA Tax Group.
After the Offerings, 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 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.
Change in Fiscal Year
During 1996, the Company changed its fiscal year end to be consistent with
the fiscal year end of HEA. The fiscal year end changed from the last Saturday
of March, the date used in the Company's preceding filings of its Form 10-K with
the Commission, to the last Saturday of December conforming to HEA's 52/53-week
year methodology. The fiscal year ended on December 27, 1997, which is audited,
comprises twelve months or 52 weeks. For discussion and analysis purposes it is
compared to the unaudited twelve months ended December 28, 1996, also comprising
52 weeks. The audited nine months ended December 28, 1996, comprising 39 weeks,
are compared to the unaudited nine months ended December 30, 1995, comprising 40
weeks.
38
<PAGE> 40
RESULTS OF OPERATIONS
Quarterly Results of Operations.
The following table sets forth certain quarterly financial information for
each of the six quarters in the six quarter period ended June 27, 1998. This
information is derived from the Company's unaudited Consolidated Financial
Statements, prepared on a basis consistent with the Company's audited
Consolidated Financial Statements which appear elsewhere in this Prospectus. In
the opinion of the Company's management, this information includes all
adjustments (consisting only of normal recurring adjustments) necessary for the
fair presentation of such information. Past quarterly operating results are not
necessarily indicative of the results that may be expected for future periods.
The data should be read in conjunction with the Consolidated Financial
Statements, related Notes and other financial information of the Company
included elsewhere in this Prospectus. Quarterly results are based on fiscal
quarters of thirteen weeks in duration ending on the last Saturday of each
quarter. See "-- Overview."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27,
1997 1997 1997 1997 1998 1998
----------- ----------- ------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue........................... $247.0 $283.1 $392.2 $502.0 $549.6 $531.3
Cost of revenue................... 254.1 280.3 370.7 447.8 487.3 468.9
------ ------ ------ ------ ------ ------
Gross profit (loss)........... (7.1) 2.8 21.5 54.2 62.3 62.4
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development........ 26.4 25.5 26.7 27.6 33.4 36.7
Selling, general and
administrative................ 15.1 15.4 15.5 16.6 15.9 18.4
Stock compensation expense...... -- -- -- -- 14.7(1) (4.8)(1)
------ ------ ------ ------ ------ ------
Total operating expenses...... 41.5 40.9 42.2 44.2 64.0(1) 50.3(1)
------ ------ ------ ------ ------ ------
Income (loss) from operations..... (48.6) (38.1) (20.7) 10.0 (1.7)(1) 12.1(1)
Interest expense.................. (7.9) (8.7) (10.9) (9.0) (8.8) (8.7)
Interest and other income......... 1.8 0.4 0.4 22.4(2) 0.3 2.1
------ ------ ------ ------ ------ ------
Income (loss) before income
taxes........................... (54.7) (46.4) (31.2) 23.4(2) (10.2)(1) 5.5(1)
Provision for income taxes........ 0.3 0.2 0.2 0.3 0.1 0.1
------ ------ ------ ------ ------ ------
Net income (loss)................. $(55.0) $(46.6) $(31.4) $ 23.1(2) $(10.3)(1) $ 5.4(1)
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27,
1997 1997 1997 1997 1998 1998
----------- ----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................... 102.9 99.0 94.5 89.2 88.7 88.3
------ ------ ------ ------ ------ ------
Gross profit (loss)........... (2.9) 1.0 5.5 10.8 11.3 11.7
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development........ 10.7 9.0 6.8 5.5 6.0 6.9
Selling, general and
administrative................ 6.1 5.5 4.0 3.3 2.9 3.5
Stock compensation expense...... -- -- -- -- 2.7(1) (0.9)(1)
------ ------ ------ ------ ------ ------
Total operating expenses...... 16.8 14.5 10.8 8.8 11.6(1) 9.5(1)
------ ------ ------ ------ ------ ------
Income (loss) from operations..... (19.7) (13.5) (5.3) 2.0 (0.3)(1) 2.2(1)
Interest expense.................. (3.2) (3.0) (2.7) (1.8) (1.7) (1.6)
Interest and other income......... 0.7 0.1 0.1 4.5(2) 0.1 0.4
------ ------ ------ ------ ------ ------
Income (loss) before income
taxes........................... (22.2) (16.4) (7.9) 4.7(2) (1.9)(1) 1.0(1)
Provision for income taxes........ 0.1 0.1 0.1 0.1 -- --
------ ------ ------ ------ ------ ------
Net income (loss)................. (22.3) (16.5) (8.0) 4.6(2) (1.9)(1) 1.0(1)
====== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Total operating expenses, income (loss) from operations, income (loss)
before income taxes and net income (loss) for the three months ended March
28, 1998 reflect a $14.7 million compensation charge related to the variable
accounting features of the 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. During the second quarter of 1998, variable plan
accounting adjustments resulted in a benefit of $4.8 million. Without such
benefit, the quarter ended June 27, 1998 would have reflected total
operating expenses of $55.1 million, income from operations of $7.3 million,
income before income taxes of $0.7 million and net income of $0.6 million.
The Option Plan has been amended and restated to remove the variable
features and provide for fixed award options. See Note 10 of Notes to
Consolidated Financial Statements.
(2) Includes recovery of a $20.0 million fully-reserved note from IMS. See
"Certain Transactions."
39
<PAGE> 41
Revenue. During the six quarter period ended June 27, 1998, the Company's
revenue grew by 115.1%, increasing from $247.0 million in the first quarter of
1997 to $531.3 million in the second quarter of 1998. The 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
offset partially by continued rapid price erosion in the HDD market as a whole,
which resulted in declining ASPs throughout the period. The Company believes
that the effect of 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 second quarter of 1998, revenue from
sales to PC OEMs increased from 54.5% to 72.2% 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 54.1% of the Company's revenue.
Cost of Revenue; Gross Profit (Loss). Cost of revenue consists principally
of the cost of HDD components purchased from outside vendors, labor and
manufacturing overhead. During the six quarter period ended June 27, 1998, gross
profit (loss) improved from a loss of $7.1 million in the first quarter of 1997
to a profit of $62.4 million in the second quarter of 1998. Gross margin
improved, quarter-over-quarter during this period, increasing from (2.9)% in the
first quarter of 1997 to 11.7% in the second quarter of 1998. The quarter-
over-quarter improvement in gross margin is due primarily 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 and lower component costs. Growth of the Company's
gross margins, however, was constrained partially by continued rapid price
erosion in the HDD market as a whole, which resulted in declining ASPs
throughout the period. See "Relationship between the Company and HEA --
Purchases from Affiliates."
Operating Expenses.
Research and Development Expense. During each of the quarters in the six
quarter period ended March 28, 1998, the Company made substantial R&D
investments. R&D expense as a percentage of revenue decreased from 10.7% to 5.5%
during the 1997 fiscal year, while the absolute dollar level of R&D spending
during each quarter of the 1997 fiscal year remained relatively constant. Over
the first two quarters of 1998, however, R&D spending increased to $36.7
million, or 6.9% of revenue, in the second quarter of 1998 from $27.6 million,
or 5.5% of revenue, in the fourth quarter of 1997. 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. The Company anticipates that R&D expenses
will continue to increase in absolute dollars during 1998 due to continuing
efforts to diversify the Company's product portfolio. See "-- Overview."
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expenses consist mainly of employee-related expenses,
including sales commissions and outside services. During the six quarter period
ended June 27, 1998, the Company's SG&A expenses as a percentage of revenue
declined from a high of 6.1% in the first quarter of 1997 to 3.5% during the
second quarter of 1998. During this six quarter period, SG&A expenses were
relatively flat on an absolute dollar basis, except for the fourth quarter of
1997, when they increased primarily due to an accrual for company-wide employee
incentive bonuses resulting from above-target performance during 1997 and, to a
lesser extent, an increase in sales and marketing personnel and in the second
quarter of 1998, when they increased primarily due to an increase in bad debt
accruals. The decrease in SG&A expenses as a percentage of revenue during this
six quarter period is due to the increase in the Company's revenue combined with
the Company's ongoing cost control efforts. The Company anticipates that SG&A
expenses will increase in absolute dollars during 1998 due to expenses related
to expected increased sales activity.
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
40
<PAGE> 42
quarter of 1998, the Company would have realized net income of $4.4 million in
such period. The Company amended and restated the Option Plan to remove the
features which resulted in variable accounting. In the second quarter, the
Company remeasured the compensation element upon the termination of the variable
features of the Option Plan, resulting in a benefit of $4.8 million, absent
which net income for that period would have been $0.6 million. The Company will
incur non-cash stock compensation expense in connection with the Amended Plan
through the end of fiscal year 2001 in amounts expected to decrease from a high
of approximately $1.2 million in the third quarter of 1998 to a low of
approximately $0.1 million in the second quarter of 2001, assuming all options
remain in effect. After that point, no further stock compensation expenses will
be incurred in connection with the Amended Plan. MMC has agreed to reimburse the
Company for any stock compensation expenses arising from grants made to MMC
employees under the Option Plan.
Interest Expense. During the six quarter period ended June 27, 1998, the
Company's interest expense as a percentage of revenue declined from a high of
3.2% in the first quarter of 1997 to a low of 1.6% in the first and second
quarters of 1998. During the first three quarters of 1997, the Company's
interest expense in absolute dollars increased due to a growth in short-term
borrowings used to fund the Company's operations. During the fourth quarter of
1997 and first two quarters of 1998, the Company's interest expense in absolute
dollars declined due to conversion of $200.0 million of subordinated debt held
by HEA into equity in the Company with an associated reduction in interest
payments, and a reduction in other debt of $53.9 million. The benefits derived
from such debt reductions were, however, partially offset by an increase in the
Company's interest expense due 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.
Interest and Other Income. During the six quarter period ended June 27,
1998, the Company's interest and other income remained relatively constant at
approximately 0.1% of revenue, except for one time events in the first and
fourth quarters of 1997 which related to the recovery of a $1.3 million
fully-reserved note issued to the Company by Storage Dimensions, Inc. ("SDI")
and a $20.0 million fully-reserved note issued to the Company by IMS,
respectively, and in the second quarter of 1998 which related to the recovery of
$1.8 million interest receivable on the IMS note.
Potential Fluctuations in Quarterly Results. 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 in a timely manner; (ii) fluctuations in HDD product
demand as a result of the cyclical and seasonal nature of the 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 R&D 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 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. See "Risk Factors -- Potential Fluctuations in Quarterly
Results; Average Selling Price Erosion; Management of Growth."
41
<PAGE> 43
Six months ended June 28, 1997 compared to six months ended June 27, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 28, JUNE 27,
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 530.1 $1,080.9
Cost of revenue............................................. 534.4 956.2
------- --------
Gross profit (loss).................................... (4.3) 124.7
------- --------
Operating expenses:
Research and development.................................. 51.9 70.1
Selling, general and administrative....................... 30.5 34.3
Stock compensation expense................................ -- 9.9(1)
------- --------
Total operating expenses............................... 82.4 114.3(1)
------- --------
Income (loss) from operations............................... (86.7) 10.4(1)
Interest expense............................................ (16.6) (17.5)
Interest and other income................................... 2.2 2.4
------- --------
Loss before income taxes.................................... (101.1) (4.7)(1)
Provision for income taxes.................................. 0.5 0.2
------- --------
Net loss.................................................... $(101.6) $ (4.9)(1)
======= ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 28, JUNE 27,
1997 1998
----------- -----------
<S> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue..................................................... 100.0% 100.0%
Cost of revenue............................................. 100.8 88.5
------- --------
Gross profit (loss).................................... (0.8) 11.5
------- --------
Operating expenses:
Research and development.................................. 9.8 6.5
Selling, general and administrative....................... 5.8 3.2
Stock compensation expense................................ -- 0.9(1)
------- --------
Total operating expenses............................... 15.6 10.6(1)
------- --------
Income (loss) from operations............................... (16.4) 0.9(1)
Interest expense............................................ (3.1) (1.6)
Interest and other income................................... 0.4 0.2
------- --------
Loss before income taxes.................................... (19.1) (0.5)(1)
Provision for income taxes.................................. 0.1 --
------- --------
Net loss.................................................... (19.2) (0.5)(1)
======= ========
</TABLE>
- ---------------
(1) Total operating expenses, loss from operations, income (loss) before income
taxes and net loss for the six months ended June 27, 1998 reflect a $9.9
million compensation charge related to the variable accounting features of
the Option Plan. Without such charge, the Company would have had total
operating expenses of $104.4 million, income from operations of $20.3
million, income before income taxes of $5.2 million and net income of $5.0
million. The Option Plan has been amended and restated to remove the
variable features and provide for fixed award options. See Note 10 of Notes
to Consolidated Financial Statements.
Revenue. Between the first six months of 1997 and the first six months of
1998, the Company's revenue grew by 103.9%, increasing from $530.1 million in
the first six months of 1997 to $1,080.9 million the first six months 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
42
<PAGE> 44
erosion in the 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 six months of 1997 to the first six months of 1998, revenue
from sales to PC OEMs increased from 48.6% to 73.5% 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 53.0% of the Company's revenue.
Gross Profit (Loss). Gross profit (loss) improved from a loss of $4.3
million for the first six months of 1997 to a profit of $124.7 million in the
first six months of 1998. Gross margin increased from (0.8)% in the first six
months of 1997 to 11.5% in the first six months 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 9.8% in the first six months of 1997 to 6.5% in the first six
months of 1998, while the absolute dollar level of R&D spending during the same
periods increased from $51.9 million to $70.1 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 5.8% in the first six months of 1997 to 3.2%
during the first six months of 1998, while the absolute dollar level of SG&A
expenses increased slightly from $30.5 million to $34.3 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 non-
cash compensation expense of $9.9 million in the first six months of 1998,
related to the difference between the estimated fair market value of its stock
and the exercise price of the options granted under the Option Plan between May
1996 and October 1997. If this expense were not incurred, the Company would have
realized net income of $5.0 million for the first six months of 1998. 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
3.1% in the first six months of 1997 to 1.6% in the first six months of 1998,
while the absolute dollar level of interest expense increased from $16.6 million
in the first six months of 1997 to $17.5 million in the first six months of
1998. The increase in the absolute dollar amount of the Company's interest
expense between the first six months of 1997 and the first six months 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 $349.2 million of short-term and $224.0
million of long-term credit borrowings outstanding at June 28, 1997, as compared
to $131.2 million of short-term and $219.3 million of long-term credit
borrowings outstanding at June 27, 1998.
Interest and Other Income. Interest and other income increased slightly
from $2.2 million to $2.4 million between the first six months of 1997 and the
first six months of 1998.
43
<PAGE> 45
Twelve months ended December 28, 1996 compared to twelve months ended December
27, 1997. In the following discussion, references to 1996 are to the twelve
months ended December 28, 1996 and references to 1997 are to the fiscal year
ended December 27, 1997.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
----------------------------
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $1,113.8 $1,424.3
Cost of revenue............................................. 1,191.7 1,352.9
-------- --------
Gross profit (loss).................................... (77.9) 71.4
-------- --------
Operating expenses:
Research and development.................................. 113.1 106.2
Selling, general and administrative....................... 82.9 62.6
-------- --------
Total operating expenses............................... 196.0 168.8
-------- --------
Loss from operations........................................ (273.9) (97.4)
Interest expense............................................ (22.1) (36.5)
Interest and other income................................... 1.3 25.0 (1)
-------- --------
Loss before income taxes.................................... (294.7) (108.9)
Provision for income taxes.................................. 1.5 1.0
-------- --------
Net loss.................................................... $ (296.2) $ (109.9)(1)
======== ========
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
----------------------------
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue..................................................... 100.0% 100.0%
Cost of revenue............................................. 107.0 95.0
-------- --------
Gross profit (loss).................................... (7.0) 5.0
-------- --------
Operating expenses:
Research and development.................................. 10.2 7.5
Selling, general and administrative....................... 7.4 4.4
-------- --------
Total operating expenses............................... 17.6 11.9
-------- --------
Loss from operations........................................ (24.6) (6.9)
Interest expense............................................ (2.0) (2.6)
Interest and other income................................... 0.1 1.8 (1)
-------- --------
Loss before income taxes.................................... (26.5) (7.7)
Provision for income taxes.................................. 0.1 0.1
-------- --------
Net loss.................................................... (26.6) (7.8)(1)
======== ========
</TABLE>
- ---------------
(1) Includes recovery of a $20.0 million fully-reserved note from IMS. See
"Certain Transactions."
Revenue. Between 1996 and 1997, the Company's revenue grew by 27.9%,
increasing from $1,113.8 million in 1996 to $1,424.3 million in 1997. The
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 during 1997. Revenue growth from
increased unit shipments was partially offset by continued rapid price erosion
in the HDD market as a whole, which resulted in declining ASPs throughout the
period. The Company believes that during 1997 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.
44
<PAGE> 46
From 1996 to 1997, revenue from sales to PC OEMs increased from 52.7% to
64.4% of the Company's revenue, even though the 1997 results did not include any
revenues from IMS. The Company's 1996 results include $44.0 million in OEM
revenues attributable to IMS (in which the Company held a controlling interest
prior to June 1996). From 1996 to 1997, sales to three of the largest PC OEMs,
Compaq, Dell and IBM, increased from 10.8% to 37.8% of the Company's revenues.
Gross Profit (Loss). Gross profit (loss) improved from a loss of $77.9
million in 1996 to a profit of $71.4 million in 1997. Gross margin increased
from (7.0)% in 1996 to 5.0% in 1997. The improvement in gross margin in 1997 is
due primarily to the timely introduction of new, higher margin products which
achieved market acceptance and higher manufacturing yields. During 1997, gross
margin also was favorably affected by improved product designs and lower
component costs. Growth of the Company's gross margin during 1997, however, was
partially constrained by continued rapid price erosion in the HDD market as a
whole, which resulted in declining ASPs for the Company's products.
Operating Expenses.
Research and Development Expense. R&D expense as a percentage of revenue
decreased from 10.2% in 1996 to 7.5% in 1997, while the absolute dollar level of
R&D spending during 1997 declined only slightly from 1996 levels. During 1997,
R&D expenditures were focused on desktop HDDs as a result of the rationalization
of the Company's product and technology roadmap to focus on desktop HDDs
utilizing a single core technology platform and MR head technology.
Selling, General and Administrative Expense. SG&A expense as a
percentage of revenue declined from 7.4% in 1996 to 4.4% in 1997, while the
absolute dollar level of SG&A expense declined from $82.9 million to $62.6
million over the same period. Starting in the second half of 1996, SG&A expense
was reduced as a result of the Company's cost reduction efforts, as well as the
sale of the majority ownership interest in IMS in June 1996. While substantial
expense reductions occurred in 1996, the Company focused on cost containment in
1997.
Interest Expense. Interest expense increased 65.2% from $22.1 million in
1996 to $36.5 million in 1997. This increase was due to a substantial growth in
short-term and long-term borrowings required to fund the Company's operations.
During the fourth quarter of 1997, the Company's interest expense was offset by
the conversion of $200.0 million of subordinated debt held by HEA into equity in
the Company with an associated reduction in interest payments. The benefit
derived from such debt reduction was, however, partially offset by an increase
in the Company's interest expense due 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 $165.1 million of short-term and $224.3
million of long-term indebtedness outstanding at December 27, 1997, as compared
to $149.8 million of short-term and $229.1 million of long-term indebtedness
outstanding at December 28, 1996.
Interest and Other Income. Interest and other income increased from $1.3
million in 1996 to $25.0 million in 1997 due to the recovery of a $1.3 million
fully-reserved note issued to the Company by SDI, and a $20.0 million
fully-reserved note issued to the Company by IMS.
45
<PAGE> 47
Nine months ended December 30, 1995 compared to the nine months ended December
28, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $954.0 $ 798.9
Cost of revenue............................................. 893.4 888.9
------ -------
Gross profit (loss).................................... 60.6 (90.0)
------ -------
Operating expenses:
Research and development.................................. 69.4 87.8
Selling, general and administrative....................... 60.5 60.7
Other..................................................... 4.5 --
------ -------
Total operating expenses............................... 134.4 148.5
------ -------
Loss from operations........................................ (73.8) (238.5)
Interest expense............................................ (7.8) (18.1)
Interest and other income................................... 0.8 1.0
------ -------
Loss before income taxes.................................... (80.8) (255.6)
Provision for income taxes.................................. 2.1 0.8
------ -------
Net loss.................................................... $(82.9) $(256.4)
====== =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue..................................................... 100.0% 100.0%
Cost of revenue............................................. 93.6 111.3
------ -------
Gross profit (loss).................................... 6.4 (11.3)
------ -------
Operating expenses:
Research and development.................................. 7.3 11.0
Selling, general and administrative....................... 6.3 7.6
Other..................................................... 0.5 --
------ -------
Total operating expenses............................... 14.1 18.6
------ -------
Loss from operations........................................ (7.7) (29.9)
Interest expense............................................ (0.8) (2.3)
Interest and other income................................... 0.1 0.1
------ -------
Loss before income taxes.................................... (8.4) (32.1)
Provision for income taxes.................................. 0.2 0.1
------ -------
Net loss.................................................... (8.6) (32.2)
====== =======
</TABLE>
Revenue. Between the nine month period ended December 30, 1995 and the nine
month period ended December 28, 1996, the Company's revenue decreased by 16.3%
from $954.0 million to $798.9 million. This decrease was attributable primarily
to an approximately 22.0% decline in unit shipments and continued rapid price
erosion in the HDD market as a whole, which resulted in declining ASPs for the
Company's products throughout the period. During the nine month period ended
December 28, 1996, revenue from the PC OEM customer channel declined from the
comparable 1995 period by 32.0% due to delayed product introductions and product
performance and quality problems. This decline was offset partially by a 17.0%
increase in revenue from sales to distributors. Part of the revenue decrease
during the 1996 period is also attributable to the sale of a majority ownership
interest in IMS in June 1996. Revenue for 1995 also reflects a 40-week period as
compared to a 39-week period for 1996, as the first quarter of 1995 was extended
to realign the Company's fiscal year with HEA's fiscal year.
46
<PAGE> 48
Gross Profit (Loss). Gross profit (loss) decreased from a profit of $60.6
million in the nine month period ended December 30, 1995 to a loss of $90.0
million in the nine month period ended December 28, 1996. Gross margins
decreased from 6.4% in the 1995 period to (11.3%) in the 1996 period. The
decrease in gross margins in the 1996 period was due primarily to the decrease
in unit shipments and a substantial decline in ASPs discussed above. In June
1996, the Company incurred a $42.3 million charge for products in inventory and
scheduled to be built over the following six months which had market prices
lower than cost. Furthermore, in the 1996 period, the Company incurred one-time
charges of $6.5 million related to the consolidation of its manufacturing
operations to a single facility in Singapore, including the closure of a head
stack assembly plant in Thailand.
Operating Expenses.
Research and Development Expense. R&D expense as a percentage of revenue
increased from 7.3% for the nine month period ended December 30, 1995 to 11.0%
for the nine month period ended December 28, 1996. This increase was due to the
Company's establishment in 1996 of the Company's advanced technology group in
Milpitas, California and a production engineering group in Singapore. In the
third quarter of 1996, the Company incurred charges of approximately $4.5
million related to obsolete equipment and internally built equipment not
utilized due to rapid changes in product volumes and mix during the latter half
of 1996.
Selling, General and Administrative Expense. SG&A expense as a
percentage of revenue increased from 6.3% for the nine month period ended
December 30, 1995 to 7.6% for the nine month period ended December 28, 1996
primarily due to the decrease in the Company's revenue base, while the absolute
dollar level of SG&A spending increased from $60.5 million to $60.7 million.
Certain SG&A expenses decreased during the 1996 period due to reductions in the
Company's workforce and savings associated with the sale of a majority ownership
interest in IMS in June 1996. This decrease in SG&A expenses was offset by
charges related to severance costs incurred throughout 1996, caused by a
substantial change in executive staff.
Other Expenses. Other expenses in 1995 consisted of $4.5 million of
professional fees related to the acquisition of the Company by HEA.
Interest Expense. Interest expense increased 132.1% from $7.8 million for
the nine month period ended December 30, 1995 to $18.1 million for the nine
month period ended December 28, 1996. This increase was due primarily to a
growth in short-term and long-term borrowings used to fund the Company's
operations. The Company had $149.8 million of short-term and $229.1 million of
long-term indebtedness outstanding at December 28, 1996, compared to $99 million
of short-term indebtedness outstanding at December 30, 1995.
Interest and Other Income. Interest and other income increased from $0.8
million in the nine month period ended December 30, 1995 to $1.0 million in the
nine month period ended December 28, 1996 due to the availability of cash for
investing purposes.
YEAR 2000 COMPLIANCE
The Company is preparing to implement the SAP System in the fourth quarter
of 1998. The SAP System is designed to automate more fully the Company's
business processes and will affect most 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 system 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 find suitable
47
<PAGE> 49
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 new 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 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 "Risk Factors -- Transition to and Dependence on Information Systems;
Year 2000 Problem," "Relationship between the Company and Hyundai" and "Certain
Transactions."
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1998, the Company had $15.0 million in cash and cash
equivalents as compared to $16.9 million at December 27, 1997. Operating
activities provided net cash of $143.0 million for the six month period ended
June 27, 1998 as compared to utilizing net cash of $128.5 million for the six
month period ended June 28, 1997. Cash provided by operating activities for the
six months ended June 27, 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 used $25.0 million. During the six months ended June 27,
1998, the Company paid down debt of $38.9 million.
At December 27, 1997, the Company had $16.9 million in cash and cash
equivalents as compared to $31.3 million at December 28, 1996. Net cash used in
operating activities was $146.7 million during fiscal year 1997. Cash used in
operating activities was utilized to fund a net loss of $109.9 million (other
than $65.6 million of non-cash depreciation and amortization expense included
therein), and increases in accounts receivable and inventories totaling $142.5
million and $74.4 million, respectively, and was offset by an increase in
accounts payable of $102.1 million. The increases in accounts receivable,
inventories and accounts payable resulted from increased unit shipments. Net
cash used in investing activities of $61.3 million consisted primarily of
capital expenditures to add manufacturing capacity in the Singapore facility, to
effect the transition from thin-film to MR head technology and to improve
operating efficiency. Cash used in both operating and investing activities was
provided through approximately $265.0 million in working capital loans
48
<PAGE> 50
from HEA ($200.0 million of which was converted into equity in December 1997).
In addition, the Company paid off $65.0 million of bank debt during 1997.
At June 27, 1998, the Company had $350.5 million of short-term and
long-term unsecured debt comprised principally of $200.0 million of credit
facilities from various banks, $55.0 million of inter-company debt from HEA and
$95.0 million of publicly-traded convertible debt. The Company will use part of
the net proceeds from the Offerings to repay all of the outstanding indebtedness
under the Company's bank credit facilities and the inter-company loan of $55.0
million. The remaining amount of the proceeds will be available for capital
expenditures, working capital and general corporate purposes.
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 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 June 27, 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. 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. The Company intends to use a portion of the
proceeds of the Offerings to pay down in full all outstanding amounts under each
of its revolving credit facilities and any amounts then outstanding under the
demand facility as well as the $55.0 million owed to HEA, and thereafter to
terminate the revolving credit facilities. The Company intends to obtain
replacement revolving credit facilities following the Offerings that do not
depend on any Hyundai entity 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, 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 any such replacement facility
or as to the terms and amount of any such facility that it is able to obtain.
Any failure to obtain 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 has the benefit of a letter of support from HEI under which HEI agrees
to provide sufficient financial support to ensure that the Company will continue
as a going concern. Following the Offerings, the Company believes that it will
no longer have the benefit of the support letter.
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. 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.
49
<PAGE> 51
The Company has been investing significant amounts of capital to increase
the capacity and enhance the productivity of its Singapore manufacturing
facility. In the six month period ended June 27, 1998, 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 of
$36.6 million, $82.5 million, $53.8 million and $72.7 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 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 believes that the proceeds of the Offerings, together with cash
generated from operations and borrowing capacity, will be sufficient to fund its
operations through at least the next 12 months. 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.
See "Risk Factors -- Risks Associated with Leverage," "Need for Additional
Capital," "-- Single Manufacturing Facility; Future Need for Additional
Capacity." "-- Dependance on International Operation; Risks from International
Sales," "Relationship Between the Company and Hyundai,"
"Business -- Manufacturing" and "Certain Transactions."
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
issued SFAS No 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim
50
<PAGE> 52
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 131 and the effects, if any, on the
Company's current reporting and disclosures.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on when
costs related to software developed or obtained for internal use should be
capitalized or expensed. The SOP is effective for transactions entered into for
fiscal years beginning after December 15, 1998. 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.
51
<PAGE> 53
BUSINESS
The following discussion contains forward-looking statements within the
meaning of the U.S. federal securities laws, including statements regarding the
anticipated growth in the market for the Company's products, the Company's
expected manufacturing capacity, the belief of the Company as to its future
operating performance and other statements that are not historical facts.
Because such statements include risks and uncertainties, actual results may
differ materially from those anticipated in such forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Maxtor is a leading provider of HDD storage products for desktop PC
systems. The Maxtor DiamondMax product family consists of 3.5-inch form factor
HDDs with storage capacities which range from 2.1 GB to 13.6 GB. These products
have high speed interfaces for greater data throughput, a robust mechanical
design for improved reliability, MR head technology and a DSP-based electronic
architecture that, when combined, provide industry-leading benchmark
performance. On June 15, 1998, Maxtor announced two new HDD products, the
DiamondMax 3400 and the DiamondMax Plus 2500. The DiamondMax 3400 is Maxtor's
fifth MR head HDD, its sixth HDD utilizing the Company's DSP-based electronic
architecture and its eighth HDD based on the Company's Formula 4 mechanical
structure. The DiamondMax Plus 2500, which is designed for the performance
desktop PC market, is the Company's first HDD to feature a 7,200 RPM spin speed,
its sixth MR head HDD, its seventh HDD utilizing the Company's DSP-based
electronic architecture and its ninth HDD based on the Company's Formula 4
mechanical structure. The Company's customers are PC OEMs, including Compaq,
Dell and IBM; distributors, including Ingram; and retailers, including Best Buy
and CompUSA.
COMPANY BACKGROUND
The Company was founded in 1982 and completed an initial public offering of
common stock in 1986. In the mid-1980's, the Company was a leading technology
innovator in the HDD industry. As is true today, the HDD industry during the
1980's was intensely competitive, and characterized by rapid technological
change, rapid rates of product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant erosion of ASPs.
In an effort to mitigate the risks associated with these factors, the Company
pursued all major product segments in the HDD market, utilizing multiple product
families and technology platforms. This costly strategy added significant
complexity to the business which caused the Company to delay or miss a number of
key product introductions and ultimately led to the deterioration of the
Company's overall financial condition. As a result of this deterioration, the
Company sold a 40% stake to HEI and its affiliates in 1994.
THE MAXTOR TURNAROUND
In early 1996, HEA acquired all of the remaining publicly-held shares of
the Common Stock as well as all of the Common Stock then held by HEI and its
affiliates. Shortly thereafter, HEA invested in renewed efforts to revitalize
the Company. In July 1996, the Company hired Michael R. Cannon, its current
Chief Executive Officer and President and a 20 year veteran of the HDD industry,
who had previously served in senior management positions in the systems storage
division at IBM, SyQuest Technology ("SyQuest") and Control Data Corporation.
With a view toward capturing business at leading PC OEMs, Mr. Cannon identified
four key areas requiring improvement:
Corporate Leadership. To provide strong leadership and the required focus
on execution, the Company recruited seasoned, industry veterans for key senior
management positions. In addition to Mr. Cannon, these management additions
included Paul J. Tufano, the Company's Vice President, Finance, and Chief
Financial Officer, who previously had spent more than 17 years in a variety of
management positions at IBM; William F. Roach, the Company's Senior Vice
President, Worldwide Sales and Marketing, who previously had spent 20 years in a
variety of sales and marketing management positions at Quantum and Intel
Corporation; and K.H. Teh, the Company's Vice President, Worldwide
Manufacturing, who previously had spent 20 years in a variety of manufacturing
management positions at Iomega Corp. ("Iomega"), Quantum and SyQuest. These
52
<PAGE> 54
new senior managers joined Dr. Victor B. Jipson, the Company's Senior Vice
President, Engineering, who had been at Maxtor since December 1995 and had
previously spent 16 years at IBM in a variety of research, technical strategy,
product strategy, research and development, and general management positions. In
addition, the Company added personnel with significant industry experience to
its engineering, manufacturing, procurement, human resources and sales and
marketing departments.
Cost Competitiveness. In the third quarter of 1996, Maxtor aggressively
moved to reduce its cost structure. The Company ceased utilizing an HDD
manufacturing facility owned and operated by HEI in Korea and consolidated its
volume HDD manufacturing facilities in Singapore. Maxtor also closed its sub-
assembly manufacturing facility in Thailand and sold its majority interest in
IMS, its former PCB division, to certain members of IMS management and
institutional investors. These actions helped reduce the Company's workforce by
approximately 54% by October of 1996. The Company also removed layers of
management and implemented strict discretionary expense controls. In addition,
the Company improved the productivity of its research and development
expenditures by rationalizing its technology and product roadmap to focus on
desktop PC HDDs using a single core technology platform.
Timely Introduction of New Products. Maxtor's new management team took a
number of steps designed to improve time-to-market entry, time-to-volume
manufacturing, quality, performance and manufacturability of its products, and
the effectiveness and efficiency of the Company's research and development
expenditures. In particular, the Company: (i) simplified its product and
technology roadmap by canceling its 5.25-inch and 2.5-inch programs; (ii)
focused its research and development efforts on a single core technology
platform that includes MR head technology and a DSP-based electronic
architecture, which the Company believes are capable of supporting rapid
extension of the Company's product and technology roadmap; and (iii)
restructured its product development process by creating an advanced technology
group, which is responsible for assessing new technology viability, developing
early prototypes and exploiting common design architectures, and by
strengthening its existing product design teams, which are responsible for
taking the building blocks provided by the advanced technology group and
designing high performance, highly manufacturable, cost-effective products which
meet customer specifications.
Customer/Channel Mix. Recognizing that the vast majority of the growth in
the desktop PC market was being captured by a limited number of leading PC OEMs,
the new management team rationalized Maxtor's sales channels and focused its
sales and marketing resources on establishing the Company as a preferred
supplier to leading PC OEMs and a limited number of leading distributors and
retailers. To improve overall customer satisfaction and capture accounts with
leading PC OEMs, the Company took a number of steps to improve product quality
and created dedicated account support teams for its major PC OEM clients
emphasizing senior management involvement in developing and maintaining customer
relationships.
TURNAROUND RESULTS
As a result of the changes described above, Maxtor's performance has
improved significantly during a period of severe fluctuations in the overall HDD
market.
Cost Competitiveness. The Company's cost competitiveness initiatives led to
a significant reduction of operating expenses. Maxtor's SG&A expense as a
percentage of revenue were among the lowest in the industry for the 1997 fiscal
year and the first six months of 1998.
Timely Introduction of New Products. Maxtor's restructured manufacturing
and product development processes, as well as its rationalized product and
technology roadmap, enabled the Company to complete one of the fastest
transitions in the industry from HDDs utilizing thin-film head technology to
100% use of MR head technology by the end of the fourth quarter of 1997. With
its DiamondMax 2160 and DiamondMax 2880, the Company demonstrated significantly
improved time-to-volume manufacturing in the fourth quarter of 1997 and the
first quarter of 1998, by producing 1.4 million and 1.3 million units of these
products, respectively, during their first full quarters of production. In the
first quarter of 1998, the Company established itself as a time-to-market entry
leader with a 2.8 GB per disk HDD, the DiamondMax 2880. This trend continued in
the second quarter of 1998 with the Company's introductions of the DiamondMax
3400, a 3.4 GB per disk HDD, and the DiamondMax Plus 2500, the Company's first
7,200 RPM HDD. These
53
<PAGE> 55
improvements, in turn, enabled the Company to increase its units shipped per
quarter from 1.3 million units during the first quarter of 1997 to 3.7 million
units in second quarter of 1998, and increase its share of the desktop HDD
market in terms of units shipped from 5.6% in the first quarter of 1997 to 13.4%
in the first quarter of 1998.
Customer/Channel Mix. Maxtor's new focus on leading PC OEMs led to
significant improvements in its customer/channel mix. For example, Maxtor's
revenue from shipments to Compaq, Dell, and IBM have increased from
approximately 6.5% to 51.8% of the Company's total revenue over the 24 month
period ended March 28, 1998. Maxtor also became a leading supplier of desktop
HDDs to Dell in less than 6 months from May 1997 and was a leading provider in
terms of desktop HDDs shipped to the domestic retail channel during 1997.
Cumulatively, these changes have resulted in significantly improved financial
results. The Company increased revenues by 103.9%, from $530.1 million to
$1,080.9 million for the first six months of 1997 and 1998, respectively, and
improved gross margins from (0.8)% to 11.5% for the same periods.
INDUSTRY BACKGROUND
The Desktop HDD Market. According to IDC, the desktop PC market is the
largest segment of the worldwide PC market, accounting for approximately 80% of
global PC shipments in 1997. As a result, desktop PCs were the leading source of
demand for HDDs, accounting for more than 75% of all HDD units shipped worldwide
in 1997, according to IDC. The demand for desktop PCs and, therefore, desktop PC
HDDs, continues to grow in part due to: (i) continued improvements in personal
computing price/performance tradeoffs, including the emergence of the sub-$1000
PC; (ii) the rapid accumulation of data resulting from the digitization of
information previously stored in paper form; (iii) larger file sizes created by
multimedia-intensive applications associated with Windows-based user interfaces;
(iv) the exchange of increasing volumes of data among users across the Internet
and intranets with the proliferation of collaborative computing; and (v)
increased demand for PC upgrades as a result of Year 2000 compliance efforts.
Future demand growth for HDDs also may be driven by new and emerging HDD
markets. In May 1998, IDC forecasted that the worldwide desktop PC segment of
the HDD market would grow from approximately 100 million units in 1997 to 174
million units in 2001, reflecting a compound annual growth rate of approximately
15%.
Hard Drive Technology. The basic operation of an HDD has not changed
materially since its introduction in the 1950s. To improve the performance of
HDDs, HDD manufacturers have concentrated their efforts on optimizing the
performance of the various components of the HDD.
The main components of the HDD are the head disk assembly ("HDA") and the
PCB. The HDA includes the head, media (disks), head positioning mechanism
(actuator) and spin motor. These components are contained in a hard base plate
protective package in a contamination-free environment. The PCB includes custom
integrated circuits, an interface connector to the host computer and a power
connector.
The HDA is comprised of one or more disks positioned around a spindle hub
that rotates the disks by a spin motor. Disks are made of a smooth substrate to
which a thin coating of magnetic materials is applied. Each disk has a head
suspended directly above it, which can read data from or write data to the
spinning disk. The sensor element of the head, also known as the slider, is
getting progressively smaller, resulting in reduced material costs.
The integrated circuits on the PCB typically include a drive interface and
a controller. The drive interface receives instructions from the computer, while
the controller directs the flow of data to or from the disks, and controls the
heads. The location of data on each disk is logically maintained in tracks,
divided into sectors. The computer sends instructions to read data from or write
data to the disks based on track and sector locations. Industry standard
interfaces are utilized to allow the disk drive to communicate with the
computer.
A key performance metric in the HDD industry is "areal density," which is
the measure of stored bits per square inch on the recording surface of a disk.
An increase in areal density allows an HDD provider to decrease the price per
megabyte stored by increasing overall storage capacity per disk, thus reducing
product costs through reduced component requirements. During 1996 and 1997,
certain HDD providers began transitioning to MR heads. Prior to this transition,
most HDDs utilized thin-film inductive recording heads.
54
<PAGE> 56
MR heads have discrete read and write structures which provide more signal than
the older thin-film inductive heads. This results in significantly higher areal
densities, which thus increases storage capacity per disk, and improves
manufacturing margin and product reliability. HDD providers are evaluating or
implementing a number of technological innovations designed to further increase
HDD performance and reduce product costs, including attempting to simplify the
electronic architecture by combining the traditional servo-control functions of
the DSP-based electronic architecture and the error recovery and interface
management functions of traditional HDD microprocessors on a single integrated
circuit. Moreover, to consistently achieve timely introduction and rapid volume
production of new products, some HDD providers are striving to simplify their
product design processes by focusing on creating extendible core technology
platforms which utilize common firmware and mechanical designs and re-use of
manufacturing tooling and ASICs across various product generations and product
lines.
HDD Market Challenges. PC OEMs compete in a consolidating market. The top
ten PC OEMs accounted for greater than 50% of all PC units shipped during 1997
and the first six months of 1998. 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. 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.
Successful achievement on the performance parameters, however, is only part of
the competitive equation. As PC OEMs seek to develop successful business models,
they also are requiring their HDD vendors to maintain high levels of quality to
enable low cost of ownership and adapt their inventory management models to be
compatible with the emerging build-to-order business model in the PC industry.
See "Risk Factors -- Risks of Failed Execution; Changing Customer Business
Models."
MAXTOR'S SOLUTION
Maxtor has established itself as a leading provider of high quality, high
performance HDDs to major desktop PC OEMs, distributors and retailers. The
Company's management team has extensive HDD industry experience across all
functional areas. As a consequence, Maxtor has been able to define and implement
the key business processes necessary to fulfill the needs of its customers.
These processes focus on the efficient, timely and cost-effective integration of
leading-edge technology to create highly manufacturable HDDs. Moreover, the
Company's senior management team rigorously monitors these processes in an
effort to ensure consistent execution and prompt response to customer demands.
Maxtor intends to strengthen its leadership position in the desktop HDD industry
by consistently executing these fundamental business processes.
MAXTOR'S STRATEGY
Maxtor seeks to be the dominant provider of HDDs to leading PC OEMs,
distributors and retailers. Maxtor's strategy to achieve this goal includes the
following elements:
Effectively Integrate New Technology. In 1996, Maxtor overhauled its
research and development process by augmenting its traditional product
development teams with a new advanced technology group. The advanced technology
group's purpose is to monitor and evaluate advancements in HDD technology for
possible integration into the Company's future products. It also works closely
with Maxtor's product development teams and strategic component vendors to: (i)
obtain early access to the latest HDD component technology; (ii) allow for
flexibility in choosing state-of-the-art components; and (iii) ensure viability
of new product technologies and components prior to product design. Through this
process, the Company intends to continue to integrate new technologies into its
existing core technology platform and to strengthen its ability to introduce
high quality, highly manufacturable, high performance HDD products with industry
leading time-to-volume production on a consistent basis. As a result of this
process, Maxtor was able to complete one of the fastest transitions to 100% MR
head HDDs in the industry by the end of 1997.
55
<PAGE> 57
Leverage Design Excellence. Maxtor's product development methodology
reduces risks associated with design changes by focusing on common firmware and
mechanical designs, and re-use of manufacturing tooling and ASICs. Through this
process, the Company has created a technology platform which is used as the
common core of each of its current HDD products and which the Company believes
is extendible into products for new and emerging HDD market opportunities. To
reduce the overall cost of ownership of its HDD products, Maxtor utilizes a
robust mechanical architecture designed to reduce defects that result from
customer mishandling during installation. The Company also works closely with
leading component suppliers in an effort to ensure that adequate tolerances are
designed into its products to achieve high manufacturing yields and product
quality. By utilizing this product development methodology, Maxtor has
successfully introduced and achieved timely volume production of six generations
of MR HDDs in less than 18 months.
Capitalize on Flexible Manufacturing. The Company's Singapore manufacturing
facility utilizes a flexible cell-based process that enables the Company to: (i)
dedicate manufacturing cells to particular customers, thereby allowing the
Company to identify, isolate and remedy manufacturing defects quickly, resulting
in improved product quality, faster time-to-volume production and improved
overall customer satisfaction; (ii) simultaneously manufacture multiple product
configurations; (iii) quickly reconfigure the facility to respond to customer
change requests and changes in product and customer mix; (iv) effectively adapt
its inventory management model to the emerging build-to-order business model
employed by certain of its PC OEM customers; and (v) add incremental capacity as
needed at a relatively low cost. This flexible cell-based process, when coupled
with the Company's product design methodology, has enabled Maxtor to
significantly improve time-to-volume production. For example, during the first
full quarters of production the Company manufactured 1.4 million and 1.3 million
units of its DiamondMax 2160 and DiamondMax 2880 HDDs, respectively.
Increase Market Share With Leading PC OEMs. Maxtor intends to continue to
achieve leading time-to-volume production of high quality, high performance HDDs
to capture additional market share with leading PC OEMs. Maxtor's quarterly
share of the desktop HDD market in terms of units shipped increased from 5.6% in
the first quarter of 1997 to 13.4% in the first quarter of 1998. Shipments to
Compaq, Dell and IBM accounted for 6.5% of the Company's total revenue in the
quarter ended June 29, 1996 and increased to 54.1% in the quarter ended June 27,
1998.
Maintain Customer Satisfaction. Maxtor believes it distinguishes itself
from its competitors by focusing on ease of doing business and overall customer
satisfaction. For example, the Company's "No Quibble" service program has been
well received by its customers. Maxtor also has begun to place significant
attention on total supply chain management to align its business model with the
evolving build-to-order manufacturing business model of certain PC OEMs. The
Company utilizes its flexible, cell-based manufacturing process coupled with a
just-in-time inventory model to rapidly respond to the changing needs of its key
desktop PC OEM customers. To further automate and improve the efficiency of its
total supply chain management, the Company is in the process of installing new
enterprise resource planning and related software.
Broaden Product Portfolio. To capture higher margin opportunities and meet
the needs of its PC OEM customers, the Company intends to leverage its existing
technology platform and product development methodology to develop HDD products
for the low end of the enterprise data storage market, and the high performance
desktop and sub-$1000 desktop PC market segments. To this end, on June 15, 1998,
the Company introduced the DiamondMax Plus 2500, its first 7,200 RPM HDD, which
is designed for the performance desktop PC market. Maxtor also intends to
explore opportunities in a number of other emerging HDD markets.
PRODUCT DEVELOPMENT/TECHNOLOGY
One of the most important changes undertaken as part of the Maxtor
turnaround was the restructuring of the Company's product development process to
separate the enabling technology development phase from the product design
phase. In early 1996, Maxtor suffered from poor product quality and performance
and products that were late to market. This contrasts sharply with 1998 where
Maxtor now enjoys strong customer
56
<PAGE> 58
relationships based on excellent product quality, time-to-volume production
leadership and industry-leading performance.
Enabling Technology Development Phase. The advanced technology group is
responsible for the enabling technology development phase, including: (i)
working closely with the Company's product design teams and strategic component
suppliers to create a menu of state-of-the-art technologies to be used in the
Company's future products; (ii) developing early prototypes to ascertain the
stability and manufacturability of the Company's planned products; and (iii)
analyzing the latest head, disk, channel, motor and ASIC technologies and
designs to broaden and strengthen the Company's technology platform. This group
also focuses on leveraging the Company's current proven technology platform by
re-using as much electronic and mechanical technology as possible in each
successive product generation. In an effort to deliver the highest product
quality possible, the advanced technology group begins its review of emerging
technologies as early as possible, normally 18 months before such technologies
might be included in the Company's products. For example, Maxtor's advanced
technology group currently is evaluating GMR technology and pico sliders from a
variety of head suppliers for inclusion in future Maxtor products. GMR
technology is designed to significantly improve amplitude sensitivity and
provide the basis for significant future increases in areal density and improved
manufacturing margin, which in turn will result in increased drive capacity and
reliability. Pico sliders are smaller than nano sliders and are designed to
provide improved mechanical compliance and tribological performance at lower
costs.
Product Design Phase. The creation of the advanced technology group as part
of the Maxtor turnaround freed the Company's existing product design group from
the responsibility of assessing the viability of new and emerging technologies
and allowed it to concentrate on improving product performance, robustness,
manufacturability, quality and materials costs. The product design group also is
responsible, in part, for executing Maxtor's new product introduction process.
This process is a highly disciplined review procedure designed to ensure that
new product designs meet clearly specified criteria in terms of yield, scrap,
quality, productivity, and production ramp rates prior to release into volume
production. This process has enabled the Company to improve time-to-volume
manufacturing dramatically, yielding 1.4 million and 1.3 million units of the
DiamondMax 2160 and the DiamondMax 2880, respectively, during the first full
quarters of production. See "Risk Factors -- Rapid Technological Change and
Product Development."
PRODUCTS
Maxtor currently provides HDDs exclusively for the desktop PC market. The
Maxtor DiamondMax product family consists of 3.5-inch form factor HDDs with
storage capacities ranging from approximately 2.1 GB to 13.6 GB. These products
have a number of features including high speed interfaces for greater data
throughput, a robust mechanical design for improved reliability, MR head
technology and a DSP-based electronic architecture that, when combined, provides
industry-leading benchmark performance. On June 15, 1998, Maxtor announced two
new HDD products, the DiamondMax 3400 and the DiamondMax Plus 2500. The
DiamondMax 3400 is Maxtor's fifth MR head HDD, its sixth HDD utilizing the
Company's DSP-based electronic architecture and its eighth HDD based on the
Company's Formula 4 mechanical structure. The DiamondMax Plus 2500, which is
designed for the performance desktop PC market, is the Company's first HDD to
feature a 7,200 RPM spin speed, its sixth MR head HDD, its seventh HDD utilizing
the Company's DSP-based electronic architecture and its ninth HDD based on the
Company's Formula 4 mechanical structure.
57
<PAGE> 59
The table below sets forth key performance metrics and key customers for
the Company's six generations of MR products introduced since December of 1996.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX
1280 1750 2160* 2880* 3400* PLUS 2500*
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Maximum Capacity (GB)... 5.12 7.00 8.40 11.52 13.6 10.0
Capacity per Disk 1.28 1.75 2.16 2.88 3.40 2.50
(GB)..................
Rotational Speed (RPM).. 5400 5400 5400 5400 5400 7200
First Shipment Date..... Dec. 1996 June 1997 Sept. 1997 March 1998 June 1998 June 1998
Key Customers........... IBM Compaq, Dell Compaq, Dell Dell and Compaq, Dell Dell
and IBM and IBM Gateway and IBM
</TABLE>
------------------
* Currently in volume production.
- --------------------------------------------------------------------------------
Maxtor's DiamondMax product family has won a number of recent editorial and
industry awards including:
<TABLE>
<S> <C>
PC WORLD Magazine World Class Awards -- Best Hard Drive DiamondMax
2160 -- June 1998
WINDOWS Magazine Win 100 for DiamondMax 2160 -- June 1998
WINDOWS Magazine Win 100 for DiamondMax 1750 -- June 1998
VARBusiness 1998 Product Report Award -- May 1998
Computer Reseller News CRN Test Center Recommended for DiamondMax 2880 -- April
1998
BYTE Magazine Best Overall: Server Class Drive -- DiamondMax
2160 -- February 1998
BYTE Magazine Best Overall: Desktop Drive -- DiamondMax 1280 -- February
1998
CompUSA 1997 Accessories Vendor of the Year
WINDOWS Magazine Win 100 for DiamondMax 1280 -- July 1997
Home PC Reviewer's Choice DiamondMax 1280 -- May 1997
WINDOWS Magazine Recommended List DiamondMax 1280 -- April 1997
</TABLE>
See "Risk Factors -- Rapid Technological Change and Product Development."
MANUFACTURING/QUALITY
To be competitive, Maxtor must manufacture high quality, highly
manufacturable, high performance HDDs with industry leading time-to-volume
production at competitive costs. The Company's HDD manufacturing operations
consist primarily of the final assembly of high-level subassemblies built to
Company specifications and testing of completed products.
Manufacturing. Pilot production of the Company's products, as well as cost
reduction, quality and product improvement engineering on current products, are
conducted at the Company's Longmont, Colorado facility. The Company manufactures
its HDDs in volume at a single facility in Singapore which utilizes a flexible,
cell-based process. Currently, the Singapore facility consists of four modular
production units ("MPUs"), each of which has 18 modular work cells ("MWCs").
Each MWC essentially is a mini-serial production line consisting of all of the
tooling and test equipment necessary to build and test an HDD. Each MPU is
responsible for managing the supply of the components and other parts required
by its MWCs. The Company is in the process of adding a fifth MPU which will
increase overall manufacturing capacity at the facility from approximately 16
million to approximately 20 million units per year. There is sufficient
additional space at the Singapore facility for a sixth MPU which would increase
overall capacity at that facility to approximately 25 million units per year.
Maxtor has coupled its cell-based manufacturing approach with a sophisticated
factory information system that collects data from each MWC on various
productivity and quality metrics. The Company has been investing significant
amounts of capital to increase the capacity and enhance the productivity of its
Singapore manufacturing facility. In the six month period ended June 27, 1998,
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 of $36.6 million, $82.5 million, $53.8 million and
$72.7 million, respectively. During 1998, capital expenditures are expected to
58
<PAGE> 60
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 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 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 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.
In addition to risks typically associated with the concentration of vital
operations, foreign manufacturing is subject to additional risks, including
changes in governmental policies, currency fluctuations, political instability,
transportation delays and interruptions, and the imposition of tariffs and
export controls. Any disruption of the Company's manufacturing operations could
have a material adverse effect on its business, financial condition, results of
operations and customer relations.
See "Risk Factors -- Need for Additional Capital," "-- Single Manufacturing
Facility; Future Need for Additional Capacity," "-- Dependance on International
Operation; Risks from International Sales," "Relationship between the Company
and Hyundai" and "Management Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Quality. Consistent with its goal to establish Maxtor as a leader in
product quality and overall customer satisfaction, Maxtor has implemented a
corporate-wide quality program which focuses on (i) robustness of design and
improved design tolerances; (ii) quality of incoming components and factory
process control; and (iii) customer feedback, failure analysis and timely
response. In addition, Maxtor's quality, materials, enabling technology and
product development groups work closely with leading component vendors in an
effort to ensure sufficient tolerances are designed into the Company's HDDs to
achieve high manufacturing yields and product quality. Maxtor's Singapore
facility also is ISO 9002 certified. Finally, Company executives meet regularly
with customers to exchange product quality information to facilitate rapid
analysis of customer failures and timely implementation of corrective actions.
The Company currently warrants its products against defects in parts or
labor for a period of three years from the date of shipment. Products are
generally repaired or refurbished by Company subcontractors. The Company
operates a European drive exchange center in Ireland, a domestic drive exchange
center in San Jose, California, and an Asian drive exchange center in Singapore.
Additionally, the Company provides customer service and technical support for
end-users, as well as access to important information and software, via its Web
site.
59
<PAGE> 61
MATERIALS AND SUPPLIES
The Company has developed and continues to develop close, strategic
relationships with leading suppliers of many of the key components of its HDD
products. These relationships enable the Company to actively manage its supply
chain to improve flexibility in choosing state-of-the-art components and to
reduce component, inventory and overall product costs. In addition, Maxtor's
strategic component suppliers work closely with the Company's advanced
technology group, enabling the Company to gain early access to leading-edge HDD
technology and to improve the overall efficiency of the Company's product design
process.
The Company relies on a limited number of leading suppliers for the
components used in the manufacturing of its products, including MR heads and
head stack assemblies, media, custom integrated circuits ("IC"), read channel
ICs, PCBs and motor/baseplate assemblies. In general, the Company seeks to have
at least two or three suppliers for each of its component requirements. For
example, the Company currently purchases MR heads from Alps Electric Co., Ltd,
Headway Technologies, Inc., IBM, Read-Rite Corporation and TDK Corporation, and
media from HMT Technology Corporation, Komag, Incorporated and MMC. Custom
ASICs, including the Company's DSP controller chips, and channels, however,
currently are sole-sourced from TI and Lucent, respectively. Because of their
custom nature, these products require significant design-in periods and long
lead times. There can be no assurance that, in the event of any disruption or
delay in the supply of these custom ASICs or any other components, the Company
could locate an alternative source of supply on a timely basis on acceptable
terms, if at all. The Company outsources a majority of its PCB assembly to IMS,
an affiliate of the Company.
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, 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.
See "Risk Factors -- Control by and Dependence on Hyundai," "-- Dependence
on Suppliers of Components and Sub-Assemblies," "-- Dependence on International
Operations; Risks from International Sales," "Relationship Between the Company
and Hyundai" and "Certain Transactions."
CUSTOMERS AND SALES CHANNELS
From 1986 to 1997, chronic performance and quality issues, as well as being
late to the market, had adversely impacted Maxtor's ability to win business with
leading PC OEMs. As a result, the Company was heavily dependent on sales to a
large number of regional distributors which limited the Company's ability to
forecast periodic shipments and shifted the Company's product mix toward lower
performance, lower margin products. Recognizing that the majority of the growth
in shipments in the PC market was being captured by a limited number of PC OEMs,
the Company rationalized its sales channels and focused its sales and marketing
efforts on becoming a significant provider of HDDs to leading PC OEMs, including
Compaq, Dell and IBM, and a limited number of leading distributors and
retailers. By emphasizing overall customer satisfaction, product quality and
performance and time-to-volume production, the Company believes that it has
established a strong customer base.
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
60
<PAGE> 62
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.
Original Equipment Manufacturers. Shipments to Compaq, Dell and IBM
accounted for 6.5% of the Company's total revenue in the quarter ended June 29,
1996 and increased to 54.1% in the quarter ended June 27, 1998. The Company
believes that its success depends on its ability to maintain and further develop
strong PC OEM customer relationships and to provide products that fit the needs
of the PC OEM channel. 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 HDD product, it generally will purchase HDDs from those vendors for the
life of that HDD 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, most of which continue to consolidate their share of the PC
market. The Company generally negotiates pricing, volume discounts, order lead
times, product support requirements and other terms and conditions prior to
receiving a PC OEM's first purchase order. Shipments are not scheduled until
purchase orders are received and cancellation of purchase orders may occur
without significant penalty. The Company's major PC OEM customers include
Compaq, Dell and IBM. See "Risk Factors -- Risks of Failed Execution; Changing
Customer Business Models" and "Customer Concentration."
Distributors. Maxtor uses a select group of distributors to sell its
products cost-effectively to the large number of geographically dispersed
customers which tend to hold market shares of less than 1% of the overall
desktop PC market, including value-added resellers, dealers, system integrators
and small PC OEMs. Distributors accounted for 39% of revenue for the fiscal year
ended March 30, 1996; 48% of revenue for the nine month period ended December
28, 1996; 36% of revenue for the year ended December 27, 1997; and 28% of
revenue for the quarter ended June 27, 1998. Distributors generally enter into
non-exclusive agreements with the Company for purchase and redistribution of
product on a quick turnover basis. Purchase orders are placed and revised on a
weekly basis. Maxtor grants certain of its distributors price protection and
limited rights to return product on a rotation basis. The Company's major
distributors include Ingram Micro, Inc., Karma International SA, and SED.
Retailers. To increase awareness of the Maxtor brand name and benefit from
the typically higher gross margins of the retail sales channel, the Company
sells its retail-packaged products directly to major retailers such as computer
superstores, warehouse clubs and computer electronics stores and authorized
sales through distributors to smaller retailers. Retailers accounted for 5% of
revenue for the fiscal year ended March 30, 1996; 8% of revenue for the nine
month period ended December 28, 1996; 9% of revenue for the year ended December
27, 1997; and 9% of revenue for the quarter ended June 27, 1998. Maxtor's
current retail customer base is in the United States and Canada, however, the
Company has begun efforts to establish a retail channel presence in the emerging
retail markets in Europe and Asia. The Company believes the retail channel
complements its other sales channels. Retailers supply to the aftermarket
"upgrade" sector in which end-users purchase and install products to upgrade
their computers. Maxtor grants certain of its retailers price protection and
limited rights to return product on a rotation basis. The Company's major retail
customers include Best Buy Co., Inc., CompUSA Inc., and Staples, Inc. See "Risk
Factors -- Customer Concentration."
SALES AND MARKETING
The Company employs approximately 234 individuals who market and sell the
Company's products to leading PC OEMs, distributors and retailers. Sales offices
are located throughout the U.S. and in Australia, France, Germany, Great
Britain, Hong Kong, Japan, Korea, Singapore, and Taiwan. Maxtor has formed
61
<PAGE> 63
multi-disciplined, dedicated account and channel teams focused on each of its
current and target strategic PC OEM, distributor and retail accounts. These
teams generally are comprised of representatives from the Company's sales,
marketing, engineering and quality organizations. The Company's senior
management also takes an active role in the Company's sales efforts. Dedicated
field sales and technical support personnel are located in close proximity to
the manufacturing facilities of each of the Company's PC OEM customers.
The Company's marketing and public relations functions are performed both
internally and through outside firms. Public relations, direct marketing,
worldwide packaging and marketing materials are targeted to various end-user
segments. Maxtor utilizes both consumer media and trade publications. The
Company has programs under which qualifying resellers are reimbursed for certain
advertising expenditures. Maxtor also has invested in direct marketing and
customer satisfaction programs. The Company maintains ongoing contact with
end-users through primary and secondary market research, focus groups, product
registrations and technical support databases.
See "Risk Factors -- Risks of Failed Execution; Changing Customer Business
Models."
BACKLOG
The Company generally sells standard products according to standard
agreements or purchase order terms. Delivery dates are specified by purchase
orders. Such orders may be subject to change, cancellation or rescheduling by
the customer without significant penalties. The quantity actually purchased and
shipment schedules are frequently revised to reflect changes in the customer's
needs. In addition, orders for the Company's products are filled for several
large customers from just-in-time inventory warehouses, whereby orders are not
placed ahead of time on the Company's order entry backlog system. Instead, the
Company receives a periodic forecast of requirements from the customer. Upon
shipment from the just-in-time warehouse, the customer is invoiced. In light of
these factors, backlog reporting as of any particular date may not be indicative
of the Company's actual revenue for any succeeding period, and, therefore, is
not necessarily an accurate predictor of the Company's future revenue.
COMPETITION
Although the Company's share of the desktop PC segment of the 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 and rates of product and technology obsolescence, dramatic
shifts in market share and significant erosion of ASPs, and as such 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 PC HDD market.
The Company competes primarily with manufacturers of 3.5-inch HDDs,
including Fujitsu, Quantum, Samsung, Seagate and Western Digital, many of which
have a larger share of the desktop HDD market than the Company. Other companies,
such as IBM, will be significant competitors 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 substantial resources to providing desktop HDDs.
Many 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 or potential
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
62
<PAGE> 64
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.
See "Risk Factors -- Highly Competitive Industry."
INTELLECTUAL PROPERTY
The Company has been granted approximately 180 U.S. and foreign patents
related to disk drive products and technologies, and has additional patent
applications pending in the United States and certain foreign countries. 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 owned or 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.
As a majority-owned subsidiary of HEA, the Company has 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. There
can be no assurance 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.
63
<PAGE> 65
Accordingly, such an adverse ruling could have a material adverse effect on the
Company's business, financial condition or results of operations.
Similar to certain other providers of HDDs, the Company has received
correspondence from 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 "Risk Factors -- Limited Protection of Intellectual Property; Risk of
Third Party Claims of Infringement," "-- Dependence on International Operations;
Risks of International Sales" and "Relationship Between the Company and
Hyundai -- Certain Intellectual Property Indemnification and Patent Cross
License between HEI and the Company."
EMPLOYEES
As part of the Maxtor turnaround, the Company reduced its personnel from
9,330 in March 1996 to 4,330 in October 1996. Since October 1996, the Company
has added significant personnel to its research and development, sales and
marketing and production staffs. As of June 27, 1998, the Company had 5,578
employees worldwide, of which 676 were engaged in engineering, research and
development; 234 in marketing, sales and customer support; 4,213 in
manufacturing; and 455 in general management and administration. As of June 27,
1998, the Company had 4,213 employees at its manufacturing facilities in
Singapore and 89 employees at its foreign sales offices. The Company believes
that its future success will depend on its ability to continue to attract and
retain a team of highly motivated and skilled individuals. None of the Company's
employees currently are represented by a labor organization; however, in May
1997, Maxtor Singapore recognized a labor union, the United Workers of
Electronic and Electrical Industries, and in May 1998 began negotiating the
terms of a collective bargaining agreement with such union. The Company believes
that its employee relations are positive. See "Risk Factors -- Dependence on and
Integration of Key Personnel; Hiring Additional Skilled Personnel."
FACILITIES
The Company's administrative offices and advanced technology operations are
located at a 180,087 square foot facility in Milpitas, California. The Company
also maintains 332,507 square feet of engineering and pilot production
facilities in Longmont, Colorado. All the Company's domestic facilities are
leased.
The Company's volume manufacturing facilities are located in Singapore. The
Company owns a 384,000 square-foot building in Singapore, situated on land
leased through the year 2016 (subject to an option to renew for an additional 30
years). The Company anticipates that it may need additional manufacturing
capacity as early as the beginning of the year 2000; however, a sustained
increase or decline in the demand for the Company's products may affect such
timing. The Company is currently investigating additional and alternative sites
for its manufacturing operations, including the Dalian Facility. There is no
assurance that the Company will be able to locate geographically desirable
facilities, which are situated near an available pool of skilled labor, on a
cost effective basis, if at all. 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 leases a 34,604 square foot facility in San Jose, California to house
its U.S. drive exchange facility and finished goods warehouse, and a 28,500
square foot facility in Ireland to house its European drive exchange facility.
All the Company's sales offices, located in the United States, Europe and Asia
Pacific, are
64
<PAGE> 66
leased. The Company intends to review constantly its facilities requirements as
part of its growth strategy and will add additional facility space as the need
arises.
The Company is experiencing space constraints at its Longmont, Colorado
facility and is exploring opportunities to obtain additional space in the
Longmont area. There can be no assurance that the Company will be able to obtain
additional space that can accommodate its needs for additional space 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 "-- Manufacturing Quality" and "Risk Factors -- Single Manufacturing
Facility; Future Need for Additional Capacity."
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.
See "Risk Factors -- StorMedia; Legal Proceedings" and "-- Limited
Protection of Intellectual Property; Risk of Third Party Claims of
Infringement."
65
<PAGE> 67
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of June 1, 1998 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Dr. Chong Sup Park(1)..... 50 Chairman of the Board
Michael R. Cannon(1)...... 45 President, Chief Executive Officer and Director
Charles F. Christ(2)(3)... 59 Director
Chang See Chung(2)........ 45 Director
Charles Hill(1)(3)(4)..... 62 Director
Y. H. Kim................. 55 Director
Philip S. Paul(2)(3)(4)... 59 Director
Dr. Victor B. Jipson...... 45 Senior Vice President, Engineering
William F. Roach.......... 54 Senior Vice President, Worldwide Sales and Marketing
Paul J. Tufano............ 44 Vice President, Finance, and Chief Financial Officer
Glenn H. Stevens.......... 47 Vice President, General Counsel and Secretary
Phillip C. Duncan......... 47 Vice President, Human Resources
John T. Hagerman.......... 43 Vice President, Strategic Initiatives
K. K. Kim................. 46 Vice President, Business Development
Misha Rozenberg........... 36 Vice President, Quality
K. H. Teh................. 44 Vice President, Worldwide Manufacturing
David L. Beaver........... 44 Vice President, Materials
</TABLE>
- ---------------
(1) Member of the Nominating Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
(4) Member of the Affiliated Transactions Committee.
Dr. Chong Sup Park has been Chairman of the Board since May 1998 and
assumed the position of Chairman, President and Chief Executive Officer of HEA
in September 1996. Dr. Park also has been Chairman of MMC's board of directors
since January 1998. From September 1996 to May 1998, Dr. Park served as Vice
Chairman of the Board. Dr. Park previously served as the Company's President and
Chief Executive Officer from February 1995 until his appointment as Vice
Chairman. From 1993 until joining Maxtor in 1995, he was Chairman, President and
Chief Executive Officer of Axil Computer, Inc., a workstation computer
manufacturer and a Hyundai Business Group company, in Santa Clara, California.
Dr. Park is also Corporate Executive Vice President of HEI and formerly held
various other management positions with HEI, including the position of Senior
Vice President, Semiconductor Sales and Marketing, which he held from 1990 to
1992. From 1985 to 1989, Dr. Park was President and Chief Executive Officer of
HEA. He is also a director of Symbios, Inc., an affiliate of the Company which
manufactures semiconductor and information storage products ("Symbios").
Michael R. Cannon has been President, Chief Executive Officer and Director
of the Company since July 1996. From 1993 until he joined Maxtor, Mr. Cannon
held several senior management positions with IBM's Storage Systems division,
including Vice President, Mobile and Desktop Business Unit; Vice President,
Product Design; and Vice President, Worldwide Operations. From 1991 to 1993, he
served as Senior Vice President of SyQuest, a removable disk drive company, and
prior to joining SyQuest, he held the position of Vice President, Southeast Asia
Operations, with Imprimis Technology. He is also a director of MMC, a wholly
owned subsidiary of HEA.
Charles F. Christ has been a member of the Board since August 1995. He has
been President, Chief Executive Officer and a director of Symbios since 1997.
From 1994 to 1997, Mr. Christ was Vice President
66
<PAGE> 68
and General Manager of the Components Division of Digital Equipment Corporation.
From 1989 to 1990, Mr. Christ was a Senior Partner with the management
consulting group of Coopers & Lybrand L.L.P. From 1986 to 1988, he was President
and Chief Executive Officer of Digital Sound Corporation, a telecommunications
voice processing company.
Chang See Chung has been a member of the Board since May 1998. Mr. Chung
has also served as Senior Vice President of HEA since May 1998. From 1995 to
1998 he served as Vice President, Strategic Planning and Corporate Coordination
of Symbios. From 1976 to 1995, Mr. Chung held various management positions with
HEA, Hyundai Electronics Europe, HEI and HHI. Mr. Chung was previously the Chief
Financial Officer and Treasurer of HEA.
Charles Hill has been a member of the Board since March 1992. He has been a
Senior Research Fellow at the Hoover Institution since 1989. From 1983 to 1984
he served as Chief of Staff of the U.S. State Department and from 1982 to 1989
as Executive Assistant to former U.S. Secretary of State George P. Shultz. From
1992 to 1996, Mr. Hill was Special Consultant to the Secretary General of the
United Nations. Presently, he is Diplomat-in-Residence and Lecturer in
International Studies at Yale University.
Y. H. Kim has been a member of the Board since January 1996. He has been
President and representative Director of HEI since September 1996. From 1989 to
1996, Mr. Kim was President and Chief Executive Officer of HEA. Mr. Kim has been
employed by the Hyundai group since 1971. He also is a Director of Symbios.
Philip S. Paul has been a member of the Board since March 1998. Since 1991,
he has managed Paul Capital Partners, L.P., a private equity firm. From 1985 to
1991, Mr. Paul was Chairman and Chief Executive Officer of Hillman Ventures,
Inc., a venture capital firm specializing in technology investments. From 1982
to 1985, Mr. Paul was President and Chief Executive Officer of Machine
Intelligence Corp., a robotics company. He is also a Director of Symbios.
Dr. Victor B. Jipson has been the Company's Senior Vice President,
Engineering since December 1995. From 1991 to 1995, he was General Manager of
IBM's Optical Storage Solutions business unit. From 1975 to 1991, Dr. Jipson
held key management positions in research, technical strategy, product strategy
and research and development with IBM.
William F. Roach has been the Company's Senior Vice President, Worldwide
Sales and Marketing since January 1997. From 1989 to 1996, he held various sales
and marketing positions with Quantum, an information storage products company,
including Executive Vice President, Worldwide Sales, from 1994 to 1996. From
1977 to 1989 Mr. Roach held sales and marketing positions with Intel
Corporation, a semiconductor company.
Paul J. Tufano has been the Company's Vice President, Finance and Chief
Financial Officer since July 1996. From 1979 to 1996, Mr. Tufano held a variety
of management positions at IBM. From 1995 to 1996, Mr. Tufano was Manager of
Worldwide Logistics for IBM's Storage Systems division. Other management
positions included Manager of Plans and Controls for its Desktop and Mobile
Storage products business unit, and Controller for IBM's San Jose, California
facility. He is currently a Director of IMS, an electronic manufacturing service
company.
Glenn H. Stevens has been the Company's Vice President, General Counsel and
Secretary since June 1994. From 1992 to 1994, Mr. Stevens had a private law
practice. From 1979 to 1992, he held various positions within the legal
department at U S WEST, Inc., a telecommunications products and services
provider, including Chief Counsel and Secretary for its research and development
organization and Chief Intellectual Property Counsel for the family of U S WEST,
Inc. companies.
Phillip C. Duncan has been the Company's Vice President, Human Resources
since August 1996. From 1994 to 1996, he was Vice President, International Sales
and Marketing and Human Resources of Berkeley Systems, a software company. From
May 1992 to June 1994 he held senior human resources management positions at
SyQuest and from March 1990 to May 1992 he held similar positions at Cirrus
Logic, a semiconductor company.
67
<PAGE> 69
John T. Hagerman has been the Company's Vice President, Strategic
Initiatives since October 1997. From June 1996 to October 1997 he was the
Company's Vice President, Marketing and Strategic Planning. From February 1996
to June 1996, he was the Company's Vice President, Strategic Planning and from
1993 to February 1996 he was the Company's Vice President, Mobile Products.
K. K. Kim has been the Company's Vice President, Business Development since
May 1994. From 1991 to 1994, Mr. Kim was Director of Corporate Planning Office
for HEI. Prior to 1991, he held various management positions with other
companies affiliated with HEA.
Misha Rozenberg has been the Company's Vice President, Quality since March
1998. From April 1996 to March 1998, he was Vice President, Supplier
Engineering. From 1994 to 1996, Mr. Rozenberg was a Senior Director of Supplier
Engineering with Conner Peripherals, Inc., a disk drive company. From 1990 to
1994 he was a Manager with Apple Computer.
K. H. Teh has been the Company's Vice President, Worldwide Manufacturing
since May 1997. From 1996 to 1997 he was with Iomega Corp., a removable disk
drive company, where he had been Managing Director of its Malaysia manufacturing
facility. From 1994 to 1996, he was a Managing Director, Malaysia Manufacturing,
with Quantum, and was a Senior Director with SyQuest from 1993 to 1994.
David L. Beaver has been the Company's Vice President, Materials since May
1998. From 1994 to 1997, he was Director of Operations-Materials at EMASS, a
data storage company, and from 1991 to 1994 he was Director of Corporate
Materials Procurement at SyQuest.
There are no family relationships among any of the Company's directors or
executive officers.
BOARD OF DIRECTORS
The Board is divided into three classes and currently consists of seven (7)
directors. Messrs. Chung, Hill and Paul are Class I directors, Messrs. Kim and
Christ are Class II directors, and Messrs. Park and Cannon are Class III
directors. Class I, Class II and Class III directors serve until the annual
meetings of stockholders to be held in 1999, 2000 and 2001, respectively, and
until their respective successors are duly elected and qualified. Directors in a
class are elected for a term of three years to succeed the directors in such
class whose terms expire at such annual meeting.
BOARD COMMITTEES
Following the Offerings, the Board will have four standing committees: an
Audit Committee, a Compensation Committee, an Affiliated Transactions Committee
and a Nominating Committee. The Audit Committee currently consists of Mr.
Christ, Mr. Hill and Mr. Paul. The Audit Committee selects and engages, on
behalf of the Company, the independent public accountants to audit the Company's
annual financial statements, and reviews and approves the planned scope of the
annual audit. The Compensation Committee currently consists of Mr. Christ, Mr.
Chung and Mr. Paul. The Compensation Committee establishes compensation policies
governing the Company's executive officers, sets bonuses and salaries for
certain officers of the Company including the Chief Executive Officer and
administers or supervises the administration of the Company's employee benefit
programs and executive compensation programs. The Affiliate Transactions
Committee currently consists of Mr. Hill and Mr. Paul. The Affiliate
Transactions Committee is responsible for reviewing all material transactions
regarding contractual, corporate or business relations by and between the
Company and any related or affiliated entity of HEI or HEA following the
Offerings. The Nominating Committee currently consists of Dr. Park, Mr. Cannon
and Mr. Hill. The Nominating Committee recommends from time to time candidates
for nomination for election as directors of the Company. See "Relationship
Between the Company and Hyundai -- Stockholder Agreement -- Rights Regarding
Board of Directors," and "Certain Transactions -- Other Related Party
Transactions."
COMPENSATION OF DIRECTORS
Since 1996 and prior to May 13, 1998, non-employee members of the Board
received the following compensation: (i) an annual retainer of $22,000; (ii)
$1,000 per year for service as a committee chairperson;
68
<PAGE> 70
(iii) $1,500 for attendance at each quarterly meeting of the Board; (iv)
reimbursement of travel and expenses for such meetings; and (v) a one-time
initial grant of a nonqualified stock option to purchase 20,000 shares of Common
Stock pursuant to the Option Plan or the Amended Plan. In April 1998, in
connection with the adoption of the Amended Plan, each director holding an
option to purchase Common Stock was granted a new option to purchase a number of
shares of Common Stock equal to 10% of the option shares previously held in
exchange for such amendment. Effective May 13, 1998, non-employee members of the
Board will receive: (i) an annual retainer of $22,000; (ii) $1,000 per year for
service as a committee chairperson; (iii) $1,500 for attendance at each
quarterly meeting of the Board; (iv) $1,000 for attendance at each, if any,
special meeting of the Board; (v) $1,000 for attendance at each meeting of a
committee of the Board which are not held on the same day as a scheduled board
meeting; (vi) reimbursement of travel and expenses for such meetings; (vii) a
one-time initial grant of a nonqualified stock option to purchase 20,000 shares
of Common Stock pursuant to the Option Plan or the Amended Plan (the "Initial
Grant"); and (viii) for so long as a director remains a member of the Board an
additional grant of a non-qualified stock option to purchase 5,000 shares of
Common Stock each time that he or she is reelected to the Board. Board members
who participate telephonically in any of the meetings described in subsections
(iii), (iv) and (v) above will receive only 50% of the above-noted compensation
for such meeting. See "-- Option Amendment Program."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee is composed of Mr. Paul, Mr. Chung and Mr.
Christ. No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of directors
or compensation committee.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation paid
by the Company during the fiscal years ended March 30, 1996, December 28, 1996
and December 27, 1997 to the Company's Chief Executive Officer and the four
other most highly compensated executive officers whose total compensation for
services in all capacities to the Company exceeded $100,000 during the fiscal
year ended December 27, 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
--------------------------------------- SECURITIES ALL OTHER
NAME AND FISCAL YEAR SALARY BONUS OTHER ANNUAL UNDERLYING COMPENSATION($)
PRINCIPAL POSITION ENDED(1) ($) ($) COMPENSATION($) OPTIONS(#) (2)
------------------ ------------- ------- ----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Cannon(3)... Dec. 27, 1997 500,000 750,000(4) -- -- --
President, and Chief Dec. 28, 1996 240,387 250,000(2) -- 450,000 --
Executive Officer Mar. 30, 1996 -- -- -- -- --
William F. Roach(5).... Dec. 27, 1997 339,242 -- 116,667(6) 125,000 --
Senior VP, Worldwide Dec. 28, 1996 -- -- -- -- --
Sales and Marketing Mar. 30, 1996 -- -- -- -- --
Dr. Victor B. Jipson... Dec. 27, 1997 258,846 50,000(7) -- -- 4,800
Senior VP, Dec. 28, 1996 176,924 107,500(7) -- 50,000 3,173
Engineering Mar. 30, 1996 70,768 50,000(7) 116,490(8) -- 1,326
Paul J. Tufano(9)...... Dec. 27, 1997 229,986 50,000(10) -- -- 4,800
VP, Finance and Dec. 28, 1996 92,879 50,000(10) -- 50,000 2,322
Chief Financial Mar. 30, 1996 -- -- -- -- --
Officer
Phillip C. Dec. 27, 1997 220,000 -- -- -- 4,800
Duncan(11)...........
VP, Human Dec. 28, 1996 84,615 80,000(12) -- 40,000 2,094
Resources Mar. 30, 1996 -- -- -- -- --
</TABLE>
- ---------------
(1) As a result of the Company's change in fiscal year end, the fiscal period
ended December 28, 1996 comprises nine months.
(2) The amounts shown in this column, unless otherwise indicated, represent the
Company's annual contribution to the Maxtor Savings Retirement Plan, a
401(k) plan. All U.S. employees are eligible to participate in this plan.
69
<PAGE> 71
(3) Mr. Cannon joined the Company as President and Chief Executive Officer in
July 1996.
(4) Represents bonuses paid in accordance with the Company's offer letter to
Mr. Cannon. See "-- Employment Agreements."
(5) Mr. Roach joined the Company as Senior Vice President, Worldwide Sales and
Marketing in January 1997.
(6) Represents a portion of a $350,000 loan to be forgiven over a three year
period in accordance with the Company's offer letter to Mr. Roach. See
"-- Employment Agreements."
(7) Represents bonus paid in connection with the Company's hiring of Dr.
Jipson.
(8) Represents relocation expenses reimbursed in connection with the Company's
hiring of Dr. Jipson.
(9) Mr. Tufano joined the Company as Vice President, Finance and Chief
Financial Officer in August 1996.
(10) Represents bonus paid in accordance with the Company's offer letter to Mr.
Tufano. See "-- Employment Agreements."
(11) Mr. Duncan joined the Company as Vice President, Human Resources in August
1996.
(12) Represents bonus paid in accordance with the Company's offer letter to Mr.
Duncan. See "-- Employment Agreements."
The following table sets forth information with respect to stock options
granted during the fiscal year ended December 27, 1997 to each of the Named
Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
NUMBER OF GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------ -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Cannon(3)........ -- -- -- -- -- --
William F. Roach(3)......... 125,000 7.70% $ 6.00 01/02/07 $471,671 $1,195,307
Dr. Victor B. Jipson(3)..... -- -- -- -- -- --
Paul J. Tufano(3)........... -- -- -- -- -- --
Phillip C. Duncan(3)........ -- -- -- -- -- --
</TABLE>
- ---------------
(1) All options were granted under the Amended Plan. Options granted under the
Amended Plan vest over a four-year period with 25% vesting at 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 on the
hiring date, whichever is later. The Board retains discretion to modify the
terms, including the price of outstanding options.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% annual rates of stock price appreciation from the date of grant
to the end of the option term are provided in accordance with rules of the
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock, overall market
conditions and the option holders' continued employment through the vesting
period. This table does not take into account any actual appreciation in the
price of the Common Stock from the date of grant to the present.
(3) On January 25, 1998, the Compensation Committee of the Board approved grants
to purchase Common Stock under the Amended Plan to the following Named
Executive Officers at an exercise price of $6.00: Mr. Cannon received an
option for 100,000 shares, Dr. Jipson received an option for 37,500 shares,
Mr. Tufano received an option for 37,500 shares, and Mr. Duncan received an
option for 15,000 shares. On February 25, 1998, in connection with the
Option Amendment Program the following Named Executive Officers received
options to purchase Common Stock under the Amended Plan at an exercise price
of $6.00: Mr. Cannon received an option for 45,000 shares, Mr. Roach
received an option for 12,500 shares, Dr. Jipson received an option for
5,000 shares, Mr. Tufano received an option for 5,000 shares, and Mr. Duncan
received an option for 4,000 shares. On June 26, 1998, the Compensation
70
<PAGE> 72
Committee of the Board approved grants to purchase Common Stock under the
Amended Plan to the following Named Executive Officers at an exercise price
of $9.50: Mr. Roach received an option for 35,000 shares, Dr. Jipson
received an option for 35,000 shares, Mr. Tufano received an option for
35,000 shares, and Mr. Duncan received an option for 15,000 shares. See
"-- Option Amendment Program."
There were no options exercised during the twelve months ended December 27,
1997. The following table provides the specified information concerning
unexercised options held as of December 27, 1997 by the Named Executive
Officers:
FISCAL YEAR-END VALUES OF UNEXERCISED OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 27, 1997(1) AT DECEMBER 27, 1997(2)
------------------------ ------------------------
NAME VESTED(#) UNVESTED(#) VESTED($) UNVESTED($)
---- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Michael R. Cannon............................. 140,625 309,375 -- --
William F. Roach.............................. -- 125,000 -- --
Dr. Victor B. Jipson.......................... 18,750 31,250 -- --
Paul J. Tufano................................ 15,625 34,375 -- --
Phillip C. Duncan............................. 12,500 27,500 -- --
</TABLE>
- ---------------
(1) All options were granted under the Amended Plan. Options granted under the
Amended Plan vest over a four-year period with 25% vesting at 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 on the
hiring date, whichever is later.
(2) As of December 27, 1997, there were no unexercised in-the-money options
because the exercise price per share was equal to the fair market value per
share, as determined by the Board.
EMPLOYMENT AGREEMENTS
In July 1996, the Company entered into a letter agreement with Mr. Cannon,
its current President and Chief Executive Officer, relating to the terms of his
employment, his initial level of compensation and payment of certain
compensation in the event of his termination from the Company under certain
circumstances. The agreement provides for base compensation of $500,000 per
year; payment of a sign-on bonus of $1,000,000, payable in four equal quarterly
installments beginning on the last day of December 1996; an annual bonus
opportunity of approximately $250,000; and the grant of options to purchase
450,000 shares of Common Stock vesting over a four year period. The letter
agreement further provides that in the event Mr. Cannon is terminated by the
Company without cause, the Company shall pay Mr. Cannon the equivalent of one
year's base salary plus any portion of the sign-on bonus remaining unpaid as of
the date of such termination.
In July 1996, the Company entered into a letter agreement with Mr. Tufano,
its current Vice President, Finance and Chief Financial Officer, relating to the
terms of his employment, his initial level of compensation and payment of
certain compensation in the event of his termination from the Company under
certain circumstances. The agreement provides for base compensation of $230,000
per year; payment of a sign-on bonus of $100,000, payable in two equal
installments in July 1996 and January 1997; an annual bonus opportunity of
approximately $115,000; and the grant of options to purchase 50,000 shares of
Common Stock vesting over a four year period. The letter agreement further
provides that in the event Mr. Tufano is terminated by the Company without
cause, the Company shall pay Mr. Tufano the equivalent of nine months' base
salary plus any portion of the sign-on bonus remaining unpaid as of the date of
such termination.
In January 1997, the Company entered into a letter agreement with Mr.
Roach, its Senior Vice President, Worldwide Sales and Marketing, relating to the
terms of his employment, his initial level of compensation, and a loan and
associated repayment terms. The agreement provides for base compensation of
$350,000 per year; a $350,000 loan, a one-time annual bonus between
approximately $175,000 and $350,000; and the grant
71
<PAGE> 73
of options to purchase 125,000 shares of Common Stock vesting over a four year
period. In accordance with the foregoing agreement, on January 10, 1997, Mr.
Roach delivered to the Company a promissory note in the principal amount of
$350,000 in exchange for payment to him by the Company of the loan amount. The
note provides for forgiveness of one-third of the outstanding principal balance
on each of the first three anniversary dates of his employment, provided that
Mr. Roach is an employee of the Company on each such date. In addition, the
promissory note shall be forgiven in full in the event of his termination by the
Company for any reason other than willful misconduct of a culpable nature. In
the event Mr. Roach voluntarily terminates his employment with the Company, the
loan amount, reduced pro rata for the period of Mr. Roach's employment relative
to the term of the loan, shall become immediately due and payable.
In August 1996, the Company entered into a letter agreement with Mr.
Duncan, its current Vice President, Human Resources, relating to the terms of
his employment, his initial level of compensation and payment of certain
compensation in the event of his termination from the Company under certain
circumstances. The agreement provides for base compensation of $220,000 per
year; payment of a sign-on bonus of $80,000, payable during the first week of
employment; an annual bonus opportunity of approximately $110,000; and the grant
of options to purchase 40,000 shares of Common Stock vesting over a four year
period. The letter agreement further provides that in the event Mr. Duncan is
terminated by the Company without cause, the Company shall pay Mr. Duncan the
equivalent of nine months' base salary.
In March 1997, the Company entered into a letter agreement with Mr. Teh,
its current Vice President, Worldwide Manufacturing, relating to terms of his
employment, his initial level of compensation and payment of certain
compensation in the event of his termination from the Company under certain
circumstances. The agreement provides for base compensation of S$396,000
(Singapore dollars) per year; a sign-on bonus of $100,000 (U.S. dollars),
payable in two installments in March 1997 and March 1998; an annual wage
supplement of one month's base salary payable in December so long as Mr. Teh has
completed twelve months of continued employment; an annual bonus opportunity of
approximately S$198,000 (Singapore dollars), and the grant of options to
purchase 50,000 shares of Common Stock vesting over a four year period. The
Company will provide Mr. Teh with a car and pay for certain operating expenses.
The letter agreement further provides that in the event Mr. Teh is terminated by
the Company without cause, the Company shall pay Mr. Teh the equivalent of nine
months' base salary.
In June 1998, the Company entered into a letter agreement with Dr. Jipson,
its current Senior Vice President, Engineering, which provides that in the event
Dr. Jipson is terminated by the Company without cause, the Company shall pay Dr.
Jipson the equivalent of nine months' base salary.
BENEFIT PLANS
Amended and Restated 1996 Stock Option Plan. The Amended Plan provides for
the grant of incentive stock options ("ISOs") within the meaning of section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), to employees, and
for grants of nonstatutory stock options to employees, non-employee directors
and consultants. The Amended Plan provides that all options must be granted, if
at all, before May 1, 2006. The Board has the authority to amend or terminate
the Amended Plan, provided that no such action may adversely affect the rights
of any person granted an option under the Amended Plan without such person's
consent unless such action is required to enable an option designated as an ISO
to qualify as an ISO or is necessary to comply with any applicable law or
regulation.
The Amended Plan's maximum share reserve is 10,000,000 shares of Common
Stock and as of July 21, 1998, options to purchase of a total of 5,158,888
shares at a weighted average exercise price of $6.06 per share were outstanding
and 4,773,144 shares were available for future grants under the Amended Plan. As
of the closing of the Offerings, the share reserve of the Amended Plan will be
increased to a number of shares equal to 15% of the number of shares of Common
Stock which are outstanding on such date.
The Amended Plan is administered by the Board or a committee of the Board.
The Board has the power to select the persons to whom options will be granted
and to determine the terms of the options (except as described below with
respect to the automatic outside director grants), including the exercise price,
the number of shares subject to each option and the exercisability thereof, and
the form of consideration payable
72
<PAGE> 74
upon exercise. However, after the closing of the Offerings, no employee may be
granted options for more than 600,000 shares during any fiscal year of the
Company.
The Amended Plan provides for the automatic grant of nonstatutory stock
options to directors of the Company who are not employees of the Company or a
parent or subsidiary corporation of the Company (an "Outside Director"). The
Plan provides that each Outside Director (other than a director who became an
Outside Director as a result of his or her termination of employment), who was
serving as an Outside Director on May 1, 1996 (the "Effective Date") or first
became an Outside Director after the Effective Date, will be granted an option
to purchase 20,000 shares of Common Stock on the Effective Date or the date he
or she became an Outside Director. In addition, for so long as an Outside
Director remains a member of the Board, he or she shall receive an additional
grant of a nonstatutory stock option to purchase 5,000 shares of Common Stock on
each date that he or she is reelected to the Board, provided that he or she has
served on the Board for 2 years.
Options granted under the Amended Plan are not generally transferable by
the optionee, other than by will or the laws of descent and distribution. In
general, options granted under the Amended Plan must be exercised within 90 days
after the end of optionee's status as an employee, director or consultant of the
Company or a parent or subsidiary corporation of the Company, or within twelve
months after a termination due to death or disability, but in no event later
than the expiration of the option's expiration date. The exercise price of all
incentive stock options granted under the Amended Plan must be at least equal to
the fair market value of the Common Stock on the date of grant, and the exercise
price of all nonstatutory stock options granted under the Amended Plan must be
at least equal to 85% of the fair market value of the Common Stock on the date
of grant. With respect to any person who owns stock possessing more than 10% of
the voting power of all classes of the outstanding capital stock of the Company
or a parent or a subsidiary corporation of the Company, the exercise price of
any ISO must equal at least 110% of the fair market value on the grant date and
if the option is an ISO, the term of the option must not exceed five years. The
term of all other ISOs granted under the Amended Plan may not exceed ten years.
The Amended Plan provides that in the event of certain "transfer of
control" transactions involving the Company, each option may be assumed or an
equivalent option substituted for by the acquiring corporation. If the
outstanding options are not assumed or substituted for as described in the
preceding sentence, shares subject to the outstanding options will become fully
vested and exercisable prior to the date of the closing of such transfer of
control.
See "Risk Factors -- Shares Eligible for Future Sale" and "Dilution."
Option Amendment Program. In the second quarter of 1998, the Company
implemented a stock option amendment program (the "Option Amendment Program")
pursuant to which it amended certain options granted under the Option Plan prior
to October 1, 1997. The Option Amendment Program was implemented because the
agreements evidencing such options provided for a "Pseudo-IPO Repurchase Right"
in favor of the optionee, as well as certain repurchase rights in favor of the
Company, which required the Company to recognize a quarterly compensation
expense for financial statement purposes. The "Pseudo-IPO Repurchase Right"
provided that if the Company did not complete an initial public offering (an
"IPO") within six months after an "IPO Trigger Date," the optionee could tender
his shares to the Company and require the Company to repurchase such shares at
fair market value. An "IPO Trigger Date" is a date, on or before February 1,
2001, on which all of the following have occurred: (a) the Company has positive
net income for four consecutive quarters, (b) the Company's value, as determined
by an independent appraisal, equals or exceeds $700 million, and (c) the Company
receives the written opinion of a nationally-recognized investment banking firm
indicating that the Company may undertake an underwritten IPO of its Common
Stock.
The agreement evidencing each option which was amended pursuant to the
Option Amendment Program was modified to: (i) remove the Company's right of
first refusal and vested share repurchase option; (ii) remove the Pseudo-IPO
Repurchase Right; and (iii) provide that in the event of a transfer of control
of the Company, the shares subject to the option will become fully vested and
exercisable in the event that the option is not assumed or substituted for by
the acquiring corporation. In addition, each holder of an amended option was
granted a new option to purchase a number of shares of the Common Stock equal to
10% of the
73
<PAGE> 75
shares subject to the old option (the "New Option"). The shares subject to the
New Option will vest at the same rate as the shares subject to the old option
and the New Option will be evidenced by an agreement with the same terms and
conditions of the old option, as amended. The Pseudo-IPO Repurchase Right was
implemented shortly after HEA had acquired the Company in order to award and
retain employees. Most of the options having this feature were granted in 1996.
As a result of the amendment, the Company's options are no longer subject to
variable accounting treatment.
1998 Employee Stock Purchase Plan. A total of 1.7 million shares of Common
Stock have been reserved for issuance under the Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan"), none of which have yet been issued. The
Purchase Plan permits eligible employees to purchase Common Stock at a discount,
but only through accumulated payroll deductions, during sequential 6-month
offering periods. Participants will purchase shares on the last day of each
offering period. In general, the price at which shares are purchased under the
Purchase Plan is equal to 85% of the lower of the fair market value of a share
of Common Stock on (a) the first day of the offering period, or (b) the purchase
date. The initial offering period under the Purchase Plan will commence on the
closing of the Offerings.
1998 Restricted Stock Plan. The Company's 1998 Restricted Stock Plan (the
"Restricted Stock Plan") provides for awards of shares of Common Stock to
employees. The Board has the authority to amend or terminate the Restricted
Stock Plan. The Restricted Stock Plan's maximum share reserve is 390,000 shares
of Common Stock. In June 1998, the Compensation Committee of the Board awarded
the Named Executive Officers restricted stock grants as follows: Mr. Cannon
received 100,000 shares; Dr. Jipson received 35,000 shares; Mr. Roach received
35,000 shares; Mr. Tufano received 35,000 shares; and Mr. Duncan received 15,000
shares. The remaining 170,000 shares under the Restricted Stock Plan also were
awarded in June 1998 by the Compensation Committee of the Board to certain other
officers of the Company. As of the date of grant, the fair market value of such
shares was determined by the Compensation Committee to be $9.50. All shares
reserved under the Restricted Stock Plan have been awarded. All unvested shares
of restricted stock are forfeited in the event of termination of employment with
the Company. The restricted stock shares vest and are released from the
forfeiture provision three years from the date of the restricted stock award.
Under the terms of a change of control agreement, vesting of these shares is
subject to acceleration upon the occurrence of a change of control. See
"-- Change of Control Agreements."
Change of Control Agreements. Effective May 29, 1998, the Compensation
Committee of the Board approved Change of Control Agreements pursuant to which
certain executives of the Company may receive severance benefits in the event of
a termination of employment under certain circumstances involving a Change of
Control of the Company. For this purpose, a "Change of Control" is defined
generally as acquisition by any person of a beneficial ownership of 50% or more
of the voting stock of the Company, certain mergers or other business
combinations involving the Company, the sale of more than 50% of the assets of
the Company, liquidation of the Company or change in the majority of the
incumbent members of the Board (except for changes in Board composition approved
by a majority of the directors), or the sale by HEA of more than 50% of its
stock in the Company to an HDD manufacturer, provided the number of shares sold
represents at least 10% of the outstanding stock in a single transaction at the
time of such sale. Initial public offerings are excluded from the definition of
Change of Control. Subject to the terms and conditions set forth in the Change
of Control Agreements, severance benefits become payable in the event that,
within 12 months following a Change of Control, the executive is terminated by
the Company without cause, or resigns following a reduction in such employee's
compensation, responsibility level, or relocation of more than 100 miles.
In such event, the Eligible Employee is entitled to receive a lump sum cash
payment equal to his or her annual salary plus target incentive for the
severance period. The severance period is 24 months for the Chief Executive
Officer and 12 months for other executives. In addition, the Change of Control
Agreements provide for accelerated vesting of the executive's unvested stock
options and/or restricted stock. For the Chief Executive Officer, all unvested
stock options and restricted stock shall become 100% vested and other executives
will have their option vesting accelerated by an additional two years, and their
restricted stock shall be vested 50% or pro rata based upon the number of months
from the restricted award date, whichever is greater. The executive also will be
entitled to continued coverage under the Company's medical plan for the
severance period. If any part of the benefits under the Change of Control
Agreement is determined by the
74
<PAGE> 76
Company's accountants to be an excess parachute payment under Section 280G of
the Internal Revenue Code, at the executive's option, the payment will be
reduced to the minimum extent necessary to have no excess parachute payment.
401(k) Plan. The Company maintains a retirement and deferred savings plan
for its employees (the "401(k) Plan") that is intended to qualify as a
tax-qualified plan under the Code. The 401(k) Plan provides that each
participant may contribute up to 15% of his or her pre-tax gross compensation
(up to a statutory limit, which is $10,000 in calendar year 1998). Under the
401(k) Plan, the Company may make discretionary matching contributions. The
Company's contributions to the 401(k) Plan for the fiscal periods ended March
30, 1996, December 28, 1996 and December 27, 1997 were $600,000, $1.2 million
and $1.6 million, respectively. All amounts contributed by participants and
earnings on such contributions are fully vested at all times.
HEA Executive Deferred Compensation Plan. Under the HEA Executive Deferred
Compensation Plan (the "Deferred Compensation Plan"), eligible executives of the
Company who are at the "director" level or above may irrevocably elect each year
to defer on a pre-tax basis up to 100% of their compensation for such year. Each
participant's account will be credited with an amount based on the "deemed
investment experience" of the investment models chosen by the executive under
the terms of the Deferred Compensation Plan. The executives' deferrals, adjusted
for the deemed investment experience, are referred to as the "deferral amounts."
The deferral amounts are distributed to the executive upon the executive's
termination of employment or as of a date certain elected by the executive.
Generally, the deferral amounts will be distributed in a single lump sum, but if
the executive has at least 10 years of service with the Company, the deferral
amount may be distributed in up to 10 annual installments. Deferral amounts may
be withdrawn in the event of a financial hardship, and also may be withdrawn by
the executive for any reason, subject to the forfeiture of 25% of the
executive's deferral amounts. All payments under the Deferred Compensation Plan
will be paid in cash from the general funds of the Company.
The Deferred Compensation Plan is administered by the Deferred Compensation
Committee of the HEA board of directors. Corporate officers of the Company who
are designated by the Deferred Compensation Committee are eligible to
participate in the Deferred Compensation Plan.
Following the Offerings, eligible Company executives will be able to
continue to participate in the Deferred Compensation Plan unless such
eligibility is terminated by HEA. The Deferred Compensation Plan may be amended,
including to terminate the participation of Company executives, or terminated at
any time by HEA. Upon termination of the Deferred Compensation Plan, all
deferral amounts will be distributed in a cash lump sum payment.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Amended and Restated Certificate of
Incorporation which provide that directors of the Company shall not be
personally liable for monetary damages to the Company or its stockholders for a
breach of fiduciary duty as a director, except for liability as a result of: (i)
a breach of the director's duty of loyalty to the Company or its stockholders;
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (iii) an act related to the unlawful stock
repurchase or payment of a dividend under Section 174 of the Delaware General
Corporation Law; and (iv) transactions from which the director derived an
improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Amended and Restated Certificate of Incorporation also authorizes the
Company to indemnify its officers, directors and other agents, by bylaws,
agreements or otherwise, to the full extent permitted under Delaware law. The
Company has and intends to continue to enter into separate indemnification
agreements with each of its directors and officers which may, in some cases, be
broader than the specific indemnification provisions contained in the Delaware
General Corporation Law. The indemnification agreements may require the Company,
among other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful
75
<PAGE> 77
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified and to
obtain directors' and officers' insurance if available on reasonable terms.
At present, except for the StorMedia litigation, there is no pending
litigation or proceeding involving a director, officer, employee or agent of the
Company where indemnification will be required or permitted. The Company is not
aware of any threatened litigation or proceeding which may result in a claim for
such indemnification.
See "Risk Factors -- Limited Protection of Intellectual Property; Risk of
Third Party Claims of Infringement" and "-- StorMedia; Legal Proceedings."
76
<PAGE> 78
CERTAIN TRANSACTIONS
RELATIONSHIP WITH HEA
In 1994, HEI and certain of its affiliates purchased 40% of the Company's
outstanding Common Stock for an aggregate cash purchase price of $150.0 million
pursuant to the Stock Purchase Agreement. In early 1996, HEA acquired all of the
remaining shares of the publicly-held Common Stock in a tender offer and merger
for an aggregate purchase price of $215.0 million and also acquired all of the
Company's Common Stock held by HEI and its affiliates. In June 1996 HEA
exchanged its Common Stock in the Company for 58,208,955 shares of Series A
Preferred Stock.
In December 1995 HEA loaned the Company $100 million which was due on April
10, 1996 and accrued interest at LIBOR plus 0.65%, with interest payable at
maturity. This $100 million loan was replaced in April 1996 with a one year $100
million revolving line of credit bearing interest at HEA's cost of funds plus
0.10%, with interest payable quarterly. In July 1996, the Company borrowed an
additional $35 million from HEA due in August 1996, bearing interest at LIBOR
plus 0.70% with interest payable at maturity; this loan was repaid at maturity.
In April 1997 HEA renewed the $100 million revolving line of credit and
increased the borrowing limit to $150 million. HEA increased the borrowing limit
on this line of credit to $185 million in June 1997, and to $270 million in
August 1997. The Company had utilized all available credit under this facility
as of August 1997. In December 1997, $200 million of this outstanding
indebtedness was cancelled in exchange for 29,859,766 shares of Series A
Preferred Stock, the borrowing limit was reduced to $150 million and the Company
repaid an additional $5 million in principal. In January 1998, the Company
repaid an additional $10 million in principal. In April 1998 this revolving line
of credit was renewed with a borrowing limit of $100 million. A total of $55
million remains outstanding under this revolving line of credit.
HEA currently is an unconditional guarantor of the Company's Milpitas,
California facilities lease. The aggregate monthly rent under the lease is
currently $558,270 per month.
In contemplation of the Offerings, HEA, HEI and Maxtor have entered into
certain agreements governing certain relationships between the parties.
See "Relationship Between the Company and Hyundai."
RELATIONSHIP WITH HEI
In August 1995, HEI guaranteed a $100 million 364-day revolving credit
facility of the Company which expired in August 1996. In January 1996, HEI
guaranteed a $13.8 million one year loan to Maxtor Singapore, which was renewed
in January 1997 for an additional year and repaid at maturity on January 1998.
In August 1996, HEI guaranteed an $86 million 364-day revolving credit facility
and a $129 million three year revolving credit facility. In October 1996, the
$86 million 364-day revolving credit facility was increased by $10 million and
HEI guaranteed the additional amount. In addition, in October 1996, HEI
guaranteed a separate $10 million one year revolving credit facility which was
repaid by the Company in January 1998. In December 1996, HEI guaranteed two
additional credit facilities, one of which was a three month $20 million
uncommitted line which the Company repaid at maturity in March 1997 and the
other of which was a $10 million one year facility which was repaid at maturity
in December 1997. In August 1997, the Company repaid $65 million of the $96
million 364-day revolving credit facility and extended the balance of $31
million for an additional 364 days, continuing HEI's guarantee. In October 1997,
HEI guaranteed an additional $10 million one year revolving credit facility.
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 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
77
<PAGE> 79
Company that is repayable on demand of the lender, is not guaranteed and had an
outstanding principal amount of $30.0 million as of June 27, 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. As of June 27, 1998, aggregate indebtedness of $170.0
million under the revolving credit facilities was guaranteed by HHI. The Company
intends to use a portion of the proceeds of the Offerings to pay down in full
all outstanding amounts under each of its revolving credit facilities and any
amounts then outstanding under the demand facility as well as the $55.0 million
owed to HEA, and thereafter to terminate the revolving credit facilities. The
Company intends to obtain replacement revolving credit facilities following the
Offerings that do not depend on any Hyundai entity 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, 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
any such replacement facility or as to the terms and amount of any such facility
that it is able to obtain. Any failure to obtain 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 has the benefit of a letter of support from HEI
under which HEI agrees to provide sufficient financial support to ensure that
the Company will continue as a going concern. Following the Offerings, 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. ("Citicorp Securities").
Under this program the Company could sell its qualified trade accounts
receivable up to $100 million on a non-recourse basis. As of December 27, 1997,
$79.8 million of advances related to sales of accounts receivable were included
in accrued and other liabilities. As of June 27, 1998, this amount was $19.4
million. In connection with this agreement, HEI entered into a performance
undertaking under which HEI agreed to cause the Company to collect receivables
and to perform obligations of the Company in the event of the Company's failure
to perform. HEI also indemnified the purchasers from any expenses incurred in
enforcing their rights under the agreement. 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 Securities to replace the then
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 receivables then securitized under the existing program, in the amount of
approximately $100 million, were transferred to Citicorp's Corporate Receivables
Corporation ("CRC") under the New Program. HHI entered into a new performance
undertaking similar to that under the former 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 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 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.
In May 1995, the Company entered into a definitive manufacturing agreement
with HEI. Under the terms of the agreement, HEI manufactured Company-designed
HDDs for the Company at a site in Korea and
78
<PAGE> 80
the Company purchased approximately $24.1 million of HDDs. In October 1996, the
manufacturing agreement was canceled and production at the Korean manufacturing
site was transferred to the Company's manufacturing facilities in Singapore. As
part of the transfer, the Company purchased $4.3 million in inventories and
approximately $14 million of HEI's manufacturing equipment, with the purchase
price payable one year from the invoice date. The equipment was invoiced over
the period from November 1996 through February 1997. HEI bore all other costs
associated with the shut down of production in Korea.
HEI and IBM are parties to 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 Agreement with the Company pursuant to which Maxtor is obligated to
pay IBM a portion of the license fee otherwise due from HEI under the IBM
License Agreement, payable in annual installments ranging from $1.0 million to
$2.3 million, when such amounts are due IBM from HEI. Under the IBM License
Agreement, if Maxtor ceases to be a majority-owned subsidiary of HEA, Maxtor can
obtain a royalty-free license under the same terms from IBM upon the joint
request of HEI and Maxtor, 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 license fee following the grant of such a license from IBM. HEI and
the Company have indemnified each other for certain liabilities arising from
their acts or omissions relating to the IBM License Agreement.
The Company currently is involved in a dispute with StorMedia, which arises
out of the StorMedia Agreement. Pursuant to the StorMedia Agreement, StorMedia
agreed to supply disk media to the Company. StorMedia sued HEI, Mong Hun Chung
(HEI's chairman), Dr. Chong Sup Park (HEA's President and the individual who
signed the StorMedia Agreement on behalf of the Company) and K.S. Yoo (the
individual who signed the StorMedia Agreement on behalf of HEI) alleging 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. The
Company believes that it has meritorious defenses against the claims alleged by
StorMedia.
See "Risk Factors -- Control by and Dependence on Hyundai," "-- Limited
Protection of Intellectual Property; Risk of Third Party Claims of
Infringement," "-- StorMedia; Legal Proceedings" and "Relationship between the
Company and Hyundai."
RELATIONSHIP WITH IMS
In 1996, the Company sold a majority interest in IMS to certain members of
IMS management and other investors for $25 million in cash and $20 million in
notes and retained a 23.5% ownership interest in IMS. In October 1997, IMS
completed an initial public offering and repaid in full the note and its related
interest, which aggregated $21.8 million. As of June 27, 1998 the Company's
equity interest in IMS was 16.2%. The Company has agreed to indemnify the
investors and IMS up to $17.5 million for certain breaches of representations,
provided that tax and environmental representations are not subject to the
liability limit.
The Company outsources most of its PCB assembly to IMS; IMS supplies the
Company with PCBs, sub-assemblies and fully integrated products under a
manufacturing services agreement. The Company made purchases from IMS in the
years ended December 28, 1996 and December 27, 1997 of $191.9 million and $115.3
million, respectively. Two former officers of the Company, Robert Behlman
(formerly Vice President of Manufacturing of the Company) and Nathan Kawaye
(formerly Vice President and Chief Financial Officer of the Company), hold
positions as President and Chief Executive Officer and Vice President and Chief
Financial Officer, respectively, at IMS. Mr. Paul J. Tufano is a current
director of IMS.
See "Risk Factors -- Dependence on Suppliers of Components and
Sub-Assemblies," "Relationship between the Company and Hyundai,"
"Business -- Materials and Supplies" and "Certain Transactions."
79
<PAGE> 81
RELATIONSHIP WITH HIT
The Company is preparing to implement the SAP System. The Company's rights
to this new information system are governed by a license agreement between HIT
and SAP. The Company currently is discussing with SAP the terms on which the
Company could obtain a direct license with SAP. See "Risk Factors -- Transition
to and Dependence on Information Systems; Year 2000 Problem," "Relationship
between the Company and Hyundai" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RELATIONSHIP WITH MMC
HEA formed a division in May 1996 to provide a supply of hard disk media to
the Company. This division of HEA was incorporated as MMC in December 1997 and
is currently a wholly-owned subsidiary of HEA. Mr. Michael R. Cannon is
currently a director of MMC. During the quarter ended December 27, 1997, the
quarter in which the Company first began to purchase media from MMC, and the six
month period ended June 27, 1998, MMC supplied 18.0% and 41.0%, respectively, of
media purchased by the Company for an aggregate purchase price of $13.2 million
and $61.2 million, respectively. During 1997, MMC's media price to the Company
was 2% below the best price for media available to the Company from any of its
qualified merchant vendors. For the six months ended June 27, 1998, the actual
price for media supplied by MMC for each family of Maxtor products was based on
a discount from weighted average prices of media purchased by the Company from
qualified merchant vendors for such Maxtor products, resulting in an aggregate
2.5% discount. The Company currently is negotiating an agreement with MMC with
respect to pricing of future purchases and expects that such agreement will be a
multi-year contract providing for pricing discounts in return for a minimum
purchase volume commitment based on a percentage of Maxtor's total media
purchases. See "Risk Factors -- Control by and Dependence on Hyundai,"
"-- Dependence on Suppliers of Components and Sub-Assemblies," "-- Dependence on
International Operations; Risks from International Sales," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Materials and Supplies" and "Certain Transactions."
OTHER RELATED PARTY TRANSACTIONS
The Company has entered into employment agreements and change of control
agreements with certain of its officers and has made a loan to one officer. The
Company has entered into indemnification agreements with each of its directors
and executive officers. Such indemnification agreements require the Company to
indemnify such individuals to the fullest extent permitted by law.
All material transactions between the Company and its executive officers,
directors, principal stockholders and other affiliates occurring after the
Offerings will be subject to approval by the Affiliated Transaction Committee or
by a majority of the Company's independent and disinterested directors.
See "Risk Factors -- Control by and Dependence on Hyundai," "Relationship
between the Company and Hyundai" and "Management -- Board Committees" and
"-- Employment Agreements."
80
<PAGE> 82
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 27, 1998 (assuming conversion
of all outstanding shares of Series A Preferred Stock into Common Stock upon the
closing of the Offerings and as adjusted to reflect the sale of the shares
offered hereby, and assuming no exercise of the Underwriters' over-allotment
options): (i) by each person who is known by the Company to beneficially own
more than 5% of Common Stock; (ii) by each of the Named Executive Officers and
by each of the Company's directors; and (iii) by all of the Company's officers
and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE BENEFICIALLY
OWNED PRIOR TO OFFERINGS OWNED AFTER OFFERINGS
------------------------- --------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
------------------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
5% STOCKHOLDER:
Hyundai Electronics America(2)............... 44,029,850 99.0% 44,029,850 47.9%
3101 North First Street
San Jose, CA 95134
EXECUTIVE OFFICERS AND DIRECTORS:
Dr. Chong Sup Park(3)(4)..................... 13,750 * 13,750 *
Michael R. Cannon(5)......................... 347,500 * 347,500 *
Charles F. Christ(3)......................... 13,750 * 13,750 *
Chang See Chung(4)........................... -- -- -- --
Charles Hill(3).............................. 13,750 * 13,750 *
Y.H. Kim(3)(4)............................... 13,750 * 13,750 *
Philip S. Paul (3)........................... -- * -- *
Dr. Victor B. Jipson(6)...................... 69,375 * 69,375 *
William F. Roach(7).......................... 86,563 * 86,563 *
Paul J. Tufano(8)............................ 62,500 * 62,500 *
Phillip C. Duncan(9)......................... 37,000 * 37,000 *
All executives officers and directors as a
group (17 persons)(4)(10).................. 836,918 1.1 836,918 *
</TABLE>
- ---------------
* Less than one percent (1%)
(1) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on: (i) 44,474,998 shares outstanding as of
June 27, 1998 and (ii) 91,974,998 shares outstanding after the Offerings
assuming no exercise of the Underwriters' over-allotment options. If such
options are exercised in full, the number of shares outstanding after the
Offerings will be 99,099,998 (44.4% of which will be owned by HEA).
Beneficial ownership is determined in accordance with the rules of the
Commission. All shares of Common Stock subject to options currently
exercisable or exercisable within 60 days after June 27, 1998 are deemed to
be outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the number of shares beneficially
owned and the percentage of ownership of such person, but are not deemed to
be outstanding and to be beneficially owned for the purpose of computing
the percentage of ownership of any other person. Except as indicated in the
footnotes to the table and subject to applicable community property laws,
based on information provided by the persons named in the table, such
persons have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) HEA has certain nomination rights and rights to maintain at least a 30%
ownership interest in the Company through the year 2000, and has agreed to
certain limitations on the acquisition of the Company's Common Stock and
proxy solicitations. See "Relationship Between the Company and
Hyundai -- Stockholder Agreement."
(3) All shares subject to an option granted under the Amended Plan which are
exercisable within 60 days after June 27, 1998.
81
<PAGE> 83
(4) Excludes 44,029,850 shares of Common Stock beneficially owned by HEA. Each
such individual disclaims beneficial ownership of such shares.
(5) Includes 247,500 shares of Common Stock which are subject to an option
which will vest 60 days after June 27, 1998.
(6) Includes 34,375 shares of Common Stock which are subject to an option which
will vest 60 days after June 27, 1998.
(7) Includes 51,563 shares of Common Stock which are subject to an option which
will vest 60 days after June 27, 1998.
(8) Includes 27,500 shares of Common Stock which are subject to an option which
will vest 60 days after June 27, 1998.
(9) Includes 22,000 shares of Common Stock which are subject to an option which
will vest 60 days after June 27, 1998.
(10) Includes 531,918 shares of Common Stock which are subject to an option
which will vest 60 days after June 27, 1998.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 250 million shares
of Common Stock and 95 million shares of preferred stock, par value $0.01 per
share, all of which have been designated Series A Preferred Stock. Each
outstanding share of Series A Preferred Stock will be converted into 0.5 of a
share of Common Stock upon the closing of the Offerings. Upon such conversion,
such Series A Preferred Stock will be canceled, retired and eliminated from the
shares that the Company is authorized to issue. The following summary of certain
provisions of the Common Stock and the Series A Preferred Stock of the Company
does not purport to be complete and is subject to, and qualified in its entirety
by, the Amended and Restated Certificate of Incorporation and Bylaws of the
Company that are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
As of June 27, 1998, there were approximately 445,148 shares of Common
Stock outstanding held of record by 35 stockholders. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock and preferred stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any preferred
stock. Holders of Common Stock have no preemptive or subscription rights, and
there are no redemption or conversion rights with respect to such shares. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock offered hereby will be fully paid and non-assessable.
PREFERRED STOCK
The Board has the authority, without action by the stockholders, to
designate and issue preferred stock in one or more series and to designate the
dividend rate, voting rights and other rights, preferences and restrictions of
each series, any or all of which may be greater than the rights of the Common
Stock. It is not possible to state the actual effect of the issuance of any
shares of preferred stock upon the rights of holders of the Common Stock until
the Board determines the specific rights of the holders of such preferred stock.
However, the effects might include, among other things, restricting dividends on
the Common Stock, diluting the voting power of the Common Stock, impairing the
liquidation rights of the Common Stock and delaying or preventing a change in
control of the Company without further action by the stockholders. The Company
has no present plans to issue any shares of preferred stock. See "-- Delaware
Anti-Takeover Law and Certain Charter Provisions."
82
<PAGE> 84
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After the Offerings, HEA, which will hold approximately 44,029,850 shares
of Common Stock, or certain transferees, will be entitled to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of the Stockholder Agreement between the Company and HEA, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or the account of other stockholders exercising registration
rights, HEA and its transferees are entitled to notice of such registration and
are entitled to include shares of such Common Stock therein; provided, among
other conditions, that the underwriters of any offering have the right to limit
the number of such shares included in such registration. In addition, HEA and
certain transferees may require the Company, beginning six months after the date
of this Prospectus, on not more than five occasions to file a registration
statement under the Securities Act with respect to minimum specified amounts and
value of shares held by HEA or such transferees, and the Company is required to
use its reasonable commercial efforts to effect such registration, subject to
certain conditions and limitations. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable and could
have an adverse effect on the market price for the Common Stock. See "Risk
Factors -- Shares Eligible for Future Sale" and "Relationship between the
Company and Hyundai -- Stockholder Agreement."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER 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 form 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
83
<PAGE> 85
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. 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, voting as a single class. The Company has entered into
a Stockholders 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 for nomination are honored, and restricts
HEA's right to solicit proxies and 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 stockholder 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.
See "Risk Factors -- Effect of Antitakeover Provisions," and "-- Control By
and Dependence on Hyundai" and "Relationship Between the Company and Hyundai."
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION PROVISIONS RELATING TO
CONFLICTS OF INTEREST AND CORPORATE OPPORTUNITIES
In order to address certain potential conflicts of interest between HEA and
the Company, the Company's Amended and Restated Certificate of Incorporation
contains provisions concerning the conduct of certain affairs of the Company as
they may involve HEA and its affiliates (other than the Company) and their
respective officers and directors, and the powers, rights, duties and
liabilities of the Company and its officers, directors, stockholders in
connection therewith. In general, these provisions recognize that the Company
and HEA and their respective affiliates may engage in the same or similar
business activities and lines of business and may have an interest in the same
areas of corporate opportunities and that the Company and HEA and their
respective affiliates will continue to have contractual and business relations
with each other (including service of officers and directors of HEA as directors
of the Company).
The Amended and Restated Certificate of Incorporation provides that any
person purchasing or otherwise acquiring any interest in any shares of capital
stock of the Company shall be deemed to have notice of and to have consented to
these provisions.
For purposes of these provisions the term "Company" includes its
subsidiaries and other entities in which it beneficially owns directly or
indirectly one-third or more of the outstanding voting securities or interests.
For purposes of the following discussion, "Hyundai Affiliates" means HEA, HEI,
any of their successors, and all corporations, partnerships, joint ventures,
associations and other entities that directly or indirectly through one or more
intermediaries is controlled by HEA or HEI (other than the Company and its
subsidiaries and such other entities controlled by the Company). See
"Management -- Directors and Executive Officers."
Conflict of Interest Policy. Article Tenth of the Amended and Restated
Certificate of Incorporation sets forth provisions to regulate and guide certain
contractual relations and other business relations of the Company as they may
involve Hyundai Affiliates, or their officers or directors, or other
corporations, partnerships, associations or other organizations in which one or
more the Company's directors have a financial interest ("Related Entities").
Pursuant to Article Tenth, no contract, agreement, arrangement or transaction
between the Company and any Hyundai Affiliate or any Related Entity, or between
the Company and one of the directors or officers of the Company, any Hyundai
Affiliate or any Related Entity or any amendment, modification or termination
thereof (each a "Transaction"), shall be void or voidable solely for the reason
that such parties are parties thereto or that such directors or officers are
present in or participate in the meeting of the Board or committee which
authorizes such Transaction or solely because his or their votes are counted for
such purpose. Pursuant to Article Tenth, any Hyundai Affiliate, any Related
Entity and such officers and directors shall have fully satisfied and fulfilled
any fiduciary duties they may have to the Company
84
<PAGE> 86
and its stockholders, shall not be liable to the Company or its stockholders for
any breach of any fiduciary duty they may have by reason of the entering into,
performance or consummation of such Transaction and shall be deemed to have
acted in good faith and in a manner such persons believed to be in or not
opposed to the best interest of the Company to the extent such standard is
applicable to such person's conduct, and shall be deemed not to have breached
any duty of loyalty to the Company or its stockholders and not to have derived
any improper personal benefit therefrom if:
(i) the material facts as to the Transaction are disclosed to or known
by the Board or the committee that authorized the Transaction and the Board
or such committee in good faith authorizes or approves the Transaction by
the affirmative vote of a majority of the Disinterested Directors on the
Board or such committee (even if less than a quorum);
(ii) the material facts as to the Transaction are disclosed or known
to the holders of voting stock entitled to vote thereon and the Transaction
is specifically approved in good faith by vote of the holders of a majority
of the then outstanding voting stock not owned by any Hyundai Affiliate or
Related Entity, voting as a single class; or
(iii) such Transaction is fair as to the Company at the time it is
authorized, approved or ratified by the Board, a committee thereof or the
stockholders of the Company.
Any Transaction authorized, approved or effected as described in (i) or
(ii) above shall be deemed entirely fair to the Company and its stockholders,
provided however that if such authorization or approval is not obtained or such
Transaction is not effected, no presumption shall arise that such Transaction is
not fair to the Company or its stockholders. Directors of the Company who are
also directors or officers of any Hyundai Affiliate or any Related Entity may be
counted in determining the presence of a quorum at a meeting of the Board of a
committee that authorizes or approves any such Transaction and may vote at such
meeting. Equity securities with voting rights owned by any Hyundai Affiliate or
any Related Entities may be counted in determining the presence of a quorum at a
meeting of stockholders that authorizes or approves any such transaction and may
be voted at such meeting. No Hyundai Affiliate shall be liable to the Company or
its stockholders for breach of any fiduciary duty it may have by reason of the
fact that any Hyundai Affiliate takes any action or exercise any rights or gives
or withholds any consent in connection with any Transaction between any Hyundai
Affiliate and the Company. Any Transaction with any corporation, partnership,
joint venture, association or other entity in which the Company beneficially
owns, directly or indirectly 50% or more of the outstanding voting stock, voting
power or similar interest or with any officer or director thereof shall be
deemed to be a Transaction with the Company.
The affirmative vote of the holders of more than two-thirds of the voting
power of the Company's equity securities then outstanding, voting together as a
single class, is required to alter, amend or repeal Article Tenth of the Amended
and Restated Certificate of Incorporation in a manner adverse to the interests
of any Hyundai Affiliate or to adopt any provision of the Amended and Restated
Certificate of Incorporation adverse to the interests of any Hyundai Affiliate
and inconsistent with any provision of Article Tenth. Article Tenth further
provides that neither the alteration, amendment or repeal of Article Tenth nor
the adoption of any provision inconsistent with Article Tenth will eliminate or
reduce the effect of Article Tenth in respect of any matter occurring or cause
of action, suit or claim that, but for Article Tenth, would accrue or arise,
prior to such alteration, amendment repeal or adoption.
Corporate Opportunity Policy. Article Eleventh of the Amended and Restated
Certificate of Incorporation sets forth provisions to regulate, define and guide
the conduct of certain affairs of the Company as they may involve Hyundai
Affiliates and their officers and directors, and the powers, rights, duties and
liabilities of the Company and its officers, directors and stockholders,
regarding corporate opportunities.
Article Eleventh provides that in the event that any Hyundai Affiliate
acquires knowledge of a potential transaction or matter that may be a corporate
opportunity for both a Hyundai Affiliate and the Company, the Hyundai Affiliate
shall have no duty to communicate or present such corporate opportunity to the
Company and shall not be liable to the Company or its stockholders for breach of
any fiduciary duty as a stockholder of the Company by reason of the fact that
the Hyundai Affiliate pursues or acquires such corporate opportunity
85
<PAGE> 87
for itself or another Hyundai Affiliate, directs such corporate opportunity to
another person, or does not present such corporate opportunity to the Company,
except to the extent required by Article Eleventh.
Article Eleventh provides further that if a director or officer of the
Company who is also a director or officer of a Hyundai Affiliate acquires
knowledge of a potential transaction or matter that may be a corporate
opportunity for both the Company and any Hyundai Affiliate, such director or
officer of the Company: (i) shall have fully satisfied and fulfilled the
fiduciary duties to the Company and its stockholders with respect to such
corporate opportunity; (ii) shall not be liable to the Company or its
stockholders for breach of any fiduciary duty by reason of the fact that any
Hyundai Affiliate pursues or acquires such corporate opportunity for itself or
directs such corporate opportunity to another person (including, without
limitation, another Hyundai Affiliate) or does not communicate information
regarding such corporate opportunity to the Company; (iii) shall be deemed to
have acted in good faith and in a manner he or she reasonably believes to be in
or not opposed to the best interests of the Company; and (iv) shall be deemed
not to have breached his or her duty of loyalty to the Company or its
stockholders and not to have derived an improper benefit therefrom, if such
director or officer acts in a manner consistent with the following policy:
(x) a corporate opportunity offered to any person who is a director
but not an officer of the Company and who is also an officer (whether or
not a director) of any Hyundai Affiliate shall belong to such Hyundai
Affiliate, unless such opportunity is expressly offered, in writing, to
such person primarily in his or her capacity as a director of the Company,
in which case such opportunity shall belong to the Company;
(y) a corporate opportunity offered to any person who is an officer
(whether or not a director) of the Company and who is also a director but
not an officer of any Hyundai Affiliate shall belong to the Company, unless
such opportunity is expressly offered, in writing, to such person primarily
in his or her capacity as a director of a Hyundai Affiliate, in which case
such opportunity shall belong to such Hyundai Affiliate; and
(z) a corporate opportunity offered to any other person who is either
(i) an officer of both the Company and a Hyundai Affiliate or (ii) a
director of both the Company and a Hyundai Affiliate and not an officer of
either entity, shall belong to such Hyundai Affiliate or to the Company, as
the case may be, if such opportunity is expressly offered, in writing, to
such person primarily in his or her capacity as an officer or director of
the Company or of such Hyundai Affiliate, respectively; otherwise, such
opportunity shall belong to the Company.
Article Eleventh further provides that any corporate opportunity that
belongs to a Hyundai Affiliate or to the Company pursuant to the foregoing
policy shall not be pursued by the other, or directed by the other to another
person, unless and until the Hyundai Affiliate or the Company, as the case may
be, determines not to pursue the opportunity. However, if the party to whom the
corporate opportunity belongs does not within a reasonable period of time begin
to pursue, or thereafter continue to pursue, such opportunity diligently and in
good faith, the other party may then pursue such opportunity or direct it to
another person.
For purposes of Article Eleventh, "corporate opportunities" shall consist
of business opportunities which: (i) the Company is financially able to
undertake; (ii) are, from their nature, in the line or lines of the Company's
business and are of practical advantage to it; and (iii) are ones in which the
Company has an interest or reasonable expectancy. In addition, "corporate
opportunities" shall not include any transaction in which the Company or any
Hyundai Affiliate is permitted to participate pursuant to (a) any agreement
between the Company and any Hyundai Affiliate which was entered into prior to
the closing of this Offering or (b) any subsequent agreement between the Company
and any Hyundai Affiliate approved pursuant to Article Tenth of the Amended and
Restated Certificate of Incorporation. The rights of the Company under any such
agreement are deemed to be contractual rights and shall not be corporate
opportunities of the Company for any purpose.
Article Eleventh further provides that if any contract, agreement,
arrangement or transaction between the Company and any Hyundai Affiliate
involves a corporate opportunity and is approved in accordance with the
procedures set forth in Article Tenth of the Amended and Restated Certificate of
Incorporation, a Hyundai
86
<PAGE> 88
Affiliate and its officers and directors shall also, for the purposes of Article
Eleventh and the other provisions of the Amended and Restated Certificate of
Incorporation, be deemed to have fully satisfied and fulfilled any fiduciary
duties they may have to the Company and its stockholders. Article Eleventh
provides that any such contract, agreement, arrangement or transaction involving
a corporate opportunity not so approved will not by reason thereof result in any
such breach of any fiduciary duty, but shall be governed by the other provisions
of Article Eleventh, the Amended and Restated Certificate of Incorporation, the
Bylaws, and applicable law.
For purposes of Article Eleventh, a director of the Company who is Chairman
of the Board or a committee of the Board shall not be deemed to be an officer of
the Company by reason of holding such position (regardless of whether such
position is deemed an office of the Company under the Bylaws), unless such
person is a full-time employee of the Company.
The affirmative vote of the holders of more than two-thirds of the voting
power of the Company's equity securities then outstanding, voting together as a
single class, is required to alter, amend or repeal Article Eleventh in a manner
adverse to the interests of the Hyundai Affiliates, or adopt any provision of
the Amended and Restated Certificate of Incorporation adverse to the interests
of any Hyundai Affiliate and inconsistent with any provision of Article
Eleventh. Neither the alteration, amendment or repeal of Article Eleventh, nor
the adoption of any provision inconsistent with Article Eleventh, shall
eliminate or reduce the effect of Article Eleventh in respect of any matter
occurring, or any cause of action, suit or claim that, but for Article Eleventh,
would accrue or arise, prior to such alteration, amendment, repeal or adoption.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The Bank of New
York.
87
<PAGE> 89
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to the Offerings, there was no public market for the
Common Stock. Future sales of substantial amounts of the Common Stock in the
public market could adversely affect the market price of the Common Stock.
Upon completion of the Offerings, the Company will have outstanding an
aggregate of 91,974,998 shares of Common Stock, assuming (i) the issuance of
47,500,000 shares of Common Stock offered hereby and (ii) no exercise of options
to purchase Common Stock after June 27, 1998. Of these shares, the 47,500,000
shares sold in the Offerings will be freely tradable without restriction or
further registration under the Securities Act, except for any shares purchased
by "Affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act (whose sales would be subject to certain limitations and
restrictions described below).
The remaining 44,474,998 shares of Common Stock held by existing
stockholders were issued and sold by the Company in reliance on exemptions from
the registration requirements of the Securities Act. All of these shares will be
subject to "lock-up" agreements described below on the effective date of the
Offerings. On the effective date of the Offerings, no shares not subject to the
lock-up agreements described below will be eligible for sale pursuant to Rule
144(k). Beginning 90 days after the effective date of the Offerings, no shares
not subject to the lock-up agreements described below will be eligible for sale.
Upon expiration of the lock-up agreements 180 days after the effective date of
the Offerings, 44,084,998 shares will become eligible for sale, subject in most
cases to the limitations of Rule 144. In addition, holders of stock options
could exercise such options and sell certain of the shares issued upon exercise
as described below.
As of June 27, 1998 there were a total of 5,183,129 shares of Common Stock
subject to outstanding options under the Amended Plan, 1,947,171 of which were
vested and exercisable. All of these shares are subject to lock-up agreements.
All options held by officers and directors of the Company are subject to 180 day
lock-up agreements. Beginning 90 days after the effective date of the Offerings,
no shares of Common Stock which are subject to outstanding options and not
subject to the lock-up agreements will after exercise become eligible for sale
in accordance with Rule 701 under the Securities Act ("Rule 701"). Immediately
after the completion of the Offerings, the Company intends to file registration
statements on Form S-8 under the Securities Act to register all of the shares of
Common Stock issued or reserved for future issuance under the Amended Plan. On
the date 180 days after the effective date of the Offerings, a total of
approximately 2,792,416 shares of Common Stock subject to outstanding options
will be vested and exercisable. After the effective dates of the registration
statements on Form S-8, shares purchased upon exercise of options granted
pursuant to the Amended Plan generally would be available for resale in the
public market.
The officers and directors and all existing stockholders of the Company
have agreed not to sell or otherwise dispose of any of their shares for a period
of 180 days after the date of the Offerings. Smith Barney Inc., however, may in
its sole discretion, at any time without notice, release all or any portion of
the shares subject to lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 919,749 shares
immediately after the Offerings) or (ii) generally, the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Pursuant to Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice filing provisions of
Rule 144. Pursuant to Rule 701, persons who purchase shares upon exercise of
options granted prior to the effective date of the Offerings are entitled to
sell such shares 90 days after the effective date of the Offerings in reliance
on Rule 144, without having to comply with the
88
<PAGE> 90
holding period and notice filing requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice filing provisions of Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the Company
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit
plans or written contracts relating the compensation of such persons. In
addition, the Commission had indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this Prospectus, may be sold by persons other than Affiliates (as
defined in Rule 144 under the Securities Act) subject only to the manner of sale
provisions of Rule 144 and by Affiliates under Rule 144 without compliance with
its one year minimum holding period requirements.
See "Risk Factors -- Shares Eligible for Future Sale," "Description of
Capital Stock -- Registration Rights of Certain Holders."
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO HOLDERS OF COMMON STOCK
GENERAL
The following is a general discussion of certain United States federal
income and estate tax considerations relating to the ownership and disposition
of Common Stock by a holder who acquires and owns such Common Stock as a capital
asset within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended (the "Code"). This discussion does not consider specific facts and
requirements that may be relevant to a particular holder's tax position, does
not address all aspects of United States federal income and estate taxes and
does not deal with foreign, state, and local tax consequences and United States
federal gift taxes that may be relevant to such holders in light of their
personal circumstances. Further, it does not discuss the rules applicable to
holders subject to special tax treatment under the federal income tax laws
(including but not limited to, banks, insurance companies, tax-exempt
organizations, dealers in securities or currencies, holders of securities held
as part of a "straddle," "hedge," or "conversion transaction," traders in
securities electing to mark to market their securities positions and persons who
undertake a constructive sale of Common Stock). This discussion is based on
current provisions of the Code, existing and proposed regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change, possibly on a retroactive basis. Accordingly, each
prospective purchaser of Common Stock is advised to consult a tax advisor with
respect to current and possible future tax consequences of acquiring, holding
and disposing of Common Stock.
U.S. HOLDERS
The following discussion is limited to a holder of Common Stock that for
United States federal income tax purposes is (i) a citizen or resident (within
the meaning of Section 7701(b) of the Code) of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States, or any state or any political subdivision thereof,
(iii) an estate whose income is includible in gross income for United States
federal income tax purposes, regardless of its source, or (iv) in general, a
trust subject to the primary supervision of a court within the United States and
the control of a United States person as described in Section 7701(a)(30) of the
Code (a "U.S. Holder").
Dividends and Gain on Disposition of Common Stock
In general, dividends paid from current or accumulated earnings and profits
of the Company, as determined for U.S. federal income tax purposes, will be
included in a U.S. Holder's income as ordinary
89
<PAGE> 91
income (subject to a possible dividends received deduction in the case of
corporate holders) as they are paid. Gain or loss realized on the sale or
exchange of Common Stock will equal the difference between the amount realized
on such sale or exchange and the U.S. Holder's adjusted tax basis in such Common
Stock. Under recently enacted legislation, long-term capital gains recognized by
an individual holder generally are subject to a maximum rate of 20 percent in
respect of property held for more than one year, effective for amounts properly
taken into account on or after January 1, 1998.
Information Reporting and Backup Withholding
A U.S. Holder of Common Stock may be subject to "backup withholding" at a
rate of 31% with respect to certain "reportable payments," including dividend
payments. These backup withholding rules apply if the holder, among other
things, (i) fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest or dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such holder is
not subject to backup withholding. A holder who does not provide the Company
with its correct TIN also may be subject to penalties imposed by the United
States Internal Revenue Service ("IRS"). Any amount withheld from a payment to a
U.S. Holder under the backup withholding rules is creditable against the
holder's federal income tax liability, provided that the required information is
furnished to the IRS. Backup withholding will not apply, however, with respect
to payments made to certain U.S. Holders, including corporations and tax-exempt
organizations, provided their exemptions from backup withholding are properly
established.
The Company will report to the U.S. Holders of Common Stock and to the IRS
the amount of any "reportable payments" for each calendar year and the amount of
tax withheld, if any, with respect to such payments.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder. As used herein, the term "Non-U.S.
Holder" means any holder other than a U.S. Holder. For purposes of withholding
tax on dividends discussed below, dividends and gain on the sale, exchange or
other disposition of Common Stock will generally be considered to be "U.S. trade
or business income" if such income or gain is (i) effectively connected with the
conduct of a U.S. trade or business or (ii) in the case of treaty residents,
attributable to a permanent establishment (or, in the case of an individual, a
fixed base) in the United States.
Dividends
In general, dividends paid to a Non-U.S. Holder of Common Stock will be
subject to withholding of United States federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty, unless the
dividends are U.S. trade or business income. If the dividend is U.S. trade or
business income, the dividend would be subject to United States federal income
tax on a net income basis at applicable graduated individual or corporate rates
and would be exempt from the 30% withholding tax described above. Any such
dividends that are U.S. trade or business income received by a foreign
corporation may, under certain circumstances, be subject to the additional
"branch profits tax" at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Certain certification and disclosure requirements
must be complied with in order to be exempt from withholding under the U.S.
trade or business income exemption discussed above.
Under current United States Treasury regulations, dividends paid to a
stockholder at an address in a foreign country are presumed to be paid to a
resident of such country for purposes of the withholding discussed above (unless
the payor has knowledge to the contrary), including for purposes of determining
the applicability of a tax treaty rate. Under Treasury regulations effective for
payments after December 31, 1999 (the "New Regulations"), to obtain a reduced
rate of withholding under a treaty, a Non-U.S. Holder would
90
<PAGE> 92
generally be required to provide an Internal Revenue Service Form W-8 (or
suitable substitute form) certifying such Non-U.S. Holder's entitlement to
benefits under a treaty. These certification requirements may be relaxed
somewhat in the case of a Non-U.S. Holder who holds Common Stock through an
account maintained at a non-U.S. office of a financial institution. Certain
other special rules may be applicable to a Non-U.S. Holder under the New
Regulations.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty or whose dividends have
otherwise been subjected to withholding in an amount that exceeds such holders'
United States federal income tax liability, may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain realized on a sale or other disposition of
Common Stock unless (i) the gain is U.S. trade or business income, (ii) in the
case of a Non-U.S. Holder who is a nonresident alien individual and holds Common
Stock as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition and certain other
conditions are met or (iii) the Non-U.S. Holder is subject to tax pursuant to
provisions of United States tax law that apply to certain expatriates.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of any dividends paid to, and the tax withheld with respect to, such
Non-U.S. Holder, regardless of whether any tax was actually withheld. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
Non-U.S. Holder resides.
The payment of proceeds on the disposition of shares of Common Stock to or
through the United States office of a United States or foreign broker will be
subject to information reporting and backup withholding at a rate of 31% unless
the owner provides the certification described above or otherwise establishes an
exemption. The proceeds of the disposition by a Non-U.S. Holder of shares of
Common Stock to or through a foreign office of a broker will not be subject to
backup withholding or information reporting. However, if such broker is a U.S.
person, a controlled foreign corporation for United States tax purposes, or a
foreign person, 50% or more of whose gross income from all sources for certain
periods is from activities that are effectively connected with a U.S. trade or
business, information reporting requirements will apply unless such broker has
documentary evidence in its files of the holder's Non-U.S. status and has no
actual knowledge to the contrary or unless the holder otherwise establishes an
exemption. Any amount withheld under the backup withholding rules is allowable
as a credit against the Non-U.S. Holder's federal income tax, provided that the
required information is provided to the IRS. The New Regulations would modify
the application of the information reporting requirements and back-up
withholding tax to Non-U.S. Holders effective January 1, 2000.
91
<PAGE> 93
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "U.S. Underwriting Agreement") among the Company, HEA and each of the
underwriters named below (the "U.S. Underwriters"), for whom Smith Barney Inc.,
Hambrecht & Quist LLC, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and NationsBanc Montgomery Securities LLC are acting as
representatives (the "U.S. Representatives"), the Company has agreed to sell to
each of the U.S. Underwriters and each of the U.S. Underwriters has severally
agreed to purchase from the Company the number of shares of Common Stock set
forth opposite its name in the table below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
UNDERWRITER COMMON STOCK
----------- -------------------
<S> <C>
Smith Barney Inc...........................................
Hambrecht & Quist LLC......................................
Lehman Brothers Inc........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
NationsBanc Montgomery Securities LLC......................
----------------
Total.................................................
================
</TABLE>
The U.S. Underwriting Agreement provides that the obligations of the U.S.
Underwriters to purchase the shares of Common Stock listed above are subject to
certain conditions set forth therein. The U.S. Underwriters are committed to
purchase all of the shares of Common Stock agreed to be purchased by the U.S.
Underwriters pursuant to the U.S. Underwriting Agreement (other than those
covered by the over-allotment options described below), if any shares of Common
Stock are purchased. In the event of default by any U.S. Underwriter, the U.S.
Underwriting Agreement provides that, in certain circumstances, the purchase
commitments of the non-defaulting U.S. Underwriters may be increased or the U.S.
Underwriting Agreement may be terminated.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer such shares of Common Stock to the
public at the initial public offering price thereof set forth on the cover page
of this Prospectus, and to certain dealers at such price less a discount not in
excess of $ per share. The U.S. Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share on sales to certain other
dealers. After the initial public offering of the shares of Common Stock, the
public offering price and such discounts may be changed.
The Company and HEA also have entered into an underwriting agreement (the
"International Underwriting Agreement") with the underwriters named therein (the
"International Underwriters"), for whom Smith Barney Inc., Hambrecht & Quist
LLC, Lehman Brothers International (Europe), Merrill Lynch International and
NationsBanc Montgomery Securities LLC are acting as representatives (the
"International Representatives" and, together with the U.S. Representatives, the
"Representatives"), providing for the concurrent offer and sale of 9,500,000 of
the shares of Common Stock outside the United States and Canada.
The closing with respect to the sale of the shares of Common Stock pursuant
to the U.S. Underwriting Agreement is a condition to the closing with respect to
the sale of the shares of Common Stock pursuant to the International
Underwriting Agreement, and the closing with respect to the sale of the shares
of Common Stock pursuant to the International Underwriting Agreement is a
condition to the closing with respect to the sale of the shares of Common Stock
pursuant to the U.S. Underwriting Agreement. The initial public offering price
and underwriting discounts per share of Common Stock for the U.S. Offering and
the International Offering will be identical.
Each U.S. Underwriter has severally agreed that, as part of the
distribution of the 38,000,000 shares of Common Stock by the U.S. Underwriters,
(i) it is not purchasing any shares of Common Stock for the account of anyone
other than a United States or Canadian Person; (ii) it has not offered or sold,
and will not
92
<PAGE> 94
offer or sell, directly or indirectly, any shares of Common Stock or distribute
any prospectus relating to the U.S. Offering to any person outside of the United
States or Canada, or to anyone other than a United States or Canadian Person;
and (iii) any dealer to whom it may sell any shares of Common Stock will
represent that it is not purchasing for the account of anyone other than a
United States or Canadian Person and agree that it will not offer or resell,
directly or indirectly, any shares of Common Stock outside of the United States
or Canada, or to anyone other than a United States or Canadian Person or to any
other dealer who does not so represent and agree.
Each International Underwriter has severally agreed that, as part of the
distribution of the 9,500,000 shares of Common Stock by the International
Underwriters, (i) it is not purchasing any shares of Common Stock for the
account of any United States or Canadian Person; (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any shares of Common
Stock or distribute any prospectus to any person in the United States or Canada,
or to any United States or Canadian Person; and (iii) any dealer to whom it may
sell any shares of Common Stock will represent that it is not purchasing for the
account of any United States or Canadian Person and agree that it will not offer
or resell, directly or indirectly, any shares of Common Stock in the United
States or Canada, or to any United States or Canadian Person or to any other
dealer who does not so represent and agree.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and Managers dated , 1998. "United States or Canadian Persons"
means any person who is a national or resident of the United States or Canada,
any corporation, partnership or other entity created or organized in or under
the laws of the United States or Canada or of any political subdivision thereof,
and any estate or trust the income of which is subject to United States or
Canadian federal income taxation, regardless of its source (other than a foreign
branch of such entity) and includes any United States or Canadian branch of a
person other than a United States or Canadian Person.
Each U.S. Underwriter that will offer or sell shares of Common Stock in
Canada as part of the distribution has severally agreed that such offers and
sales will be made only pursuant to an exemption from the prospectus
requirements in each jurisdiction in Canada in which such offers and sales are
made.
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the International Underwriters of such
number of shares of Common Stock as may be mutually agreed. The price of any
shares of Common Stock so sold shall be the initial public offering price
thereof set forth on the cover page of this Prospectus, less an amount not
greater than the concession to securities dealers set forth above. To the extent
that there are sales between the International Underwriters and the U.S.
Underwriters pursuant to the Agreement Between U.S. Underwriters and Managers,
the number of shares of Common Stock initially available for sale by the U.S.
Underwriters or by the International Underwriters may be more or less than the
amount specified on the cover page of this Prospectus.
Each International Underwriter has severally represented and agreed that,
(i) it has not offered or sold and, prior to the expiration of six months from
the closing of the International Offering, will not offer or sell any shares of
Common Stock in the United Kingdom other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (whether as principal or agent) for the purposes of their businesses
or otherwise in circumstances which have not resulted in and will not result in
an offer to the public within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom; and (iii) it has only issued or passed on and will only issue or
pass on in the United Kingdom any document received by it in connection with the
issue of the shares of Common Stock to a person who is of a kind described in
Article II(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise
lawfully be issued or passed on.
The Company has granted to the U.S. Underwriters and the International
Underwriters options to purchase up to an additional 5,700,000 and 1,425,000
shares of Common Stock, respectively, in each case at the applicable price to
the public less the applicable underwriting discount set forth on the cover page
of this
93
<PAGE> 95
Prospectus, solely to cover over-allotments, if any. Such options may be
exercised at any time up to 30 days after the date of this Prospectus. To the
extent such options are exercised, each of the U.S. Underwriters and the
Managers will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the percentage it was obligated to purchase pursuant to the U.S. Underwriting
Agreement or the International Underwriting Agreement, as applicable.
The Company has agreed with the Underwriters not to offer, pledge, sell,
contract to sell, or otherwise dispose of (or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company), directly or
indirectly, or announce the offering of, any other shares of Common Stock or any
securities or options convertible into, or exchangeable or exercisable for,
shares of Common Stock for a period of 180 days following the date hereof
without the prior written consent of Smith Barney Inc. subject to certain
limited exceptions. In addition, each of the Company's officers, directors and
stockholders has agreed with the Underwriters not to offer, sell, contract to
sell, pledge or otherwise dispose of, or file a registration statement with the
Commission in respect of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the meaning of Section
16 of the Exchange Act with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock, or publicly announce an intention to effect any such transaction, for a
period of 180 days after the date hereof unless with the prior written consent
of Smith Barney Inc., subject to certain limited exceptions. Smith Barney Inc.
currently does not intend to release any securities subject to such lock-up
agreements, but may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to such lock-up agreements.
The U.S. Underwriting Agreement and the International Underwriting
Agreement provide that the Company and HEA will indemnify the several U.S.
Underwriters and International Underwriters against certain liabilities under
the Securities Act, or contribute to payments the U.S. Underwriters and the
International Underwriters may be required to make in respect thereof.
In connection with the Offerings, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offerings than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offerings to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 7,125,000 shares of Common Stock, by
exercising the Underwriters' over-allotment options referred to above. In
addition, the Representatives, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in the Offerings), for
the account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offerings but subsequently purchased for
the account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
The Underwriters do not intend to confirm sales in the Offerings to any
accounts over which they exercise discretionary authority.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill") currently is
acting as financial advisor to HEI and its subsidiaries and affiliates in
connection with their strategic assessment of their assets, financial
liabilities and overall capital structure, and in connection therewith receives
certain fees from HEI. Merrill will receive no separate or additional fee from
HEI in connection with the Offerings.
Affiliates of Lehman Brothers Inc. acted as arranger and syndication agent
for a subsidiary of HEA with respect to a one year $300 million credit facility
that matures in February 1999 and is guaranteed by HEA,
94
<PAGE> 96
and an affiliate of Lehman Brothers Inc. is currently a lender under such
facility. In connection therewith, such affiliates of Lehman Brothers Inc.
receive certain fees and interest from such subsidiary of HEA.
Bank of America, a lender to the Company, has entered into a definitive
agreement to merge with NationsBanc Montgomery Securities LLC. Citicorp, a
parent corporation of Citicorp Securities, with whom the Company has an asset
securitization program, has entered into a definitive agreement to merge with
Travelers Group Inc., a parent company of Smith Barney Inc.
Immediately prior to the Offerings, there has been no public market for the
Common Stock. Accordingly, the initial public offering price for the shares of
Common Stock will be determined by negotiation among the Company and the
Representatives. Among the factors considered in determining the initial public
offering price will be the Company's record of operations, its current financial
condition, its future prospects, the market for its services, the experience of
management, the economic conditions of the Company's industry in general, the
general condition of the equity securities market and the demand for similar
securities of companies considered comparable to the Company and other relevant
factors. There can be no assurance, however, that the prices at which the Common
Stock will sell in the public market after the Offerings will not be lower than
the price at which the shares of Common Stock are sold by the Underwriters.
See "Risk Factors -- Expected Volatility of Stock Price; Absence of Current
Trading Market for the Common Stock."
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Gray Cary Ware &
Freidenrich LLP, Palo Alto, California and for the Underwriters by Cleary,
Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The consolidated balance sheets of Maxtor Corporation as of December 28,
1996 and December 27, 1997 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the nine months
ended December 28, 1996 and for the year ended December 27, 1997 included in
this Prospectus and registration statement, have been included herein in
reliance on the report, which include an emphasis of a matter related to the
Company's ultimate parent, Hyundai Electronics Industries Co., Ltd., of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. The consolidated statements of
operations, stockholders' equity (deficit) and cash flows of the Company for the
year ended March 30, 1996 included in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report, given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto
95
<PAGE> 97
and the financial statements and notes filed as a part thereof, as well as such
reports and other information filed with the Commission, may be inspected
without charge at the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and copies of all or any part thereof may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, New York, New York 10048 upon payment of certain fees
prescribed by the Commission. The Commission also maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. The reports and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W. Washington,
D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
also can be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and
other information concerning the Company can also be inspected at the offices of
the National Association of Securities Dealers, Inc., Market Listing Section,
1735 K Street, N.W. Washington, D.C. 20006.
96
<PAGE> 98
GLOSSARY
Application Specific Integrated Circuit (ASIC) -- a custom designed
integrated circuit that performs a specific application rather than
general-purpose chips such as conventional logic chips with discrete gates. The
use of an ASIC in place of a conventional logic chip reduces product size and
cost.
Actuator -- the mechanism that moves the head assembly across a disk to the
proper track. This mechanical assembly positions the read/write heads over the
circumferential line which describes the target cylinder.
Areal density -- the maximum number of bits per linear inch of storage
surface times the number of tracks per radial inch yields the areal density of
bits per square inch.
Build-to-Order (BTO) -- supply chain management methodology where personal
computers are built to the unique requirements of a specific end-user customer
order.
Controller -- a portion of the IC circuit that manages the flow of data to
and from the disk media including the error correction coding, media defect
management, actuator positioning and system host interface interaction.
Digital Signal Processor (DSP) -- a compact integrated circuit that
provides an ultra-fast simplified instruction set processor commonly used in
actuator control applications.
Firmware -- the permanent instructions and data programmed directly into
the circuitry of read only memory, written either in high-level language or in
assembly or machine language, which, when combined with the mechanical
mechanisms and ASICs within the drive, controls the functions of the hard drive.
Gigabyte (GB) -- one billion bytes.
Hard Disk Drive (HDD) -- An electro-mechanical device composed of an HSA,
PCBA and magnetic disks that records data onto spinning rigid media in discrete
data blocks each of which can be randomly accessed. The primary mass storage
device of a computer.
Head Disk Assembly (HDA) -- the mechanical components of a disk drive
(minus the electronics), which includes the actuators, read/write heads and
platters.
Head Stack Assembly (HSA) -- the sub-assembly that contains the read/write
heads and actuator assembly.
Interface -- the all-inclusive definition of the connection and interaction
between the hard drive and the host system.
Just-in-Time (JIT) -- inventory management system where components are
stored near a manufacturing facility so they can be released as they are needed
to support the flow of material on the assembly line.
Magnetic Disk -- are disks made of a smooth substrate to which a thin
coating of magnetic materials is applied. Each disk has a slider suspended
directly above it, holding the head, which can read from or write data to the
spinning disk.
Magneto-resistive (MR) -- a technology used for the read element of a
read/write head used with a high-density magnetic disk. HDDs use a
magneto-resistive read head for reading and an inductive element for writing. As
storage capacity increases and the bit gets smaller, the magnetic field of the
bit becomes weaker. The magneto-resistive head is more sensitive to magnetic
fields than inductive read heads.
Media -- materials that hold data in any form or that allow data to pass
through them, including paper, transparencies, multipart forms, hard, floppy and
optical disks, magnetic tape, wire, cable and fiber.
Megabyte (MB) -- one million bytes.
Printed Circuit Board (PCB) -- a flat board that holds chips and other
electronic components. The board is made of reinforced fiberglass or plastic and
interconnects components via copper pathways. The main
97
<PAGE> 99
printed circuit board in a system is called a system board or motherboard, while
smaller PCBs that plug into the slots in the motherboard are called boards or
cards.
Read Channel -- a circuit in a disk drive that translates the signal read
from or recorded to the read/write head into a single serial stream of data.
Read/Write Head -- a device that reads (senses) and writes (records) data
on a magnetic disk or tape. For writing, the surface of the disk or tape is
moved past the read/write head. By discharging electrical impulses at the
appropriate times, bits are recorded as tiny, magnetized spots of positive or
negative polarity. For reading, the surface is moved past the read/write head,
and the bits that are present induce an electrical current within the head.
Sector -- the smallest unit of storage read or written on a disk.
Sliders -- aerodynamically designed objects that keep the read/write head
at a proper distance from the disk platter. The read/write head is embedded
within the slider.
Spindle -- a rotating shaft in a disk drive.
Thin-film -- a microscopically thin layer of semiconductor or magnetic
material that is deposited onto a metal or ceramic disk.
Thin-film Head -- a read/write head for high-density disks that is made
from thin layers of a conducting film deposited onto a nickel-iron core.
98
<PAGE> 100
MAXTOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF MAXTOR CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets December 28, 1996, December 27,
1997 and June 27, 1998 (unaudited)........................ F-2
Consolidated Statements of Operations Fiscal year ended
March 30, 1996, nine months ended December 28, 1996,
fiscal year ended December 28, 1997, and for each of the
six month periods ended June 28, 1997 and June 27, 1998
(unaudited)............................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal year ended March 30, 1996, nine months ended
December 28, 1996, fiscal year ended December 28, 1997 and
for the six month period ended June 27, 1998
(unaudited)............................................... F-4
Consolidated Statements of Cash Flows Fiscal year ended
March 30, 1996, nine months ended December 28, 1996,
fiscal year ended December 28, 1997 and for each of the
six month periods ended June 28, 1997 and June 27, 1998
(unaudited)............................................... F-5
Notes to Consolidated Financial Statements.................. F-6
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-23
Report of Ernst & Young LLP, Independent Auditors........... F-24
</TABLE>
F-1
<PAGE> 101
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JUNE 27,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 31,313 $ 16,925 $ 15,010
Accounts receivable, net of allowance for doubtful
accounts of $5,255 at December 28, 1996, $3,573 at
December 27, 1997 and $5,652 at June 27, 1998.......... 82,876 241,777 218,900
Accounts receivable from affiliates....................... 6,248 5,870 3,370
Inventories............................................... 80,878 155,312 162,954
Prepaid expenses and other................................ 5,239 20,814 34,977
--------- --------- ---------
Total current assets.............................. 206,554 440,698 435,211
Net property, plant and equipment........................... 92,073 99,336 102,371
Other assets................................................ 15,912 15,438 8,067
--------- --------- ---------
$ 314,539 $ 555,472 $ 545,649
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings, including current portion of
long-term debt......................................... $ 149,800 $ 100,057 $ 76,154
Short-term borrowings due to affiliates................... -- 65,000 55,000
Accounts payable.......................................... 109,956 206,563 268,220
Accounts payable to affiliates............................ 13,459 25,022 35,684
Accrued and other liabilities............................. 139,678 155,563 105,957
--------- --------- ---------
Total current liabilities......................... 412,893 552,205 541,015
Long-term debt and capital lease obligations due after one
year...................................................... 229,109 224,313 219,314
--------- --------- ---------
Total liabilities........................................... 642,002 776,518 760,329
Commitments and contingencies (Note 8)
Stockholders' deficit:
Series A Preferred Stock, $0.01 par value, 95,000,000
shares authorized; 58,208,955 shares issued and
outstanding at December 28, 1996; 88,059,701 issued and
outstanding at December 27, 1997 and June 27, 1998;
aggregate liquidation value $390,000 at December 28,
1996, $590,000 at December 27, 1997, and June 27,
1998................................................... 582 880 880
Common Stock, $0.01 par value, 250,000,000 shares
authorized; no shares issued and outstanding at
December 28, 1996; 7,563 shares issued and outstanding
at December 27, 1997 and 445,148 shares issued and
outstanding at June 27, 1998........................... -- -- 4
Additional paid-in capital.................................. 335,017 534,765 537,370
Cumulative other comprehensive income -- unrealized gain on
investments in equity securities.......................... -- 16,262 24,922
Accumulated deficit......................................... (663,062) (772,953) (777,856)
--------- --------- ---------
Total stockholders' deficit....................... (327,463) (221,046) (214,680)
--------- --------- ---------
$ 314,539 $ 555,472 $ 545,649
========= ========= =========
</TABLE>
See accompanying notes.
F-2
<PAGE> 102
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, JUNE 28, JUNE 27,
1996 1996 1997 1997 1998
---------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................... $1,264,627 $ 771,655 $ 1,384,799 $ 512,018 $1,075,317
Revenue from affiliates........... 4,371 27,229 39,521 18,084 5,565
---------- --------- ----------- --------- ----------
Total revenue................ 1,268,998 798,884 1,424,320 530,102 1,080,882
Cost of revenue................... 1,192,403 861,551 1,316,774 517,830 951,577
Cost of revenue from affiliates... 3,902 27,307 36,162 16,613 4,574
---------- --------- ----------- --------- ----------
Total cost of revenue........ 1,196,305 888,858 1,352,936 534,443 956,151
Gross profit (loss)............... 72,693 (89,974) 71,384 (4,341) 124,731
---------- --------- ----------- --------- ----------
Operating expenses:
Research and development........ 94,717 87,752 106,249 51,917 70,096
Selling, general and
administrative............... 82,775 60,701 62,520 30,408 34,315
Stock compensation expense...... -- -- -- -- 9,908
Other........................... 4,460 -- -- -- --
---------- --------- ----------- --------- ----------
Total operating expenses..... 181,952 148,453 168,769 82,325 114,319
---------- --------- ----------- --------- ----------
Income (loss) from operations..... (109,259) (238,427) (97,385) (86,666) 10,412
Interest expense.................. (11,849) (18,075) (36,502) (16,624) (17,536)
Interest and other income......... 1,169 1,000 25,031 2,197 2,399
---------- --------- ----------- --------- ----------
Loss before income taxes.......... (119,939) (255,502) (108,856) (101,093) (4,725)
Provision for income taxes........ 2,826 824 1,035 501 178
---------- --------- ----------- --------- ----------
Net loss.......................... (122,765) (256,326) (109,891) (101,594) (4,903)
---------- --------- ----------- --------- ----------
Other comprehensive income:
Unrealized gain on investments in
equity securities............... -- -- 16,262 -- 8,660
---------- --------- ----------- --------- ----------
Comprehensive income (loss)....... $ (122,765) $(256,326) $ (93,629) $(101,594) $ 3,757
========== ========= =========== ========= ==========
Net loss per share -- basic and
diluted (Note 1)................ $ (5.94) $ -- $(58,112.64) $ -- $ (202.72)
Shares used in per share
calculation -- basic and
diluted......................... 20,677,000 -- 1,891 -- 24,186
</TABLE>
See accompanying notes.
F-3
<PAGE> 103
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
PREFERRED STOCK COMMON STOCK ADDITIONAL INVESTMENTS IN TOTAL
------------------- -------------------- PAID-IN EQUITY ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES DEFICIT (DEFICIT)
---------- ------ ----------- ------ ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 25, 1995...... -- -- 25,848,642 $258 $327,616 -- $(283,971) $ 43,903
Issuance of common stock
under stock option plans... -- -- 567,403 6 4,739 -- -- 4,745
Issuance of common stock
under stock purchase
plan....................... -- -- 400,213 4 2,976 -- -- 2,980
Shares canceled resulting
from acquisition by HEA.... -- -- (26,815,958) (268) 268 -- -- --
Net loss..................... -- -- -- -- -- -- (122,765) (122,765)
---------- ---- ----------- ---- -------- ------- --------- ---------
Balance, March 30, 1996...... -- -- 300 -- 335,599 -- (406,736) (71,137)
Exchange of common shares for
Series A Preferred......... 58,208,955 $582 (300) -- (582) -- -- --
Net loss..................... -- -- -- -- -- -- (256,326) (256,326)
---------- ---- ----------- ---- -------- ------- --------- ---------
Balance, December 28, 1996... 58,208,955 582 -- -- 335,017 -- (663,062) (327,463)
Issuance of additional Series
A Preferred to parent in
exchange for debt.......... 29,850,746 298 -- -- 199,702 -- -- 200,000
Issuance of stock under stock
option plan and related
benefits................... -- -- 7,563 -- 46 -- -- 46
Change in unrealized gain on
equity securities.......... $16,262 16,262
Net loss..................... -- -- -- -- -- (109,891) (109,891)
---------- ---- ----------- ---- -------- ------- --------- ---------
Balance, December 27, 1997... 88,059,701 880 7,563 -- 534,765 16,262 (772,953) (221,046)
Issuance of stock under stock
option and restricted stock
plan....................... 437,585 4 280 284
Stock compensation
reimbursement due from an
affiliate (unaudited)...... -- -- -- -- 2,325 -- -- 2,325
Change in unrealized gain on
equity investments
(unaudited)................ -- -- -- -- -- 8,660 -- 8,660
Net loss (unaudited)......... -- -- -- -- -- -- (4,903) (4,903)
---------- ---- ----------- ---- -------- ------- --------- ---------
Balance, June 27, 1998
(unaudited)................ 88,059,701 $880 445,148 $ 4 $537,370 $24,922 $(777,856) $ 214,680
========== ==== =========== ==== ======== ======= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 104
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE SIX SIX
YEAR MONTHS YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, JUNE 28, JUNE 27,
1996 1996 1997 1997 1998
--------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(122,765) $(256,326) $(109,891) $(101,594) $ (4,903)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 45,200 47,064 65,642 26,244 31,188
Stock compensation expense................................ -- -- -- -- 9,908
Reserves for lower of cost or market...................... -- 15,194 -- (3,295) --
Change in deferred taxes.................................. 300 -- -- -- --
Loss (gain) on disposal of property, plant and
equipment............................................... 669 700 4,366 -- 1,049
Gain on sale of subsidiary................................ -- (2,385) -- -- --
Gain on fully reserved note receivable from affiliate..... -- -- (20,000) -- --
Other..................................................... -- (589) (157) (425) --
Changes in assets and liabilities:
Accounts receivable..................................... (12,485) 62,786 (142,860) (35,280) 43,125
Accounts receivable from affiliates..................... (2,229) (1,822) 378 3,793 4,825
Inventories............................................. (66,255) 45,955 (74,434) (45,756) (7,642)
Prepaid expenses and other assets....................... (2,947) 3,839 687 767 (5,492)
Accounts payable........................................ 18,407 (37,297) 102,108 25,358 58,784
Accounts payable to affiliates.......................... 8,656 4,803 11,563 2,994 10,662
Accrued and other liabilities........................... 637 13,015 15,885 (1,321) 1,476
--------- --------- --------- --------- --------
Total adjustments........................................... (10,047) 151,263 (36,822) (26,921) 147,883
--------- --------- --------- --------- --------
Net cash provided by (used in) operating activities......... (132,812) (105,063) (146,713) (128,515) 142,980
--------- --------- --------- --------- --------
Cash flows from investing activities:
Proceeds from sale of subsidiary.......................... -- 25,000 -- -- --
Cash received on a note receivable from affiliate......... -- -- 20,000 -- --
Proceeds from maturities of available-for-sale
investments............................................. 11,998 -- -- -- --
Purchase of property, plant and equipment................. (72,655) (53,780) (82,489) (23,955) (36,597)
Proceeds from disposals of property, plant and
equipment............................................... 353 363 609 -- 3,041
Other assets.............................................. (928) (7,599) 621 3,082 8,528
--------- --------- --------- --------- --------
Net cash used in investing activities..................... (61,232) (36,016) (61,259) (20,873) (25,028)
--------- --------- --------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of debt, including short-term
borrowings.............................................. 145,595 410,715 319,363 194,370 69,775
Principal payments on debt, including short-term debt..... (3,000) (307,444) (309,784) (64) (108,677)
Proceeds from issuance of common stock, net of issuance of
notes receivable and stock repurchase................... 7,725 -- 46 -- 239
Proceeds from intercompany notes issued to parent......... -- -- 200,000 -- --
Net payments under accounts receivable securitization..... -- 16,327 (16,041) (42,239) (81,204)
--------- --------- --------- --------- --------
Net cash provided by (used in) financing activities....... 150,320 119,598 193,584 152,067 (119,867)
--------- --------- --------- --------- --------
Net increase (decrease) in cash and cash equivalents...... (43,724) (21,481) (14,388) 2,679 (1,915)
Cash and cash equivalents at beginning of period.......... 96,518 52,794 31,313 31,313 16,925
--------- --------- --------- --------- --------
Cash and cash equivalents at end of period................ $ 52,794 $ 31,313 $ 16,925 $ 33,992 $ 15,010
========= ========= ========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest.................................................. $ 9,362 $ 13,444 $ 26,540 $ 11,885 $ 10,031
Income taxes.............................................. 1,801 2,009 1,025 514 785
Income tax refunds........................................ (3,173) -- -- -- --
Supplemental information on noncash investing and financing
activities:
Purchase of property, plant and equipment financed by
accounts payable.......................................... 4,949 8,171 2,670 15,654 11,792
Purchase of property, plant and equipment financed by
capital leases............................................ -- -- 881 -- 28
Exchange of Common Stock for Series A Preferred Stock....... -- 582 -- -- --
Exchange of notes payable for Series A Preferred Stock...... -- -- 200,000 -- --
Unrealized gain on equity securities........................ -- -- 16,262 -- 8,660
Stock compensation reimbursement due from an affiliate...... -- -- -- -- 2,325
</TABLE>
See accompanying notes.
F-5
<PAGE> 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Maxtor
Corporation and its wholly-owned subsidiaries ("Maxtor" or the "Company"). All
significant intercompany accounts and transactions have been eliminated. Maxtor
Corporation operates as a majority-owned subsidiary of Hyundai Electronics
America ("HEA").
FISCAL YEAR
During 1996, the Company changed its fiscal year end to be consistent with
the fiscal year end of HEA. The fiscal year end changed from the last Saturday
of March, the date used in the Company's preceding filing of its Form 10-K with
the Securities and Exchange Commission, to the last Saturday of December
conforming to a 52/53-week year methodology. The fiscal year ended March 30,
1996 comprised 53 weeks. The fiscal year ended December 28, 1996 comprised 39
weeks. The current year ended December 27, 1997 comprised 52 weeks. The six
month periods ended June 28, 1997 and June 27, 1998 both comprised 26 weeks.
NATURE OF BUSINESS
The Company develops, manufactures and markets hard disk drive products to
customers who sell their products in the personal computer industry. Products
are designed for desktop applications to meet both value and high-performance
needs of customers. Customers include original equipment manufacturers ("OEMs"),
distributors, and retailers. The Company relies on suppliers for components
including heads, disks and custom integrated circuits. Although printed circuit
board assemblies and head stack assemblies are outsourced, head disk assemblies
are completed by the Company. All the Company's products are manufactured by
Maxtor at its manufacturing facility in Singapore and sold worldwide.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim consolidated balance sheet of June 27, 1998 and
the consolidated statements of operations and cash flows for the six month
periods ended June 28, 1997 and June 27, 1998 and the statement of stockholders'
equity (deficit) for the six months ended June 27, 1998, together with the
related notes are unaudited but include all adjustments, consisting of only
normal recurring adjustments, which the Company considers necessary for a fair
presentation of the consolidated financial position at June 27, 1998, and the
consolidated results of its operations and cash flows for the periods ended June
28, 1997 and June 27, 1998. Results for the six months ended June 27, 1998 are
not necessarily indicative of results that may be expected for the full year.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The actual results with regard to warranty expenditures could have a
material unfavorable impact on the Company if the actual rate of unit failure or
the cost to repair a unit is greater than what the Company has used in
estimating its warranty expense accrual.
Given the volatility of the market for disk drives and for the Company's
products, the Company makes adjustments to the value of inventories based on
estimates of potentially excess and obsolete inventories and negative margin
products after considering forecasted demand and forecasted average selling
prices. However, forecasts are always subject to revisions, cancellations, and
rescheduling. Actual demand will inevitably differ from such anticipated demand
and such differences may have a material impact on the financial statements.
F-6
<PAGE> 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RISKS AND UNCERTAINTIES
The Company's business entails a number of risks. As is typical in the disk
drive industry, the Company must utilize leading edge components for its new
generation of products which may only be available from a limited number of
suppliers. While the Company has qualified and continues to qualify multiple
sources for many components, it is reliant on, and will continue to be reliant
on, the availability of supply from its vendors for many semi-custom and custom
integrated circuits, heads, media and other key components. Any de-commitments
from customers for product or delays of components from vendors could have an
adverse impact on the Company's ability to ship products as scheduled to its
customers.
The Company's ultimate parent is Hyundai Electronics Industries Co. Ltd.
("HEI"), a Korean corporation. The Korean economy has recently suffered a period
of economic turmoil, which has resulted in the devaluation of the Korean
currency and large volatility in interest rates. A significant portion of the
Company's debt was guaranteed by HEI, and the Company has relied upon the HEI
guarantees. As of June 1, 1998, the Company substituted Hyundai Heavy Industries
Co., Ltd. ("HHI") as the guarantor of substantially all of the debt previously
guaranteed by HEI. The Company's parent, HEA, also has a written letter of
support from HEI to support operations for it and all of its subsidiaries
through May 31, 2000.
As further described in Note 7, it is reasonably possible that further
deteriorations in the Korean economy and the value of the Korean currency could
have an adverse effect on the ability of the ultimate parent or HHI to continue
to guarantee the debt of the Company. While the Company believes that other
sources of credit would be available, there is no assurance that such other
credit would be available, either in the amount or at the rates currently
available to the Company.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which are purchased
with an original maturity of three months or less, to be cash equivalents.
EQUITY SECURITIES
All equity securities are classified as available-for-sale.
Available-for-sale securities are carried at market value. Unrealized gains and
losses on securities classified as available-for-sale, when material, are
reported as a separate component of stockholders' deficit. Realized gains and
losses on sales of all such investments are included in the results of
operations computed using the specific identification cost method.
INVENTORIES
Inventories are stated at the lower of cost (computed on a first-in,
first-out basis) or market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated on the
straight-line basis over the estimated useful lives of the assets, which
generally range from three to five years, except for buildings which are
depreciated over thirty years. Assets under capital leases and leasehold
improvements are amortized over the shorter of the asset life or the remaining
lease term. Capital lease amortization is included with depreciation expense.
Upon disposal, the Company removes the asset and accumulated depreciation from
its records and recognizes the related gain or loss in results of operations.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenue is recognized upon product shipment. Revenue from sales to certain
distributors and retailers is subject to agreements providing limited rights of
return, as well as price protection on unsold merchandise. Accordingly, the
Company records reserves upon shipment for estimated returns, exchanges and
credits for price protection. The Company also provides for the estimated cost
to repair or replace products under
F-7
<PAGE> 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
warranty at the time of sale. The Company currently warrants its products
against defects in parts and labor from the date of shipment with an additional
three months allowed for distributors to account for "shelf life." All products
currently in production are warranted for a period of three years after
shipment.
ADVERTISING EXPENSE
Cooperative advertising costs are charged as the related revenue is earned
and other advertising costs are expensed as incurred. Advertising costs were not
significant for the fiscal year ended March 30, 1996, the nine months ended
December 28, 1996, the fiscal year ended December 27, 1997 or the six months
ended June 28, 1997 and June 27, 1998, respectively.
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company is required to adjust
its deferred tax liabilities in the period when tax rates or the provisions of
the income tax laws change. Valuation allowances are established to reduce
deferred tax assets to the amounts expected to be realized.
FOREIGN CURRENCY TRANSLATION
The functional currency for all foreign operations is the U.S. dollar. As
such, all material foreign exchange gains or losses are included in the
determination of net loss. Net foreign exchange losses included net income
(loss) for the fiscal year ended March 30, 1996, the nine months ended December
28, 1996, the fiscal year ended December 27, 1997 and the six months ended June
28, 1997 and June 27, 1998 (unaudited) were immaterial.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable and cash
equivalents. The Company has cash equivalent and short-term investment policies
that limit the amount of credit exposure to any one financial institution and
restrict placement of these funds to financial institutions evaluated as highly
credit-worthy. The Company's products are sold worldwide to OEMs, distributors,
and retailers. Concentration of credit risk with respect to the Company's trade
receivables is limited by the Company's ongoing credit evaluation process and
the geographical dispersion of sales transactions. Therefore, the Company
generally requires no collateral from its customers. The allowance for doubtful
accounts is based upon the expected collectibility of all accounts receivable.
One customer accounted for more than 10% of outstanding trade receivables at
March 30, 1996. As of December 27, 1997, the Company had one customer who
accounted for more than 10% of the outstanding trade receivables. As of June 27,
1998 (unaudited) three customers represent more than 53% of outstanding trade
receivables. If the customers fail to perform their obligations to the Company,
such failures would have adverse effects upon the Company's financial position,
results of operations, cash flows, and liquidity.
LONG-LIVED ASSETS
The Company reviews property, plant and equipment and other long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability is
measured by comparison of its carrying amount to future net cash flows the
assets are expected to generate. If such assets are considered to be impaired,
the impairment to be recognized is measured as the amount by which the carrying
amount of the asset exceeds the present value of the future net cash flows.
F-8
<PAGE> 108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes and
has adopted the disclosure only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123. "Accounting for Stock-Based Compensation."
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
The Company accounts for its accounts receivable securitization program in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
NET 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 six months ended June 27,
1998 (unaudited) is not meaningful due to the very limited number of common
shares outstanding during such periods.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for disclosure about
operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
statement supercedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise." The new standard becomes effective for fiscal years
beginning after December 15, 1997, and requires that comparative information
from earlier years be restated to conform to the requirements of this standard.
The Company is evaluating the requirements of SFAS 131 and the effects, if any,
on the Company's current reporting and disclosures.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
when costs related to software developed or obtained for internal use should be
capitalized or expensed. The SOP is effective for transactions entered into for
fiscal years beginning after December 15, 1998. The Company has reviewed the
provisions of the SOP and does not believe adoption of this standard will have a
material effect upon its results or operations, financial position or cash
flows.
F-9
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 27, 1997 JUNE 27, 1998
----------------- ----------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Raw materials............................... $ 33,012 $ 48,834 $ 39,090
Work-in-process............................. 15,674 15,177 14,368
Finished goods.............................. 32,192 91,301 109,496
--------- --------- ---------
$ 80,878 $ 155,312 $ 162,954
========= ========= =========
Prepaid expenses and other:
Investments in equity securities, at fair
value.................................... $ -- $ 16,262 $ 24,922
Prepaid expenses and other.................. 5,239 4,552 10,055
--------- --------- ---------
$ 5,239 $ 20,814 $ 34,977
========= ========= =========
Property, plant and equipment, at cost:
Buildings................................... $ 29,512 $ 32,453 $ 33,927
Machinery and equipment..................... 194,644 220,213 230,613
Furniture and fixtures...................... 13,300 11,374 12,044
Leasehold improvements...................... 12,695 9,012 9,812
--------- --------- ---------
250,151 273,052 286,396
Less accumulated depreciation and
amortization................................ (158,078) (173,716) (184,025)
--------- --------- ---------
Net property, plant and equipment........... $ 92,073 $ 99,336 $ 102,371
========= ========= =========
Accrued and other liabilities:
Income taxes payable........................ $ 5,088 $ 2,416 $ 1,875
Accrued payroll and payroll-related
expenses................................. 17,159 29,116 23,962
Accrued warranty............................ 20,194 22,716 26,216
Accrued expenses............................ 42,851 21,561 34,518
Advances under securitization............... 54,386 79,754 19,386
--------- --------- ---------
$ 139,678 $ 155,563 $ 105,957
========= ========= =========
</TABLE>
3. RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform to current classifications. These reclassifications had no impact on
any prior years or the Company's net assets or results of operations.
4. FINANCIAL INSTRUMENTS
FAIR VALUE DISCLOSURES
The fair values of cash and cash equivalents approximate carrying values
due to the short period of time to maturity. The carrying values of notes
receivable, which are classified in other assets, approximate fair values. The
fair values of the Company's fixed rate debt are estimated based on the current
rates offered to the Company for similar debt instruments having the same
remaining maturities. The fair values of the Company's variable rate debt
approximate carrying values as these instruments are adjusted periodically
during the course of the year at market prices. The fair values of the Company's
convertible subordinated debentures are based on the bid price of the last trade
for the fiscal period ended December 28, 1996 and fiscal year ended December 27,
1997, respectively.
F-10
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying values and fair values of the Company's financial instruments
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 27, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 31,313 $ 31,313 $ 16,925 $ 16,925
Notes receivable................................ 11,492 11,492 11,492 11,492
Short and long-term debt:
fixed rates................................... 13,800 13,800 13,800 13,800
variable rates................................ 265,000 265,000 210,570 210,570
debt from parent -- fixed rates............... -- -- 65,000 65,000
Convertible subordinated debentures............. 100,000 68,000 100,000 70,000
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company attempts to minimize the impact of foreign currency exchange
rate changes on certain underlying assets, liabilities and anticipated cash
flows for operating expenses denominated in foreign currencies by entering into
short-term foreign exchange (primarily forward purchase and sale) contracts. The
Company's policy is to hedge all material transaction exposures on a quarterly
basis. Contracts are generally entered into at the end of each fiscal quarter to
reduce foreign currency exposures for the following fiscal quarter. Contracts
generally have maturities of three months or less. Any gains or losses on these
instruments are accounted for in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation," and are generally
included in cost of revenue. Unrealized gains or losses on foreign currency
forward contracts that are designated and effective as hedges of firm
commitments, are deferred and recorded in the same period as the underlying
transaction. Notional amounts of outstanding currency forward contracts were
$17.3 million, $0 and $25.8, as of December 28, 1996, December 27, 1997 and June
27, 1998 (unaudited), respectively.
5. INTERNATIONAL MANUFACTURING SERVICES
In May 1996, the Company entered into an agreement to sell a majority
interest in International Manufacturing Services, Inc. ("IMS"), previously a
wholly-owned subsidiary, to certain members of IMS management and other
investors. At completion of the transaction in June 1996, the Company received
$25.0 million in cash and $20.0 million in notes from IMS, and retained a 24%
ownership interest in IMS. The note receivable, which was fully reserved at the
time of sale, was recovered in the fourth quarter of 1997 resulting in a gain of
$20.0 million. As of December 27, 1997, the Company's ownership interest was
16%. The Company's share of IMS results of operations for the fiscal year ended
December 28, 1996 and the fiscal period ended December 27, 1997 were not
material to the Company's results of operations for either period presented.
The Company outsources most of its PCB assembly to IMS; IMS supplies the
Company with PCBs, sub-assemblies and fully integrated products under a
manufacturing services agreement. The Company made purchases from IMS in the
years ended December 28, 1996 and December 27, 1997 of $191.9 million and $115.3
million, respectively.
6. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: the design, manufacture
and sale of data storage products for desktop computer systems. It has a
world-wide sales, service and distribution network. The Company markets and
sells its products through a direct sales force to OEMs, distributors and
retailers.
During the year ended March 30, 1996, no customer accounted for more than
10% of the Company's revenue. During the nine months ended December 28, 1996,
one customer, SED International accounted for
F-11
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11% of the Company's revenue. During the year ended December 27, 1997, two
customers, Compaq and Dell, accounted for more than 21% and 10%, respectively,
of the Company's revenue.
The Company's export sales represented 41%, 48% and 40% of total revenue
for the year ended March 30, 1996, the nine months ended December 28, 1996 and
the year ended December 27, 1997, respectively. Approximately 60%, 38% and 57%,
of export sales were to Europe, while 35%, 55%, and 36% of export sales were to
Asia Pacific for the year ended March 30, 1996, the nine months ended December
28, 1996 and year ended December 27, 1997, respectively.
Operations outside the United States primarily consist of the manufacturing
plant in Singapore that produces subassemblies and final assemblies for the
Company's disk drive products. The geographic breakdown of the Company's
activities for each of the three fiscal periods is presented in the following
table:
<TABLE>
<CAPTION>
U.S. ASIA PACIFIC ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended March 30, 1996
Revenue from unaffiliated customers............ $1,196,105 $ 68,522 $ -- $1,264,627
Revenue from affiliated customers.............. 3,417 954 -- 4,371
Transfers between geographic locations......... 14,600 1,585,545 (1,600,145) --
---------- ---------- ----------- ----------
Total Revenue.................................. $1,214,122 $1,655,021 $(1,600,145) $1,268,998
========== ========== =========== ==========
Income (loss) from operations.................. $ (204,376) $ 95,035 $ 82 $ (109,259)
========== ========== =========== ==========
Identifiable assets............................ $ 326,106 $ 397,837 $ (281,456) $ 442,487
========== ========== =========== ==========
Nine Months Ended December 28, 1996
Revenue from unaffiliated customers............ $ 751,597 $ 20,058 $ -- $ 771,655
Revenue from affiliated customers.............. 25,712 1,517 -- 27,229
Transfers between geographic locations......... 14,150 918,488 (932,638) --
---------- ---------- ----------- ----------
Total Revenue.................................. $ 791,459 $ 940,063 $ (932,638) $ 798,884
========== ========== =========== ==========
Income (loss) from operations.................. $ (323,061) $ 79,926 $ 4,708 $ (238,427)
========== ========== =========== ==========
Identifiable assets............................ $ 286,084 $ 369,631 $ (341,176) $ 314,539
========== ========== =========== ==========
Year Ended December 27, 1997
Revenue from unaffiliated customers............ $1,384,703 $ 96 $ -- $1,384,799
Revenue from affiliated customers.............. 39,521 -- -- 39,521
Transfers between geographic locations......... 21,886 1,595,189 (1,617,075) --
---------- ---------- ----------- ----------
Total Revenue.................................. $1,446,110 $1,595,285 $(1,617,075) $1,424,320
========== ========== =========== ==========
Income (loss) from operations.................. $ (284,915) $ 187,496 $ 34 $ (97,385)
========== ========== =========== ==========
Identifiable assets............................ $ 498,778 $ 569,207 $ (512,513) $ 555,472
========== ========== =========== ==========
</TABLE>
Revenue from unaffiliated and affiliated customers is based on the origin
of the sale. Transfers between geographic locations are accounted for at amounts
that are above cost. Such transfers are eliminated in the consolidated financial
statements. Identifiable assets are those assets that can be directly associated
with a particular geographic location through acquisition and/or utilization. In
determining each of the geographic locations' income (loss) from operations and
identifiable assets, the expenses and assets relating to general corporate or
headquarter activities are included in the amounts for the geographic locations
where they were incurred, acquired or utilized.
F-12
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LINES OF CREDIT, DEBT AND CAPITAL LEASE OBLIGATIONS
Lines of credit, debt and capital lease obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27, JUNE 27,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
5.75% Convertible Subordinated Debentures due March 1,
2012...................................................... $100,000 $100,000 $ 95,000
Short-term borrowings; interest payable at variable rates
ranging from 6.24% to 7.88% per annum..................... 136,000 80,967 70,871
Short-term borrowings from parent; interest payable at rate
of 10.29%................................................. -- 65,000 55,000
Short-term borrowing; interest payable at a rate of 6.52%;
collateralized by equipment............................... 13,800 13,800 --
Long-term borrowing, interest payable at variable rates
ranging from 6.18% to 6.24% per annum..................... 129,000 129,000 129,000
Other obligations........................................... 109 603 597
-------- -------- --------
378,909 389,370 350,468
Less amounts due within one year............................ 149,800 165,057 131,154
-------- -------- --------
Due after one year.......................................... $229,109 $224,313 $219,314
======== ======== ========
</TABLE>
Future aggregate maturities as of December 27, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
<S> <C>
1998............................................. $165,057
1999............................................. 134,313
2000............................................. 5,000
2001............................................. 5,000
2002............................................. 5,000
Later years...................................... 75,000
--------
Total....................................... $389,370
========
</TABLE>
The 5.75% Convertible Subordinated Debentures ("Debentures") originally
were convertible at any time prior to maturity, unless previously redeemed, into
shares of common stock of the Company at a conversion rate of 12.5 shares per
each $1,000 principal amount of debentures (equivalent to a conversion price of
$80 per common share), subject to adjustment in certain events. Pursuant to the
terms of the Indenture governing the Debentures, dated March 1, 1987, upon the
closing of the acquisition by HEA under the Agreement and Plan of Merger, dated
November 2, 1995, between HEA and the Company, Debenture holders were entitled
to receive in lieu of shares of common stock of the Company the same
consideration per share received by holders of common stock at the closing of
the merger. A First Supplemental Indenture, dated January 11, 1996, provides
that each $1,000 principal amount of Debentures may be convertible to 12.5
shares of common stock of the Company (equivalent to a conversion price of $80
per share), which is immediately converted into a cash payment of $167.50.
Interest on the Debentures is payable on March 1 and September 1 of each year.
The Debentures, at the option of the Company, are redeemable at 100.575% of
principal amount as of March 30, 1996 and thereafter at prices adjusting to the
principal amount on or after March 1, 1997, plus accrued interest. The
Debentures are entitled to a sinking fund of $5.0 million principal amount of
Debentures, payable annually beginning March 1, 1998, which is calculated to
retire at least 70% of the Debentures prior to maturity. The Debentures are
subordinated in right to payment to all senior indebtedness.
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. Under this program the
Company could sell its qualified trade accounts receivable up to $100.0 million
on a non-recourse basis. The face amount of the eligible receivables are
discounted based on the Corporate Receivables Corporation commercial paper rate,
5.85% as of December 27, 1997 plus commission and is subject to a 10% retention.
As of December 27, 1997, $79.8 million of advances related to
F-13
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sales of accounts receivable were included in accrued and other liabilities. As
of June 27, 1998, this amount was $19.4 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 specified rating. In addition, the New
Program remains subject to certain conditions subsequent related to obtaining
appropriate waivers as may be necessary from lenders of the Company's credit
facilities, or effecting a cure of any outstanding defaults under such credit
facilities of the Company and obtaining a performance guarantee from HHI of the
obligations of the Company under the New Program. The Company must satisfy these
conditions subsequent within 30 days of receiving undertaking documents from
Citicorp and presently believes that it will be able to successfully satisfy
these conditions.
On January 31, 1996 the Company signed a one year credit facility in the
amount of $13.8 million to be used for capital equipment requirements at the
Singapore facility, which was fully utilized as of December 27, 1997. This
credit facility was guaranteed by HEI and all outstanding amounts of principal
and accrued interest were paid in January 1998.
On April 10, 1997, the Company obtained a $150.0 million intercompany line
of credit from HEA. This line of credit allows for draw downs up to $150.0
million and interest is payable quarterly. As of December 27, 1997, $65.0
million was outstanding under this facility. In March 1998, this line was
reduced to $100.0 million and as of June 27, 1998, $55.0 million was outstanding
under this facility bearing interest at 11.06% (unaudited).
On August 29, 1996, the Company established two uncollateralized, revolving
lines of credit totaling $215.0 million (the "Facilities") through Citibank,
N.A. and syndicated among fifteen banks. In September 1996, the Facilities were
increased $10.0 million to a total of $225.0 million. The Facilities are
guaranteed by HEI and a total of $129.0 million of the Facilities is a three
year committed Facility that is used primarily for general operating purposes
and bears interest at a rate based on LIBOR plus 0.53%. As of June 27, 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 28, 1997,
this Facility was amended and reduced to $31.0 million. The Facility is
primarily for general operating purposes and bears interest at a rate based on
LIBOR plus 0.53%. As of June 27, 1998, $31.0 million of borrowings under this
line of credit were outstanding (unaudited).
The Company had credit facilities amounting to $50.8 million in the
aggregate from three banks as of December 27, 1997. The facilities, which are
guaranteed by HEI, are used primarily for general operating purposes. In January
1998, one $10.0 million facility was retired and all principal, owing has been
paid. As of June 27, 1998, $40.0 million of borrowings were outstanding under
this line of credit at interest rates ranging from 7.68% to 8.62% (unaudited).
HEI was the guarantor of an aggregate $170.0 million outstanding under the
Company's credit facilities as of December 27, 1997. HEI has various obligations
as guarantor, including the satisfaction of certain financial covenants. Due to
the economic conditions in the Republic of Korea and a significant recent
devaluation of the Korean won versus the U.S. dollar, the Company received
notice on April 9, 1998 from the administrative agent for the Facilities that
HEI is not in compliance with certain financial covenants. Due to
F-14
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HEI's inability, as guarantor, to comply with such financial covenants, there is
currently a technical default under the terms of the guaranty which constitutes
a default under the Company's credit facilities guaranteed by HEI and due to
certain cross-default provisions a default under a credit facility with $30
million outstanding as of December 27, 1997 and June 27, 1998 (unaudited) not
guaranteed by HEI. The Company had requested waivers of the non-compliance for
the year ended December 27, 1997, and had obtained a commitment from an
affiliated company to provide an equivalent long-term facility in the event the
waivers were not successfully obtained. Consequently, the Company did not
reclassify the debt outstanding under the credit facilities as a current
liability. As of June 1, 1998, the Company obtained waivers for $160.0 million
of $170.0 million of the debt which was in default and substituted HHI as the
guarantor. As of June 27, 1998, aggregate indebtedness of $170.0 million under
the revolving credit facilities was guaranteed by HHI (unaudited).
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its principal facilities and certain
machinery and equipment under operating lease arrangements. The future minimum
annual rental commitments as of December 27, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
<S> <C>
1998........................................... $10,602
1999........................................... 8,401
2000........................................... 5,261
2001........................................... 4,610
2002........................................... 1,735
Later years.................................... 8,556
-------
Total........................................ $39,165
=======
</TABLE>
The above commitments extend through fiscal year 2016. Rental expense was
approximately $12.0 million for the year ended March 30, 1996, $8.9 million for
the nine months ended December 28, 1996 and $10.7 million for the year ended
December 27, 1997.
LEGAL PROCEEDINGS
The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
HEI which became effective on November 17, 1995 (the "StorMedia Agreement").
Pursuant to the StorMedia Agreement, StorMedia agreed to supply disk media to
the Company. StorMedia's disk media did not meet the Company's specifications
and functional requirements as required by the StorMedia Agreement and the
Company ultimately terminated the StorMedia Agreement. After a class action
securities lawsuit was filed against StorMedia by certain of its shareholders in
September 1996 which alleged, in part, that StorMedia failed to perform under
the StorMedia Agreement, StorMedia sued HEI, Mong Hun Chung (HEI's chairman),
Dr. Chong Sup Park (HEA's President and the individual who signed the StorMedia
Agreement on behalf of the Company) and K.S. Yoo (the individual who signed the
StorMedia Agreement on behalf of HEI) (collectively the "Original Defendants")
in the U.S. District Court for the Northern District of California (the "Federal
Suit"). In the Federal Suit, StorMedia alleged that at the time HEI entered into
the StorMedia Agreement, it knew that it would not and could not purchase the
volume of products which it committed to purchase, and that failure to do so
caused damages to StorMedia in excess of $206 million.
In December 1996, the Company filed a complaint against StorMedia and
William Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado
state court seeking approximately $100 million in damages and alleging, among
other claims, breach of contract, breach of implied warranty of fitness and
fraud under the StorMedia Agreement (the "Colorado Suit"). This proceeding was
stayed pending resolution of the
F-15
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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").
The Company believes that it has meritorious defenses against the claims
alleged by StorMedia and intends to defend itself vigorously. However, due to
the nature of the litigation and because the pending lawsuits are in the very
early pre-trial stages, the Company cannot determine the possible loss, if any,
that may ultimately be incurred either in the context of a trial or as a result
of a negotiated settlement. The litigation could result in significant diversion
of time by the Company's technical personnel, as well as substantial
expenditures for future legal fees. After consideration of the nature of the
claims and facts relating to the litigation, including the results of
preliminary discovery, the Company's management believes that the resolution of
this matter will not have a material adverse effect on the Company's business,
financial condition or results of operations. However, the results of these
proceedings, including any potential settlement, are uncertain and there can be
no assurance that they will not have a material adverse effect on the Company's
business, financial position and results of operations.
The Company has been notified of certain other claims, including claims of
patent infringement. While the ultimate outcome of these claims and the claims
described above is not determinable, the Company does not believe that
resolution of these matters will have a material impact on the Company's
business, financial condition or results of operations. No amounts related to
any action or actions have been reserved in the accompanying financial
statements.
9. RELATED PARTY TRANSACTIONS
In January 1996, the Company became a wholly-owned subsidiary of HEA.
Subsequently, trading of Maxtor common stock on the NASDAQ National Market was
suspended. Currently, there is no public market for the Company's equity
securities. The Company's 5.75% convertible subordinated Debentures, due March
1, 2012, remain publicly traded.
HEI has guaranteed certain debts of the Company (Note 7) and has 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 $15.5 million during the
year ended December 31, 1997 and $58.5 million during the three months ended
June 27, 1998(unaudited).
HEA currently is an unconditional guarantor of the Company's Milpitas,
California facilities lease. The aggregate monthly rent under the lease is
currently $558,270 per month.
10. STOCKHOLDERS' DEFICIT
PREFERRED STOCK
The Company has one class of $0.01 par value preferred stock with
95,000,000 shares authorized, designated as Series A Preferred Stock. Each share
of preferred stock is convertible, at the option of the holder, to shares of the
Company's common stock on a two for one basis, subject to adjustment under
certain circumstances pursuant to anti-dilution provisions. The preferred stock
automatically converts to common stock upon the earlier of the time the consent
of at least a majority of the outstanding Series A Preferred Stock subject to
such conversion is obtained, or the closing of the sale of the Corporation's
securities pursuant to a firm commitment, underwritten public offering. The
holders of preferred shares are entitled to one vote for each share of common
stock into which the preferred stock is convertible.
F-16
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Holders of Series A Preferred Stock are entitled to dividends, when and as
declared by the board of directors of the Company (the "Board"), at an annual
rate of $0.40 per share. Dividends are noncumulative, and to date, no dividends
have been declared or paid by the Company.
The Series A Preferred Stock has a liquidation preference of $6.70 per
share, plus any declared but unpaid dividends on such shares.
In June 1996, the Company entered into an exchange agreement with HEA
whereby HEA exchanged 300 shares of Common Stock for 58,208,955 shares of Series
A Preferred Stock. As of December 27, 1997, 88,059,701 shares of Series A
Preferred Stock and 7,563 shares of Common Stock, were issued and outstanding.
As of December 27, 1997 all outstanding shares of Series A Preferred Stock were
held by HEA and all outstanding Common Stock, issued pursuant to the Corporation
1996 Stock Option Plan, were held by three individuals.
At the time of the acquisition by HEA, the Company canceled its employee
stock purchase plan and stockholder rights plan.
On December 12, 1997 the Company entered into an exchange with HEA where
HEA exchanged $200.0 million of debt for 29,850,746 shares of Series A Preferred
Stock.
STOCK OPTIONS
Effective as of the acquisition by HEA, the Company's 1988, 1992, 1995
Stock Option Plans and the 1986 and 1996 Outside Directors Stock Option Plans
were terminated and were subsequently replaced by the 1996 Stock Option Plan
(the "Plan"). The Plan was approved by the Board in May 1996 and provides for a
maximum of 5,136,084 shares to be reserved for grants. Options under the Plan
expire ten years from the date of grant. On February 25, 1998, the Board
approved an additional one million common shares for issuance under the Plan.
The Plan generally provides for non-qualified stock options and incentive
stock options to be granted to eligible employees, consultants, and directors of
the Company (or any parent or subsidiary of the Company) at a price not less
than 85% of the fair market value at the date of grant, as determined by the
Board. The Board or an executive committee appointed by the Board also approves
other terms such as number of shares granted and exercisability thereof. Any
person who is not an employee may be granted only a non-qualified stock option.
Options granted under the Plan generally vest over a four-year period with 25%
vesting of the first anniversary date of the vest date and 6.25% each quarter
thereafter. The vesting schedule for new participants begins February 1, 1996 or
the participant's hire date, whichever is later.
Until there is a "public market" for the Company's Common Stock, the
Company has (i) the right to repurchase any vested shares at the greater of the
exercise price or fair market value upon termination of service by the holder,
and (ii) a 90-day right of first refusal whereby the Company may repurchase all
shares held by the holder on the same terms and at the same price as offered by
a third party (collectively, the "Repurchase Rights"). While the Company is
privately-held, the holder must give the Company written notice prior to any
proposed transfer.
In the event that the Company has not completed an initial public offering
("IPO") within six months of the date it reaches an "IPO Trigger Date", the
Company is required to purchase all the Common Stock acquired by participants
under the Plan, if tendered, at fair market value (the "Pseudo-IPO Purchase").
The IPO Trigger Date is the date, on or before February 1, 2001, on which all of
the following have occurred: (a) the Company has a positive net income for four
consecutive quarters, (b) the fair market value of the Company as determined by
an independent appraisal equals or exceeds $700.0 million, and (c) the Company
receives the written opinion of a nationally recognized investment banking firm
stating that the Company may undertake an underwritten IPO of its common stock.
F-17
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company amended and restated the Plan in February 1998 to remove the
Pseudo-IPO Purchase, the Repurchase Rights and rights of first refusal, which
had given rise to variable accounting, and offered and modified employee option
agreements in the second quarter of 1998 for the majority of employees which had
previously held variable options to achieve fixed-award accounting. To comply
with variable plan accounting, the Company has recorded compensation expense
related to the difference between the estimated fair market value of its stock
and the stated exercise price of the Company's options. Compensation cost was
reflected in accordance with Financial Accounting Standards Board Interpretation
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans."
The following table summarizes option activity through June 27, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE EXERCISE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE VALUE
---------- ---------- ----------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at March 25, 1995........... 1,590,256 3,076,483 $11.98 $36,833
Options granted..................... (970,274) 970,273 9.50 9,226
Options exercised................... -- (567,403) 8.36 (4,745)
Options canceled.................... 496,431 (496,431) 11.12 (5,519)
Plan shares expired................. (75,943) -- -- --
Options canceled due to
acquisitions...................... (1,040,470) (2,982,922) 12.00 (35,795)
---------- ---------- -------
Balance at March 30, 1996........... -- -- -- --
Shares reserved..................... 5,136,084 -- -- --
Options granted..................... (4,661,099) 4,661,099 6.00 27,966
Option canceled..................... 1,108,349 (1,108,349) 6.00 (6,650)
---------- ---------- -------
Balance at December 28, 1996........ 1,583,334 3,552,750 6.00 21,316
Options granted..................... (1,622,375) 1,622,375 6.00 9,735
Options exercised................... -- (7,563) 6.00 (46)
Option canceled..................... 759,645 (759,645) 6.00 (4,558)
---------- ---------- -------
Balance at December 27, 1997........ 720,604 4,407,917 6.00 26,447
Shares reserved (unaudited)......... 4,863,916 -- -- --
Options granted (unaudited)......... (1,040,618) 1,040,618 6.39 6,650
Options exercised................... -- (47,585) 6.00 (284)
Options cancelled (unaudited)....... 217,821 (217,821) 6.06 (1,320)
---------- ---------- -------
Balance at June 27, 1998
(unaudited)....................... 4,761,723 5,183,129 6.06 $31,493
========== ========== =======
</TABLE>
There were no shares vested as of March 30, 1996 and December 28, 1996 and
1,229,081 shares vested as of December 27, 1997 at a weighted average exercise
price of $6.00. There were 7,563 shares outstanding subject to repurchase as of
December 27, 1997 and no shares outstanding subject to repurchase as of March
30, 1996 and December 28, 1996. As of June 27, 1998, options for 1,947,171
shares were vested and there were no shares outstanding subject to repurchase
(unaudited).
Under SFAS No. 123, the Company is required to calculate the pro forma fair
market value of options granted and report the impact that would result from
recording the compensation expense. Pro forma net loss for the nine months ended
December 28, 1996 and the year ended December 27, 1997 is set forth in the table
F-18
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
below. Comparable information for the year ended March 30, 1996 is not presented
due to the termination of all formerly existing options pursuant to the January
1996 acquisition by HEA.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 28, 1996
------------------------
AS REPORTED PRO FORMA
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net Loss....................................... $256,326 $257,488
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 27, 1997
------------------------
AS REPORTED PRO FORMA
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net Loss....................................... $109,891 $111,613
</TABLE>
The pro forma net loss disclosures made above are not necessarily
representative of the effects on pro forma net income (loss) for future years as
options granted typically vest over several years and additional option grants
are expected to be made in future years.
Pro forma compensation expense resulting from stock options is to be based
upon fair value at the date of grant. To calculate this fair value, the Company
has elected to apply the Black-Scholes pricing model which is one of the
currently accepted models recognized by SFAS 123.
To compute the estimated grant date fair market value of the Company's
stock option grants for 1996 and 1997, the following weighted-average
assumptions were used:
<TABLE>
<CAPTION>
GROUP A GROUP A GROUP B GROUP B
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Risk-free interest rate................................ 6.14% 5.69% 6.21% 6.02%
Weighted average expected life......................... 4 years 4 years 5 years 5 years
</TABLE>
No dividend yield and price volatility are assumed because the Company's
equity securities are not traded publicly.
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of each subgroup. Group A represents higher
paid participants who tend to exercise prior to the vesting period to take
advantage of tax laws, and Group B represents all other participants. The
risk-free interest rate was calculated in accordance with the grant date and
expected life calculated for each subgroup.
The following table summarizes information for stock options outstanding at
December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$6.00 4,407,917 8.81 $6.00 1,229,081 $6.00
</TABLE>
F-19
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED
-----------------------------------------
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
--------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Foreign................................................. $2,526 $1,124 $1,035
Deferred:
Foreign................................................. 300 (300) --
------ ------ ------
Total................................................... $2,826 $ 824 $1,035
====== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the U.S. statutory rate of 35% to the loss before income taxes for the twelve
months ended March 30, 1996, the nine months ended December 28, 1996, and the
twelve months ended December 27, 1997. The principal reasons for this difference
are as follows:
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED
-----------------------------------------
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
--------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at U.S. statutory rate...................... $(41,982) $(89,442) $(38,100)
Tax savings from foreign operations..................... (30,757) (27,104) (63,487)
Repatriated foreign earnings absorbed by current year
losses................................................ 11,624 -- --
U.S. loss providing current tax benefit................. 27,325 52,722 100,748
Valuation of temporary differences...................... 36,550 64,492 2,361
Other................................................... 66 156 (487)
-------- -------- --------
Total................................................... $ 2,826 $ 824 $ 1,035
======== ======== ========
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and accruals.................... $ 16,211 $ 8,975
Depreciation....................................... 5,423 6,149
Sales related reserves............................. 10,836 11,006
Net operating loss carryforwards................... 152,519 218,718
Tax credit carryforwards........................... 18,252 19,335
Capitalized research and development............... 77,466 102,049
Notes receivable reserve........................... 7,561 1,220
Other.............................................. 2,496 10,965
------------ ---------
Total deferred tax assets.......................... 290,764 378,417
Valuation allowance for deferred tax assets........ (251,464) (289,832)
------------ ---------
Net deferred tax assets............................ $ 39,300 $ 88,585
============ =========
Deferred tax liabilities:
Unremitted earnings of certain foreign entities.... $ 39,300 $ 88,585
------------ ---------
Total deferred tax liabilities..................... $ 39,300 $ 88,585
============ =========
</TABLE>
F-20
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pre-tax income from foreign operations was approximately $95.9 million,
$79.0 million and $86.0 million for the twelve months ended March 30, 1996, nine
months ended December 28, 1996 and twelve months ended December 27, 1997,
respectively. Subject to its continued compliance with certain legal
requirements, the Company currently enjoys a tax holiday for its operations in
Singapore that has been extended until June 30, 2003.
During the year ended December 27, 1997, the valuation allowance for
deferred tax assets increased by $38.4 million.
At December 27, 1997, for federal income tax purposes, the Company had net
operating loss carryforwards of $616.7 million and tax credit carryforwards of
approximately $18.8 million which will expire beginning in fiscal year 1999.
Certain changes in stock ownership can result in a limitation on the amount of
net operating loss and tax credit carryovers that can be utilized each year. The
Company determined it had undergone such an ownership change. Consequently,
utilization of approximately $253.0 million of net operating loss carryforwards
and the deduction equivalent of approximately $18.3 million of tax credit
carryforwards will be limited to approximately $22.4 million per year.
The acquisition of the Company by HEA resulted in the Company becoming part
of the HEA consolidated group for federal income tax purposes during January
1996. As a member of the HEA consolidated group, the Company is subject to a tax
allocation agreement. For financial reporting purposes, however, Company's tax
loss has been computed on a separate tax return basis, and, as such, Company has
not recorded any tax benefit in its financial statements for the amount of the
net operating loss included in the HEA consolidated income tax return.
12. NET LOSS PER SHARE:
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted net (loss)
per share calculations is provided as follows (in thousands, except share and
per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED SIX MONTHS
MARCH 30, DECEMBER 28, DECEMBER 27, ENDED
1996 1996 1997 JUNE 27, 1998
----------- ----------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net loss.......................... $ (122,765) $(256,326) $ (109,891) $ (4,903)
=========== ========= =========== ========
Net loss available to common
stockholders.................... $ (122,765) $(256,326) $ (109,891) $ (4,903)
=========== ========= =========== ========
DENOMINATOR
Basic weighted average common
shares outstanding.............. 20,677,000 -- 1,891 24,186
Effect of dilutive securities..... -- -- -- --
----------- --------- ----------- --------
Diluted weighted average common
shares.......................... 20,677,000 -- 1,891 24,186
=========== ========= =========== ========
Basic and diluted net loss per
share (See Note 1).............. $ (5.94) $ -- $(58,112.64) $(202.72)
=========== ========= =========== ========
</TABLE>
F-21
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following securities and contingently issuable shares are excluded in
the calculation of diluted shares outstanding as their effects would be
antidilutive:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED SIX MONTHS ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, JUNE 27,
1996 1996 1997 1998
---------- ----------------- ------------ ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Unvested restricted common
stock......................... -- -- -- 390,000
Stock options................... -- 3,552,000 4,408,000 --
Convertible subordinated
debentures.................... 1,250,000 1,250,000 1,250,000 1,188,000
Convertible preferred stock..... -- 29,104,000 44,030,000 44,030,000
</TABLE>
13. EMPLOYEE BENEFIT PLAN:
The Company maintains a retirement and deferred savings plan for its
employees (the "401(k) Plan") that is intended to qualify as a tax-qualified
plan under the Code. The 401(k) Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (up to a statutory
limit). Under the 401(k) Plan, the Company may make discretionary contributions.
The Company's contributions to the 401(k) Plan for the fiscal periods ended
March 30, 1996 and December 28, 1996 and December 27, 1997 were $600,000, $1.2
million, and $1.6 million, respectively. All amounts contributed by participants
and earnings on such contributions are fully vested at all times.
14. SUBSEQUENT EVENTS:
Reverse Stock Split
On May 29, 1998, the Board approved a one-for-two reverse split of the
Company's outstanding common stock, which became effective upon the Company's
filing of an amended and restated certificate of incorporation in Delaware on
July 24, 1998. All references in the financial statements to the number of the
Company's common shares and price per share amounts, as well as the conversion
ratio of preferred shares, have been retroactively restated to reflect the
reverse split. The Board of Directors also approved the increase of the
Company's authorized common stock to 250,000,000 shares.
1998 Restricted Stock Plan (unaudited)
On May 29, 1998, the Company adopted the 1998 Restricted Stock Plan which
provides for awards of shares of common stock to employees. Restricted stock
awarded under this plan vests three years from the date of grant and are subject
to forfeiture in the event of termination of employment with the Company. The
Company has granted 390,000 shares of common stock under this plan.
F-22
<PAGE> 122
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Maxtor Corporation:
We have audited the consolidated financial statements of Maxtor Corporation
(a subsidiary of Hyundai Electronics America) listed in the index on page F-1 of
this Form S-1 as of December 28, 1996 and December 27, 1997, and for the nine
month period ended December 28, 1996 and the year ended December 27, 1997. We
have also audited the financial statement schedule listed in Item 16(b) of this
Form S-1. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Maxtor
Corporation as of December 28, 1996 and December 27, 1997, and the consolidated
results of its operations and its cash flows for the nine month period ended
December 28, 1996 and the year ended December 27, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Note 1 to the financial statements, the Company's ultimate
parent, Hyundai Electronics Industries, Co., Ltd., (HEI) is located in the
Republic of Korea. The Republic of Korea has recently experienced volatility in
its currency and interest rates which have affected the operations of most
Korean companies, including HEI. HEI has provided certain financial support to
the Company in the past and is a guarantor of the Company's debt.
PricewaterhouseCoopers LLP
San Jose, California
February 3, 1998, except for
Notes 7 and 10 for which
the date is April 9, 1998,
the ninth paragraphs of
Notes 1 and 7, for which
date is June 3, 1998, and
the first paragraph of Note 14,
for which the date is July 24, 1998
F-23
<PAGE> 123
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Maxtor Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Maxtor Corporation (a
wholly-owned subsidiary of Hyundai Electronics America) for the year ended March
30, 1996. Our audit also included the financial statement schedule for the year
ended March 30, 1996 listed in the Index at Item 16(b). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Maxtor Corporation for the year ended March 30, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule for the year ended March 30, 1996, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
April 25, 1996
except for the first paragraph of the
"Subsequent Event" note
as to which this date is July 24, 1998
F-24
<PAGE> 124
Description of Graphics
Inside Front Cover:
Quality, Capacity
and Performance.
The DiamondMax Difference
[Picture of HDD] DiamondMax Plus 2500
[Picture of HDD] DiamondMax 3400
[Picture of HDD] DiamondMax 2880
[Picture of HDD] DiamondMax 2160
[Picture of HDD] DiamondMax 1750
[Picture of HDD] DiamondMax 1280
Inside Back Cover:
[Picture of HDD]
<PAGE> 125
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 25
Relationship Between the Company and
Hyundai............................. 26
Use of Proceeds....................... 32
Dividend Policy....................... 32
Capitalization........................ 33
Selected Consolidated Financial
Data................................ 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Business.............................. 52
Management............................ 66
Certain Transactions.................. 77
Principal Stockholders................ 81
Description of Capital Stock.......... 82
Shares Eligible for Future Sale....... 88
Certain United States Federal Tax
Consequences to Holders of Common
Stock............................... 89
Underwriting.......................... 92
Legal Matters......................... 95
Experts............................... 95
Additional Information................ 95
Glossary.............................. 97
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
47,500,000 SHARES
MAXTOR CORPORATION
COMMON STOCK
[MAXTOR LOGO]
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY
SECURITIES LLC
REPRESENTATIVES OF THE UNDERWRITERS
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 126
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
47,500,000 SHARES
LOGO
COMMON STOCK
Of the 47,500,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock"), of Maxtor Corporation ("Maxtor" or the "Company") offered
hereby, 38,000,000 shares are being offered by the U.S. Underwriters (as
defined) in the United States and Canada (the "U.S. Offering") and 9,500,000
shares are being offered by the International Underwriters (as defined) in a
concurrent offering outside the United States and Canada (the "International
Offering" and, together with the U.S. Offering, the "Offerings"), subject to
transfers between the U.S. Underwriters and the International Underwriters
(collectively the "Underwriters"). The initial public offering price and the
aggregate underwriting discount per share will be identical for the U.S.
Offering and the International Offering. The closing of the International
Offering is conditioned upon the closing of the U.S. Offering and vice versa.
See "Underwriting."
All of the shares of Common Stock offered hereby are being sold by the
Company. Upon completion of the Offerings, Hyundai Electronics America ("HEA"),
which is a majority-owned subsidiary of Hyundai Electronics Industries Co., Ltd.
("HEI"), a corporation organized under the laws of the Republic of Korea, will
own approximately 48% (approximately 44% if the Underwriters' over-allotment
options are fully exercised) of the outstanding shares of Common Stock. See
"Risk Factors -- Control by and Dependence on Hyundai."
Prior to the Offerings, there has not been a public market for the Common
Stock. It currently is estimated that the initial public offering price will be
between $8.50 and $10.50 per share. See "Underwriting" for information relating
to the factors to be considered in determining the initial public offering
price. The shares of Common Stock offered hereby have been approved for
quotation on the Nasdaq National Market under the symbol "MXTR."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------------
Per Share $ $ $
- -----------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $1,500,000, payable by the Company.
(3) The Company has granted the U.S. Underwriters and the International
Underwriters, 30-day options to purchase up to 5,700,000 and 1,425,000
additional shares of Common Stock, respectively, solely to cover
over-allotment, if any. If such options are exercised in full, the total
Price to Public, Underwriting, Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively.
------------------------
The shares of Common Stock are being offered by the several International
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that certificates for the
shares of Common Stock offered hereby will be available for delivery on or about
, 1998, at the office of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001, or through the facilities of The Depository
Trust Company.
------------------------
SALOMON SMITH BARNEY INTERNATIONAL
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH INTERNATIONAL
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
<PAGE> 127
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "International Underwriting Agreement") among the Company, HEA and each of
the underwriters named below (the "International Underwriters"), for whom Smith
Barney Inc., Hambrecht & Quist LLC, Lehman Brothers International (Europe),
Merrill Lynch International and NationsBanc Montgomery Securities LLC are acting
as representatives (the "International Representatives"), the Company has agreed
to sell to each of the International Underwriters and each of the International
Underwriters has severally agreed to purchase from the Company the number of
shares of Common Stock set forth opposite its name in the table below.
<TABLE>
<CAPTION>
NUMBER OF
COMMON
INTERNATIONAL UNDERWRITERS STOCK
-------------------------- ------------
<S> <C>
Smith Barney Inc.......................................
Hambrecht & Quist LLC..................................
Lehman Brothers International (Europe).................
Merrill Lynch International............................
NationsBanc Montgomery Securities LLC..................
---------
Total........................................
=========
</TABLE>
The International Underwriting Agreement provides that the obligations of
the International Underwriters to purchase the shares of Common Stock listed
above are subject to certain conditions set forth therein. The International
Underwriters are committed to purchase all of the shares of Common Stock agreed
to be purchased by the International Underwriters pursuant to the International
Underwriting Agreement (other than those covered by the over-allotment options
described below), if any shares of Common Stock are purchased. In the event of
default by any International Underwriter, the International Underwriting
Agreement provides that, in certain circumstances, the purchase commitments of
the non-defaulting International Underwriters may be increased or the
International Underwriting Agreement may be terminated.
The International Underwriters have advised the Company that the
International Underwriters propose initially to offer such shares of Common
Stock to the public at the initial public offering price thereof set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
discount not in excess of $. per share. The International Underwriters may
allow, and such dealers may reallow, a discount not in excess of $. per share
on sales to certain other dealers. After the initial public offering of the
shares of Common Stock, the public offering price and such discounts may be
changed.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the initial public offering price set
forth on the cover page hereof.
The Company and HEA also have entered into an underwriting agreement (the
"U.S. Underwriting Agreement") with the underwriters named therein (the "U.S.
Underwriters"), for whom Smith Barney Inc., Hambrecht & Quist LLC, Lehman
Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
NationsBanc Montgomery Securities LLC are acting as representatives (the "U.S.
Representatives" and, together with the International Representatives, the
"Representatives"), providing for the concurrent offer and sale of 38,000,000 of
the shares of Common Stock in the United States and Canada.
The closing with respect to the sale of the shares of Common Stock pursuant
to the International Underwriting Agreement is a condition to the closing with
respect to the sale of the shares of Common Stock pursuant to the U.S.
Underwriting Agreement, and the closing with respect to the sale of the shares
of Common Stock pursuant to the U.S. Underwriting Agreement is a condition to
the closing with respect to the sale of the shares of Common Stock pursuant to
the International Underwriting Agreement. The initial public offering price and
underwriting discount per share of Common Stock for the International Offering
and the U.S. Offering will be identical.
Each International Underwriter has severally agreed that, as part of the
distribution of the shares of Common Stock by the International Underwriters,
(i) it is not purchasing any shares of Common Stock for
91
<PAGE> 128
the account of any United States or Canadian Person, (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any shares of Common
Stock or distribute any prospectus to any person in the United States or Canada,
or to any United States or Canadian Person and (iii) any dealer to whom it may
sell any shares of Common Stock will represent that it is not purchasing for the
account of any United States or Canadian Person and agree that it will not offer
or resell, directly or indirectly, any shares of Common Stock in the United
States or Canada, or to any United States or Canadian Person or to any other
dealer who does not so represent and agree.
Each U.S. Underwriter has severally agreed that, as part of the
distribution of the 38,000,000 shares of Common Stock by the U.S. Underwriters,
(i) it is not purchasing any shares of Common Stock for the account of anyone
other than a United States or Canadian Person, (ii) it has not offered or sold,
and will not offer or sell, directly or indirectly, any shares of Common Stock
or distribute any prospectus relating to the U.S. Offering to any person outside
of the United States or Canada, or to anyone other than a United States or
Canadian Person and (iii) any dealer to whom it may sell any shares of Common
Stock will represent that it is not purchasing for the account of anyone other
than a United States or Canadian Person and agree that it will not offer or
resell, directly or indirectly, any shares of Common Stock outside of the United
States or Canada, or to anyone other than a United States or Canadian Person or
to any other dealer who does not so represent and agree.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S. Underwriters
and Managers. "United States or Canadian Persons" means any person who is a
national or resident of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or of any political subdivision thereof, and any estate
or trust the income of which is subject to United States or Canadian federal
income taxation, regardless of its source (other than a foreign branch of such
entity) and includes any United States or Canadian branch of a person other than
a United States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the International Underwriters and the U.S. Underwriters of such
number of shares of Common Stock as may be mutually agreed. The price of any
shares of Common Stock so sold shall be the initial public offering price
thereof set forth on the cover page of this Prospectus, less an amount not
greater than the concession to securities dealers set forth above. To the extent
that there are sales between the International Underwriters and the U.S.
Underwriters pursuant to the Agreement Between U.S. Underwriters and
International Underwriters, the number of shares of Common Stock initially
available for sale by the International Underwriters or by the U.S. Underwriters
may be more or less than the amount specified on the cover page of this
Prospectus.
Each International Underwriter has severally represented and agreed that
(i) it has not offered or sold and, prior to the expiration of six months from
the closing of the International Offering, will not offer or sell any shares of
Common Stock in the United Kingdom other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (whether as principal or agent) for the purposes of their businesses
or otherwise in circumstances which have not resulted in and will not result in
an offer to the public within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom; and (iii) it has only issued or passed on and will only issue or
pass on in the United Kingdom any document received by it in connection with the
issue of the shares of Common Stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise
lawfully be issued or passed on.
The Company has granted to the International Underwriters and the U.S.
Underwriters options to purchase up to an additional 1,425,000 and 5,700,000
shares of Common Stock, respectively, at the applicable price to the public less
the applicable underwriting discount set forth on the cover page of this
Prospectus, solely to cover over-allotments, if any. Such options may be
exercised at any time up to 30 days after the date of this Prospectus. To the
extent such options are exercised, each of the International Underwriters and
the U.S. Underwriters will become obligated, subject to certain conditions, to
purchase approximately the same
92
<PAGE> 129
percentage of such additional shares of Common Stock as the percentage it was
obligated to purchase pursuant to the International Underwriting Agreement or
the U.S. Underwriting Agreement, as applicable.
The Company has agreed with the Underwriters not to offer, pledge, sell,
contract to sell, or otherwise dispose of (or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company), directly or
indirectly, or announce the offering of, any other shares of Common Stock or any
securities or options convertible into, or exchangeable or exercisable for,
shares of Common Stock for a period of 180 days following the date hereof
without the prior written consent of Smith Barney Inc., subject to certain
limited exceptions. In addition, each of the Company's officers, directors and
stockholders has agreed with the Underwriters not to offer, sell, contract to
sell, pledge or otherwise dispose of, or file a registration statement with the
Commission in respect of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the meaning of Section
16 of the Exchange Act with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock, or publicly announce an intention to effect any such transaction, for a
period of 180 days after the date hereof unless with the prior written consent
of Smith Barney Inc., subject to certain limited exceptions. Smith Barney Inc.
currently does not intend to release any securities subject to such lock-up
agreements, but may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to such lock-up agreements.
The International Underwriting Agreement and the U.S. Underwriting
Agreement provide that the Company and HEA will indemnify the several
International Underwriters and U.S. Underwriters against certain liabilities
under the Securities Act, or contribute to payments the International
Underwriters and the U.S. Underwriters may be required to make in respect
thereof.
In connection with the Offerings, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing their market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offerings than
they are committed to purchase from the Company, and in such case may purchase
Common Stock following completion of the Offerings to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position, up to 7,125,000 shares of Common Stock, by exercising the
Underwriters' over-allotment options referred to above. In addition, the
Representatives, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offerings), for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offerings but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Underwriters do not intend to confirm sales in the Offerings to any
accounts over which they exercise discretionary authority.
Merrill Lynch, Pierce, Fenner & Smith Incorporated is currently acting as
financial advisor to HEI and its subsidiaries and affiliates in connection with
their strategic assessment of their assets, financial liabilities and overall
capital structure, and in connection therewith receives certain fees from HEI.
Merrill will receive no separate or additional fee from HEI in connection with
the Offerings.
Affiliates of Lehman Brothers Inc. acted as arranger and syndication agent
for a subsidiary of HEA with respect to a one year $300 million credit facility
that matures in February 1999 and is guaranteed by HEA, and an affiliate of
Lehman Brothers Inc. is currently a lender under such facility. In connection
therewith, such affiliates of Lehman Brothers Inc. receive certain fees and
interest from such subsidiary of HEA.
93
<PAGE> 130
Bank of America, a lender to the Company, has entered into a definitive
agreement to merge with NationsBanc Montgomery Securities LLC. Citicorp, a
parent corporation of Citicorp Securities, with whom the Company has an asset
securitization program, has entered into a definitive agreement to merge with
Travelers Group Inc., a parent company of Smith Barney Inc.
Immediately prior to the Offerings, there has been no public market for the
Common Stock. Accordingly, the initial public offering price for the shares of
Common Stock was determined by negotiation among the Company and the
Representatives. Among the factors considered in determining the initial public
offering price were the Company's record of operations, its current financial
condition, its future prospects, the market for its services, the experience of
management, the economic conditions of the Company's industry in general, the
general condition of the equity securities market and the demand for similar
securities of companies considered comparable to the Company and other relevant
factors. There can be no assurance, however, that the prices at which the Common
Stock will sell in the public market after the Offerings will not be lower than
the price at which the shares of Common Stock are sold by the Underwriters.
See "Risk Factors -- Expected Volatility of Stock Price; Absence of Current
Trading Market for the Common Stock."
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Gray Cary Ware &
Freidenrich LLP, Palo Alto, California and for the Underwriters by Cleary,
Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The consolidated balance sheets of Maxtor Corporation as of December 28,
1996 and December 27, 1997 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the nine months
ended December 28, 1996 and for the year ended December 27, 1997 included in
this Prospectus and registration statement, have been included herein in
reliance on the report, which include an emphasis of a matter related to the
Company's ultimate parent, Hyundai Electronics Industries, Co. Ltd., of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. The consolidated statements of
operations, stockholders' equity (deficit) and cash flows of the Company for the
year ended March 30, 1996 included in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report, given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such reports
and other information filed with the Commission, may be inspected without charge
at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549 and copies of all or any part thereof may be obtained from the Public
94
<PAGE> 131
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at 7 World Trade Center,
New York, New York 10048 upon payment of certain fees prescribed by the
Commission. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's Web site is http://www.sec.gov.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. The reports and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W. Washington,
D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
also can be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Reports and
other information concerning the Company can also be inspected at the offices of
the National Association of Securities Dealers, Inc., Market Listing Section,
1735 K Street, N.W. Washington, D.C. 20006.
95
<PAGE> 132
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 25
Relationship Between the Company and
Hyundai............................. 26
Use of Proceeds....................... 32
Dividend Policy....................... 32
Capitalization........................ 33
Selected Consolidated Financial
Data................................ 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Business.............................. 52
Management............................ 66
Certain Transactions.................. 77
Principal Stockholders................ 81
Description of Capital Stock.......... 82
Shares Eligible for Future Sale....... 88
Certain United States Federal Tax
Consequences to Holders of Common
Stock............................... 89
Underwriting.......................... 91
Legal Matters......................... 94
Experts............................... 94
Additional Information................ 94
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
47,500,000 SHARES
MAXTOR CORPORATION
COMMON STOCK
[MAXTOR LOGO]
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
INTERNATIONAL
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH INTERNATIONAL
NATIONSBANC MONTGOMERY
SECURITIES LLC
REPRESENTATIVES OF THE UNDERWRITERS
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 133
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions payable by the Registrant in connection with the sale
of the Common Stock being registered. All amounts shown are estimates except for
the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
Registration fee............................................ $ 198,276
NASD filing fee............................................. 30,500
Nasdaq National Market application fee...................... 90,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 170,000
Legal fees and expenses..................................... 650,000
Accounting fees and expenses................................ 250,000
Transfer agent and registrar fees........................... 8,000
Miscellaneous expenses...................................... 98,224
----------
Total....................................................... $1,500,000
==========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Amended and Restated
Certificate of Incorporation and Bylaws provide that the Registrant shall
indemnify its directors, officers, employees and agents to the full extent
permitted by Delaware General Corporation Law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. In
addition, the Registrant intends to enter into separate indemnification
agreements with its directors, officers and certain employees which would
require the Registrant, among other things, to indemnify them against certain
liabilities which may arise by reason of their status or service (other than
liabilities arising from willful misconduct of a culpable nature). The
Registrant also intends to maintain director and officer liability insurance, if
available on reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreements filed as Exhibits 1.1 and 1.2 to this
Registration Statement provide for indemnification by the Underwriters of the
Registrant and its officers and directors for certain liabilities arising under
the Securities Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1994, the Company has sold and issued the following
unregistered securities:
(a) In February 1994, the Company sold an aggregate of 19,480,000
shares of the Company's Series A Common Stock to four Hyundai affiliated
entities. The purchase price in this transaction was $7.70 per share of
Series A Common Stock, resulting in aggregate proceeds of approximately
$150 million.
II-1
<PAGE> 134
(b) In January 1996, upon the merger of HEA with Maxtor, all
pre-merger issued and outstanding shares of Maxtor were canceled and the
Company issued 300 shares of Common Stock to HEA pursuant to the Agreement
and Plan of Reorganization.
(c) In June 1996, the Company entered into an exchange agreement with
HEA whereby HEA exchanged 300 shares of Common Stock for 58,208,955 shares
of Series A Preferred Stock, $.001 par value.
(d) In December 1997, the Company and HEA entered into a Debt Payment
and Stock Purchase Agreement pursuant to which the Company issued
29,850,746 shares of the Company's Series A Preferred Stock to HEA as
payment for the cancellation of $200 million owed to HEA by the Company.
The price in this transaction was $6.70 per share of Series A Preferred
Stock.
(e) From December 1997 through June 1998, pursuant to the Plan, the
Company issued an aggregate of 55,148 shares of the Common Stock to 21
stockholders for an aggregate of $330,000 and issued options to purchase an
aggregate of 1,042,680 shares of Common Stock with an exercise price equal
to the fair market value on the date of grant as determined by the Board to
1,767 optionholders.
(f) In June 1998, pursuant to the Restricted Stock Plan, the Company
issued an aggregate of 390,000 shares of restricted Common Stock to 14
individuals. As of the date of grant, the fair market value of such shares
was determined by the Compensation Committee to be $9.50 per share.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of Prospectus included herein.
The issuances described in Items 15(a) through 15(d) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act as transactions by an issuer not involving a public offering.
Certain issuances described in Item 15(e) were deemed exempt from registration
under the Securities Act in reliance on Section 4(2) or Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about the Company or had access, through employment or other relationships, to
such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of
Registrant dated June 6, 1996.+
3.2 Amended and Restated Certificate of Incorporation of
Registrant dated , 1998.
3.3 Amended and Restated Bylaws of Registrant dated June 6,
1996.+
3.4 Amended and Restated Bylaws of Registrant dated July 24,
1998.
4.1 Stockholder Agreement dated June 25, 1998.+
4.2 Specimen certificate representing the Common Stock.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.+
10.2 Indenture dated as of March 1, 1987 between Registrant and
Security Pacific National Bank, as Trustee.+
</TABLE>
II-2
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.3 (2) Lease Agreement for Premises Located at 1821 Lefthand
Circle, Suite D, between Registrant and Pratt Land Limited
Liability Company, dated October 19, 1994.
10.4 (2) Lease Agreement for Premises Located at 1841 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.5 (2) Lease Agreement for Premises Located at 1851 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.6 (2) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.7 (2) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.8 (3) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995.
10.9 (3) Lease Agreement for Premises Located at 1900 Pike Road,
Suite A Longmont, CO, between Registrant as Tenant and Pratt
Land Limited Liability Company as Landlord, dated February
24, 1995.
10.10 (3) Lease Agreement for Premises Located at 2040 Miller Drive
Suite A, B, & C between Registrant as Tenant and Pratt Land
Limited Liability Company as Landlord, dated February 24,
1995.
10.11 (3) Manufacturing and Purchase Agreement by and Between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995.
10.12 (3) Lease Agreement for Premises Located at 2040 Miller Drive,
Suites D, E, & F, Longmont, CO, between Registrant as Tenant
and Pratt Management Company, LLC as Landlord.
10.13 (5) Credit Agreement among Registrant and The Initial Lenders
and the Issuing Bank and Citibank, N.A., dated August 31,
1995.
10.14 (5) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995.
10.15 (5) Amendment to the Financing Agreement among Registrant and
the CIT Group/ Business Credit, Inc., dated October 17,
1995.
10.16 (6) First Supplemental Indenture, dated as of January 11, 1996,
between Registrant and State Street Bank and Trust Company.
10.17 (6) Credit Agreement, dated as of December 29, 1995 between
Registrant and Hyundai Electronics America.
10.18 (12) Maxtor Corporation 1996 Stock Option Plan.**
10.19 (12) Intercompany Loan Agreement, dated as of April 10, 1996,
between Registrant and Hyundai Electronics America.
10.20 (12) Receivables Purchase and Sale Agreement, dated as of March
30, 1996, among Registrant and Corporate Receivables
Corporation and Citicorp North America, Incorporated.
10.21 (7) Recapitalization Agreement among the Registrant,
International Manufacturing Services, Incorporated and
certain investors, dated as of May 21, 1996.
10.22 (7) Redemption Agreement between Registrant and International
Manufacturing Services, Incorporated, dated as of May 21,
1996.
10.23 (7) Manufacturing Services Agreement between Registrant and
International Manufacturing Services, Incorporated, dated
June 13, 1996.*
10.24 (8) Credit Facility, dated as of July 31, 1996, between
Registrant and Hyundai Electronics America.
10.25 (9) Exchange Agreement effective June 18, 1996, between Maxtor
Corporation and Hyundai Electronics America.
</TABLE>
II-3
<PAGE> 136
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.26 (10) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
10.27 (10) Credit Agreement, dated August 29, 1996, among Registrant,
Citibank, N.A., and Syndicate Banks.
10.28 (11) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996.**
10.29 (11) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996.**
10.30 (11) Employment Agreement between William Roach and Registrant,
dated December 13, 1996.**
10.31 (12) Intercompany Loan Agreement, dated as of April 10, 1997,
between Registrant and Hyundai Electronics America.
10.32 364-Day Credit Agreement dated as of October 31, 1997
between Registrant and Nomura Bank International.+
10.33 (13) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Registrant and Hyundai
Electronics America.
10.34 (13) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.35 (14) Employment Agreement between Philip Duncan and Registrant
dated July 15, 1996.**+
10.36 (15) Receivables Purchase and Sale Agreement dated as of April 8,
1998, among Maxtor Receivables Corporation, Registrant,
Corporate Receivables Corporation, Citicorp North America
and Bankers Trust Company.+
10.37 (16) Intercompany Loan Agreement dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.+
10.38 (17) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.+
10.39 (18) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**+
10.40 (19) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.+
10.41 (20) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*+
10.42 (21) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*+
10.43 (22) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.+
10.44 (23) R/3 Software End-User Value License Agreement between SAP
Korea Ltd. and Hyundai Information Technology Co. Ltd. dated
as of June 30, 1996.+
10.45 (24) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.+
10.46 (25) Tax Allocation Agreement dated as of July 21, 1995 among
Hyundai Electronics America, registrant and certain other
subsidiaries.+
10.47 (4) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
10.48 Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.+
10.49 Indemnity Agreement between HEI and Registrant dated June
25, 1998.+
10.50 License Agreement between Registrant and HEI dated June 25,
1998.+
</TABLE>
II-4
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.51 (1) Stock Purchase Agreement between Registrant and Hyundai
Electronics Industries Co., Ltd., Hyundai Heavy Industries
Co., Ltd., Hyundai Corporation, and Hyundai Merchant Marine
Co., Ltd., dated September 10, 1993.
10.52 Purchase Agreement between Registrant and MMC.++
10.53 1998 Restricted Stock Plan.+**
10.54 Form of Restricted Stock Grant Agreement.+**
10.55 Second Amended and Restated 1996 Stock Option Plan.+**
10.56 Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael Cannon.+**
10.57 Retention Agreement dated as of May 29, 1998 between
Registrant and Paul Tufano.+**
10.58 Form of Retention Agreement between Registrant and Executive
Officers.+**
10.59 Letter Agreement between Victor B. Jipson and Registrant
dated as of June 12, 1998.+**
10.60 Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.+
10.61 Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.+
10.62 Letter Agreement setting forth terms and conditions of Loan
Agreement between Registrant and the Bank of New York dated
as of December 27, 1997.+
10.63 Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.+
10.64 Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of October 31, 1997 between
Registrant and Nomura Bank International plc.+
10.65 Waiver and Amendment dated as of May 22, 1998 to Three-Year
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.+
21.1 Subsidiaries of Registrant.+
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Gray Cary Ware & Freidenrich, LLP.+
24.1 Power of Attorney (included on signature page).+
27.1 Financial Data Schedule (EDGAR filed version only).+
</TABLE>
- ---------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
+ Previously filed.
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993.
(2) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
(3) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995.
(4) Incorporated by reference to exhibit III of Schedule 14D-9 filed November
9, 1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed November 14, 1996.
(6) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(7) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
(8) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(9) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(10) Incorporated by reference to exhibits of Form 8-K filed September 13, 1996.
(11) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997.
(12) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997.
II-5
<PAGE> 138
(13) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(14) Previously filed with this Registration Statement as Exhibit 10.44.
(15) Previously filed with this Registration Statement as Exhibit 10.45.
(16) Previously filed with this Registration Statement as Exhibit 10.46.
(17) Previously filed with this Registration Statement as Exhibit 10.47.
(18) Previously filed with this Registration Statement as Exhibit 10.48.
(19) Previously filed with this Registration Statement as Exhibit 10.49.
(20) Previously filed with this Registration Statement as Exhibit 10.51.
(21) Previously filed with this Registration Statement as Exhibit 10.52.
(22) Previously filed with this Registration Statement as Exhibit 10.53.
(23) Previously filed with this Registration Statement as Exhibit 10.54.
(24) Previously filed with this Registration Statement as Exhibit 10.55.
(25) Previously filed with this Registration Statement as Exhibit 10.56.
(b) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of the Company is
filed as part of this Registration Statement and should be read in conjunction
with the consolidated financial statements of the Company.
SCHEDULE II
<TABLE>
<S> <C>
Valuation and Qualifying Accounts -- Allowance for Doubtful
Accounts.................................................. S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Milpitas, County of Santa Clara, State of California, on the 28th day of July
1998.
MAXTOR CORPORATION
By: /s/ MICHAEL R. CANNON
------------------------------------
Michael R. Cannon
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act, this Amendment No. 3 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DR. CHONG SUP PARK* Chairman of the Board July 28, 1998
- -----------------------------------------------------
Dr. Chong Sup Park
/s/ MICHAEL R. CANNON President, Chief Executive July 28, 1998
- ----------------------------------------------------- Officer and Director
Michael R. Cannon
/s/ PAUL J. TUFANO* Vice President, Finance, Chief July 28, 1998
- ----------------------------------------------------- Financial Officer and Principal
Paul J. Tufano Accounting Officer
/s/ CHANG SEE CHUNG* Director July 28, 1998
- -----------------------------------------------------
Chang See Chung
/s/ CHARLES HILL* Director July 28, 1998
- -----------------------------------------------------
Charles Hill
/s/ CHARLES F. CHRIST* Director July 28, 1998
- -----------------------------------------------------
Charles F. Christ
/s/ Y.H. KIM* Director July 28, 1998
- -----------------------------------------------------
Y.H. Kim
/s/ PHILIP S. PAUL* Director July 28, 1998
- -----------------------------------------------------
Philip S. Paul
*By: /s/ MICHAEL R. CANNON July 28, 1998
------------------------------------------------
Michael R. Cannon
(Attorney-in-fact)
</TABLE>
II-7
<PAGE> 140
MAXTOR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS CHARGED
BALANCE AT TO COST DEDUCTIONS/ BALANCE AT
PERIOD ENDED BEGINNING OF PERIOD AND EXPENSES (RECOVERIES(1)) END OF PERIOD
------------ ------------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C>
March 30, 1996....................... $3,850 $1,232 $ (114) $5,196
December 28, 1996.................... $5,196 $1,355 $1,296 $5,255
December 27, 1997.................... $5,255 $1,000 $2,682 $3,573
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 141
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of
Registrant dated June 6, 1996.+
3.2 Amended and Restated Certificate of Incorporation of
Registrant dated , 1998.
3.3 Amended and Restated Bylaws of Registrant dated June 6,
1996.+
3.4 Amended and Restated Bylaws of Registrant dated July 24,
1998.
4.1 Stockholder Agreement dated June 25, 1998.+
4.2 Specimen certificate representing the Common Stock.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.+
10.2 Indenture dated as of March 1, 1987 between Registrant and
Security Pacific National Bank, as Trustee.+
10.3 (2) Lease Agreement for Premises Located at 1821 Lefthand
Circle, Suite D, between Registrant and Pratt Land Limited
Liability Company, dated October 19, 1994.
10.4 (2) Lease Agreement for Premises Located at 1841 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.5 (2) Lease Agreement for Premises Located at 1851 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.6 (2) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.7 (2) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.8 (3) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995.
10.9 (3) Lease Agreement for Premises Located at 1900 Pike Road,
Suite A Longmont, CO, between Registrant as Tenant and Pratt
Land Limited Liability Company as Landlord, dated February
24, 1995.
10.10 (3) Lease Agreement for Premises Located at 2040 Miller Drive
Suite A, B, & C between Registrant as Tenant and Pratt Land
Limited Liability Company as Landlord, dated February 24,
1995.
10.11 (3) Manufacturing and Purchase Agreement by and Between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995.
10.12 (3) Lease Agreement for Premises Located at 2040 Miller Drive,
Suites D, E, & F, Longmont, CO, between Registrant as Tenant
and Pratt Management Company, LLC as Landlord.
10.13 (5) Credit Agreement among Registrant and The Initial Lenders
and the Issuing Bank and Citibank, N.A., dated August 31,
1995.
10.14 (5) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995.
10.15 (5) Amendment to the Financing Agreement among Registrant and
the CIT Group/ Business Credit, Inc., dated October 17,
1995.
</TABLE>
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.16 (6) First Supplemental Indenture, dated as of January 11, 1996,
between Registrant and State Street Bank and Trust Company.
10.17 (6) Credit Agreement, dated as of December 29, 1995 between
Registrant and Hyundai Electronics America.
10.18 (12) Maxtor Corporation 1996 Stock Option Plan.**
10.19 (12) Intercompany Loan Agreement, dated as of April 10, 1996,
between Registrant and Hyundai Electronics America.
10.20 (12) Receivables Purchase and Sale Agreement, dated as of March
30, 1996, among Registrant and Corporate Receivables
Corporation and Citicorp North America, Incorporated.
10.21 (7) Recapitalization Agreement among the Registrant,
International Manufacturing Services, Incorporated and
certain investors, dated as of May 21, 1996.
10.22 (7) Redemption Agreement between Registrant and International
Manufacturing Services, Incorporated, dated as of May 21,
1996.
10.23 (7) Manufacturing Services Agreement between Registrant and
International Manufacturing Services, Incorporated, dated
June 13, 1996.*
10.24 (8) Credit Facility, dated as of July 31, 1996, between
Registrant and Hyundai Electronics America.
10.25 (9) Exchange Agreement effective June 18, 1996, between Maxtor
Corporation and Hyundai Electronics America.
10.26 (10) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
10.27 (10) Credit Agreement, dated August 29, 1996, among Registrant,
Citibank, N.A., and Syndicate Banks.
10.28 (11) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996.**
10.29 (11) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996.**
10.30 (11) Employment Agreement between William Roach and Registrant,
dated December 13, 1996.**
10.31 (12) Intercompany Loan Agreement, dated as of April 10, 1997,
between Registrant and Hyundai Electronics America.
10.32 364-Day Credit Agreement dated as of October 31, 1997
between Registrant and Nomura Bank International.+
10.33 (13) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Registrant and Hyundai
Electronics America.
10.34 (13) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.35 (14) Employment Agreement between Philip Duncan and Registrant
dated July 15, 1996.**+
10.36 (15) Receivables Purchase and Sale Agreement dated as of April 8,
1998, among Maxtor Receivables Corporation, Registrant,
Corporate Receivables Corporation, Citicorp North America
and Bankers Trust Company.+
10.37 (16) Intercompany Loan Agreement dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.+
</TABLE>
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.38 (17) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.+
10.39 (18) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**+
10.40 (19) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.+
10.41 (20) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*+
10.42 (21) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*+
10.43 (22) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.+
10.44 (23) R/3 Software End-User Value License Agreement between SAP
Korea Ltd. and Hyundai Information Technology Co. Ltd. dated
as of June 30, 1996.+
10.45 (24) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.+
10.46 (25) Tax Allocation Agreement dated as of July 21, 1995 among
Hyundai Electronics America, registrant and certain other
subsidiaries.+
10.47 (4) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
10.48 Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.+
10.49 Indemnity Agreement between HEI and Registrant dated June
25, 1998.+
10.50 License Agreement between Registrant and HEI dated June 25,
1998.+
10.51 (1) Stock Purchase Agreement between Registrant and Hyundai
Electronics Industries Co., Ltd., Hyundai Heavy Industries
Co., Ltd., Hyundai Corporation, and Hyundai Merchant Marine
Co., Ltd., dated September 10, 1993.
10.52 Purchase Agreement between Registrant and MMC.++
10.53 1998 Restricted Stock Plan.+**
10.54 Form of Restricted Stock Grant Agreement.+**
10.55 Second Amended and Restated 1996 Stock Option Plan.+**
10.56 Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael Cannon.+**
10.57 Retention Agreement dated as of May 29, 1998 between
Registrant and Paul Tufano.+**
10.58 Form of Retention Agreement between Registrant and Executive
Officers.+**
10.59 Letter Agreement between Victor B. Jipson and Registrant
dated as of June 12, 1998.+**
10.60 Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.+
10.61 Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.+
10.62 Letter Agreement setting forth terms and conditions of Loan
Agreement between Registrant and the Bank of New York dated
as of December 27, 1997.+
10.63 Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.+
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.64 Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of October 31, 1997 between
Registrant and Nomura Bank International plc.+
10.65 Waiver and Amendment dated as of May 22, 1998 to Three-Year
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.+
21.1 Subsidiaries of Registrant.+
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Gray Cary Ware & Freidenrich, LLP.+
24.1 Power of Attorney (included on signature page).+
27.1 Financial Data Schedule (EDGAR filed version only).+
</TABLE>
- ---------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
+ Previously filed.
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993.
(2) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
(3) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995.
(4) Incorporated by reference to exhibit III of Schedule 14D-9 filed November
9, 1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed November 14, 1996.
(6) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(7) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
(8) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(9) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(10) Incorporated by reference to exhibits of Form 8-K filed September 13, 1996.
(11) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997.
(12) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997.
(13) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(14) Previously filed with this Registration Statement as Exhibit 10.44.
(15) Previously filed with this Registration Statement as Exhibit 10.45.
(16) Previously filed with this Registration Statement as Exhibit 10.46.
(17) Previously filed with this Registration Statement as Exhibit 10.47.
(18) Previously filed with this Registration Statement as Exhibit 10.48.
(19) Previously filed with this Registration Statement as Exhibit 10.49.
(20) Previously filed with this Registration Statement as Exhibit 10.51.
(21) Previously filed with this Registration Statement as Exhibit 10.52.
(22) Previously filed with this Registration Statement as Exhibit 10.53.
(23) Previously filed with this Registration Statement as Exhibit 10.54.
(24) Previously filed with this Registration Statement as Exhibit 10.55.
(25) Previously filed with this Registration Statement as Exhibit 10.56.
<PAGE> 1
Exhibit 1.1
Maxtor Corporation
38,000,000 Shares a/
Common Stock
($0.01 par value)
Form of U. S. Underwriting Agreement
New York, New York
o , 1998
Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
NationsBanc Montgomery Securities LLC
As U.S. Representatives of the several U.S. Underwriters,
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Maxtor Corporation, a Delaware corporation (the "Company"),
proposes to sell to the several underwriters named in Schedule I hereto (the
"U.S. Underwriters"), for whom you (the "U.S. Representatives") are acting as
representatives, 38,000,000 shares of Common Stock, $0.01 par value ("Common
Stock") of the Company (said shares to be issued and sold by the Company being
hereinafter called the "U.S. Underwritten Securities"). The Company also
proposes to grant to the U.S. Underwriters an option to purchase up to 5,700,000
additional shares of Common Stock to cover over-allotments (the "U.S. Option
Securities"; the U.S. Option Securities, together with the U.S. Underwritten
Securities, being hereinafter called the "U.S. Securities").
It is understood that the Company and Hyundai Electronics America
("HEA"), a stockholder of the Company, are concurrently entering into an
International Underwriting Agreement dated the date hereof (the "International
Underwriting Agreement") providing for the sale by the Company of an aggregate
of 9,500,000 shares of Common Stock (said shares to be issued and sold by the
Company pursuant to the International Underwriting Agreement being hereinafter
called the "International Underwritten Securities"), and providing for the grant
to the
- ----------
a/ Plus an option to purchase from the Company up to 5,700,000 additional
shares of Common Stock to cover over-allotments.
<PAGE> 2
2
underwriters named in Schedule I thereto (the "Managers") of an option to
purchase from the Company up to 1,425,000 additional shares of Common Stock (the
"International Option Securities"; the International Option Securities, together
with the International Underwritten Securities, being hereinafter called the
"International Securities"; and the U.S. Securities, together with the
International Securities, being hereinafter called the "Securities").
It is further understood and agreed that the Managers and the
U.S. Underwriters have entered into an Agreement Between U.S. Underwriters and
Managers dated the date hereof (the "Agreement Between U.S. Underwriters and
Managers"), pursuant to which, among other things, the Managers may purchase
from the U.S. Underwriters a portion of the U.S. Securities to be sold pursuant
to the U.S. Underwriting Agreement and the U.S. Underwriters may purchase from
the Managers a portion of the International Securities to be sold pursuant to
the International Underwriting Agreement. To the extent there are no additional
U.S. Underwriters listed on Schedule I other than you, the term U.S.
Representatives as used herein shall mean you, as U.S. Underwriters, and the
terms U.S. Representatives and U.S. Underwriters shall mean either the singular
or plural as the context requires. The use of the neuter in this Agreement shall
include the feminine and masculine wherever appropriate. Certain terms used
herein are defined in Section 17 hereof.
1. Representations and Warranties.
(i) The Company represents and warrants to, and agrees with, each
U.S. Underwriter as set forth below in this Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-56099) on Form S-1, including
the related Preliminary Prospectuses, for registration under the Act of
the offering and sale of the Securities. The Company may have filed one
or more amendments thereto, including the related Preliminary
Prospectuses, each of which has previously been furnished to you. The
Company will next file with the Commission either (1) prior to the
Effective Date of such registration statement, a further amendment to
such registration statement (including the form of the final
Prospectuses) or (2) after the Effective Date of such registration
statement, a final prospectus in accordance with Rules 430A and 424(b).
In the case of clause (2), the Company has included in such registration
statement, as amended at the Effective Date, all information (other than
Rule 430A Information) required by the Act and the rules thereunder to
be included in such registration statement and the Prospectuses. As
filed, such amendment and form of final Prospectuses, or such final
Prospectuses, shall contain all Rule 430A Information, together with all
other such required information, and, except to the extent the U.S.
Representatives shall agree in writing to a modification, shall be in
all substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time,
shall contain only such specific additional information and other
changes (beyond that contained in the latest U.S. Preliminary
Prospectus) as the Company has advised you, prior to the Execution Time,
will be included or made therein.
<PAGE> 3
3
It is understood that two forms of prospectus are to be used in
connection with the offering and sale of the Securities: one form of
prospectus relating to the U.S. Securities, which are to be offered and
sold to United States and Canadian Persons, and one form of prospectus
relating to the International Securities, which are to be offered and
sold to persons other than United States and Canadian Persons. The two
forms of prospectus are identical except for the outside front cover
page, the discussion under the heading "Underwriting" and the outside
back cover page. Such form of prospectus relating to the U.S. Securities
as first filed pursuant to Rule 424(b) after the Execution Time or, if
no filing pursuant to Rule 424(b) is made, such form of prospectus
included in the Registration Statement at the Effective Date, is
hereinafter called the "U.S. Prospectus"; such form of prospectus
relating to the International Securities as first filed pursuant to Rule
424(b) after the Execution Time or, if no filing pursuant to Rule 424(b)
is made, such form of prospectus included in the Registration Statement
at the Effective Date, is hereinafter called the "International
Prospectus"; and the U.S. Prospectus and the International Prospectus
are hereinafter collectively called the "Prospectuses".
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectuses are first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which U.S. Option Securities are purchased, if such
date is not the Closing Date (a "settlement date"), each Prospectus (and
any supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the rules thereunder; on the
Effective Date and at the Execution Time, the Registration Statement did
not or will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on the
Effective Date, each Prospectus, if not filed pursuant to Rule 424(b),
will not, and on the date of any filing pursuant to Rule 424(b) and on
the Closing Date and any settlement date, each Prospectus (together with
any supplement thereto) will not, include any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to the information
contained in or omitted from the Registration Statement or the
Prospectuses (or any supplement thereto) in reliance upon and in
conformity with information furnished herein or in writing to the
Company by or on behalf of any U.S. Underwriter through the U.S.
Representatives specifically for inclusion in the Registration Statement
or the Prospectuses (or any supplement thereto).
(c) Each of the Company and Maxtor Asia Pacific Limited, Maxtor
Disc Drives Pty. Limited, Maxtor Europe GmbH, Maxtor Europe Limited,
Maxtor Europe SARL, Maxtor (Japan) Limited, Maxtor Korea Limited, Maxtor
Ireland Limited, Maxtor Peripherals (S) Pte. Limited, Maxtor Receivables
Corporation, Maxtor Sales Private Limited, Maxtor (Thailand) Limited and
Old SDI Sub (each a "Subsidiary" and collectively the "Subsidiaries")
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction in which it is
chartered or organized with full corporate power and authority to own or
lease, as the case may be,
<PAGE> 4
4
and to operate its properties and conduct its business as described in
the Prospectuses, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction
which requires such qualification except to the extent that the failure
to be so qualified or be in good standing could not reasonably be
expected to have a Material Adverse Effect (as defined herein).
(d) All the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and all outstanding shares of capital
stock of the Subsidiaries are owned by the Company either directly or
through wholly owned Subsidiaries free and clear of any perfected
security interest or any other security interests, claims, liens or
encumbrances.
(e) The Company's authorized equity capitalization is as set
forth in the Prospectuses; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectuses; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
U.S. Securities being sold hereunder by the Company have been duly and
validly authorized, and, when issued and delivered to and paid for by
the U.S. Underwriters pursuant to this Agreement, will be fully paid and
nonassessable; the U.S. Securities being sold hereunder are duly listed,
and admitted and authorized for trading, subject to official notice of
issuance, on the Nasdaq National Market; the certificates for the U.S.
Securities are in valid and sufficient form; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive or
other rights to subscribe for the U.S. Securities; and, except as set
forth in the Prospectuses, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or rights to convert
any obligations into or exchange any securities for, shares of capital
stock of or ownership interests in the Company are outstanding.
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectuses, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectuses
under the headings "Risk Factors--Limited Protection of Intellectual
Property; Risk of Third Party Claims of Infringement", "Relationship
Between the Company and HEA", "Business--Intellectual Property",
"Description of Capital Stock", "Shares Eligible for Future Sale",
"Certain Transactions" and "Certain United States Federal Tax
Consequences to Holders of Common Stock" insofar as such statements
summarize legal matters, agreements, documents, or proceedings discussed
therein, are accurate and fair summaries of such legal matters,
agreements, documents or proceedings.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company, enforceable in accordance with its terms, except (i) as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (ii) to
<PAGE> 5
5
the extent that rights to indemnity or contribution under this Agreement
may be limited by Federal and state securities laws or the public policy
underlying such laws.
(h) The Company is not and, after giving effect to the offering
and sale of the Securities and the application of the proceeds thereof
as described in the Prospectuses, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order of
any court or governmental agency or body is required for the
consummation by the Company of the transactions contemplated herein,
except such as have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the U.S. Securities by the U.S.
Underwriters in the manner contemplated herein and in the Prospectuses.
(j) Neither the issue and sale of the U.S. Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, or result in a
breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any Subsidiaries pursuant
to, (i) the charter or by-laws of the Company or any Subsidiaries, (ii)
the terms of any material indenture, contract, lease, mortgage, deed of
trust, note agreement, loan agreement or other material agreement,
obligation, condition, covenant or instrument to which the Company or
any Subsidiary is a party or bound or to which its or their property is
subject, or (iii) any statute, law, rule, regulation, judgment, order or
decree applicable to the Company or any Subsidiary of any court,
regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or any Subsidiary
or any of its or their properties.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement which
have not been waived in writing prior to the Execution Time.
(l) The consolidated historical financial statements and
schedules of the Company and its consolidated subsidiaries included in
the Prospectuses and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods indicated,
comply as to form with the applicable accounting requirements of the Act
and have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods involved
(except as otherwise noted therein). The selected financial data set
forth under the caption "Selected Consolidated Financial Data" in the
Prospectuses and Registration Statement fairly present, on the basis
stated in the Prospectuses and the Registration Statement, the
information included therein.
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any Subsidiaries or its or their property is pending or, to
the knowledge of the Company, threatened that (i) could
<PAGE> 6
6
reasonably be expected to have a material adverse effect on the
performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected to
have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and the Subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business (a "Material Adverse
Effect"), except as set forth in or contemplated in the Prospectuses
(exclusive of any supplement thereto).
(n) Each of the Company and the Subsidiaries owns, leases or has
sufficient rights to use all such properties as are necessary to the
conduct of its operations as presently conducted.
(o) Neither the Company nor any Subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms of
any material indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other material agreement, obligation,
condition, covenant or instrument to which it is a party or bound or to
which its property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or such subsidiary or any of its
properties, as applicable, the violation of which could reasonably be
expected to have a Material Adverse Effect.
(p) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company and its consolidated subsidiaries
and delivered their report with respect to the audited consolidated
financial statements and schedules included in the Prospectuses, and
Ernst & Young LLP, who have certified certain financial statements of
the Company and its consolidated subsidiaries and delivered their report
with respect to the audited consolidated financial statements included
in the Prospectuses, are each independent public accountants with
respect to the Company within the meaning of the Act and the applicable
published rules and regulations thereunder.
(q) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and
delivery of this Agreement or the issuance and sale by the Company of
the U.S. Securities.
(r) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not
have a Material Adverse Effect) and has paid all taxes required to be
paid by it and any other assessment, fine or penalty levied against it,
to the extent that any of the foregoing is due and payable, except for
any such assessment, fine or penalty that is currently being contested
in good faith or as could not reasonably be expected to have a Material
Adverse Effect.
<PAGE> 7
7
(s) No labor problem or dispute with the employees of the Company
or any Subsidiary exists or, to the knowledge of the Company, is
threatened or imminent, that could, in any such case, reasonably be
expected to have a Material Adverse Effect.
(t) The Company and each Subsidiary carry, or are entitled to the
benefits of, insurance (including self-insurance) in such amounts and
covering such risks as are prudent and customary in the businesses in
which they are engaged and all such insurance is, and after consummation
of the transactions contemplated herein will be, in full force and
effect; and neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that could not reasonably be expected to have a Material Adverse
Effect.
(u) No Subsidiary is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any
other distribution on such Subsidiary's capital stock, from repaying to
the Company any loans or advances to such Subsidiary from the Company or
from transferring any of such Subsidiary's property or assets to the
Company or any other Subsidiary, except for any requirements under the
laws of the jurisdictions in which any Subsidiary is organized that
corporations organized in such jurisdictions maintain specified levels
of capital or statutory reserves.
(v) The Company and the Subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses as presently conducted except where the
failure to possess such licenses, certificates, permits or
authorizations would not have a Material Adverse Effect, and neither the
Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any such license,
certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, could
reasonably be expected to have a Material Adverse Effect.
(w) The Company and each of the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(x) Neither the Company nor its affiliated purchasers, as defined
in Rule 100 of Regulation M ("Regulation M") under the Exchange Act,
either alone or with one or more other persons, (i) has taken, either
directly or indirectly, any action which was
<PAGE> 8
8
designed to cause or result in, or which has constituted, or which might
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company ("Subject
Securities") in connection with the offering of the Securities or (ii)
will bid for or purchase any Subject Securities of the Company or any
other covered securities (within the meaning of Regulation M) relating
to the Subject Securities (together with Subject Securities, "Covered
Securities"), or attempt to induce any person to bid for or purchase any
Covered Securities, in either case, for the purpose of creating actual
or apparent active trading in, or raising the price of the Securities.
(y) The Company and the Subsidiaries (i) are in material
compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) have received
and are in compliance with all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses as presently conducted and (iii) have not received
notice of any actual or potential liability for the investigation or
remediation of any disposal or release of hazardous or toxic substances
or wastes, pollutants or contaminants, except where such non-compliance
with Environmental Laws, failure to receive required permits, licenses
or other approvals, or liability would not, individually or in the
aggregate, have a Material Adverse Effect. Neither the Company nor any
Subsidiary has been named as a "potentially responsible party" under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended.
(z) Each of the Company and the Subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302
of the United States Employee Retirement Income Security Act of 1974
("ERISA") and the regulations and published interpretations thereunder
with respect to each "plan" (as defined in Section 3(3) of ERISA and
such regulations and published interpretations) in which employees of
the Company or any of the Subsidiaries are eligible to participate. Each
such plan is in compliance in all material respects with the presently
applicable provisions of ERISA and such regulations and published
interpretations, except where the failure to so comply could not
reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect. Neither the Company nor any of the Subsidiaries
has incurred any unpaid liability to the Pension Benefit Guaranty
Corporation (other than for the payment of premiums in the ordinary
course) or to any such plan under Title IV of ERISA.
(aa) Maxtor Peripherals (S) Pte. Limited ("Maxtor Singapore") is
the only Subsidiary that reasonably could be deemed to be a "significant
subsidiary" of the Company within the meaning of Rule 11-02(w) of
Regulation S-X under the Act.
(bb) The Company and the Subsidiaries own, possess, license or
have other rights to use, on reasonable terms, all patents, patent
applications, trade and service marks, trade and service mark
registrations, trade names, copyrights, licenses, inventions, trade
secrets, technology, know-how and other intellectual property
(collectively, the
<PAGE> 9
9
"Intellectual Property") necessary for the conduct of their respective
businesses as now conducted (as described in the Prospectuses), except
where the failure to own or possess any such Intellectual Property could
not reasonably be expected, singly or in the aggregate, to have a
Material Adverse Effect and (i) to the knowledge of the Company, there
are no rights of third parties to any such Intellectual Property; (ii)
to the knowledge of the Company, there is no material infringement by
third parties of any such Intellectual Property; (iii) there is no
pending or, to the knowledge of the Company, threatened action, suit,
proceeding or claim by others challenging the Company's rights in or to
any such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (iv) there is no
pending or to the knowledge of the Company, threatened action, suit,
proceeding or claim by others challenging the validity or scope of any
such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (v) except as
specifically set forth in the Prospectuses under the caption
"Business--Intellectual Property," there is no pending or, to the
knowledge of the Company, threatened action, suit, proceeding or claim
by others that the Company infringes or otherwise violates any patent,
trademark, copyright, trade secret or other proprietary rights of
others, and the Company is unaware of any other fact which would form a
reasonable basis for any such claim and (vi) to the Company's knowledge,
all U.S. patents owned by the Company are valid and enforceable.
(cc) Except as disclosed in the Prospectuses, the Company (i)
does not have any material lending or other relationship with any bank
or lending affiliate of any of the U.S. Underwriters and (ii) does not
intend to use any of the proceeds from the sale of the U.S. Securities
hereunder to repay any outstanding debt owed to any affiliate of any of
the U.S. Underwriters.
(dd) The Company and the Subsidiaries have determined that the
computer hardware and software used by them may be unable to recognize
and properly execute date-sensitive functions involving certain dates
prior to and any dates after December 31, 1999 (the "Year 2000
Problem"), and reasonably believe that the Company's implementation of a
new enterprise-wide information system provided by SAP, AG will remedy
such risk on a timely basis and that such risk could not reasonably be
expected to have a Material Adverse Effect. The Company is in compliance
with the Commission's staff legal bulletin No. 5 dated January 12, 1998
related to Year 2000 compliance.
(ee) Neither the Company nor any of the Subsidiaries has
distributed nor will it distribute prior to the latest of (i) the
Closing Date, (ii) any settlement date and (iii) completion of the
distribution of the U.S. Securities, any offering material in connection
with the offering and sale of the U.S. Securities other than any
Preliminary Prospectuses, the Prospectuses, the Registration Statement
and other materials, if any, permitted by the Act.
(ff) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by
<PAGE> 10
10
the Company or any of the Subsidiaries to or for the benefit of any of
the officers or directors of the Company or any Subsidiary or any of the
members of the families of any of them, which loans, advances or
guarantees are required to be, and are not, disclosed in the
Registration Statement and Prospectuses.
(gg) There have not been, and there are not proposed, any
transactions or agreements between the Company or any of the
Subsidiaries on the one hand and the officers, directors or stockholders
of the Company or any of the Subsidiaries on the other, which
transactions or agreements are required to be, and are not, disclosed in
the Registration Statement and Prospectuses.
(hh) No officer or director of the Company is in breach or
violation of any employment agreement, non-competition agreement,
confidentiality agreement, or other agreement restricting the nature or
scope of employment to which such officer or director is a party, other
than such breaches or violations which could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect; the
conduct of the Company's business, as described in the Registration
Statement and Prospectuses, will not result in a breach or violation of
any such agreement.
(ii) There are no outstanding options to acquire shares of
capital stock of the Company that are vested and exercisable, and there
are no outstanding options to acquire shares of capital stock of the
Company that can, by their terms, become exercisable within 180 days of
the date hereof, except as disclosed in the Registration Statement and
the Prospectuses.
(jj) The Company has not received any notice or communication (in
writing or otherwise), or any other information, indicating that there
is a material possibility that any customer of the Company identified in
the "Business-Customers" section of the Registration Statement will
cease dealing with the Company or otherwise materially reduce the volume
of business transacted by such customer with the Company below
historical levels.
Any certificate signed by any officer of the Company and
delivered to the U.S. Representatives or counsel for the U.S. Underwriters in
connection with this Agreement shall be deemed a representation and warranty by
the Company, as to matters covered thereby, to each U.S. Underwriter.
(ii) HEA represents and warrants to, and agrees with, each U.S.
Underwriter that:
(a) HEA has full legal right, capacity, power and authority to
enter into and perform this Agreement.
(b) Neither HEA nor its affiliated purchasers, as defined in
Regulation M under the Exchange Act, either alone or with one or more
other persons, (i) has taken, either directly or indirectly, any action
which was designed to cause or result in, or which has constituted, or
which might reasonably be expected to cause or result in, stabilization
or
<PAGE> 11
11
manipulation of the price of any Subject Securities in connection with
the offering of the Securities or (ii) will bid for or purchase any
Covered Securities or attempt to induce any person to bid for or
purchase any Covered Securities, in either case, for the purpose of
creating actual or apparent active trading in, or raising the price of
the Securities.
(c) Neither the issue and sale by the Company of the U.S.
Securities nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will conflict with,
or result in a breach or violation or imposition of any lien, charge or
encumbrance upon any property or assets of HEA pursuant to, (i) the
charter or by-laws of HEA, (ii) the terms of any material indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement
or other material agreement, obligation, condition, covenant or
instrument to which HEA is a party or bound or to which its property is
subject, or (iii) any statute, law, rule, regulation, judgment, order or
decree applicable to HEA of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over HEA or any of its properties.
(f) On the Effective Date, the Registration Statement did or
will, and when the Prospectuses are first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any settlement date, each Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable
requirements of the Act and the rules thereunder; on the Effective Date
and at the Execution Time, the Registration Statement did not or will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and, on the Effective Date,
each Prospectus, if not filed pursuant to Rule 424(b), will not, and on
the date of any filing pursuant to Rule 424(b) and on the Closing Date
and any settlement date, each Prospectus (together with any supplement
thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that HEA makes no representations or
warranties as to the information contained in or omitted from the
Registration Statement, or the Prospectuses (or any supplement thereto)
in reliance upon and in conformity with information furnished herein or
in writing to the Company or HEA by or on behalf of any U.S. Underwriter
through the U.S. Representatives specifically for inclusion in the
Registration Statement or the Prospectuses (or any supplement thereto).
(g) This Agreement has been duly authorized, executed and
delivered by HEA and constitutes a valid and binding obligation of HEA
enforceable in accordance with its terms, except (i) as the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (ii) to the extent that rights to indemnity or
contribution under this Agreement may be limited by Federal and state
securities laws or the public policy underlying such laws.
<PAGE> 12
12
(h) HEA is not and, after giving effect to the offering and sale
of the Securities and the application of the proceeds thereof as
described in the Prospectuses, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended.
(j) Except as disclosed in the Prospectuses, HEA (i) does not
have any material lending or other relationship with any bank or lending
affiliate of any of the U.S. Underwriters and (ii) does not intend to
use any of the proceeds from the sale of the U.S. Securities hereunder
to repay any outstanding debt owed to any affiliate of any of the U.S.
Underwriters.
(k) There have not been, and there are not proposed, any
transactions or agreements between HEA or any of its subsidiaries
(excluding the Company and the Subsidiaries) on the one hand and the
officers, directors or stockholders of the Company or any of the
Subsidiaries on the other, which transactions or agreements are required
to be, and are not, disclosed in the Registration Statement and
Prospectuses.
Any certificate signed by any officer of HEA and delivered to the
U.S. Representatives or counsel for the U.S. Underwriters in connection with
this Agreement shall be deemed a representation and warranty by HEA, as to
matters covered thereby, to each U.S. Underwriter.
2. Purchase and Sale. (a) Subject to such adjustments as you may
determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each U.S. Underwriter and, upon the basis of the representations, warranties and
agreements of the Company and HEA herein contained and subject to all the terms
and conditions set forth herein, each U.S. Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of -- per share
(the "purchase price per share"), the number of U.S. Underwritten Securities
which bears the same proportion to the aggregate number of U.S. Underwritten
Securities to be issued and sold by the Company as the number of U.S.
Underwritten Securities set forth opposite the name of such U.S. Underwriter in
Schedule I hereto (or such number of U.S. Underwritten Securities increased as
set forth in Section 9 hereof) bears to the aggregate number of U.S.
Underwritten Securities to be sold by the Company.
(b) The Company also agrees, subject to all the terms and
conditions set forth herein, to sell to the U.S. Underwriters, and, upon the
basis of the representations, warranties and agreements of the Company and HEA
herein contained and subject to all the terms and conditions set forth herein,
the U.S. Underwriters shall have the right to purchase from the Company, at the
purchase price per share, pursuant to an option (the "over-allotment option")
which may be exercised at any time (but not more than once) prior to 9:00 P.M.,
New York City time, on the 30th day after the date of the Prospectus (or, if
such 30th day shall be a Saturday or Sunday or a holiday, on the next business
day thereafter when the Nasdaq National Market is open for trading), up to an
aggregate of 5,700,000 shares of U.S. Option Securities from the Company. U.S.
Option Securities may be purchased only for the purpose of covering
over-
<PAGE> 13
13
allotments made in connection with the sale of the U.S. Underwritten Securities
by the U.S. Underwriters. The number of U.S. Option Securities which the U.S.
Underwriters elect to purchase upon any exercise of the over-allotment option
shall be provided by the Company in proportion to the maximum number of U.S.
Option Securities which the Company has agreed to sell. Upon any exercise of the
over-allotment option, each U.S. Underwriter, severally and not jointly, agrees
to purchase from the Company the number of U.S. Option Securities (subject to
such adjustments as you may determine in order to avoid fractional shares) which
bears the same proportion to the number of U.S. Option Securities to be sold by
the Company as the number of U.S. Underwritten Securities set forth opposite the
name of such U.S. Underwriters in Schedule I hereto (or such number of U.S.
Underwritten Securities increased as set forth in Section 9 hereof) bears to the
aggregate number of U.S. Underwritten Securities to be sold by the Company.
3. Delivery and Payment. Delivery of and payment for the U.S.
Underwritten Securities and the U.S. Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the third
Business Day prior to the Closing Date) shall be made at 10:00 AM, New York City
time, on --, 1998, or at such time on such later date not more than three
Business Days after the foregoing date as the U.S. Representatives shall
designate, which date and time may be postponed by agreement among the U.S.
Representatives and the Company or as provided in Section 9 hereof (such date
and time of delivery and payment for the U.S. Securities being herein called the
"Closing Date"). Delivery of the U.S. Securities shall be made to the U.S.
Representatives for the respective accounts of the several U.S. Underwriters
against payment by the several U.S. Underwriters through the U.S.
Representatives of the respective aggregate purchase prices of the U.S.
Securities being sold by the Company to or upon the order of the Company by wire
transfer payable in same-day funds to the accounts specified by the Company.
Delivery of the U.S. Underwritten Securities and the U.S. Option Securities
shall be made through the facilities of The Depository Trust Company unless the
U.S. Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the U.S. Option Securities (at the expense of the Company) to the U.S.
Representatives on the date specified by the U.S. Representatives (which shall
be within three Business Days after exercise of said option) for the respective
accounts of the several U.S. Underwriters, against payment by the several U.S.
Underwriters through the U.S. Representatives of the purchase price thereof to
or upon the order of the Company by wire transfer payable in same-day funds to
the accounts specified by the Company. If settlement for the U.S. Option
Securities occurs after the Closing Date, the Company and HEA will deliver to
the U.S. Representatives on the settlement date for the U.S. Option Securities,
and the obligation of the U.S. Underwriters to purchase the U.S. Option
Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof.
4. Offering by U.S. Underwriters. It is understood that the
several U.S. Underwriters propose to offer the U.S. Securities for sale to the
public as set forth in the Prospectuses.
<PAGE> 14
14
5. Agreements.
(i) The Company agrees with the several U.S. Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the U.S. Securities, the Company will not file any amendment
of the Registration Statement or supplement to the Prospectuses or any
Rule 462(b) Registration Statement unless the Company has furnished you
a copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object. Subject
to the foregoing sentence, if the Registration Statement has become or
becomes effective pursuant to Rule 430A, or filing of the Prospectuses
is otherwise required under Rule 424(b), the Company will cause the
Prospectuses, properly completed, and any supplement thereto to be filed
with the Commission pursuant to the applicable paragraph of Rule 424(b)
within the time period prescribed and will provide evidence satisfactory
to the U.S. Representatives of such timely filing. The Company will
promptly advise the U.S. Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have become
effective, (2) when the Prospectuses, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule
424(b) or when any Rule 462(b) Registration Statement shall have been
filed with the Commission, (3) when, prior to termination of the
offering of the U.S. Securities, any amendment to the Registration
Statement shall have been filed or become effective, (4) of any request
by the Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any
supplement to the Prospectuses or for any additional information, (5) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (6) of the receipt by
the Company of any notification with respect to the suspension of the
qualification of the U.S. Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order or the suspension of any such qualification and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the U.S.
Securities is required to be delivered under the Act, any event occurs
as a result of which either of the Prospectuses as then supplemented
would include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein in the light
of the circumstances under which they were made not misleading, or if it
shall be necessary to amend the Registration Statement or supplement
either of the Prospectuses to comply with the Act or the rules
thereunder, the Company promptly will (1) notify the U.S.
Representatives of any such event; (2) prepare and file with the
Commission, subject to the second sentence of paragraph (i)(a) of this
Section 5, an amendment or supplement which will correct such statement
or omission or effect such compliance; and (3) supply any supplemented
Prospectuses to you in such quantities as you may reasonably request.
<PAGE> 15
15
(c) As soon as practicable, the Company will make generally
available to its security holders and to the U.S. Representatives an
earnings statement or statements of the Company and the Subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the U.S. Representatives and
counsel for the U.S. Underwriters signed copies of the Registration
Statement (including exhibits thereto) and to each other U.S.
Underwriter a copy of the Registration Statement (without exhibits
thereto) and, so long as delivery of a prospectus by a U.S. Underwriter
or dealer may be required by the Act, as many copies of each Preliminary
Prospectus and the U.S. Prospectus and any supplement thereto as the
U.S. Representatives may reasonably request.
(e) The Company will use its best efforts to arrange, if
necessary, for the qualification of the U.S. Securities for sale under
the laws of such jurisdictions as the U.S. Representatives may designate
and will maintain such qualifications in effect so long as required for
the distribution of the U.S. Securities; provided that in no event shall
the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out
of the offering or sale of the U.S. Securities, in any jurisdiction
where it is not now so subject.
(f) The Company will not, without the prior written consent of
Smith Barney Inc., for a period of 180 days following the Execution
Time, offer, sell or contract to sell, or otherwise dispose of (or enter
into any transaction which is designed to, or might reasonably be
expected to, result in the disposition (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise) by
the Company or any affiliate of the Company or any person in privity
with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other shares of Common
Stock or any securities convertible into, or exchangeable for, shares of
Common Stock; provided, however, that the Company may issue and sell
Common Stock pursuant to any employee stock option plan, restricted
stock plan, employee stock purchase plan or dividend reinvestment plan
of the Company in effect at the Execution Time and the Company may issue
Common Stock issuable upon the conversion of securities or the exercise
of warrants outstanding at the Execution Time.
(g) Neither the Company nor its affiliated purchasers, as defined
in Regulation M under the Exchange Act, either alone or with one or more
other persons, (i) will take, either directly or indirectly, any action
which is designed to cause or result in, or which will constitute, or
which might reasonably be expected to cause or result in, stabilization
or manipulation of the price of any Subject Securities in connection
with the offering of the Securities or (ii) will bid for or purchase any
Covered Securities or attempt to induce any person to bid for or
purchase any Covered Securities, in either case, for the purpose of
creating actual or apparent active trading in, or raising the price of
the Securities.
<PAGE> 16
16
(h) The Company agrees to pay the costs and expenses relating to
the following matters: (i) the preparation, printing or reproduction and
filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary Prospectus,
the U.S. Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air
freight charges and charges for counting and packaging) of such copies
of the Registration Statement, each Preliminary Prospectus, the U.S.
Prospectus, and all amendments or supplements to any of them, as may, in
each case, be reasonably requested for use in connection with the
offering and sale of the U.S. Securities; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the
U.S. Securities, including any stamp or transfer taxes in connection
with the original issuance and sale of the U.S. Securities; (iv) the
printing (or reproduction) and delivery of this Agreement, any blue sky
memorandum and all other agreements or documents printed (or reproduced)
and delivered in connection with the offering of the U.S. Securities;
(v) the registration of the U.S. Securities under the Exchange Act and
the listing of the U.S. Securities on the Nasdaq National Market; (vi)
any registration or qualification of the U.S. Securities for offer and
sale under the securities or blue sky laws of the several states
(including filing fees and the reasonable fees and expenses of counsel
for the U.S. Underwriters relating to such registration and
qualification); (vii) any filings required to be made with the National
Association of Securities Dealers, Inc. (including filing fees and the
reasonable fees and expenses of counsel for the U.S. Underwriters
relating to such filings); (viii) the transportation and other expenses
incurred by or on behalf of Company representatives (excluding the U.S.
Underwriters) in connection with presentations to prospective purchasers
of the U.S. Securities; (ix) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and HEA; and (x) all other costs and
expenses incident to the performance by the Company and HEA of their
obligations hereunder.
(i) The Company will use the net proceeds to the Company of the
offering of the Securities as described under the heading "Use of
Proceeds" in the Prospectuses.
(ii) HEA agrees with the several U.S. Underwriters that:
(a) HEA will not, without the prior written consent of Smith
Barney Inc., offer, sell, contract to sell, pledge or otherwise dispose
of, or file (or participate in the filing of) a registration statement
with the Commission in respect of, or establish or increase a put
equivalent position or liquidate or decrease a call equivalent position
within the meaning of Section 16 of the Exchange Act with respect to,
any shares of capital stock of the Company or any securities convertible
into or exercisable or exchangeable for such capital stock, or publicly
announce an intention to effect any such transaction, for a period of
180 days after the date of this Agreement, other than shares of Common
Stock disposed of as bona fide gifts approved by Smith Barney Inc.
(b) Neither HEA nor its affiliated purchasers, as defined in
Regulation M under the Exchange Act, either alone or with one or more
other persons, (i) will take, either
<PAGE> 17
17
directly or indirectly, any action which is designed to cause or result
in, or which will constitute, or which might reasonably be expected to
cause or result in, stabilization or manipulation of the price of any
Subject Securities in connection with the offering of the Securities or
(ii) will bid for or purchase any Covered Securities or attempt to
induce any person to bid for or purchase any Covered Securities, in
either case, for the purpose of creating actual or apparent active
trading in, or raising the price of the Securities.
(c) HEA will advise you promptly, and if requested by you, will
confirm such advice in writing, so long as delivery of a prospectus
relating to the U.S. Securities by an underwriter or dealer may be
required under the Act, of (i) any material change in the Company's
condition (financial or otherwise), prospects, earnings, business or
properties, (ii) any change in information in the Registration Statement
or the Prospectuses relating to HEA or (iii) any new material
information relating to the Company or relating to any matter stated in
the Prospectuses which comes to the attention of HEA.
(iii) Each U.S. Underwriter agrees that (i) it is not purchasing
any of the U.S. Securities for the account of anyone other than a United States
or Canadian Person, (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any of the U.S. Securities or distribute any U.S.
Prospectus to any person outside the United States or Canada, or to anyone other
than a United States or Canadian Person, and (iii) any dealer to whom it may
sell any of the U.S. Securities will represent that it is not purchasing for the
account of anyone other than a United States or Canadian Person and agree that
it will not offer or resell, directly or indirectly, any of the U.S. Securities
outside the United States or Canada, or to anyone other than a United States or
Canadian Person or to any other dealer who does not so represent and agree;
provided, however, that the foregoing shall not restrict (i) purchases and sales
between the Managers on the one hand and the U.S. Underwriters on the other hand
pursuant to the Agreement Between U.S. Underwriters and Managers, (ii)
stabilization transactions contemplated under the Agreement Between U.S.
Underwriters and Managers, conducted through Smith Barney Inc. (or through the
U.S. Representatives and Lead Managers) as part of the distribution of the
Securities, and (iii) sales to or through (or distributions of U.S. Prospectuses
or Preliminary Prospectuses to) United States or Canadian Persons who are
investment advisors, or who otherwise exercise investment discretion, and who
are purchasing for the account of anyone other than a United States or Canadian
Person.
The agreement of the U.S. Underwriters set forth in the above
paragraph shall terminate upon the earlier of the following events:
(a) a mutual agreement of the U.S. Representatives and the Lead
Managers to terminate the selling restrictions set forth in such
paragraph and in Section 5(iii)(a) of the International Underwriting
Agreement; or
(b) the expiration of a period of 30 days after the Closing Date,
unless (A) the Lead Managers shall have given notice to the Company and
the U.S. Representatives that the distribution of the International
Securities by the Managers has not yet been completed, or (B) the U.S.
Representatives shall have given notice to the Company and
<PAGE> 18
18
the Managers that the distribution of the U.S. Securities by the U.S.
Underwriters has not yet been completed. If such notice by the U.S.
Representatives or the Lead Managers is given, the agreements set forth
in such paragraph shall survive until the earlier of (1) the event
referred to in clause (a) above or (2) the expiration of an additional
period of 30 days from the date of any such notice.
6. Conditions to the Obligations of the U.S. Underwriters. The
obligations of the U.S. Underwriters to purchase the U.S. Underwritten
Securities and the U.S. Option Securities, as the case may be, shall be subject
to the accuracy of the representations and warranties on the part of the Company
and HEA contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and HEA made in any certificates pursuant to the provisions
hereof, to the performance by the Company and HEA of their respective
obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective prior
to the Execution Time, unless the U.S. Representatives agree in writing
to a later time, the Registration Statement will become effective not
later than (i) 6:00 PM New York City time on the date of determination
of the public offering price, if such determination occurred at or prior
to 3:00 PM New York City time on such date or (ii) 9:30 AM on the
Business Day following the day on which the public offering price was
determined, if such determination occurred after 3:00 PM New York City
time on such date; if filing of any of the Prospectuses, or any
supplement thereto, is required pursuant to Rule 424(b), the
Prospectuses, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have caused Gray Cary Ware & Freidenrich
LLP, counsel for the Company, to have furnished to the U.S.
Representatives their opinion, dated the Closing Date and addressed to
the U.S. Representatives, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own or
lease, as the case may be, and to operate its properties and
conduct its businesses as described in the Prospectuses, and is
duly qualified to do business as foreign corporation and is in
good standing under the laws of the State of California and, to
the knowledge of such counsel, each other jurisdiction which
requires such qualification, except where the failure to be so
qualified or be in good standing could not reasonably be expected
to have a Material Adverse Effect.
(ii) except as otherwise set forth in the Prospectuses,
all outstanding shares of capital stock of each Subsidiary are
owned of record by the Company or by another Subsidiary;
<PAGE> 19
19
(iii) the Company's authorized equity capitalization is as
set forth in the Prospectuses; the capital stock of the Company
conforms in all material respects to the description thereof
contained in the Prospectuses; the outstanding shares of Common
Stock have been duly and validly authorized and issued and are
fully paid and nonassessable; the U.S. Securities being sold
hereunder by the Company have been duly and validly authorized,
and, when issued and delivered to and paid for by the U.S.
Underwriters pursuant to this Agreement, will be fully paid and
nonassessable; the U.S. Securities being sold hereunder are duly
listed, and admitted and authorized for trading, subject to
official notice of issuance, on the Nasdaq National Market; the
certificates for the U.S. Securities are in valid and sufficient
form; the holders of outstanding shares of capital stock of the
Company are not entitled to preemptive rights under the Company's
charter documents, Delaware corporate law or any agreements of
which such counsel is aware, or to such counsel's knowledge,
similar rights to subscribe for the U.S. Securities except for
the ownership maintenance rights granted to HEA under the
stockholder agreement, dated as of June 25, 1998 among the
Company, HEA and Hyundai Electronics Industries Co., Ltd. (the
"Stockholder Agreement) ; and, except as set forth in the
Prospectuses, to the knowledge of such counsel, no options,
warrants or other rights to purchase, agreements or other
obligations to issue, or rights to convert any obligations into
or exchange any securities for, shares of capital stock of or
ownership interests in the Company are outstanding;
(iv) to the knowledge of such counsel, there is no pending
or threatened action, suit or proceeding by or before any court
or governmental agency, authority or body or any arbitrator
involving the Company or any Subsidiaries or its or their
property of a character required to be disclosed in the
Registration Statement which is not adequately disclosed in the
Prospectuses, and, to the knowledge of such counsel, there is no
franchise, contract or other document of a character required to
be described in the Registration Statement or Prospectuses, or to
be filed as an exhibit thereto, which is not described or filed
as required under the Act or the applicable rules and regulations
of the Commission thereunder; and the statements in the
Prospectuses under the headings "Relationship Between the Company
and Hyundai," "Business--Intellectual Property," "Certain
Transactions," "Management--Executive Compensation--Employment
Agreements--Benefit Plans," "Description of Capital Stock,"
"Shares Eligible for Future Sale" and "Certain United States
Federal Tax Consequences to Holders of Common Stock" accurately
summarize in all material respects the matters therein described
to the extent they are matters of law and descriptions of
contractual arrangements;
(v) the Registration Statement has become effective under
the Act; any required filing of the Prospectuses, and any
supplements thereto, pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); to the
knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued, no
proceedings for
<PAGE> 20
20
that purpose have been instituted or threatened and the
Registration Statement and the Prospectuses (other than the
financial statements, schedules and other financial information
contained therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules thereunder;
(vi) each of this Agreement and the International
Underwriting Agreement has been duly authorized, executed and
delivered by the Company (assuming due authorization and
execution by each party thereto other than the Company);
(vii) the Company is not and, after giving effect to the
offering and sale of the Securities and the application of the
proceeds thereof as described in the Prospectuses, will not be,
an "investment company" as defined in the Investment Company Act
of 1940, as amended;
(viii) no consent, approval, authorization, filing with or
order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such
as have been obtained under the Act and such as may be required
under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the U.S. Securities by the U.S.
Underwriters in the manner contemplated in this Agreement and in
the Prospectuses and such other approvals (specified in such
opinion) as have been obtained;
(ix) neither the issuance and sale of the U.S. Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or imposition
of any lien, charge or encumbrance upon any property or assets of
the Company pursuant to, (i) the charter or by-laws of the
Company, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which
the Company is a party or bound or to which its property is
subject and that is filed as an exhibit to the Registration
Statement, or (iii) any statute, law, rule or regulation which,
in the experience of such counsel, typically is applicable to the
types of transactions contemplated herein or, to the knowledge of
such counsel, any judgment, order or decree applicable to the
Company of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority asserting
jurisdiction over the Company or any of its properties; and
(x) to the knowledge of such counsel, no holders of
securities of the Company have rights to the registration of such
securities under the Registration Statement except for rights
granted to HEA under the Stockholder Agreement.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of California, the General Corporation Law of the State of
Delaware or the Federal laws of the United States, to
<PAGE> 21
21
the extent they deem proper and specified in such opinion, upon the
opinion of other counsel of good standing whom they believe to be
reliable and who are reasonably satisfactory to counsel for the U.S.
Underwriters and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and
public officials. References to the Prospectuses in this paragraph (b)
include any supplements thereto at the Closing Date.
In addition, such counsel shall state that such counsel has participated
in conferences and in telephone conversations with officers and other
representatives of the Company, representatives of the U.S.
Representatives and representatives of the independent public
accountants of the Company, during which conferences and conversations
the contents of the Registration Statement and the Prospectuses were
discussed, and such counsel has reviewed certain corporate records and
documents furnished to such counsel by the Company and that, although
such counsel has not undertaken to independently verify and does not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the
Prospectuses (except as specified in the foregoing opinion), on the
basis of the foregoing, and such counsel's understanding of the U.S.
federal securities laws, no information has come to the attention of
such counsel that causes such counsel to believe that the Registration
Statement on the Effective Date or at the Execution Time contained any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectuses as of their date and on
the Closing Date included or include any untrue statement of a material
fact or omitted or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading (other than financial statements and schedules
and other financial information contained therein, as to which such
counsel need express no opinion).
(c) The Company shall have caused counsel for Maxtor Singapore
(such counsel to be reasonably satisfactory to the U.S. Representatives)
to have furnished to the U.S. Representatives an opinion, dated the
Closing Date and addressed to the U.S. Representatives, to the effect
that:
(i) Maxtor Singapore has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the jurisdiction in which it is chartered or organized, with
corporate power and authority to own or lease, as the case may
be, and to operate its properties and conduct its businesses as
described in the Prospectuses, and, to the knowledge of such
counsel, is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification, except where the
failure to be so qualified or be in good standing could not
reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business
or properties of Maxtor Singapore, whether or not arising from
transactions in the ordinary course of business;
<PAGE> 22
22
(ii) all the outstanding shares of capital stock of Maxtor
Singapore have been duly and validly authorized and issued and
are fully paid and nonassessable, and except as otherwise set
forth in the Prospectuses, are owned of record by the Company;
(iii) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator
involving Maxtor Singapore or its property which, if determined
adversely to Maxtor Singapore, would have, individually or in the
aggregate, could reasonably be expected to have a material
adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of Maxtor Singapore,
whether or not arising from transactions in the ordinary course
of business; and
(iv) neither the issue and sale of the U.S. Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or imposition
of any lien, charge or encumbrance upon any property or assets of
Maxtor Singapore pursuant to, (i) the charter or by-laws of
Maxtor Singapore, (ii) to the knowledge of such counsel, the
terms of any material indenture, contract, lease, mortgage, deed
of trust, note agreement, loan agreement or other material
agreement, obligation, condition, covenant or instrument to which
Maxtor Singapore is a party or bound or to which its property is
subject, or (iii) any statute, law, rule or regulation which, in
the experience of such counsel, typically is applicable to the
types of transactions contemplated herein or, to the knowledge of
such counsel, any judgment, order or decree applicable to Maxtor
Singapore of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority asserting
jurisdiction over Maxtor Singapore or any of its property.
In rendering such opinion, such counsel may rely as to matters of fact,
to the extent they deem proper and specified in such opinion, upon
certificates of responsible officers of the Company, Maxtor Singapore
and public officials. References to the Prospectuses in this paragraph
(c) include any supplements thereto at the Closing Date.
(d) HEA shall have caused Hal Hofherr, counsel for HEA, to have
furnished to the U.S. Representatives his opinion dated the Closing Date
and addressed to the U.S. Representatives, to the effect that:
(i) HEA is duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction
in which it is chartered or organized, with corporate power and
authority to own or lease, as the case may be, and to operate its
properties and conduct its business as described in the
Prospectuses, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of the State
of California and, to the knowledge
<PAGE> 23
23
of such counsel, each other jurisdiction which requires such
qualification, except where the failure to be so qualified or be
in good standing could not reasonably be expected to have a
material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of HEA
and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business.
(ii) each of this Agreement and the International
Underwriting Agreement has been duly authorized, executed and
delivered by HEA (assuming due authorization and execution by
each party thereto other than HEA);
(iii) HEA is not, and after giving effect to the offering
and sale of the Securities and the application of the proceeds
thereof as described in the Prospectuses, will not be, an
"investment company" as defined in the Investment Company Act of
1940, as amended.
(iv) no consent, approval, authorization, filing with or
order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such
as have been obtained under the Act and such as may be required
under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the U.S. Securities by the U.S.
Underwriters in the manner contemplated in this Agreement and in
the Prospectuses and such other approvals (specified in such
opinion) as have been obtained; and
(v) neither the sale of the U.S. Securities being sold by
the Company nor the consummation of any other of the transactions
herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or imposition
of any lien, charge or encumbrance upon any property or assets of
HEA pursuant to, (i) the charter or by-laws of the HEA, (ii) to
the knowledge of such counsel, the terms of any material
indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other material agreement,
obligation, condition, covenant or instrument to which HEA is a
party or bound or to which its property is subject, or (iii) any
statute, law, rule or regulation which, in the experience of such
counsel, typically is applicable to the types of transactions
contemplated herein or, to the knowledge of such counsel, any
judgment, order or decree applicable to HEA of any court,
regulatory body, administrative agency, governmental body,
arbitrator or other authority asserting jurisdiction over HEA or
any of its properties.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of California, the General Corporation Law of the State of
Delaware or the Federal laws of the United States, to the extent it
deems proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who are
reasonably satisfactory to
<PAGE> 24
24
counsel for the U.S. Underwriters, and (B) as to matters of fact, to the
extent it deems proper, on certificates of responsible officers of HEA
and public officials.
(e) The U.S. Representatives shall have received from Cleary,
Gottlieb, Steen & Hamilton, counsel for the U.S. Underwriters, such
opinion or opinions, dated the Closing Date and addressed to the U.S.
Representatives, with respect to the issuance and sale of the U.S.
Securities, the Registration Statement, the Prospectuses (together with
any supplement thereto) and other related matters as the U.S.
Representatives may reasonably require, and the Company and HEA shall
have furnished to such counsel such documents as they reasonably request
for the purpose of enabling them to pass upon such matters.
(f) The Company shall have furnished to the U.S. Representatives
a certificate of the Company, signed by the Chief Executive Officer and
the Chief Financial Officer of the Company, dated the Closing Date, to
the effect that the signers of such certificate have carefully examined
the Registration Statement, the Prospectuses, any supplements to the
Prospectuses and this Agreement and that:
(i) the representations and warranties of the Company in
this Agreement are true and correct on and as of the Closing Date
with the same effect as if made on the Closing Date and the
Company has complied in all material respects with all the
agreements and satisfied in all material respects all the
conditions on its part to be performed or satisfied at or prior
to the Closing Date (such certificate to set forth all known
failures to comply with such agreements or satisfy such
conditions, whether such known failures are material or
immaterial);
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and to the Company's
knowledge, after due inquiry with the Commission, no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectuses (exclusive of any
supplement thereto), there has been no material adverse effect on
the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and the Subsidiaries, taken
as a whole, whether or not arising from transactions in the
ordinary course of business, except as set forth in or
contemplated in the Prospectuses (exclusive of any supplement
thereto).
(g) HEA shall have furnished to the U.S. Representatives a
certificate, signed by the Chief Executive Officer, dated the Closing
Date, to the effect that the signer of such certificate has carefully
examined the Registration Statement, the Prospectuses, any supplement to
the Prospectuses and this Agreement and that the representations and
warranties of HEA in this Agreement are true and correct in all material
respects on and as of the Closing Date to the same effect as if made on
the Closing Date.
<PAGE> 25
25
(h) The Company shall have caused PricewaterhouseCoopers LLP to
have furnished to the U.S. Representatives letters, at the Execution
Time and at the Closing Date, dated respectively as of the Execution
Time and as of the Closing Date, in form and substance reasonably
satisfactory to the U.S. Representatives, confirming that they are
independent accountants within the meaning of the Act and the applicable
published rules and regulations thereunder and that they have performed
a review of the unaudited interim financial information of the Company
for the six-month period ended June 30, 1998 and as at June 30, 1998, as
well as for the six quarterly periods for the period ended June 30, 1998
in accordance with Statement on Auditing Standards No. 71, and stating
in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration
Statement and the Prospectuses and reported on by them comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations;
(ii) on the basis of a reading of the latest unaudited
financial statements made available by the Company and the
Subsidiaries; their limited review, in accordance with standards
established under Statement on Auditing Standards No. 71, of the
unaudited interim financial information for the six-month period
ended June 30, 1998, and as at June 30, 1998; carrying out
certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which
would not necessarily reveal matters of significance with respect
to the comments set forth in such letter; a reading of the
minutes of the meetings of the stockholders, directors and the
audit, executive and compensation committees of the Company and
the Subsidiaries; and inquiries of certain officials of the
Company who have responsibility for financial and accounting
matters of the Company and the Subsidiaries as to transactions
and events subsequent to December 27, 1997, nothing came to their
attention which caused them to believe that:
(1) the unaudited financial statements described in
(ii) above and included in the Registration Statement and
the Prospectuses do not comply as to form in all material
respects with the applicable accounting requirements of
the Act and with the published rules and regulations of
the Commission with respect to registration statements on
Form S-1; and said unaudited financial statements are not
in conformity with generally accepted accounting
principles applied on a basis substantially consistent
with that of the audited financial statements included in
the Registration Statement and the Prospectuses;
(2) with respect to the period subsequent to June
30, 1998, there were any changes, at a specified date not
more than five days prior to the date of the letter, in
the long-term debt and capital lease obligations due
<PAGE> 26
26
after one year of the Company and the Subsidiaries or
capital stock of the Company or increases in the
stockholders' deficit of the Company or decreases in
working capital of the Company and the Subsidiaries as
compared with the amounts shown on the June 30, 1998,
consolidated balance sheet included in the Registration
Statement and the Prospectuses, or for the period from
July 1, 1998 to such specified date there were any
decreases, as compared with the corresponding period in
the preceding quarter in total revenue or income from
operations or income before income taxes or in per share
amounts of net income of the Company and the Subsidiaries,
except in all instances for changes or decreases set forth
in such letter, in which case the letter shall be
accompanied by an explanation by the Company as to the
significance thereof unless said explanation is not deemed
necessary by the U.S. Representatives; and
(3) the information included in the Registration
Statement and Prospectuses in response to Regulation S-K,
Item 301 (Selected Financial Data), Item 302
(Supplementary Financial Information) and Item 402
(Executive Compensation) is not in conformity with the
applicable disclosure requirements of Regulation S-K.
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and the Subsidiaries) set forth in the Registration
Statement and the Prospectuses, including the information set
forth under the captions "Summary Consolidated Financial Data"
and "Selected Consolidated Financial Data" in the Prospectuses,
agrees with the accounting records of the Company and the
Subsidiaries, excluding any questions of legal interpretation.
References to the Prospectuses in this paragraph (h) include any
supplement thereto at the date of the letter.
(i) Subsequent to the Execution Time or, if earlier, the dates as
of which information is given in the Registration Statement (exclusive
of any amendment thereof) and the Prospectuses (exclusive of any
supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph (g)
of this Section 6 or (ii) any change, or any development involving a
prospective change, in or affecting the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and the Subsidiaries taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectuses (exclusive of any supplement
thereto) the effect of which, in any case referred to in clause (i) or
(ii) above, is, in the sole judgment of the U.S. Representatives, so
material and adverse as to make it impractical or inadvisable to proceed
with the offering or delivery of the U.S. Securities as contemplated by
the
<PAGE> 27
27
Registration Statement (exclusive of any amendment thereof) and the
Prospectuses (exclusive of any supplement thereto).
(j) Subsequent to the Execution Time, there shall not have been
any decrease in the rating of any of the Company's debt securities by
any "nationally recognized statistical rating organization" (as defined
for purposes of Rule 436(g) under the Act) or any notice given of any
intended or potential decrease in any such rating or of a possible
change in any such rating that does not indicate the direction of the
possible change.
(k) The U.S. Securities shall have been listed and admitted and
authorized for trading on the Nasdaq National Market, and satisfactory
evidence of such actions shall have been provided to the U.S.
Representatives.
(l) Prior to the Closing Date, all of the conditions set forth in
the International Underwriting Agreement with respect to the obligations
of the Managers to purchase the International Securities shall have been
satisfied and not waived, and the purchase and sale of the International
Underwritten Securities shall have been completed in accordance with the
terms of the International Underwriting Agreement.
(m) Prior to the Closing Date, the Company shall have furnished
to the U.S. Representatives evidence satisfactory to the U.S.
Representatives that (i) the Company has obtained an asset
securitization facility (or a commitment to provide an asset
securitization facility) in an aggregate amount reasonably acceptable to
the U.S. Representatives and not guaranteed in any manner by, or
dependent upon or linked in any way to the creditworthiness of, HEA or
any affiliates of HEA and (ii) the Company has obtained a direct license
with SAP Korea Ltd. that provides the Company with substantially the
same terms, rights and services as those currently available to or
received by the Company pursuant to the license agreement between
Hyundai Information Technology Co. Ltd. and SAP Korea Ltd.
(n) At the Execution Time, the Company shall have furnished to
the U.S. Representatives and the Lead Managers a letter substantially in
the form of Exhibit A hereto from each officer, director, and
stockholder of the Company, which persons are listed on Schedule II
hereto, addressed to the U.S. Representatives and the Lead Managers.
(o) Prior to the Closing Date, the Company and HEA shall have
furnished to the U.S. Representatives such further information,
certificates and documents as the U.S. Representatives may reasonably
request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the U.S. Representatives and counsel for
the U.S. Underwriters, this Agreement and all obligations of the U.S.
Underwriters hereunder may be canceled at, or at any time prior to, the Closing
Date by the U.S. Representatives. Notice of
<PAGE> 28
28
such cancellation shall be given to the Company and HEA in writing or by
telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Gray Cary Ware & Freidenrich LLP, counsel for the
Company, at 400 Hamilton Avenue, Palo Alto, California 94301, on the Closing
Date.
7. Reimbursement of U.S. Underwriters' Expenses. If the sale of
the U.S. Securities provided for herein is not consummated because any condition
to the obligations of the U.S. Underwriters set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof or because
of any refusal, inability or failure on the part of the Company or HEA to
perform any agreement herein or comply with any provision hereof other than by
reason of a default by any of the U.S. Underwriters, the Company will reimburse
the U.S. Underwriters severally through Smith Barney Inc. on demand for all
reasonable out-of-pocket expenses (including reasonable fees and disbursements
of counsel) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities.
8. Indemnification and Contribution. (a) The Company and HEA
jointly and severally agree to indemnify and hold harmless each U.S.
Underwriter, the directors, officers, employees and agents of each U.S.
Underwriter and each person who controls any U.S. Underwriter within the meaning
of either the Act or the Exchange Act against any and all losses, claims,
damages or liabilities, joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement for the registration of the U.S.
Securities as originally filed or in any amendment thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectuses, or in any amendment thereof or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and agrees to reimburse each such indemnified party, as incurred,
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company and HEA will not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any U.S. Underwriter
through the U.S. Representatives specifically for inclusion therein; provided,
further, that with respect to any untrue statement or omission of material fact
made in any Preliminary Prospectus, the indemnity agreement contained in this
Section 8(a) shall not inure to the benefit of any U.S. Underwriter from whom
the person asserting any such loss, claim, damage or liability purchased the
securities concerned, to the extent that any such loss, claim, damage or
liability of such U.S. Underwriter
<PAGE> 29
29
occurs under the circumstance where it shall have been determined by final
nonappealable judgment that (w) the Company had previously furnished copies of
the U.S. Prospectus to the U.S. Representatives, (x) delivery of the U.S.
Prospectus was required by the Act to be made to such person, (y) the untrue
statement or omission of a material fact contained in the Preliminary Prospectus
was corrected in the U.S. Prospectus and (z) there was not sent or given to such
person, at or prior to the written confirmation of the sale of such securities
to such person, a copy of the U.S. Prospectus.
This indemnity agreement will be in addition to any liability
which the Company or HEA may otherwise have.
(b) Each U.S. Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, each person who controls the
Company within the meaning of either the Act or the Exchange Act and HEA, to the
same extent as the foregoing indemnity to each U.S. Underwriter, but only with
reference to written information relating to such U.S. Underwriter furnished to
the Company by or on behalf of such U.S. Underwriter through the U.S.
Representatives specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any U.S. Underwriter may otherwise have. The Company and HEA
acknowledge that the statements set forth in the last paragraph of the cover
page regarding delivery of the U.S. Securities, the legend in block capital
letters on the inside front cover related to stabilization, syndicate covering
transactions and penalty bids, and under the heading "Underwriting" in any
Preliminary Prospectus and the Prospectuses constitute the only information
furnished in writing by or on behalf of the several U.S. Underwriters for
inclusion in any Preliminary Prospectus or the Prospectuses.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
<PAGE> 30
30
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and HEA, jointly and severally,
and the U.S. Underwriters severally agree to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively
"Losses") to which the Company, HEA and one or more of the U.S. Underwriters may
be subject in such proportion as is appropriate to reflect the relative benefits
received by the Company and HEA on the one hand and by the U.S. Underwriters on
the other from the offering of the U.S. Securities; provided, however, that in
no case shall any U.S. Underwriter (except as may be provided in any agreement
among underwriters relating to the offering of the U.S. Securities) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the U.S. Securities purchased by such U.S. Underwriter hereunder.
If the allocation provided by the immediately preceding sentence is unavailable
for any reason, the Company and HEA, jointly and severally, and the U.S.
Underwriters severally shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and HEA on the one hand and of the U.S. Underwriters on the other in
connection with the statements or omissions which resulted in such Losses as
well as any other relevant equitable considerations. Benefits received by the
Company and HEA shall be deemed to be equal to the total net proceeds from the
offering (before deducting expenses) received by them, and benefits received by
the U.S. Underwriters shall be deemed to be equal to the total underwriting
discounts and commissions, in each case as set forth on the cover page of the
Prospectuses. Relative fault shall be determined by reference to, among other
things, whether any untrue or any alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to information
provided by the Company or HEA on the one hand or the U.S. Underwriters on the
other, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company, HEA and the U.S. Underwriters agree that it would not be
just and equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was
<PAGE> 31
31
not guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person who controls a U.S. Underwriter within the meaning of either the Act
or the Exchange Act and each director, officer, employee and agent of a U.S.
Underwriter shall have the same rights to contribution as such U.S. Underwriter,
and each person who controls the Company within the meaning of either the Act or
the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the applicable
terms and conditions of this paragraph (d).
(e) The liability of HEA under the indemnity and contribution
provisions contained in this Section 8 and the corresponding section in the
International Underwriting Agreement shall be limited to an amount equal to
$25,000,000; provided, however, that the U.S. Underwriters shall not make any
claim for indemnity or contribution against HEA pursuant to this Section 8
unless the U.S. Underwriters shall have first made a claim on the Company
pursuant to this Section 8 and such claim is not paid within 15 days from the
time it is made. The Company and HEA may agree, as among themselves and without
limiting the rights of the U.S. Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible.
9. Default by a U.S. Underwriter. If any one or more U.S.
Underwriters shall fail to purchase and pay for any of the U.S. Securities
agreed to be purchased by such U.S. Underwriter or U.S. Underwriters hereunder
and such failure to purchase shall constitute a default in the performance of
its or their obligations under this Agreement, the remaining U.S. Underwriters
shall be obligated severally to take up and pay for (in the respective
proportions which the amount of U.S. Securities set forth opposite their names
in Schedule I hereto bears to the aggregate amount of U.S. Securities set forth
opposite the names of all the remaining U.S. Underwriters) the U.S. Securities
which the defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of U.S.
Securities which the defaulting U.S. Underwriter or U.S. Underwriters agreed but
failed to purchase shall exceed 10% of the aggregate amount of U.S. Securities
set forth in Schedule I hereto, the remaining U.S. Underwriters shall have the
right to purchase all, but shall not be under any obligation to purchase any, of
the U.S. Securities, and if such nondefaulting U.S. Underwriters do not purchase
all the U.S. Securities, then the Company shall have 36 hours within which it
may, but is not obligated, to find one or more substitute underwriters
satisfactory to the U.S. Representatives to purchase such U.S. Securities upon
the terms set forth in this Agreement and, if the Company is unable to find one
or more such underwriters that are satisfactory to the U.S. Representatives,
this Agreement will terminate without liability to any nondefaulting U.S.
Underwriter, HEA or the Company. In the event of a default by any U.S.
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding five Business Days, as the U.S. Representatives
shall determine in order that the required changes in the Registration Statement
and the Prospectuses or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting U.S.
Underwriter of its liability, if any, to the Company, HEA and any nondefaulting
U.S. Underwriter for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination
in the absolute discretion of the U.S. Representatives, by notice given to the
Company prior to delivery of and payment for the U.S. Securities, if at any time
prior to such time (i) trading in any of the
<PAGE> 32
32
Company's securities shall have been suspended by the Commission or the Nasdaq
National Market or trading in securities generally on the New York Stock
Exchange or the Nasdaq National Market shall have been suspended or limited or
minimum prices shall have been established on either of such Exchanges, (ii) a
banking moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war, or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the sole judgment of the U.S. Representatives, impractical or
inadvisable to proceed with the offering or delivery of the U.S. Securities as
contemplated by the Prospectuses (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of HEA and of the U.S. Underwriters set forth in or
made pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of any U.S. Underwriter, HEA or the
Company or any of the officers, directors or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the U.S.
Securities. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the U.S. Representatives, will be
mailed, delivered or telefaxed to the SBI General Counsel (fax no.: (212)
816-7912) and confirmed to the General Counsel, c/o Smith Barney Inc., at 388
Greenwich Street, New York, New York, 10013, Attention: General Counsel; or, if
sent to the Company, will be mailed, delivered or telefaxed to Chief Financial
Officer c/o of Maxtor Corporation, 510 Cottonwood Drive, Milpitas, California
95035 (fax no. (408) 432-4158) and confirmed to the General Counsel c/o Maxtor
Corporation, 2190 Miller Drive, Longmont. Colorado 80501 (fax no. (303)
678-3111), attention of the Legal Department, with a copy to Diane Holt Frankle
(fax no. (650) 327-3699) at Gray Cary Ware & Freidenrich LLP, 400 Hamilton
Avenue, Palo Alto, California 94301; or if sent to HEA, will be mailed,
delivered or telefaxed to Chief Executive Officer, c/o Hyundai Electronics
America, 3101 North First Street, San Jose, California 95134 (fax no. (408)
232-8194) and confirmed to the General Counsel c/o Hyundai Electronics America,
3101 North First Street, San Jose, California 95134 (fax no. (408) 232-8194),
attention of the Legal Department.
13. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
<PAGE> 33
33
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday
or a legal holiday or a day on which banking institutions or trust
companies are authorized or obligated by law to close in New York City
or London.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this Agreement
is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
with respect to the offering of the U.S. Securities and the
International Securities, as the case may be, referred to in paragraph
1(i)(a) above and any preliminary prospectus with respect to the
offering of the U.S. Securities and the International Securities, as the
case may be, included in the Registration Statement at the Effective
Date that omits Rule 430A Information.
"Prospectuses" shall mean, collectively, the U.S. Prospectus and
the International Prospectus.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(i)(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective) and,
in the event any post-effective amendment thereto or any Rule 462(b)
Registration Statement becomes effective prior to the Closing Date,
shall also mean such registration statement as so amended or such Rule
462(b) Registration
<PAGE> 34
34
Statement, as the case may be. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as
provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under
the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
"United States or Canadian Persons" means any person who is a
national or resident of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of
the United States or Canada or of any political subdivision thereof, and
any estate or trust the income of which is subject to United States or
Canadian federal income taxation, regardless of its source (other than a
foreign branch of such entity) and includes any United States or
Canadian branch of a person other than a United States or Canadian
Person.
<PAGE> 35
35
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company, HEA and the several U.S. Underwriters.
Very truly yours,
Maxtor Corporation
By:
------------------------------
Name:
Title:
Hyundai Electronics America
By:
------------------------------
Name:
Title:
<PAGE> 36
36
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
NationsBanc Montgomery Securities LLC
By: Smith Barney Inc.
By:
------------------------------
Name:
Title:
For themselves and the other
several U.S. Underwriters named in
Schedule I to the foregoing
Agreement.
<PAGE> 37
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF U.S.
UNDERWRITERS UNDERWRITTEN SECURITIES
- ------------ TO BE PURCHASED
---------------
<S> <C>
Smith Barney Inc..............................................
Hambrecht & Quist LLC.........................................
Lehman Brothers Inc...........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated............
NationsBanc Montgomery Securities LLC.........................
----------
Total................................................. 38,000,000
==========
</TABLE>
<PAGE> 38
SCHEDULE II
List of Officers, Directors and Shareholders
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Position
<S> <C>
Dr. C.S. Park Chairman of the Board of Directors
Michael R. Cannon President, Chief Executive Officer, Director
Charles F. Christ Director
Chang See Chung Director
Charles Hill Director
Y.H. Kim Director
Phillip S. Paul Director
Victor B. Jipson Senior Vice President
William F. Roach Senior Vice president
Paul J. Tufano Vice President
Glenn H. Stevens Vice President
Phillip C. Duncan Vice President
John Hagerman Vice President
K.K. Kim Vice President
Misha Rozenberg Vice President
K.H. Teh Vice President
David L. Beaver Vice President
</TABLE>
Principal Stockholders
Hyundai Electronics America
<PAGE> 1
Exhibit 1.2
Maxtor Corporation
9,500,000 Shares (a)
Common Stock
($0.01 par value)
Form of International Underwriting Agreement
London, England
o , 1998
Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers International (Europe)
Merrill Lynch International
NationsBanc Montgomery Securities LLC
As Lead Managers of the several Managers,
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Maxtor Corporation, a Delaware corporation (the "Company"),
proposes to sell to the several underwriters named in Schedule I hereto (the
"Managers"), for whom you (the "Lead Managers") are acting as representatives,
9,500,000 shares of Common Stock, $0.01 par value ("Common Stock") of the
Company (said shares to be issued and sold by the Company being hereinafter
called the "International Underwritten Securities"). The Company also proposes
to grant to the Managers an option to purchase up to 1,425,000 additional shares
of Common Stock to cover over-allotments (the "International Option Securities";
the International Option Securities, together with the International
Underwritten Securities, being hereinafter called the "International
Securities").
It is understood that the Company and Hyundai Electronics America
("HEA"), a stockholder of the Company, are concurrently entering into a U.S.
Underwriting Agreement dated the date hereof (the "U.S. Underwriting Agreement")
providing for the sale by the Company of an aggregate of 38,000,000 shares of
Common Stock (said shares to be issued and sold by the Company pursuant to the
U.S. Underwriting Agreement being hereinafter called the
- ----------
(a) Plus an option to purchase from the Company up to 1,425,000 additional
shares of Common Stock to cover over-allotments.
<PAGE> 2
2
"U.S. Underwritten Securities"), and providing for the grant to the underwriters
named in Schedule I thereto (the "U.S. Underwriters") of an option to purchase
from the Company up to 5,700,000 additional shares of Common Stock (the "U.S.
Option Securities"; the U.S. Option Securities, together with the U.S.
Underwritten Securities, being hereinafter called the "U.S. Securities"; and the
U.S. Securities, together with the International Securities, being hereinafter
called the "Securities").
It is further understood and agreed that the Managers and the
U.S. Underwriters have entered into an Agreement Between U.S. Underwriters and
Managers dated the date hereof (the "Agreement Between U.S. Underwriters and
Managers"), pursuant to which, among other things, the Managers may purchase
from the U.S. Underwriters a portion of the U.S. Securities to be sold pursuant
to the U.S. Underwriting Agreement and the U.S. Underwriters may purchase from
the Managers a portion of the International Securities to be sold pursuant to
the International Underwriting Agreement. To the extent there are no additional
Managers listed on Schedule I other than you, the term Lead Managers as used
herein shall mean you, as Managers, and the terms Lead Managers and Managers
shall mean either the singular or plural as the context requires. The use of the
neuter in this Agreement shall include the feminine and masculine wherever
appropriate. Certain terms used herein are defined in Section 17 hereof.
1. Representations and Warranties.
(i) The Company represents and warrants to, and agrees with, each
Manager as set forth below in this Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-56099) on Form S-1, including
the related Preliminary Prospectuses, for registration under the Act of
the offering and sale of the Securities. The Company may have filed one
or more amendments thereto, including the related Preliminary
Prospectuses, each of which has previously been furnished to you. The
Company will next file with the Commission either (1) prior to the
Effective Date of such registration statement, a further amendment to
such registration statement (including the form of the final
Prospectuses) or (2) after the Effective Date of such registration
statement, a final prospectus in accordance with Rules 430A and 424(b).
In the case of clause (2), the Company has included in such registration
statement, as amended at the Effective Date, all information (other than
Rule 430A Information) required by the Act and the rules thereunder to
be included in such registration statement and the Prospectuses. As
filed, such amendment and form of final Prospectuses, or such final
Prospectuses, shall contain all Rule 430A Information, together with all
other such required information, and, except to the extent the Lead
Managers shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the Execution
Time or, to the extent not completed at the Execution Time, shall
contain only such specific additional information and other changes
(beyond that contained in the latest U.S. Preliminary Prospectus) as the
Company has advised you, prior to the Execution Time, will be included
or made therein.
<PAGE> 3
3
It is understood that two forms of prospectus are to be used in
connection with the offering and sale of the Securities: one form of
prospectus relating to the U.S. Securities, which are to be offered and
sold to United States and Canadian Persons, and one form of prospectus
relating to the International Securities, which are to be offered and
sold to persons other than United States and Canadian Persons. The two
forms of prospectus are identical except for the outside front cover
page, the discussion under the heading "Underwriting" and the outside
back cover page. Such form of prospectus relating to the U.S. Securities
as first filed pursuant to Rule 424(b) after the Execution Time or, if
no filing pursuant to Rule 424(b) is made, such form of prospectus
included in the Registration Statement at the Effective Date, is
hereinafter called the "U.S. Prospectus"; such form of prospectus
relating to the International Securities as first filed pursuant to Rule
424(b) after the Execution Time or, if no filing pursuant to Rule 424(b)
is made, such form of prospectus included in the Registration Statement
at the Effective Date, is hereinafter called the "International
Prospectus"; and the U.S. Prospectus and the International Prospectus
are hereinafter collectively called the "Prospectuses".
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectuses are first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which International Option Securities are purchased,
if such date is not the Closing Date (a "settlement date"), each
Prospectus (and any supplements thereto) will, comply in all material
respects with the applicable requirements of the Act and the rules
thereunder; on the Effective Date and at the Execution Time, the
Registration Statement did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, each Prospectus, if not filed
pursuant to Rule 424(b), will not, and on the date of any filing
pursuant to Rule 424(b) and on the Closing Date and any settlement date,
each Prospectus (together with any supplement thereto) will not, include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
the information contained in or omitted from the Registration Statement
or the Prospectuses (or any supplement thereto) in reliance upon and in
conformity with information furnished herein or in writing to the
Company by or on behalf of any Manager through the Lead Managers
specifically for inclusion in the Registration Statement or the
Prospectuses (or any supplement thereto).
(c) Each of the Company and Maxtor Asia Pacific Limited, Maxtor
Disc Drives Pty. Limited, Maxtor Europe GmbH, Maxtor Europe Limited,
Maxtor Europe SARL, Maxtor (Japan) Limited, Maxtor Korea Limited, Maxtor
Ireland Limited, Maxtor Peripherals (S) Pte. Limited, Maxtor Receivables
Corporation, Maxtor Sales Private Limited, Maxtor (Thailand) Limited and
Old SDI Sub (each a "Subsidiary" and collectively the "Subsidiaries")
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction in which it is
chartered or organized with full corporate power and authority to own or
lease, as the case may be,
<PAGE> 4
4
and to operate its properties and conduct its business as described in
the Prospectuses, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction
which requires such qualification except to the extent that the failure
to be so qualified or be in good standing could not reasonably be
expected to have a Material Adverse Effect (as defined herein).
(d) All the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and all outstanding shares of capital
stock of the Subsidiaries are owned by the Company either directly or
through wholly owned Subsidiaries free and clear of any perfected
security interest or any other security interests, claims, liens or
encumbrances.
(e) The Company's authorized equity capitalization is as set
forth in the Prospectuses; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectuses; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
International Securities being sold hereunder by the Company have been
duly and validly authorized, and, when issued and delivered to and paid
for by the Managers pursuant to this Agreement, will be fully paid and
nonassessable; the International Securities being sold hereunder are
duly listed, and admitted and authorized for trading, subject to
official notice of issuance, on the Nasdaq National Market; the
certificates for the International Securities are in valid and
sufficient form; the holders of outstanding shares of capital stock of
the Company are not entitled to preemptive or other rights to subscribe
for the International Securities; and, except as set forth in the
Prospectuses, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert any
obligations into or exchange any securities for, shares of capital stock
of or ownership interests in the Company are outstanding.
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectuses, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectuses
under the headings "Risk Factors--Limited Protection of Intellectual
Property; Risk of Third Party Claims of Infringement", "Relationship
Between the Company and HEA", "Business--Intellectual Property",
"Description of Capital Stock", "Shares Eligible for Future Sale",
"Certain Transactions" and "Certain United States Federal Tax
Consequences to Holders of Common Stock" insofar as such statements
summarize legal matters, agreements, documents, or proceedings discussed
therein, are accurate and fair summaries of such legal matters,
agreements, documents or proceedings.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company, enforceable in accordance with its terms, except (i) as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (ii) to
<PAGE> 5
5
the extent that rights to indemnity or contribution under this Agreement
may be limited by Federal and state securities laws or the public policy
underlying such laws.
(h) The Company is not and, after giving effect to the offering
and sale of the Securities and the application of the proceeds thereof
as described in the Prospectuses, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order of
any court or governmental agency or body is required for the
consummation by the Company of the transactions contemplated herein,
except such as have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the International Securities by the
Managers in the manner contemplated herein and in the Prospectuses.
(j) Neither the issue and sale of the International Securities
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will conflict with,
or result in a breach or violation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any
Subsidiaries pursuant to, (i) the charter or by-laws of the Company or
any Subsidiaries, (ii) the terms of any material indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
material agreement, obligation, condition, covenant or instrument to
which the Company or any Subsidiary is a party or bound or to which its
or their property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to the Company or any
Subsidiary of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction
over the Company or any Subsidiary or any of its or their properties.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement which
have not been waived in writing prior to the Execution Time.
(l) The consolidated historical financial statements and
schedules of the Company and its consolidated subsidiaries included in
the Prospectuses and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods indicated,
comply as to form with the applicable accounting requirements of the Act
and have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods involved
(except as otherwise noted therein). The selected financial data set
forth under the caption "Selected Consolidated Financial Data" in the
Prospectuses and Registration Statement fairly present, on the basis
stated in the Prospectuses and the Registration Statement, the
information included therein.
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any Subsidiaries or its or their property is pending or, to
the knowledge of the Company, threatened that (i) could
<PAGE> 6
6
reasonably be expected to have a material adverse effect on the
performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected to
have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and the Subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business (a "Material Adverse
Effect"), except as set forth in or contemplated in the Prospectuses
(exclusive of any supplement thereto).
(n) Each of the Company and the Subsidiaries owns, leases or has
sufficient rights to use all such properties as are necessary to the
conduct of its operations as presently conducted.
(o) Neither the Company nor any Subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms of
any material indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other material agreement, obligation,
condition, covenant or instrument to which it is a party or bound or to
which its property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or such subsidiary or any of its
properties, as applicable, the violation of which could reasonably be
expected to have a Material Adverse Effect.
(p) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company and its consolidated subsidiaries
and delivered their report with respect to the audited consolidated
financial statements and schedules included in the Prospectuses, and
Ernst & Young LLP, who have certified certain financial statements of
the Company and its consolidated subsidiaries and delivered their report
with respect to the audited consolidated financial statements included
in the Prospectuses, are each independent public accountants with
respect to the Company within the meaning of the Act and the applicable
published rules and regulations thereunder.
(q) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and
delivery of this Agreement or the issuance and sale by the Company of
the International Securities.
(r) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not
have a Material Adverse Effect) and has paid all taxes required to be
paid by it and any other assessment, fine or penalty levied against it,
to the extent that any of the foregoing is due and payable, except for
any such assessment, fine or penalty that is currently being contested
in good faith or as could not reasonably be expected to have a Material
Adverse Effect.
<PAGE> 7
7
(s) No labor problem or dispute with the employees of the Company
or any Subsidiary exists or, to the knowledge of the Company, is
threatened or imminent, that could, in any such case, reasonably be
expected to have a Material Adverse Effect.
(t) The Company and each Subsidiary carry, or are entitled to the
benefits of, insurance (including self-insurance) in such amounts and
covering such risks as are prudent and customary in the businesses in
which they are engaged and all such insurance is, and after consummation
of the transactions contemplated herein will be, in full force and
effect; and neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that could not reasonably be expected to have a Material Adverse
Effect.
(u) No Subsidiary is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any
other distribution on such Subsidiary's capital stock, from repaying to
the Company any loans or advances to such Subsidiary from the Company or
from transferring any of such Subsidiary's property or assets to the
Company or any other Subsidiary, except for any requirements under the
laws of the jurisdictions in which any Subsidiary is organized that
corporations organized in such jurisdictions maintain specified levels
of capital or statutory reserves.
(v) The Company and the Subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses as presently conducted except where the
failure to possess such licenses, certificates, permits or
authorizations would not have a Material Adverse Effect, and neither the
Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any such license,
certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, could
reasonably be expected to have a Material Adverse Effect.
(w) The Company and each of the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(x) Neither the Company nor its affiliated purchasers, as defined
in Rule 100 of Regulation M ("Regulation M") under the Exchange Act,
either alone or with one or more other persons, (i) has taken, either
directly or indirectly, any action which was
<PAGE> 8
8
designed to cause or result in, or which has constituted, or which might
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company ("Subject
Securities") in connection with the offering of the Securities or (ii)
will bid for or purchase any Subject Securities of the Company or any
other covered securities (within the meaning of Regulation M) relating
to the Subject Securities (together with Subject Securities, "Covered
Securities"), or attempt to induce any person to bid for or purchase any
Covered Securities, in either case, for the purpose of creating actual
or apparent active trading in, or raising the price of the Securities.
(y) The Company and the Subsidiaries (i) are in material
compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) have received
and are in compliance with all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses as presently conducted and (iii) have not received
notice of any actual or potential liability for the investigation or
remediation of any disposal or release of hazardous or toxic substances
or wastes, pollutants or contaminants, except where such non-compliance
with Environmental Laws, failure to receive required permits, licenses
or other approvals, or liability would not, individually or in the
aggregate, have a Material Adverse Effect. Neither the Company nor any
Subsidiary has been named as a "potentially responsible party" under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended.
(z) Each of the Company and the Subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302
of the United States Employee Retirement Income Security Act of 1974
("ERISA") and the regulations and published interpretations thereunder
with respect to each "plan" (as defined in Section 3(3) of ERISA and
such regulations and published interpretations) in which employees of
the Company or any of the Subsidiaries are eligible to participate. Each
such plan is in compliance in all material respects with the presently
applicable provisions of ERISA and such regulations and published
interpretations, except where the failure to so comply could not
reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect. Neither the Company nor any of the Subsidiaries
has incurred any unpaid liability to the Pension Benefit Guaranty
Corporation (other than for the payment of premiums in the ordinary
course) or to any such plan under Title IV of ERISA.
(aa) Maxtor Peripherals (S) Pte. Limited ("Maxtor Singapore") is
the only Subsidiary that reasonably could be deemed to be a "significant
subsidiary" of the Company within the meaning of Rule 11-02(w) of
Regulation S-X under the Act.
(bb) The Company and the Subsidiaries own, possess, license or
have other rights to use, on reasonable terms, all patents, patent
applications, trade and service marks, trade and service mark
registrations, trade names, copyrights, licenses, inventions, trade
secrets, technology, know-how and other intellectual property
(collectively, the
<PAGE> 9
9
"Intellectual Property") necessary for the conduct of their respective
businesses as now conducted (as described in the Prospectuses), except
where the failure to own or possess any such Intellectual Property could
not reasonably be expected, singly or in the aggregate, to have a
Material Adverse Effect and (i) to the knowledge of the Company, there
are no rights of third parties to any such Intellectual Property; (ii)
to the knowledge of the Company, there is no material infringement by
third parties of any such Intellectual Property; (iii) there is no
pending or, to the knowledge of the Company, threatened action, suit,
proceeding or claim by others challenging the Company's rights in or to
any such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (iv) there is no
pending or to the knowledge of the Company, threatened action, suit,
proceeding or claim by others challenging the validity or scope of any
such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (v) except as
specifically set forth in the Prospectuses under the caption
"Business--Intellectual Property," there is no pending or, to the
knowledge of the Company, threatened action, suit, proceeding or claim
by others that the Company infringes or otherwise violates any patent,
trademark, copyright, trade secret or other proprietary rights of
others, and the Company is unaware of any other fact which would form a
reasonable basis for any such claim and (vi) to the Company's knowledge,
all U.S. patents owned by the Company are valid and enforceable.
(cc) Except as disclosed in the Prospectuses, the Company (i)
does not have any material lending or other relationship with any bank
or lending affiliate of any of the Managers and (ii) does not intend to
use any of the proceeds from the sale of the International Securities
hereunder to repay any outstanding debt owed to any affiliate of any of
the Managers.
(dd) The Company and the Subsidiaries have determined that the
computer hardware and software used by them may be unable to recognize
and properly execute date-sensitive functions involving certain dates
prior to and any dates after December 31, 1999 (the "Year 2000
Problem"), and reasonably believe that the Company's implementation of a
new enterprise-wide information system provided by SAP, AG will remedy
such risk on a timely basis and that such risk could not reasonably be
expected to have a Material Adverse Effect. The Company is in compliance
with the Commission's staff legal bulletin No. 5 dated January 12, 1998
related to Year 2000 compliance.
(ee) Neither the Company nor any of the Subsidiaries has
distributed nor will it distribute prior to the latest of (i) the
Closing Date, (ii) any settlement date and (iii) completion of the
distribution of the International Securities, any offering material in
connection with the offering and sale of the International Securities
other than any Preliminary Prospectuses, the Prospectuses, the
Registration Statement and other materials, if any, permitted by the
Act.
(ff) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by
<PAGE> 10
10
the Company or any of the Subsidiaries to or for the benefit of any of
the officers or directors of the Company or any Subsidiary or any of the
members of the families of any of them, which loans, advances or
guarantees are required to be, and are not, disclosed in the
Registration Statement and Prospectuses.
(gg) There have not been, and there are not proposed, any
transactions or agreements between the Company or any of the
Subsidiaries on the one hand and the officers, directors or stockholders
of the Company or any of the Subsidiaries on the other, which
transactions or agreements are required to be, and are not, disclosed in
the Registration Statement and Prospectuses.
(hh) No officer or director of the Company is in breach or
violation of any employment agreement, non-competition agreement,
confidentiality agreement, or other agreement restricting the nature or
scope of employment to which such officer or director is a party, other
than such breaches or violations which could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect; the
conduct of the Company's business, as described in the Registration
Statement and Prospectuses, will not result in a breach or violation of
any such agreement.
(ii) There are no outstanding options to acquire shares of
capital stock of the Company that are vested and exercisable, and there
are no outstanding options to acquire shares of capital stock of the
Company that can, by their terms, become exercisable within 180 days of
the date hereof, except as disclosed in the Registration Statement and
the Prospectuses.
(jj) The Company has not received any notice or communication (in
writing or otherwise), or any other information, indicating that there
is a material possibility that any customer of the Company identified in
the "Business-Customers" section of the Registration Statement will
cease dealing with the Company or otherwise materially reduce the volume
of business transacted by such customer with the Company below
historical levels.
Any certificate signed by any officer of the Company and
delivered to the Lead Managers or counsel for the Managers in connection with
this Agreement shall be deemed a representation and warranty by the Company, as
to matters covered thereby, to each Manager.
(ii) HEA represents and warrants to, and agrees with, each
Manager that:
(a) HEA has full legal right, capacity, power and authority to
enter into and perform this Agreement.
(b) Neither HEA nor its affiliated purchasers, as defined in
Regulation M under the Exchange Act, either alone or with one or more
other persons, (i) has taken, either directly or indirectly, any action
which was designed to cause or result in, or which has constituted, or
which might reasonably be expected to cause or result in, stabilization
or manipulation of the price of any Subject Securities in connection
with the offering of the
<PAGE> 11
11
Securities or (ii) will bid for or purchase any Covered Securities or
attempt to induce any person to bid for or purchase any Covered
Securities, in either case, for the purpose of creating actual or
apparent active trading in, or raising the price of the Securities.
(c) Neither the issue and sale by the Company of the
International Securities nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof
will conflict with, or result in a breach or violation or imposition of
any lien, charge or encumbrance upon any property or assets of HEA
pursuant to, (i) the charter or by-laws of HEA, (ii) the terms of any
material indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other material agreement, obligation,
condition, covenant or instrument to which HEA is a party or bound or to
which its property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to HEA of any court,
regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over HEA or any of its properties.
(d) On the Effective Date, the Registration Statement did or
will, and when the Prospectuses are first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any settlement date, each Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable
requirements of the Act and the rules thereunder; on the Effective Date
and at the Execution Time, the Registration Statement did not or will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and, on the Effective Date,
each Prospectus, if not filed pursuant to Rule 424(b), will not, and on
the date of any filing pursuant to Rule 424(b) and on the Closing Date
and any settlement date, each Prospectus (together with any supplement
thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that HEA makes no representations or
warranties as to the information contained in or omitted from the
Registration Statement, or the Prospectuses (or any supplement thereto)
in reliance upon and in conformity with information furnished herein or
in writing to the Company or HEA by or on behalf of any Manager through
the Lead Managers specifically for inclusion in the Registration
Statement or the Prospectuses (or any supplement thereto).
(e) This Agreement has been duly authorized, executed and
delivered by HEA and constitutes a valid and binding obligation of HEA
enforceable in accordance with its terms, except (i) as the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (ii) to the extent that rights to indemnity or
contribution under this Agreement may be limited by Federal and state
securities laws or the public policy underlying such laws.
<PAGE> 12
12
(f) HEA is not and, after giving effect to the offering and sale
of the Securities and the application of the proceeds thereof as
described in the Prospectuses, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended.
(g) Except as disclosed in the Prospectuses, HEA (i) does not
have any material lending or other relationship with any bank or lending
affiliate of any of the Managers and (ii) does not intend to use any of
the proceeds from the sale of the International Securities hereunder to
repay any outstanding debt owed to any affiliate of any of the Managers.
(h) There have not been, and there are not proposed, any
transactions or agreements between HEA or any of its subsidiaries
(excluding the Company and the Subsidiaries) on the one hand and the
officers, directors or stockholders of the Company or any of the
Subsidiaries on the other, which transactions or agreements are required
to be, and are not, disclosed in the Registration Statement and
Prospectuses.
Any certificate signed by any officer of HEA and delivered to the
Lead Managers or counsel for the Managers in connection with this Agreement
shall be deemed a representation and warranty by HEA, as to matters covered
thereby, to each Manager.
2. Purchase and Sale. (a) Subject to such adjustments as you may
determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Manager and, upon the basis of the representations, warranties and
agreements of the Company and HEA herein contained and subject to all the terms
and conditions set forth herein, each Manager agrees, severally and not jointly,
to purchase from the Company, at a purchase price of -- per share (the
"purchase price per share"), the number of International Underwritten Securities
which bears the same proportion to the aggregate number of International
Underwritten Securities to be issued and sold by the Company as the number of
International Underwritten Securities set forth opposite the name of such
Manager in Schedule I hereto (or such number of International Underwritten
Securities increased as set forth in Section 9 hereof) bears to the aggregate
number of International Underwritten Securities to be sold by the Company.
(b) The Company also agrees, subject to all the terms and
conditions set forth herein, to sell to the Managers, and, upon the basis of the
representations, warranties and agreements of the Company and HEA herein
contained and subject to all the terms and conditions set forth herein, the
Managers shall have the right to purchase from the Company, at the purchase
price per share, pursuant to an option (the "over-allotment option") which may
be exercised at any time (but not more than once) prior to 9:00 P.M., New York
City time, on the 30th day after the date of the Prospectus (or, if such 30th
day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the Nasdaq National Market is open for trading), up to an
aggregate of 1,425,000 shares of International Option Securities from the
Company. International Option Securities may be purchased only for the purpose
of covering over-allotments made in connection with the sale of the
International Underwritten Securities by
<PAGE> 13
13
the Managers. The number of International Option Securities which the Managers
elect to purchase upon any exercise of the over-allotment option shall be
provided by the Company in proportion to the maximum number of International
Option Securities which the Company has agreed to sell. Upon any exercise of the
over-allotment option, each Manager, severally and not jointly, agrees to
purchase from the Company the number of International Option Securities (subject
to such adjustments as you may determine in order to avoid fractional shares)
which bears the same proportion to the number of International Option Securities
to be sold by the Company as the number of International Underwritten Securities
set forth opposite the name of such Manager in Schedule I hereto (or such number
of International Underwritten Securities increased as set forth in Section 9
hereof) bears to the aggregate number of International Underwritten Securities
to be sold by the Company.
3. Delivery and Payment. Delivery of and payment for the
International Underwritten Securities and the International Option Securities
(if the option provided for in Section 2(b) hereof shall have been exercised on
or before the third Business Day prior to the Closing Date) shall be made at
10:00 AM, New York City time, on --, 1998, or at such time on such later date
not more than three Business Days after the foregoing date as the Lead Managers
shall designate, which date and time may be postponed by agreement among the
Lead Managers and the Company or as provided in Section 9 hereof (such date and
time of delivery and payment for the International Securities being herein
called the "Closing Date"). Delivery of the International Securities shall be
made to the Lead Managers for the respective accounts of the several Managers
against payment by the several Managers through the Lead Managers of the
respective aggregate purchase prices of the International Securities being sold
by the Company to or upon the order of the Company by wire transfer payable in
same-day funds to the accounts specified by the Company. Delivery of the
International Underwritten Securities and the International Option Securities
shall be made through the facilities of The Depository Trust Company unless the
Lead Managers shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the International Option Securities (at the expense of the Company) to the Lead
Managers on the date specified by the Lead Managers (which shall be within three
Business Days after exercise of said option) for the respective accounts of the
several Managers, against payment by the several Managers through the Lead
Managers of the purchase price thereof to or upon the order of the Company by
wire transfer payable in same-day funds to the accounts specified by the
Company. If settlement for the International Option Securities occurs after the
Closing Date, the Company and HEA will deliver to the Lead Managers on the
settlement date for the International Option Securities, and the obligation of
the Managers to purchase the International Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. Offering by Managers. It is understood that the several
Managers propose to offer the International Securities for sale to the public as
set forth in the Prospectuses.
<PAGE> 14
14
5. Agreements.
(i) The Company agrees with the several Managers that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the International Securities, the Company will not file any
amendment of the Registration Statement or supplement to the
Prospectuses or any Rule 462(b) Registration Statement unless the
Company has furnished you a copy for your review prior to filing and
will not file any such proposed amendment or supplement to which you
reasonably object. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectuses is otherwise required under Rule
424(b), the Company will cause the Prospectuses, properly completed, and
any supplement thereto to be filed with the Commission pursuant to the
applicable paragraph of Rule 424(b) within the time period prescribed
and will provide evidence satisfactory to the Lead Managers of such
timely filing. The Company will promptly advise the Lead Managers (1)
when the Registration Statement, if not effective at the Execution Time,
shall have become effective, (2) when the Prospectuses, and any
supplement thereto, shall have been filed (if required) with the
Commission pursuant to Rule 424(b) or when any Rule 462(b) Registration
Statement shall have been filed with the Commission, (3) when, prior to
termination of the offering of the International Securities, any
amendment to the Registration Statement shall have been filed or become
effective, (4) of any request by the Commission or its staff for any
amendment of the Registration Statement, or any Rule 462(b) Registration
Statement, or for any supplement to the Prospectuses or for any
additional information, (5) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or
the institution or threatening of any proceeding for that purpose and
(6) of the receipt by the Company of any notification with respect to
the suspension of the qualification of the International Securities for
sale in any jurisdiction or the institution or threatening of any
proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or the suspension of any
such qualification and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the
International Securities is required to be delivered under the Act, any
event occurs as a result of which either of the Prospectuses as then
supplemented would include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein
in the light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend the Registration
Statement or supplement either of the Prospectuses to comply with the
Act or the rules thereunder, the Company promptly will (1) notify the
Lead Managers of any such event; (2) prepare and file with the
Commission, subject to the second sentence of paragraph (i)(a) of this
Section 5, an amendment or supplement which will correct such statement
or omission or effect such compliance; and (3) supply any supplemented
Prospectuses to you in such quantities as you may reasonably request.
<PAGE> 15
15
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Lead Managers an earnings
statement or statements of the Company and the Subsidiaries which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under
the Act.
(d) The Company will furnish to the Lead Managers and counsel for
the Managers signed copies of the Registration Statement (including
exhibits thereto) and to each other Manager a copy of the Registration
Statement (without exhibits thereto) and, so long as delivery of a
prospectus by a Manager or dealer may be required by the Act, as many
copies of each Preliminary Prospectus and the International Prospectus
and any supplement thereto as the Lead Managers may reasonably request.
(e) The Company will use its best efforts to arrange, if
necessary, for the qualification of the International Securities for
sale under the laws of such jurisdictions as the Lead Managers may
designate and will maintain such qualifications in effect so long as
required for the distribution of the International Securities; provided
that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take
any action that would subject it to service of process in suits, other
than those arising out of the offering or sale of the International
Securities, in any jurisdiction where it is not now so subject.
(f) The Company will not, without the prior written consent of
Smith Barney Inc., for a period of 180 days following the Execution
Time, offer, sell or contract to sell, or otherwise dispose of (or enter
into any transaction which is designed to, or might reasonably be
expected to, result in the disposition (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise) by
the Company or any affiliate of the Company or any person in privity
with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other shares of Common
Stock or any securities convertible into, or exchangeable for, shares of
Common Stock; provided, however, that the Company may issue and sell
Common Stock pursuant to any employee stock option plan, restricted
stock plan, employee stock purchase plan or dividend reinvestment plan
of the Company in effect at the Execution Time and the Company may issue
Common Stock issuable upon the conversion of securities or the exercise
of warrants outstanding at the Execution Time.
(g) Neither the Company nor its affiliated purchasers, as defined
in Regulation M under the Exchange Act, either alone or with one or more
other persons, (i) will take, either directly or indirectly, any action
which is designed to cause or result in, or which will constitute, or
which might reasonably be expected to cause or result in, stabilization
or manipulation of the price of any Subject Securities in connection
with the offering of the Securities or (ii) will bid for or purchase any
Covered Securities or attempt to induce any person to bid for or
purchase any Covered Securities, in either case, for the purpose of
creating actual or apparent active trading in, or raising the price of
the Securities.
<PAGE> 16
16
(h) The Company agrees to pay the costs and expenses relating to
the following matters: (i) the preparation, printing or reproduction and
filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary Prospectus,
the International Prospectus, and each amendment or supplement to any of
them; (ii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of
such copies of the Registration Statement, each Preliminary Prospectus,
the International Prospectus, and all amendments or supplements to any
of them, as may, in each case, be reasonably requested for use in
connection with the offering and sale of the International Securities;
(iii) the preparation, printing, authentication, issuance and delivery
of certificates for the International Securities, including any stamp or
transfer taxes in connection with the original issuance and sale of the
International Securities; (iv) the printing (or reproduction) and
delivery of this Agreement, any blue sky memorandum and all other
agreements or documents printed (or reproduced) and delivered in
connection with the offering of the International Securities; (v) the
registration of the International Securities under the Exchange Act and
the listing of the International Securities on the Nasdaq National
Market; (vi) any registration or qualification of the International
Securities for offer and sale under the securities or blue sky laws of
the several states (including filing fees and the reasonable fees and
expenses of counsel for the Managers relating to such registration and
qualification); (vii) any filings required to be made with the National
Association of Securities Dealers, Inc. (including filing fees and the
reasonable fees and expenses of counsel for the Managers relating to
such filings); (viii) the transportation and other expenses incurred by
or on behalf of Company representatives (excluding the Managers) in
connection with presentations to prospective purchasers of the
International Securities; (ix) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and HEA; and (x) all other costs and
expenses incident to the performance by the Company and HEA of their
obligations hereunder.
(i) The Company will use the net proceeds to the Company of the
offering of the Securities as described under the heading "Use of
Proceeds" in the Prospectuses.
(ii) HEA agrees with the several Managers that:
(a) HEA will not, without the prior written consent of Smith
Barney Inc., offer, sell, contract to sell, pledge or otherwise dispose
of, or file (or participate in the filing of) a registration statement
with the Commission in respect of, or establish or increase a put
equivalent position or liquidate or decrease a call equivalent position
within the meaning of Section 16 of the Exchange Act with respect to,
any shares of capital stock of the Company or any securities convertible
into or exercisable or exchangeable for such capital stock, or publicly
announce an intention to effect any such transaction, for a period of
180 days after the date of this Agreement, other than shares of Common
Stock disposed of as bona fide gifts approved by Smith Barney Inc.
<PAGE> 17
17
(b) Neither HEA nor its affiliated purchasers, as defined in
Regulation M under the Exchange Act, either alone or with one or more
other persons, (i) will take, either directly or indirectly, any action
which is designed to cause or result in, or which will constitute, or
which might reasonably be expected to cause or result in, stabilization
or manipulation of the price of any Subject Securities in connection
with the offering of the Securities or (ii) will bid for or purchase any
Covered Securities or attempt to induce any person to bid for or
purchase any Covered Securities, in either case, for the purpose of
creating actual or apparent active trading in, or raising the price of
the Securities.
(c) HEA will advise you promptly, and if requested by you, will
confirm such advice in writing, so long as delivery of a prospectus
relating to the International Securities by an underwriter or dealer may
be required under the Act, of (i) any material change in the Company's
condition (financial or otherwise), prospects, earnings, business or
properties, (ii) any change in information in the Registration Statement
or the Prospectuses relating to HEA or (iii) any new material
information relating to the Company or relating to any matter stated in
the Prospectuses which comes to the attention of HEA.
(iii)(a) Each Manager agrees that (i) it is not purchasing any of
the International Securities for the account of any United States or Canadian
Person, (ii) it has not offered or sold, and will not offer or sell, directly or
indirectly, any of the International Securities or distribute any International
Prospectus to any person in the United States or Canada, or to any United States
or Canadian Person, and (iii) any dealer to whom it may sell any of the
International Securities will represent that it is not purchasing for the
account of any United States or Canadian Person and agree that it will not offer
or resell, directly or indirectly, any of the International Securities in the
United States or Canada, or to any United States or Canadian Person or to any
other dealer who does not so represent and agree; provided, however, that the
foregoing shall not restrict (i) purchases and sales between the U.S.
Underwriters on the one hand and the Managers on the other hand pursuant to the
Agreement Between U.S. Underwriters and Managers, (ii) stabilization
transactions contemplated under the Agreement Between U.S. Underwriters and
Managers, conducted through Smith Barney Inc. (or through the U.S.
Representatives and Lead Managers) as part of the distribution of the
Securities, and (iii) sales to or through (or distributions of International
Prospectuses or Preliminary Prospectuses to) persons not United States or
Canadian Persons who are investment advisors, or who otherwise exercise
investment discretion, and who are purchasing for the account of any United
States or Canadian Person.
The agreement of the Managers set forth in the above paragraph
shall terminate upon the earlier of the following events:
(A) a mutual agreement of the U.S. Representatives and the
Lead Managers to terminate the selling restrictions set forth in
such paragraph and in Section 5(iii) of the U.S. Underwriting
Agreement; or
(B) the expiration of a period of 30 days after the
Closing Date, unless (A) the Lead Managers shall have given
notice to the Company and the U.S.
<PAGE> 18
18
Representatives that the distribution of the International
Securities by the Managers has not yet been completed, or (B) the
U.S. Representatives shall have given notice to the Company and
the Managers that the distribution of the U.S. Securities by the
U.S. Underwriters has not yet been completed. If such notice by
the U.S. Representatives or the Lead Managers is given, the
agreements set forth in such paragraph shall survive until the
earlier of (1) the event referred to in clause (A) above or (2)
the expiration of an additional period of 30 days from the date
of any such notice.
(b) Each Manager severally represents and agrees that:
(A) it has not offered or sold and, prior to the
expiration of six months from the closing of the offering of the
International Securities, will not offer or sell any
International Securities in the United Kingdom other than to
persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (whether as
principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not
result in an offer to the public within the meaning of the U.K.
Public Offers of Securities Regulations 1995;
(B) it has complied and will comply with all applicable
provisions of the U.K. Financial Services Act 1986 with respect
to anything done by it in relation to the International
Securities in, from or otherwise involving the United Kingdom;
and
(C) it has only issued or passed on and will only issue or
pass on in the United Kingdom any document received by it in
connection with the issue of the International Securities to a
person who is of a kind described in Article 11(3) of the U.K.
Financial Services Act 1986 (Investment
Advertisement)(Exemptions) order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on.
6. Conditions to the Obligations of the Managers. The obligations
of the Managers to purchase the International Underwritten Securities and the
International Option Securities, as the case may be, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
HEA contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and HEA made in any certificates pursuant to the provisions
hereof, to the performance by the Company and HEA of their respective
obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective prior
to the Execution Time, unless the Lead Managers agree in writing to a
later time, the Registration Statement will become effective not later
than (i) 6:00 PM New York City time on the date of determination of the
public offering price, if such determination occurred at or prior to
3:00 PM New York City time on such date or (ii) 9:30 AM on the Business
Day
<PAGE> 19
19
following the day on which the public offering price was determined, if
such determination occurred after 3:00 PM New York City time on such
date; if filing of any of the Prospectuses, or any supplement thereto,
is required pursuant to Rule 424(b), the Prospectuses, and any such
supplement, will be filed in the manner and within the time period
required by Rule 424(b); and no stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings
for that purpose shall have been instituted or threatened.
(b) The Company shall have caused Gray Cary Ware & Freidenrich
LLP, counsel for the Company, to have furnished to the Lead Managers
their opinion, dated the Closing Date and addressed to the Lead
Managers, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own or
lease, as the case may be, and to operate its properties and
conduct its businesses as described in the Prospectuses, and is
duly qualified to do business as foreign corporation and is in
good standing under the laws of the State of California and, to
the knowledge of such counsel, each other jurisdiction which
requires such qualification, except where the failure to be so
qualified or be in good standing could not reasonably be expected
to have a Material Adverse Effect.
(ii) except as otherwise set forth in the Prospectuses,
all outstanding shares of capital stock of each Subsidiary are
owned of record by the Company or by another Subsidiary;
(iii) the Company's authorized equity capitalization is as
set forth in the Prospectuses; the capital stock of the Company
conforms in all material respects to the description thereof
contained in the Prospectuses; the outstanding shares of Common
Stock have been duly and validly authorized and issued and are
fully paid and nonassessable; the International Securities being
sold hereunder by the Company have been duly and validly
authorized, and, when issued and delivered to and paid for by the
Managers pursuant to this Agreement, will be fully paid and
nonassessable; the International Securities being sold hereunder
are duly listed, and admitted and authorized for trading, subject
to official notice of issuance, on the Nasdaq National Market;
the certificates for the International Securities are in valid
and sufficient form; the holders of outstanding shares of capital
stock of the Company are not entitled to preemptive rights under
the Company's charter documents, Delaware corporate law or any
agreements of which such counsel is aware, or to such counsel's
knowledge, similar rights to subscribe for the International
Securities except for the ownership maintenance rights granted to
HEA under the stockholder agreement, dated as of June 25, 1998
among the Company, HEA and Hyundai Electronics Industries Co.,
Ltd. (the "Stockholder Agreement); and, except as set forth in
the Prospectuses, to the knowledge of such counsel, no options,
warrants or other rights to purchase, agreements or other
<PAGE> 20
20
obligations to issue, or rights to convert any obligations into
or exchange any securities for, shares of capital stock of or
ownership interests in the Company are outstanding;
(iv) to the knowledge of such counsel, there is no pending
or threatened action, suit or proceeding by or before any court
or governmental agency, authority or body or any arbitrator
involving the Company or any Subsidiaries or its or their
property of a character required to be disclosed in the
Registration Statement which is not adequately disclosed in the
Prospectuses, and, to the knowledge of such counsel, there is no
franchise, contract or other document of a character required to
be described in the Registration Statement or Prospectuses, or to
be filed as an exhibit thereto, which is not described or filed
as required under the Act or the applicable rules and regulations
of the Commission thereunder; and the statements in the
Prospectuses under the headings "Relationship Between the Company
and Hyundai," "Business--Intellectual Property," "Certain
Transactions," "Management--Executive Compensation--Employment
Agreements--Benefit Plans," "Description of Capital Stock,"
"Shares Eligible for Future Sale" and "Certain United States
Federal Tax Consequences to Holders of Common Stock" accurately
summarize in all material respects the matters therein described
to the extent they are matters of law and descriptions of
contractual arrangements;
(v) the Registration Statement has become effective under
the Act; any required filing of the Prospectuses, and any
supplements thereto, pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); to the
knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued, no
proceedings for that purpose have been instituted or threatened
and the Registration Statement and the Prospectuses (other than
the financial statements, schedules and other financial
information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules
thereunder;
(vi) each of this Agreement and the U.S. Underwriting
Agreement has been duly authorized, executed and delivered by the
Company (assuming due authorization and execution by each party
thereto other than the Company);
(vii) the Company is not and, after giving effect to the
offering and sale of the Securities and the application of the
proceeds thereof as described in the Prospectuses, will not be,
an "investment company" as defined in the Investment Company Act
of 1940, as amended;
(viii) no consent, approval, authorization, filing with or
order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such
as have been obtained under the Act and such as
<PAGE> 21
21
may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the
International Securities by the Managers in the manner
contemplated in this Agreement and in the Prospectuses and such
other approvals (specified in such opinion) as have been
obtained;
(ix) neither the issuance and sale of the International
Securities, nor the consummation of any other of the transactions
herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or imposition
of any lien, charge or encumbrance upon any property or assets of
the Company pursuant to, (i) the charter or by-laws of the
Company, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which
the Company is a party or bound or to which its property is
subject and that is filed as an exhibit to the Registration
Statement, or (iii) any statute, law, rule or regulation which,
in the experience of such counsel, typically is applicable to the
types of transactions contemplated herein or, to the knowledge of
such counsel, any judgment, order or decree applicable to the
Company of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority asserting
jurisdiction over the Company or any of its properties; and
(x) to the knowledge of such counsel, no holders of
securities of the Company have rights to the registration of such
securities under the Registration Statement except for rights
granted to HEA under the Stockholder Agreement.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of California, the General Corporation Law of the State of
Delaware or the Federal laws of the United States, to the extent they
deem proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who are
reasonably satisfactory to counsel for the Managers and (B) as to
matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and public officials. References to
the Prospectuses in this paragraph (b) include any supplements thereto
at the Closing Date.
In addition, such counsel shall state that such counsel has participated
in conferences and in telephone conversations with officers and other
representatives of the Company, representatives of the Lead Managers and
representatives of the independent public accountants of the Company,
during which conferences and conversations the contents of the
Registration Statement and the Prospectuses were discussed, and such
counsel has reviewed certain corporate records and documents furnished
to such counsel by the Company and that, although such counsel has not
undertaken to independently verify and does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectuses
(except as specified in the foregoing opinion), on the basis of the
foregoing, and such counsel's understanding of the U.S. federal
securities laws, no information has come to the
<PAGE> 22
22
attention of such counsel that causes such counsel to believe that the
Registration Statement on the Effective Date or at the Execution Time
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectuses as of their
date and on the Closing Date included or include any untrue statement of
a material fact or omitted or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading (other than financial statements
and schedules and other financial information contained therein, as to
which such counsel need express no opinion).
(c) The Company shall have caused counsel for each Subsidiary
(each such counsel to be reasonably satisfactory to the Lead Managers)
to have furnished to the Lead Managers an opinion, dated the Closing
Date and addressed to the Lead Managers, to the effect that:
(i) Maxtor Singapore has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the jurisdiction in which it is chartered or organized, with
corporate power and authority to own or lease, as the case may
be, and to operate its properties and conduct its businesses as
described in the Prospectuses, and, to the knowledge of such
counsel, is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification, except where the
failure to be so qualified or be in good standing could not
reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business
or properties of Maxtor Singapore, whether or not arising from
transactions in the ordinary course of business;
(ii) all the outstanding shares of capital stock of Maxtor
Singapore have been duly and validly authorized and issued and
are fully paid and nonassessable, and except as otherwise set
forth in the Prospectuses, are owned of record by the Company;
(iii) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator
involving Maxtor Singapore or its property which, if determined
adversely to Maxtor Singapore, would have, individually or in the
aggregate, could reasonably be expected to have a material
adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of Maxtor Singapore,
whether or not arising from transactions in the ordinary course
of business; and
(iv) neither the issue and sale of the International
Securities, nor the consummation of any other of the transactions
herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or imposition
of any lien, charge or encumbrance upon any property or assets of
<PAGE> 23
23
Maxtor Singapore pursuant to, (i) the charter or by-laws of
Maxtor Singapore, (ii) to the knowledge of such counsel, the
terms of any material indenture, contract, lease, mortgage, deed
of trust, note agreement, loan agreement or other material
agreement, obligation, condition, covenant or instrument to which
Maxtor Singapore is a party or bound or to which its property is
subject, or (iii) any statute, law, rule or regulation which, in
the experience of such counsel, typically is applicable to the
types of transactions contemplated herein or, to the knowledge of
such counsel, any judgment, order or decree applicable to Maxtor
Singapore of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority asserting
jurisdiction over Maxtor Singapore or any of its property.
In rendering such opinion, such counsel may rely as to matters of fact,
to the extent they deem proper and specified in such opinion, upon
certificates of responsible officers of the Company, Maxtor Singapore
and public officials. References to the Prospectuses in this paragraph
(c) include any supplements thereto at the Closing Date.
(d) HEA shall have caused Hal Hofherr, counsel for HEA, to have
furnished to the Lead Managers his opinion dated the Closing Date and
addressed to the Lead Managers, to the effect that:
(i) HEA is duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction
in which it is chartered or organized, with corporate power and
authority to own or lease, as the case may be, and to operate its
properties and conduct its business as described in the
Prospectuses, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of the State
of California and, to the knowledge of such counsel, each other
jurisdiction which requires such qualification, except where the
failure to be so qualified or be in good standing could not
reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business
or properties of HEA and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course
of business.
(ii) each of this Agreement and the International
Underwriting Agreement has been duly authorized, executed and
delivered by HEA (assuming due authorization and execution by
each party thereto other than HEA);
(iii) HEA is not, and after giving effect to the offering
and sale of the Securities and the application of the proceeds
thereof as described in the Prospectuses, will not be, an
"investment company" as defined in the Investment Company Act of
1940, as amended.
(iv) no consent, approval, authorization, filing with or
order of any court or governmental agency or body is required in
connection with the transactions contemplated herein, except such
as have been obtained under the Act and such as
<PAGE> 24
24
may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the U.S.
Securities by the U.S. Underwriters in the manner contemplated in
this Agreement and in the Prospectuses and such other approvals
(specified in such opinion) as have been obtained; and
(v) neither the sale of the International Securities being
sold by the Company nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms
hereof will conflict with, result in a breach or violation of or
imposition of any lien, charge or encumbrance upon any property
or assets of HEA pursuant to, (i) the charter or by-laws of the
HEA, (ii) to the knowledge of such counsel, the terms of any
material indenture, contract, lease, mortgage, deed of trust,
note agreement, loan agreement or other material agreement,
obligation, condition, covenant or instrument to which HEA is a
party or bound or to which its property is subject, or (iii) any
statute, law, rule or regulation which, in the experience of such
counsel, typically is applicable to the types of transactions
contemplated herein or, to the knowledge of such counsel, any
judgment, order or decree applicable to HEA of any court,
regulatory body, administrative agency, governmental body,
arbitrator or other authority asserting jurisdiction over HEA or
any of its properties. (i) such Subsidiary has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction in which it is
chartered or organized, with corporate power and authority to own
or lease, as the case may be, and to operate its properties and
conduct its businesses as described in the Prospectuses, and, to
the knowledge of such counsel, is duly qualified to do business
as a foreign corporation and is in good standing under the laws
of each jurisdiction which requires such qualification, except
where the failure to be so qualified or be in good standing could
not reasonably be expected to have a material adverse effect on
the condition (financial or otherwise), prospects, earnings,
business or properties of such subsidiary, whether or not arising
from transactions in the ordinary course of business;
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of California, the General Corporation Law of the State of
Delaware or the Federal laws of the United States, to the extent it
deems proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Managers, and (B) as to matters of fact,
to the extent it deems proper, on certificates of responsible officers
of HEA and public officials.
(e) The Lead Managers shall have received from Cleary, Gottlieb,
Steen & Hamilton, counsel for the Managers, such opinion or opinions,
dated the Closing Date and addressed to the Lead Managers, with respect
to the issuance and sale of the International Securities, the
Registration Statement, the Prospectuses (together with any supplement
thereto) and other related matters as the Lead Managers may reasonably
<PAGE> 25
25
require, and the Company and HEA shall have furnished to such counsel
such documents as they reasonably request for the purpose of enabling
them to pass upon such matters.
(f) The Company shall have furnished to the Lead Managers a
certificate of the Company, signed by the Chief Executive Officer and
the Chief Financial Officer of the Company, dated the Closing Date, to
the effect that the signers of such certificate have carefully examined
the Registration Statement, the Prospectuses, any supplements to the
Prospectuses and this Agreement and that:
(i) the representations and warranties of the Company in
this Agreement are true and correct on and as of the Closing Date
with the same effect as if made on the Closing Date and the
Company has complied in all material respects with all the
agreements and satisfied in all material respects all the
conditions on its part to be performed or satisfied at or prior
to the Closing Date (such certificate to set forth all known
failures to comply with such agreements or satisfy such
conditions, whether such known failures are material or
immaterial);
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and to the Company's
knowledge, after due inquiry with the Commission, no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectuses (exclusive of any
supplement thereto), there has been no material adverse effect on
the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and the Subsidiaries, taken
as a whole, whether or not arising from transactions in the
ordinary course of business, except as set forth in or
contemplated in the Prospectuses (exclusive of any supplement
thereto).
(g) HEA shall have furnished to the Lead Managers a certificate,
signed by the Chief Executive Officer, dated the Closing Date, to the
effect that the signer of such certificate has carefully examined the
Registration Statement, the Prospectuses, any supplement to the
Prospectuses and this Agreement and that the representations and
warranties of HEA in this Agreement are true and correct in all material
respects on and as of the Closing Date to the same effect as if made on
the Closing Date.
(h) The Company shall have caused PricewaterhouseCoopers LLP to
have furnished to the Lead Managers letters, at the Execution Time and
at the Closing Date, dated respectively as of the Execution Time and as
of the Closing Date, in form and substance reasonably satisfactory to
the Lead Managers, confirming that they are independent accountants
within the meaning of the Act and the applicable published rules and
regulations thereunder and that they have performed a review of the
unaudited interim financial information of the Company for the six-month
period ended June 30, 1998 and as at June 30, 1998, as well as for the
six quarterly periods for the period ended
<PAGE> 26
26
June 30, 1998 in accordance with Statement on Auditing Standards No. 71,
and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration
Statement and the Prospectuses and reported on by them comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations;
(ii) on the basis of a reading of the latest unaudited
financial statements made available by the Company and the
Subsidiaries; their limited review, in accordance with standards
established under Statement on Auditing Standards No. 71, of the
unaudited interim financial information for the six-month period
ended June 30, 1998, and as at June 30, 1998; carrying out
certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which
would not necessarily reveal matters of significance with respect
to the comments set forth in such letter; a reading of the
minutes of the meetings of the stockholders, directors and the
audit, executive and compensation committees of the Company and
the Subsidiaries; and inquiries of certain officials of the
Company who have responsibility for financial and accounting
matters of the Company and the Subsidiaries as to transactions
and events subsequent to December 27, 1997, nothing came to their
attention which caused them to believe that:
(1) the unaudited financial statements described in
(ii) above and included in the Registration Statement and
the Prospectuses do not comply as to form in all material
respects with the applicable accounting requirements of
the Act and with the published rules and regulations of
the Commission with respect to registration statements on
Form S-1; and said unaudited financial statements are not
in conformity with generally accepted accounting
principles applied on a basis substantially consistent
with that of the audited financial statements included in
the Registration Statement and the Prospectuses;
(2) with respect to the period subsequent to June
30, 1998, there were any changes, at a specified date not
more than five days prior to the date of the letter, in
the long-term debt and capital lease obligations due after
one year of the Company and the Subsidiaries or capital
stock of the Company or increases in the stockholders'
deficit of the Company or decreases in working capital of
the Company and the Subsidiaries as compared with the
amounts shown on the June 30, 1998, consolidated balance
sheet included in the Registration Statement and the
Prospectuses, or for the period from July 1, 1998 to such
specified date there were any decreases, as compared with
the corresponding period in the preceding quarter in total
revenue or income from operations or income before
<PAGE> 27
27
income taxes or in per share amounts of net income of the
Company and the Subsidiaries, except in all instances for
changes or decreases set forth in such letter, in which
case the letter shall be accompanied by an explanation by
the Company as to the significance thereof unless said
explanation is not deemed necessary by the U.S.
Representatives; and
(3) the information included in the Registration
Statement and Prospectuses in response to Regulation S-K,
Item 301 (Selected Financial Data), Item 302
(Supplementary Financial Information) and Item 402
(Executive Compensation) is not in conformity with the
applicable disclosure requirements of Regulation S-K.
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and the Subsidiaries) set forth in the Registration
Statement and the Prospectuses, including the information set
forth under the captions "Summary Consolidated Financial Data"
and "Selected Consolidated Financial Data" in the Prospectuses,
agrees with the accounting records of the Company and the
Subsidiaries, excluding any questions of legal interpretation.
References to the Prospectuses in this paragraph (h) include any
supplement thereto at the date of the letter.
(i) Subsequent to the Execution Time or, if earlier, the dates as
of which information is given in the Registration Statement (exclusive
of any amendment thereof) and the Prospectuses (exclusive of any
supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph (g)
of this Section 6 or (ii) any change, or any development involving a
prospective change, in or affecting the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and the Subsidiaries taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectuses (exclusive of any supplement
thereto) the effect of which, in any case referred to in clause (i) or
(ii) above, is, in the sole judgment of the Lead Managers, so material
and adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the International Securities as contemplated by
the Registration Statement (exclusive of any amendment thereof) and the
Prospectuses (exclusive of any supplement thereto).
(j) Subsequent to the Execution Time, there shall not have been
any decrease in the rating of any of the Company's debt securities by
any "nationally recognized statistical rating organization" (as defined
for purposes of Rule 436(g) under the Act) or any notice given of any
intended or potential decrease in any such rating or of a possible
change in any such rating that does not indicate the direction of the
possible change.
<PAGE> 28
28
(k) The International Securities shall have been listed and
admitted and authorized for trading on the Nasdaq National Market, and
satisfactory evidence of such actions shall have been provided to the
Lead Managers.
(l) Prior to the Closing Date, all of the conditions set forth in
the U.S. Underwriting Agreement with respect to the obligations of the
U.S. Underwriters to purchase the U.S. Securities shall have been
satisfied and not waived, and the purchase and sale of the U.S.
Underwritten Securities shall have been completed in accordance with the
terms of the U.S. Underwriting Agreement.
(m) Prior to the Closing Date, the Company shall have furnished
to the Lead Managers evidence satisfactory to the Lead Managers that (i)
the Company has obtained an asset securitization facility (or a
commitment to provide an asset securitization facility) in an aggregate
amount reasonably acceptable to the Lead Managers and not guaranteed in
any manner by, or dependent upon or linked in any way to the
creditworthiness of, HEA or any affiliates of HEA and (ii) the Company
has obtained a direct license with SAP Korea Ltd. that provides the
Company with substantially the same terms, rights and services as those
currently available to or received by the Company pursuant to the
license agreement between Hyundai Information Technology Co.
Ltd. and SAP Korea Ltd.
(n) At the Execution Time, the Company shall have furnished to
the U.S. Representatives and the Lead Managers a letter substantially in
the form of Exhibit A hereto from each officer, director, and
stockholder of the Company, which persons are listed on Schedule II
hereto, addressed to the U.S. Representatives and the Lead Managers.
(o) Prior to the Closing Date, the Company and HEA shall have
furnished to the Lead Managers such further information, certificates
and documents as the Lead Managers may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Lead Managers and counsel for the
Managers, this Agreement and all obligations of the Managers hereunder may be
canceled at, or at any time prior to, the Closing Date by the Lead Managers.
Notice of such cancellation shall be given to the Company and HEA in writing or
by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Gray Cary Ware & Freidenrich LLP, counsel for the
Company, at 400 Hamilton Avenue, Palo Alto, California 94301, on the Closing
Date.
7. Reimbursement of Managers' Expenses. If the sale of the
International Securities provided for herein is not consummated because any
condition to the obligations of the Managers set forth in Section 6 hereof is
not satisfied, because of any termination pursuant to
<PAGE> 29
29
Section 10 hereof or because of any refusal, inability or failure on the part of
the Company or HEA to perform any agreement herein or comply with any provision
hereof other than by reason of a default by any of the Managers, the Company
will reimburse the Managers severally through Smith Barney Inc. on demand for
all reasonable out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the Securities.
8. Indemnification and Contribution. (a) The Company and HEA
jointly and severally agree to indemnify and hold harmless each Manager, the
directors, officers, employees and agents of each Manager and each person who
controls any Manager within the meaning of either the Act or the Exchange Act
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for the
registration of the International Securities as originally filed or in any
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectuses, or in any amendment
thereof or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company and HEA
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Manager through the Lead Managers specifically
for inclusion therein; provided, further, that with respect to any untrue
statement or omission of material fact made in any Preliminary Prospectus, the
indemnity agreement contained in this Section 8(a) shall not inure to the
benefit of any Manager from whom the person asserting any such loss, claim,
damage or liability purchased the securities concerned, to the extent that any
such loss, claim, damage or liability of such Manager occurs under the
circumstance where it shall have been determined by final nonappealable judgment
that (w) the Company had previously furnished copies of the International
Prospectus to the Lead Managers, (x) delivery of the International Prospectus
was required by the Act to be made to such person, (y) the untrue statement or
omission of a material fact contained in the Preliminary Prospectus was
corrected in the International Prospectus and (z) there was not sent or given to
such person, at or prior to the written confirmation of the sale of such
securities to such person, a copy of the International Prospectus.
This indemnity agreement will be in addition to any liability
which the Company or HEA may otherwise have.
<PAGE> 30
30
(b) Each Manager severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signs the Registration Statement, each person who controls the Company within
the meaning of either the Act or the Exchange Act and HEA, to the same extent as
the foregoing indemnity to each Manager, but only with reference to written
information relating to such Manager furnished to the Company by or on behalf of
such Manager through the Lead Managers specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which any Manager may otherwise have. The
Company and HEA acknowledge that the statements set forth in the last paragraph
of the cover page regarding delivery of the International Securities, the legend
in block capital letters on the inside front cover related to stabilization,
syndicate covering transactions and penalty bids, and under the heading
"Underwriting" in any Preliminary Prospectus and the Prospectuses constitute the
only information furnished in writing by or on behalf of the several Managers
for inclusion in any Preliminary Prospectus or the Prospectuses.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action)
<PAGE> 31
31
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and HEA, jointly and severally,
and the Managers severally agree to contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating or defending same) (collectively "Losses") to
which the Company, HEA and one or more of the Managers may be subject in such
proportion as is appropriate to reflect the relative benefits received by the
Company and HEA on the one hand and by the Managers on the other from the
offering of the International Securities; provided, however, that in no case
shall any Manager (except as may be provided in any agreement among underwriters
relating to the offering of the International Securities) be responsible for any
amount in excess of the underwriting discount or commission applicable to the
International Securities purchased by such Manager hereunder. If the allocation
provided by the immediately preceding sentence is unavailable for any reason,
the Company and HEA, jointly and severally, and the Managers severally shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and HEA on the one
hand and of the Managers on the other in connection with the statements or
omissions which resulted in such Losses as well as any other relevant equitable
considerations. Benefits received by the Company and HEA shall be deemed to be
equal to the total net proceeds from the offering (before deducting expenses)
received by them, and benefits received by the Managers shall be deemed to be
equal to the total underwriting discounts and commissions, in each case as set
forth on the cover page of the Prospectuses. Relative fault shall be determined
by reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company or HEA on the one
hand or the Managers on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company, HEA and the Managers agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls a Manager within the meaning of either
the Act or the Exchange Act and each director, officer, employee and agent of a
Manager shall have the same rights to contribution as such Manager, and each
person who controls the Company within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to the applicable terms and
conditions of this paragraph (d).
(e) The liability of HEA under the indemnity and contribution
provisions contained in this Section 8 and the corresponding section in the U.S.
Underwriting Agreement shall be limited to an amount equal to $25,000,000;
provided, however, that the Managers shall not make any claim for indemnity or
contribution against HEA pursuant to this Section 8 unless the Managers shall
have first made a claim on the Company pursuant to this Section 8 and such claim
is not paid within 15 days from the time it is made. The Company and HEA may
agree, as
<PAGE> 32
32
among themselves and without limiting the rights of the Managers under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
9. Default by a Manager. If any one or more Managers shall fail
to purchase and pay for any of the International Securities agreed to be
purchased by such Manager or Managers hereunder and such failure to purchase
shall constitute a default in the performance of its or their obligations under
this Agreement, the remaining Managers shall be obligated severally to take up
and pay for (in the respective proportions which the amount of International
Securities set forth opposite their names in Schedule I hereto bears to the
aggregate amount of International Securities set forth opposite the names of all
the remaining Managers) the International Securities which the defaulting
Manager or Managers agreed but failed to purchase; provided, however, that in
the event that the aggregate amount of International Securities which the
defaulting Manager or Managers agreed but failed to purchase shall exceed 10% of
the aggregate amount of International Securities set forth in Schedule I hereto,
the remaining Managers shall have the right to purchase all, but shall not be
under any obligation to purchase any, of the International Securities, and if
such nondefaulting Managers do not purchase all the International Securities,
then the Company shall have 36 hours within which it may, but is not obligated,
to find one or more substitute underwriters satisfactory to the Lead Managers to
purchase such International Securities upon the terms set forth in this
Agreement and, if the Company is unable to find one or more such underwriters
that are satisfactory to the Lead Managers, this Agreement will terminate
without liability to any nondefaulting Manager, HEA or the Company. In the event
of a default by any Manager as set forth in this Section 9, the Closing Date
shall be postponed for such period, not exceeding five Business Days, as the
Lead Managers shall determine in order that the required changes in the
Registration Statement and the Prospectuses or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall relieve
any defaulting Manager of its liability, if any, to the Company, HEA and any
nondefaulting Manager for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination
in the absolute discretion of the Lead Managers, by notice given to the Company
prior to delivery of and payment for the International Securities, if at any
time prior to such time (i) trading in any of the Company's securities shall
have been suspended by the Commission or the Nasdaq National Market or trading
in securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on either of such Exchanges, (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets is such as to make it, in the sole
judgment of the Lead Managers, impractical or inadvisable to proceed with the
offering or delivery of the International Securities as contemplated by the
Prospectuses (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of HEA and of the Managers set forth in or made
pursuant to this Agreement will remain in full
<PAGE> 33
33
force and effect, regardless of any investigation made by or on behalf of any
Manager, HEA or the Company or any of the officers, directors or controlling
persons referred to in Section 8 hereof, and will survive delivery of and
payment for the International Securities. The provisions of Sections 7 and 8
hereof shall survive the termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Lead Managers, will be mailed,
delivered or telefaxed to the SBI General Counsel (fax no.: (212) 816-7912) and
confirmed to the General Counsel, c/o Smith Barney Inc., at 388 Greenwich
Street, New York, New York, 10013, Attention: General Counsel; or, if sent to
the Company, will be mailed, delivered or telefaxed to Chief Financial Officer
c/o of Maxtor Corporation, 510 Cottonwood Drive, Milpitas, California 95035 (fax
no. (408) 432-4158) and confirmed to the General Counsel c/o Maxtor Corporation,
2190 Miller Drive, Longmont. Colorado 80501 (fax no. (303) 678-3111), attention
of the Legal Department, with a copy to Diane Holt Frankle (fax no. (650)
327-3699) at Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto,
California 94301; or if sent to HEA, will be mailed, delivered or telefaxed to
Chief Executive Officer, c/o Hyundai Electronics America, 3101 North First
Street, San Jose, California 95134 (fax no. (408) 232-8194) and confirmed to the
General Counsel c/o Hyundai Electronics America, 3101 North First Street, San
Jose, California 95134 (fax no. (408) 232-8194), attention of the Legal
Department.
13. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday
or a legal holiday or a day on which banking institutions or trust
companies are authorized or obligated by law to close in New York City
or London.
<PAGE> 34
34
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this Agreement
is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
with respect to the offering of the U.S. Securities and the
International Securities, as the case may be, referred to in paragraph
1(i)(a) above and any preliminary prospectus with respect to the
offering of the U.S. Securities and the International Securities, as the
case may be, included in the Registration Statement at the Effective
Date that omits Rule 430A Information.
"Prospectuses" shall mean, collectively, the U.S. Prospectus and
the International Prospectus.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(i)(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective) and,
in the event any post-effective amendment thereto or any Rule 462(b)
Registration Statement becomes effective prior to the Closing Date,
shall also mean such registration statement as so amended or such Rule
462(b) Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under
the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
"United States or Canadian Persons" means any person who is a
national or resident of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of
the United States or Canada or of any political subdivision thereof, and
any estate or trust the income of which is subject to United States or
Canadian federal income taxation, regardless of its source (other than a
<PAGE> 35
35
foreign branch of such entity) and includes any United States or
Canadian branch of a person other than a United States or Canadian
Person.
<PAGE> 36
36
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company, HEA and the several Managers.
Very truly yours,
Maxtor Corporation
By:
------------------------------
Name:
Title:
Hyundai Electronics America
By:
------------------------------
Name:
Title:
<PAGE> 37
37
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers International (Europe)
Merrill Lynch International
NationsBanc Montgomery Securities LLC
By: Smith Barney Inc.
By:
Name:
Title:
For themselves and the other
several Managers named in
Schedule I to the foregoing
Agreement.
<PAGE> 38
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF INTERNATIONAL
UNDERWRITERS UNDERWRITTEN SECURITIES
- ------------ TO BE PURCHASED
---------------
<S> <C>
Smith Barney Inc. ............................................
Hambrecht & Quist LLC.........................................
Lehman Brothers International (Europe)........................
Merrill Lynch International...................................
NationsBanc Montgomery Securities LLC.........................
---------
Total................................................. 9,500,000
=========
</TABLE>
<PAGE> 39
SCHEDULE II
List of Officers, Directors and Shareholders
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Dr. C.S. Park Chairman of the Board of Directors
Michael R. Cannon President, Chief Executive Officer, Director
Charles F. Christ Director
Chang See Chung Director
Charles Hill Director
Y.H. Kim Director
Phillip S. Paul Director
Victor B. Jipson Senior Vice President
William F. Roach Senior Vice President
Paul J. Tufano Vice President
Glenn H. Stevens Vice President
Phillip C. Duncan Vice President
John Hagerman Vice President
K.K. Kim Vice President
Misha Rozenberg Vice President
K.H. Teh Vice President
David L. Beaver Vice President
</TABLE>
Principal Stockholders
Hyundai Electronics America
<PAGE> 40
[FORM OF LOCK-UP AGREEMENT] EXHIBIT A
Maxtor Corporation
Public Offering of Common Stock
, 1998
Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
NationsBanc Montgomery Securities LLC
As U.S. Representatives of the several Underwriters,
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers International (Europe)
Merrill Lynch International
NationsBanc Montgomery Securities LLC
As Lead Managers of the several Managers,
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with (i) the
proposed Underwriting Agreement (the "U.S. Underwriting Agreement"), among
Maxtor Corporation, a Delaware corporation (the "Company"), Hyundai Electronics
America ("HEA"), a stockholder of the Company, and a group of U.S. Underwriters
named therein and (ii) the proposed Underwriting Agreement (the "International
Underwriting Agreement"), among the Company, HEA and a group of Managers named
therein, relating to an underwritten public offering of Common Stock, $0.01 par
value (the "Common Stock"), of the Company.
In order to induce you and the other U.S. Underwriters and
Managers to enter into the U.S. Underwriting Agreement and the International
Underwriting Agreement, the undersigned will not, without the prior written
consent of Smith Barney Inc., offer, sell, contract to sell, pledge or otherwise
dispose of, or file (or participate in the filing of) a registration statement
with the Securities and Exchange Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call equivalent
position within the meaning of Section 16 of the Securities Exchange Act of
1934, as amended, and the rules and regulations of
<PAGE> 41
the Securities and Exchange Commission promulgated thereunder with respect to,
any shares of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date of this Agreement, other than shares of Common Stock disposed of as bona
fide gifts approved by Smith Barney Inc.
2
<PAGE> 42
If for any reason the U.S. Underwriting Agreement and the
International Underwriting Agreement shall be terminated prior to the Closing
Date (as defined in the U.S. Underwriting Agreement and the International
Underwriting Agreement), the agreement set forth above shall likewise be
terminated.
Yours very truly,
By:
------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MAXTOR CORPORATION
Maxtor Corporation, a corporation organized and existing under the laws
of the State of Delaware, hereby certifies that:
1. The name of the corporation is Maxtor Corporation. The
corporation's original certificate of incorporation was filed with the Secretary
of State of the State of Delaware on July 24, 1986.
2. This Amended and Restated Certificate of Incorporation restates
and integrates and further amends the provisions of the Certificate of
Incorporation of this corporation and has been duly adopted in accordance with
Sections 242 and 245 of the General Corporation Law of the State of Delaware
("DGCL").
3. The text of the Certificate of Incorporation of this corporation
is hereby restated and further amended to read in its entirety as follows:
FIRST: The name of the corporation is Maxtor Corporation (hereinafter
sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the DGCL.
FOURTH:
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is three hundred forty-five million
(345,000,000), consisting of:
(1) ninety-five million (95,000,000) shares of Preferred
Stock, par value one cent ($.01) per share (the "Preferred Stock");" and
(2) two hundred fifty million (250,000,000) shares of common
stock, par value one cent ($.01) per share.
The shares of Preferred Stock authorized by this Amended and Restated
Certificate of Incorporation may be issued from time to time in one or more
series. Upon the filing of this Amended and Restated Certificate of
Incorporation, each two outstanding shares of the Corporation's Common Stock
shall be converted into and reconstituted as one (1) share of Common Stock.
B. The Preferred Stock may be divided into such number of series as
the Board of Directors may determine. The Board of Directors is authorized to
determine and alter the rights, preferences, privileges and restrictions granted
to and imposed upon any wholly unissued series of Preferred Stock,
1
<PAGE> 2
and to fix the number of shares of any series of Preferred Stock and the
designation of any such series of Preferred Stock. The Board of Directors,
within the limits and restrictions stated in any resolution or resolutions of
the Board of Directors originally fixing the number of shares constituting any
series, may increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any series subsequent to the
issue of shares of that series. The first series of Preferred Stock shall be
comprised of ninety-five million (95,000,000) shares and shall be designated and
known as "Series A Preferred Stock." The relative rights, preferences,
restrictions and other matters relating to such Series A Preferred Stock are as
follows:
(1) Dividends. (i) The holders of shares of Series A Preferred
Stock shall be entitled, when and as declared by the Board of Directors, to
dividends out of funds legally available therefor at a rate of $0.40 per share,
per annum (as adjusted to reflect stock splits, stock dividends,
recapitalizations and the like), prior to the declaration, setting aside or
payment of any dividend to the holders of the corporation's Common Stock. No
dividend shall be declared or set apart for payment with respect to the Common
Stock in any year, unless there shall have been declared and paid (or set apart
for payment) the full preferential dividend set forth above with respect to the
Series A Preferred Stock during such year. Dividends shall not be cumulative and
no undeclared or unpaid dividend shall bear interest.
(2) Preference on Liquidation.
(i) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the assets and
funds of the Corporation available for distribution to shareholders shall be
distributed as follows:
(a) First, the holders of Series A Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets and funds of the Corporation to the holders of Common
Stock, by reason of their ownership thereof an amount per share equal to $6.70
for each outstanding share of Series A Preferred Stock, subject to adjustment
for stock splits, stock dividends, recapitalizations and the like, plus any
declared but unpaid dividends on such share.
If upon the occurrence of any liquidation,
dissolution or winding up of the Corporation the assets and funds available for
distribution among the holders of the Series A Preferred Stock pursuant to this
subsection (a) shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock in proportion to the aggregate
liquidation preference to which such holders would be entitled under this
subsection (a) if the full aforesaid preferential amount were available for
distribution.
(b) After payment has been made to the holders
of the Preferred Stock of the full preferential amounts to which they shall be
entitled, if any, as described in subsection (i) above, the holders of the
Common Stock and Preferred Stock shall be entitled to share ratably in all
remaining assets to be distributed, based upon the number of shares of Common
Stock then held, with each share of Preferred Stock treated as the number of
shares of Common Stock into which such share of Preferred Stock is then
convertible.
(ii) The merger or consolidation of the Corporation into
or with another corporation in which the shareholders of the Corporation shall
own less than 50% of the voting securities of the surviving corporation or the
sale, transfer or other disposition (but not including a transfer or
2
<PAGE> 3
disposition by pledge or mortgage to a bona fide lender) of all or substantially
all of the assets of the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation as those terms are used in this
Paragraph 2.
(iii) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the Corporation
shall, within ten (10) days after the date the Board of Directors approves such
action, or twenty (20) days prior to any shareholders' meeting called to approve
such action, or twenty (20) days after the commencement of any involuntary
proceeding, whichever is earlier, give each holder of shares of Series A
Preferred Stock initial written notice of the proposed action. Such initial
written notice shall describe the material terms and conditions of such proposed
action, including a description of the stock, cash and property to be received
by the holders of shares of Series A Preferred Stock upon consummation of the
proposed action and the date of delivery thereof. If any material change in the
facts set forth in the initial notice shall occur, the Corporation shall
promptly give written notice to each holder of shares of Series A Preferred
Stock of such material change.
(iv) The Corporation shall not consummate any voluntary
or involuntary liquidation, dissolution or winding up of the Corporation before
the expiration of thirty (30) days after the mailing of the initial notice or
ten (10) days after the mailing of any subsequent written notice, whichever is
later; provided that any such 30-day or 10-day period may be shortened upon the
written consent of the holders of all of the outstanding shares of Series A
Preferred Stock, each series consenting as a class.
(v) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation which will involve the
distribution of assets other than cash, the Corporation shall promptly engage
competent independent appraisers to determine the value of the assets to be
distributed to the holders of shares of Series A Preferred Stock and the holders
of shares of Common Stock (it being understood that with respect to the
valuation of securities, the Corporation shall engage such appraiser as shall be
approved by the holders of a majority of shares of the Corporation's outstanding
Series A Preferred Stock voting together as a single class). The Corporation
shall, upon receipt of such appraiser's valuation, give prompt written notice to
each holder of shares of Series A Preferred Stock of the appraiser's valuation.
(3) Voting Rights. Except as otherwise required by law, each
holder of shares of Series A Preferred Stock shall be entitled to the number of
votes for the Series A Preferred Stock held by him as shall be equal to the
whole number of shares of Common Stock into which all of such shares of Series A
Preferred Stock could be converted immediately after the close of business on
the record date for the vote or consent of shareholders and shall have voting
rights and powers equal to the voting rights and powers of the Common Stock. The
holder of each share of Series A Preferred Stock shall be entitled to notice of
any shareholders' meeting in accordance with the Bylaws of the Corporation and
shall vote with holders of the Common Stock upon any matter submitted to a vote
of shareholders, except those matters required by law to be submitted to a class
vote.
(4) Conversion Rights. The holders of Series A Preferred Stock
shall have conversion rights as follows:
(i) Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time at the principal
office of the Corporation or any transfer agent for such shares, into fully paid
and nonassessable shares of Common Stock of the Corporation. The
3
<PAGE> 4
number of shares of Common Stock into which each share of Series A Preferred
Stock may be converted shall be determined by dividing $6.70 by the appropriate
Conversion Price for the Series A Preferred Stock determined as hereinafter
provided in effect at the time of the conversion. The Conversion Price per share
at which shares of Common Stock shall be initially issuable upon conversion of
any shares of Series A Preferred Stock shall be $6.70 for the Series A Preferred
Stock subject to adjustment as provided herein.
(ii) Each share of Series A Preferred Stock shall be
converted into Common Stock automatically in the manner provided herein upon the
earlier to occur of (i) the time the consent of at least a majority of the
outstanding Series A Preferred Stock to such conversion is obtained, or (ii) the
closing of the sale of the Corporation's securities pursuant to a firm
commitment, underwritten public offering.
(iii) Before any holder of Preferred Stock shall be
entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed in blank or
accompanied by proper instruments of transfer, at the principal office of the
Corporation or of any transfer agent for the Preferred Stock, and shall give
written notice to the Corporation at such office that such holder elects to
convert the same and shall state in writing therein the name or names in which
such holder wishes the certificate or certificates for Common Stock to be
issued. As soon as practicable thereafter, the Corporation shall issue and
deliver at such office to such holder's nominee or nominees, certificates for
the number of whole shares of Common Stock to which such holder shall be
entitled. No fractional shares of Common Stock shall be issued by the
Corporation and all such fractional shares shall be disregarded. In lieu
thereof, the Corporation shall pay in cash the fair market value of such
fractional shares as determined by the Board of Directors of the Corporation.
Such conversion shall be deemed to have been made as of the date of such
surrender of the Preferred Stock to be converted, and the person or persons
entitled to receive the Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such Common Stock on
said date.
(iv) In case the Corporation shall at any time (A)
subdivide the outstanding Common Stock, or (B) issue a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock issuable upon
conversion of the Preferred Stock immediately prior to such subdivision or the
issuance of such stock dividend shall be proportionately increased by the same
ratio as the subdivision or dividend (with appropriate adjustments in the
Conversion Price of each series of Preferred Stock). In case the Corporation
shall at any time combine its outstanding Common Stock, the number of shares of
Common Stock issuable upon conversion of the Preferred Stock immediately prior
to such combination shall be proportionately decreased by the same ratio as the
combination (with appropriate adjustments in the Conversion Price of each series
of the Preferred Stock). All such adjustments described herein shall be
effective at the close of business on the date of such subdivision, stock
dividend or combination, as the case may be.
(v) In case of any capital reorganization (other than
in connection with a merger or other reorganization in which the Corporation is
not the continuing or surviving entity) or any reclassification of the Common
Stock of the Corporation, the Preferred Stock shall thereafter be convertible
into that number of shares of stock or other securities or property to which a
holder of the number of shares of Common Stock of the Corporation deliverable
upon conversion of the shares of Preferred Stock immediately prior to such
reorganization or recapitalization would have been entitled upon such
reorganization or reclassification. In any such case, appropriate adjustment (as
determined by the Board of Directors) shall be made in the application of the
provisions herein set forth with respect to
4
<PAGE> 5
the rights and interests thereafter of the holders of Preferred Stock, such that
the provisions set forth herein shall thereafter be applicable, as nearly as
reasonably may be, in relation to any share of stock or other property
thereafter deliverable upon the conversion.
(vi) Upon the conversion of the Series A Preferred
Stock, the shares may not be reissued as shares of Series A Preferred, but shall
be restored to the status of authorized but unissued shares of Preferred Stock.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Amended and
Restated Certificate of Incorporation or the Bylaws of the Corporation, the
directors are hereby empowered to exercise all such powers and do all such acts
and things as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be called
only by the Board of Directors, the Chairman of the Board of Directors or the
Chief Executive Officer.
SIXTH:
A. The number of directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). The directors shall be
divided into three classes, as nearly equal in number as reasonably possible,
with the term of office of the first class to expire at the 1994 annual meeting
of stockholders, the term of office of the second class to expire at the 1995
annual meeting of stockholders and the term of office of the third class to
expire at the 1996 annual meeting of stockholders, provided that the term of
office of directors in office on the date of filing of this Amended and Restated
Certificate of Incorporation is unaffected by the filing of this Amended and
Restated Certificate of Incorporation. At each annual meeting of stockholders
following such initial classification and election, directors elected to succeed
those directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election. All directors shall hold office until the expiration of the term for
which elected, and until their respective successors are elected, except in the
case of the death, resignation, or removal of any director.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation or other cause (including removal from office
by a vote of the stockholders) may be filled only by a majority vote of the
directors then in office, though less than a quorum, or by sole remaining
director, and directors so chosen shall hold office
5
<PAGE> 6
for a term expiring at the next annual meeting of stockholders at which the term
of office of the class to which they have been elected expires, and until their
respective successors are elected, except in the case of the death, resignation,
or removal of any director.
C. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of at least a majority of the voting power of all of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend
or repeal Bylaws of the Corporation. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or
repeal of Bylaws of the Corporation by the stockholders shall require, in
addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Amended and Restated Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.
EIGHTH: A director of this Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability of a director,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Delaware General Corporation Law,
as so amended.
Any repeal or modification of the foregoing provisions of this Article
EIGHTH by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time of
such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any
provision contained in this Restated Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Amended and Restated Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any vote of the holders of any class or series of
the stock of this Corporation required by law or by this Restated Certificate of
Incorporation, the affirmative vote of the holders of at least 66-2/3% of the
then outstanding shares of the Capital Stock of the Corporation entitled to vote
generally in the election or directors, voting together as a single class, shall
be required to amend or appeal this Article NINTH, Article FIFTH, Article SIXTH,
Article SEVENTH, or Article EIGHTH.
TENTH:
(A) In anticipation that:
6
<PAGE> 7
(1) the Corporation will cease to be a majority-owned
subsidiary of Hyundai Electronics America ("HEA") but that HEA will remain, for
some period of time, a stockholder of the Corporation and along with certain
other Hyundai Affiliates (as defined in Article ELEVENTH) have continued
contractual, corporate and business relations with the Corporation;
(2) the Corporation, on the one hand, and any Hyundai
Affiliates or their customers or suppliers, on the other hand, may enter into
contracts or otherwise transact business with each other and that the
Corporation may derive benefits therefrom; and
(3) the Corporation may from time to time enter into
contractual, corporate or business relations with one or more of its directors,
or one or more corporations, partnerships, associations or other organizations
in which one or more of its directors have a financial interest (collectively,
"Related Entities");
the provisions of this Article TENTH are set forth to regulate and guide certain
contractual relations and other business relations of the Corporation as they
may involve certain Hyundai Affiliates, Related Entities and their respective
officers and directors, and the powers, rights, duties and liabilities of the
Corporation and its officers, directors and stockholders in connection
therewith.
(B) The provisions of this Article TENTH are in addition to, and not
in limitation of, the provisions of the DGCL and the other provisions of this
Amended and Restated Certificate of Incorporation. Any contract or business
relation which does not comply with procedures set forth in this Article TENTH
shall not by reason thereof be deemed void or voidable or result in any breach
of any fiduciary duty to, or duty of loyalty to, or failure to act in good faith
or in the best interests of, the Corporation, or the derivation of any improper
personal benefit, but shall be governed by the remaining provisions of this
Amended and Restated Certificate of Incorporation, the Bylaws, the DGCL and
other applicable law.
(C) No contract, agreement, arrangement or transaction between the
Corporation and any Hyundai Affiliate or any Related Entity or between the
Corporation and one or more of the directors or officers of the Corporation, any
Hyundai Affiliate or any Related Entity, or any amendment, modification or
termination thereof, shall be void or voidable solely for the reason that any
Hyundai Affiliate, any Related Entity or any one or more of the officers or
directors of the Corporation, any Hyundai Affiliate or any Related Entity are
parties thereto, or solely because any such directors or officers are present at
or participate in the meeting of the Board of Directors or committee thereof
which authorizes such contract, agreement, arrangement, transaction, amendment,
modification or termination (each, a "Transaction") or solely because his or
their votes are counted for such purpose, and any Hyundai Affiliate, any Related
Entity and such directors and officers (i) shall have fully satisfied and
fulfilled any fiduciary duties they may have to the Corporation and its
stockholders with respect thereto, (ii) shall not be liable to the Corporation
or its stockholders for any breach of any fiduciary duty they may have by reason
of the entering into, performance or consummation of any such Transaction, (iii)
shall be deemed to have acted in good faith and in a manner such Persons
reasonably believed to be in or not opposed to the best interests of the
Corporation, to the extent such standard is applicable to such Persons' conduct,
and (iv) shall be deemed not to have breached any duties of loyalty to the
Corporation or its stockholders they may have and not to have derived an
improper personal benefit therefrom, if:
(w) the material facts as to the Transaction are disclosed or
are known to the Board of Directors or the committee thereof that authorizes the
Transaction and the Board of Directors or such committee in good faith
authorizes or approves the Transaction by the affirmative vote of a majority of
7
<PAGE> 8
the Disinterested Directors (as defined in Article ELEVENTH) on the Board of
Directors or such committee (even though the Disinterested Directors be less
than a quorum);
(x) the material facts as to the Transaction are disclosed or
are known to the holders of voting stock entitled to vote thereon, and the
Transaction is specifically approved in good faith by vote of the holders of a
majority of the then outstanding voting stock not owned by any Hyundai Affiliate
or such Related Entity, voting together as a single class, as the case may be;
or
(y) such Transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified by the Board of Directors, a
committee thereof or the stockholders of the Corporation.
In addition, each Transaction authorized, approved or effected, as described in
(w) or (x) above, shall be deemed to be entirely fair to the Corporation and its
stockholders; provided, however, that if such authorization or approval is not
obtained, or such Transaction is not so effected, no presumption shall arise
that such Transaction is not fair to the Corporation and its stockholders.
(D) Directors of the Corporation who are also directors or officers
of any Hyundai Affiliate or any Related Entity may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
that authorizes or approves any such Transaction and may vote at such meeting in
accordance with the provisions of paragraph (C) of this Article TENTH. Equity
securities with voting rights which are owned by any Hyundai Affiliate and any
Related Entities may be counted in determining the presence of a quorum at a
meeting of stockholders that authorizes or approves any such Transaction and may
be voted at such meeting in accordance with the provisions of paragraph (C) of
this Article TENTH.
(E) No Hyundai Affiliate shall be liable to the Corporation or its
stockholders for breach of any fiduciary duty it may have by reason of the fact
that any Hyundai Affiliate takes any action or exercises any rights or gives or
withholds any consent in connection with any Transaction between any Hyundai
Affiliate and the Corporation. No vote cast or other action taken by any Person
(as defined in Article ELEVENTH) who is an officer, director or other
representative of any Hyundai Affiliate, which vote is cast or action is taken
by such Person in his capacity as a director of the Corporation, shall
constitute an action of, or the exercise of a right by, or a consent of, any
Hyundai Affiliate for the purpose of any such Transaction.
(F) For purposes of this Article TENTH, any Transaction with any
corporation, partnership, joint venture, association or other entity in which
the Corporation Beneficially Owns (as defined in Article ELEVENTH), directly or
indirectly, fifty percent (50%) or more of the outstanding voting stock, voting
power or similar voting interests, or with any officer or director thereof,
shall be deemed to be a Transaction with the Corporation.
(G) Notwithstanding anything in this Amended and Restated Certificate
of Incorporation to the contrary, and in addition to any vote of the Board of
Directors required by applicable law or this Amended and Restated Certificate of
Incorporation, the affirmative vote of the holders of more than sixty-six and
two-thirds percent (66 2/3%) of the voting power of the Corporation's equity
then outstanding, voting together as a single class, shall be required to alter,
amend or repeal in a manner adverse to the interests of any Hyundai Affiliate or
adopt any provision adverse to the interests of any Hyundai Affiliate and
inconsistent with, any provision of this Article TENTH. Neither the alteration,
amendment or repeal of this Article TENTH nor the adoption of any provision
inconsistent with this
8
<PAGE> 9
Article TENTH shall eliminate or reduce the effect of this Article TENTH in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this Article TENTH, would accrue or arise, prior to such alteration,
amendment, repeal or adoption.
(H) Any Person purchasing or otherwise acquiring any interest in any
shares of stock of the Corporation shall be deemed to have notice of and to have
consented to the provisions of this Article TENTH.
ELEVENTH:
(A) In anticipation that:
(1) the Corporation will cease to be a majority-owned
subsidiary of HEA but that HEA will remain, for some period of time, a
stockholder of the Corporation;
(2) the Corporation and certain Hyundai Affiliates may engage
in the same or similar activities or lines of business and may have an interest
in the same or similar areas of corporate opportunities;
(3) there will be benefits to be derived by the Corporation
through its continued contractual, corporate and business relations with the
Hyundai Affiliates (including without limitation service of officers of certain
Hyundai Affiliates as directors of the Corporation);
(4) there will be benefits in providing guidelines for
directors and officers of the Hyundai Affiliates and of the Corporation with
respect to the allocation of corporate opportunities and other matters;
the provisions of this Article ELEVENTH are set forth to regulate, define and
guide the conduct of certain affairs of the Corporation as they may involve the
Hyundai Affiliates and their officers and directors, and the powers, rights,
duties and liabilities of the Corporation and its officers, directors and
stockholders in connection therewith.
(B) Except as HEA may otherwise agree in writing, HEA shall have the
right to, and shall have no duty not to, (i) engage in the same or similar
business activities or lines of business as the Corporation, (ii) do business
with any potential or actual customer or supplier of the Corporation, or (iii)
employ or otherwise engage any officer or employee of the Corporation. Neither
HEA nor any officer or director thereof (except as provided in paragraph (C) of
this Article ELEVENTH) shall be liable to the Corporation or its stockholders
for breach of any fiduciary duty by reason of such activities (set forth in the
preceding sentence) of HEA or the participation therein of such Person. In the
event that HEA acquires knowledge of a potential transaction or matter that may
be a corporate opportunity for both HEA and the Corporation, HEA shall have no
duty to communicate or present such opportunity to the Corporation and shall not
be liable to the Corporation or its stockholders for breach of any fiduciary
duty as a stockholder of the Corporation by reason of the fact that HEA pursues
or acquires such corporate opportunity for itself, directs such opportunity to
another Person, or does not present such corporate opportunity to the
Corporation.
(C) If a director or officer of the Corporation who is also a
director or officer of a Hyundai Affiliate acquires knowledge of a potential
transaction or matter that may be a corporate opportunity for both the
Corporation and any Hyundai Affiliate such director or officer of the
Corporation (i) shall have fully satisfied and fulfilled the fiduciary duties of
such director or officer to the Corporation and its
9
<PAGE> 10
stockholders with respect to such corporate opportunity, (ii) shall not be
liable to the Corporation or its stockholders for breach of any fiduciary duty
by reason of the fact that any Hyundai Affiliate pursues or acquires such
corporate opportunity for itself or directs such corporate opportunity to
another Person (including, without limitation, another Hyundai Affiliate) or
does not communicate information regarding such corporate opportunity to the
Corporation, (iii) shall be deemed to have acted in good faith and in a manner
such Person reasonably believes to be in or not opposed to the best interests of
the Corporation, and (iv) shall be deemed not to have breached his or her duty
of loyalty to the Corporation or its stockholders and not to have derived an
improper benefit therefrom, if such director or officer acts in a manner
consistent with the following policy:
(x) a corporate opportunity offered to any Person who is a
director but not an officer of the Corporation and who is also an officer
(whether or not a director) of any Hyundai Affiliate shall belong to such
Hyundai Affiliate, unless such opportunity is expressly offered, in writing, to
such Person primarily in his or her capacity as a director of the Corporation,
in which case such opportunity shall belong to the Corporation;
(y) a corporate opportunity offered to any Person who is an
officer (whether or not a director) of the Corporation and who is also a
director but not an officer of any Hyundai Affiliate shall belong to the
Corporation, unless such opportunity is expressly offered, in writing, to such
Person primarily in his or her capacity as a director of a Hyundai Affiliate, in
which case such opportunity shall belong to such Hyundai Affiliate; and
(z) a corporate opportunity offered to any other Person who is
either (i) an officer of both the Corporation and a Hyundai Affiliate or (ii) a
director of both the Corporation and a Hyundai Affiliate and not an officer of
either entity, shall belong to such Hyundai Affiliate or to the Corporation, as
the case may be, if such opportunity is expressly offered, in writing, to such
Person primarily in his or her capacity as an officer or director of the
Corporation or of such Hyundai Affiliate, respectively; otherwise, such
opportunity shall belong to the Corporation.
(C) Any corporate opportunity that belongs to a Hyundai Affiliate or
to the Corporation pursuant to the foregoing policy shall not be pursued by the
other, or directed by the other to another Person, unless and until the Hyundai
Affiliate or the Corporation, as the case may be, determines not to pursue the
opportunity. Notwithstanding the preceding sentence, if the party to whom the
corporate opportunity belongs does not within a reasonable period of time begin
to pursue, or thereafter continue to pursue, such opportunity diligently and in
good faith, the other party may then pursue such opportunity or direct it to
another Person.
(D) For purposes of this Amended and Restated Certificate of
Incorporation, "Hyundai Affiliates" shall mean Hyundai Electronics America, a
California corporation ("HEA"), Hyundai Electronics Industries Co., Ltd.
("HEI"), all successors to HEA or HEI by way of merger, consolidation or sale of
all or substantially all its assets, and all corporations, partnerships, joint
ventures, associations and other entities that directly or indirectly, through
one or more intermediaries, are controlled by HEA or HEI, other than the
Corporation and all corporations, partnerships, joint ventures, associations and
other entities directly or indirectly controlled by the Corporation. The term
"control," as used in the immediately preceding sentence, shall mean with
respect to a corporation or limited liability company the right to exercise,
directly or indirectly, more than fifty percent (50%) of the voting rights
attributable to the controlled corporation or limited liability company, and,
with respect to any individual, partnership, trust, other entity or association,
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of the controlled entity.
10
<PAGE> 11
(E) For purposes of this Article ELEVENTH, "corporate opportunities"
shall consist of business opportunities which (i) the Corporation is financially
able to undertake, (ii) are, from their nature, in the line or lines of the
Corporation's business and are of practical advantage to it, and (iii) are ones
in which the Corporation has an interest or reasonable expectancy. In addition,
"corporate opportunities" shall not include any transaction in which the
Corporation or any Hyundai Affiliate is permitted to participate pursuant to (a)
any agreement between the Corporation and any Hyundai Affiliate which was
entered into prior to the closing of the sale of the Corporation's securities
pursuant to a firm commitment underwritten public offering after the filing of
this Amended and Restated Certificate of Incorporation as a result of which the
Corporation's Series A Preferred Stock is converted into Common Stock pursuant
to Article Fourth of this Amended and Restated Certificate of Incorporation or
(b) any subsequent agreement between the Corporation and any Hyundai Affiliate
approved pursuant to Article TENTH hereof, it being acknowledged that the rights
of the Corporation under any such agreement shall be deemed to be contractual
rights and shall not be corporate opportunities of the Corporation for any
purpose; provided, however, that no presumption or implication as to corporate
opportunities relating to any transaction not explicitly covered by such an
agreement shall arise from the existence or absence of any such agreement.
(F) If any contract, agreement, arrangement or transaction between
the Corporation and any Hyundai Affiliate involves a corporate opportunity and
is approved in accordance with the procedures set forth in Article TENTH hereof,
a Hyundai Affiliate and its officers and directors shall also, for the purposes
of this Article ELEVENTH and the other provisions of this Amended and Restated
Certificate of Incorporation, be deemed to have fully satisfied and fulfilled
any fiduciary duties they may have to the Corporation and its stockholders. Any
such contract, agreement, arrangement or transaction involving a corporate
opportunity not so approved shall not by reason thereof result in any such
breach of any fiduciary duty, but shall be governed by the other provisions of
this Article ELEVENTH, this Amended and Restated Certificate of Incorporation,
the Bylaws, the DGCL and other applicable law.
(G) For purposes of this Article ELEVENTH, the "Corporation" shall
mean the Corporation and all corporations, partnerships, joint ventures,
associations and other entities in which the Corporation Beneficially Owns,
directly or indirectly, thirty-three and one-third percent (33 1/3%) or more of
the outstanding voting stock, voting power or similar voting interests. For
purposes of this Article ELEVENTH and Article TENTH, (i) "Beneficial Owners,"
"Beneficially Own," "Beneficially Owned," "Beneficial Ownership," and words of
similar import shall have the meaning ascribed to such terms in Rule 13d-3 of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended, or any successor rule, (ii) "Person" shall mean any individual, firm,
corporation or other entity; and (iii) "Disinterested Director" shall mean a
director of the Corporation who is not and has never been an officer, employee
or paid consultant of any Hyundai Affiliate or the Corporation.
(H) For purposes of this Article ELEVENTH, a director of the
Corporation who is Chairman of the Board of Directors of the Corporation or a
committee thereof shall not be deemed to be an officer of the Corporation by
reason of holding such position (regardless of whether such position is deemed
an office of the Corporation under the Bylaws of the Corporation), unless such
Person is a full-time employee of the Corporation.
(I) Notwithstanding anything in this Amended and Restated Certificate
of Incorporation to the contrary and in addition to any vote of the Board of
Directors required by applicable law or this Certificate of Incorporation, the
affirmative vote of the holders of more than sixty-six and two-thirds percent
(66 2/3%) of the voting power of the Company's equity securities then
outstanding, voting together as a single class, shall be required to alter,
amend or repeal in a manner adverse to the interests
11
<PAGE> 12
of the Hyundai Affiliates, or adopt any provision adverse to the interests of
any Hyundai Affiliate and inconsistent with, any provision of this Article
ELEVENTH. Neither the alteration, amendment or repeal of this Article ELEVENTH
nor the adoption of any provision inconsistent with this Article ELEVENTH shall
eliminate or reduce the effect of this Article ELEVENTH in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
ELEVENTH, would accrue or arise, prior to such alteration, amendment, repeal or
adoption.
(J) Any Person purchasing or otherwise acquiring any interest in any
shares of stock of the Corporation shall be deemed to have notice of and
consented to the provisions of this Article ELEVENTH.
IN WITNESS WHEREOF, the corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its President and Chief Executive
Officer and attested to by its Secretary this ____ day of _________, 1998.
________________________________________
Michael R. Cannon
President and Chief Executive Officer
Attest:
______________________________
Glenn H. Stevens, Secretary
12
<PAGE> 1
EXHIBIT 3.4
MAXTOR CORPORATION,
a Delaware Corporation
AMENDED AND RESTATED BYLAWS
ARTICLE 1
STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders, for
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen months
subsequent to the last annual meeting of stockholders, or if no such meeting has
been held, the date of incorporation.
Section 2. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes prescribed in the notice of the meeting, may be called
only by (i) the Board of Directors, (ii) the Chairman of the Board or (iii) the
Chief Executive Officer of the Corporation, and shall be held at such place, on
such date, and at such time as they or he or she shall fix. Business transacted
at special meetings shall be confined to the purpose or purposes stated in the
notice of the meeting. In the event a special meeting is rightfully called by a
person other than the Board of Directors, the Board shall cooperate in causing
the meeting to be properly noticed and the matter as to which the meeting was
called to be properly brought before the meeting.
Section 3. Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation, as amended from time to time). The notices of
all meetings shall state the place, date and hour of the meeting. The notice of
a special meeting shall state, in addition, the purpose or purposes for which
the meeting is called. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the corporation.
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of
1
<PAGE> 2
the adjourned meeting shall be given in conformity herewith. At any adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Conduct of Stockholders' Meeting. At every meeting of the
stockholders, the Chairman of the Board, if there is such an officer, or if not,
the person appointed by the Board of Directors, shall act as Chairman. The
Secretary of the corporation or a person designated by the Chairman of the
meeting shall act as Secretary of the meeting. Unless otherwise approved by the
Chairman of the meeting, attendance at the stockholders' meeting is restricted
to stockholders of record, persons authorized in accordance with Section 8 of
these By-laws to act by proxy, and officers of the corporation.
The Chairman of the meeting shall call the meeting to order, establish
the agenda, and conduct the business of the meeting in accordance therewith or,
at the Chairman's discretion, it may be conducted otherwise in accordance with
the wishes of the stockholders in attendance. The date and time of the opening
and closing of the polls for each matter upon which the stockholders will vote
at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule
on the precedence of, and procedure on, motions and other procedural matters,
and exercise discretion with respect to such procedural matters with fairness
and good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the By-laws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 5. The
Chairman of a meeting shall, if the facts warrant, determine and declare to the
meeting that any proposed item of business was not brought before the meeting in
accordance with the provisions of this Section 5, and if he should so determine,
he shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted.
2
<PAGE> 3
Section 7. Notice of Stockholder Business. At any meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before a meeting, business
must be (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors, (b) properly brought before
the meeting by or at the direction of the Board of Directors, or (c) properly
brought before an annual meeting by a stockholder. For business to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder proposal to be presented at an annual meeting shall be
received at the Corporation's principal executive offices not less than 120
calendar days in advance of the date that the Corporation's (or the
Corporation's predecessor's) proxy statement was released to stockholders in
connection with the previous year's annual meeting of stockholders, except that
if no annual meeting was held in the previous year or the date of the annual
meeting has been advanced by more than 30 calendar days from the date
contemplated at the time of the previous year's proxy statement, notice by the
stockholders to be timely must be received not later than the close of business
on the tenth day following the day on which the public announcement of the date
of such meeting is first made.
A stockholder's notice to the Secretary of the Corporation shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting, (b) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business, (c) the class and number of
shares of the Corporation which are beneficially owned by the stockholder, and
(d) any material interest of the stockholder in such business. For purposes of
this Section 7, "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the Company with the Securities
and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Notwithstanding the
foregoing provisions of this Section 7, a stockholder shall also comply with all
applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this Section 7. Nothing in
this Section 7 shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8
under the Exchange Act.
Section 8. Proxies and Voting. Each stockholder shall have one vote for
each share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
by law. Each stockholder of record entitled to vote at a meeting of
stockholders, may vote in person or may authorize any other person or persons to
vote or act for him by written proxy executed by the stockholder or his
authorized agent or by a transmission permitted by law and delivered to the
Secretary of the corporation. No stockholder may authorize more than one proxy
for his shares. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the original writing or transmission could be used,
provided that such copy, facsimile transmission or other reproduction shall be a
complete reproduction of the entire original writing or transmission.
3
<PAGE> 4
Section 9. Action at Meeting. When a quorum is present at any meeting,
any election shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election, and all other matters shall be
determined by a majority of the votes cast affirmatively or negatively on the
matter (or if there are two or more classes of stock entitled to vote as
separate classes, then in the case of each such class, a majority of each such
class present or represented and voting affirmatively or negatively on the
matter), except when a different vote is required by express provision of law or
these By-laws.
All voting, including on the election of directors, but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting. The corporation may, and to the extent
required by law, shall, in advance of any meeting of stockholders, appoint one
or more inspectors to act at the meeting and make a written report thereof. The
corporation may designate one or more persons as an alternate inspector to
replace any inspector who fails to act. If no inspector or alternate is able to
act at a meeting of stockholders, the person presiding at the meeting may, and
to the extent required by law, shall, appoint one or more inspectors to act at
the meeting. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector with
strict impartiality and according to the best of his or her ability.
Section 9. Stock List. A complete list of stockholders entitled to vote
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 10. No Stockholder Action Without Meeting. Any action required
or permitted to be taken by the stockholders of the Corporation must be effected
at a duly called annual or special meeting of stockholders of the Corporation
and may not be effected by any consent in writing by such stockholders.
4
<PAGE> 5
ARTICLE II
BOARD OF DIRECTORS
Section 1. Number and Term of Office. The number of directors shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board for adoption). The
directors shall be divided into three classes, as nearly equal in number as
reasonably possible, with the term of office of the first class to expire at the
1994 annual meeting of stockholders, the term of office of the second class to
expire at the 1995 annual meeting of stockholders and the term of office of the
third class to expire at the 1996 annual meeting of stockholders, provided that
the term of office of directors in office on the date these Amended and Restated
Bylaws are adopted is not affected by the adoption of these Amended and Restated
Bylaws. At each annual meeting of stockholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election. All directors
shall hold office until the expiration of the term for which elected and until
their respective successors are elected, except in the case of the death,
resignation or removal of any director.
Section 2. Vacancies and Newly Created Directorships. Except as provided
in the Certificate of Incorporation of the Corporation, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may be filled
only by a majority vote of the directors then in office, though less than a
quorum, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Section 3. Removal. Any or all of the directors may be removed from
office at any time, but only for cause and only by the affirmative vote of the
holders of at least a majority of all outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required. A
regular meeting of the Board of Directors may be held without notice immediately
after and at the same place as the annual meeting of stockholders.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President and Chief Executive
Officer, two or more directors, or by one director in the event there is only a
single director in office, and shall be held at such place, on such date, and at
such time as they or he or she shall fix. Notice of the place, date, and
5
<PAGE> 6
time of each such special meeting shall be given each director by whom it is not
waived (i) by giving notice to such director in person or by telephone or
electronic voice message system at least 24 hours in advance of the meeting,
(ii) by sending a telegram, telecopy or telex, or delivering written notice by
hand, to his last known business or home address at least 24 hours in advance of
the meeting, or (iii) by mailing written notice to his last known business or
home address at least five (5) days in advance of the meeting. A notice or
waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting. Unless otherwise indicated in the notice thereof, any
and all business may be transacted at a special meeting.
Section 6. Quorum. At any meeting of the Board of Directors, a majority
of the total number of authorized directors shall constitute a quorum for all
purposes. In the event one or more of the directors shall be disqualified to
vote at any meeting, then the required quorum shall be reduced by one for each
such director so disqualified; provided, however, that in no case shall less
than one-third (1/3) of the number so fixed constitute a quorum. In the absence
of a quorum at any such meeting, a majority of the directors present may adjourn
the meeting from time to time without further notice other than announcement at
the meeting, until a quorum shall be present. Interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or at a meeting of a committee which authorizes a particular contract
or transaction. At any meeting of the Board of Directors at which a quorum is
present, the vote of a majority of those present shall be sufficient to take any
action, unless a different vote is specified by law or these By-Laws.
Section 7. Participation in Meetings by Conference Telephone. Members of
the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 8. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee of the Board
of Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing. Any such
written consents shall be filed with the minutes of proceedings of the Board or
committee.
Section 9. Compensation of Directors. Directors, as such, may receive,
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 10. Nomination of Director Candidates: Subject to the rights of
holders of any class or series of Preferred Stock then outstanding, nominations
for the election of Directors may be made by the Board of Directors or a proxy
committee appointed by the Board of Directors or by any stockholder entitled to
vote in the election of Directors generally. However, any stockholder entitled
to vote in the election of Directors generally may nominate one or more
6
<PAGE> 7
persons for election as Directors at a meeting only if timely notice of such
stockholder's intent to make such nomination or nominations has been given in
writing to the Secretary of the Corporation. To be timely, a stockholder
nomination for a director to be elected at an annual meeting shall be received
at the Corporation's principal executive offices not less than 120 calendar days
in advance of the date that the Corporation's proxy statement was released to
stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been advanced by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholders to be timely must be received not later than the
close of business on the tenth day following the day on which the public
announcement of the date of such meeting is first made. Each such notice shall
set forth: (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote for the election of Directors on the date of such notice and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Corporation if so elected. For purposes of this Section 10, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Company with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this Section 10, a stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this Section
10. Nothing in this Section 10 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Company's proxy statement
pursuant to Rule 14a-8 under the Exchange Act.
In the event that a person is validly designated as a nominee in
accordance with this Section 10 and shall thereafter become unable or unwilling
to stand for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five days prior to the date of
the meeting for the election of such nominee, of a written notice to the
Secretary setting forth such information regarding such substitute nominee as
would have been required to be delivered to the Secretary pursuant to this
Section 10 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 10,
such nomination shall be void; provided, however, that
7
<PAGE> 8
nothing in this Section 10 shall be deemed to limit any voting rights upon the
occurrence of dividend arrearages provided to holders of Preferred Stock
pursuant to the Preferred Stock designation for any series of Preferred Stock.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors. The Board of Directors
may from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for those committees and any others provided for herein,
elect a director or directors to serve as the member or members, designating, if
it desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to the
extent provided in the resolution of the Board of Directors and subject to the
provisions of the General Corporation Law of the State of Delaware, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers which may require it. Each
such committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its
business, but unless otherwise provided by such rules, its business shall be
conducted as nearly as possible in the same manner as is provided in these
By-laws for the Board of Directors. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law if the
resolution which designates the committee or a supplemental resolution of the
Board of Directors shall so provide. In the absence or disqualification of any
member of any committee and any alternate member in his place, the member or
members of the committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may by unanimous
vote appoint another member of the Board of Directors to act at the meeting in
the place of the absent or disqualified member.
Section 2. Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings;
one-third of the authorized members shall constitute a quorum unless the
committee shall consist of one or two members, in which event one member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of such committee.
8
<PAGE> 9
ARTICLE IV
OFFICERS
Section 1. Generally. The officers of the Corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including, at the discretion
of the Board of Directors, a Chairman of the Board, and one or more Vice
Presidents and Assistant Secretaries. Except as otherwise provided in the
Certificate of Incorporation of the Corporation, officers shall be elected by
the Board of Directors, which shall consider that subject at its first meeting
after every annual meeting of stockholders. Each officer shall hold office until
his or her successor is elected and qualified or until his or her earlier
resignation or removal. The Chairman of the Board, if there be such an officer,
and the President shall each be members of the Board of Directors. Any number of
offices may be held by the same person.
Section 2. Chairman of the Board. The Board of Directors may appoint a
Chairman of the Board. If the Board of Directors appoints a Chairman of the
Board, he shall perform such duties and possess such powers as are assigned to
him by the Board of Directors. Unless otherwise provided by the Board of
Directors, he shall preside at all meetings of the stockholders, and, if he is a
director, at all meetings of the Board of Directors.
Section 3. President. The President shall be the chief executive officer
of the Corporation. Subject to the provisions of these Bylaws and to the
direction of the Board of Directors, he or she shall have the responsibility for
the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him or her
by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all of the other
officers, employees and agents of the Corporation, other than the Chairman of
the Board, if there be such an officer.
Section 4. Vice President. Each Vice President shall have such powers
and duties as may be delegated to him or her by the Board of Directors or the
President. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have at the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
Section 5. Treasurer. The Treasurer shall perform such duties and shall
have such powers as may from time to time be assigned to him by the Board of
Directors or the President. In addition, the Treasurer shall perform such duties
and have such powers as are incident to the office of chief financial officer,
including without limitation, the duty and power to keep and be responsible for
all funds and securities of the corporation, to maintain the financial records
of the Corporation, to deposit funds of the corporation in depositories as
authorized, to disburse such
9
<PAGE> 10
funds as authorized, to make proper accounts of such funds, and to render as
required by the Board of Directors accounts of all such transactions and of the
financial condition of the corporation.
Any Assistant Treasurer shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
Section 6. Secretary. The Secretary shall perform such duties and shall
have such powers as the Board of Directors or the President may from time to
time prescribe. In addition, the Secretary shall perform such duties and have
such powers as are incident to the office of the Secretary, including, without
limitation, the duty and power to give notices of all meetings of stockholders
and special meetings of the Board of Directors, to keep a record of the
proceedings of all meetings of stockholders and the Board of Directors, to
maintain a stock ledger and prepare lists of stockholders and their addresses as
required, to be custodian of corporate records and the corporate seal and to
affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
Section 7. Delegation of Authority. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Section 8. Removal. Except as otherwise provided in the Certificate of
Incorporation of the Corporation, any officer of the Corporation may be removed
at any time, with or without cause, by the Board of Directors.
Section 9. Action With Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
10
<PAGE> 11
ARTICLE V
STOCK
Section 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate, in such a form as may be prescribed by law, signed by, or in the
name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any of or all the
signatures on the certificate may be facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
By-laws, applicable securities laws or any agreement among any number of
stockholders or among such holders and the corporation shall have conspicuously
noted on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction.
Section 2. Transfers of Stock. Except as otherwise established by rules
and regulations adopted by the Board of Directors, and subject to applicable
law, shares of stock may be transferred on the books of the corporation by the
surrender to the corporation or its transfer agent of the certificate
representing such shares properly endorsed or accompanied by a written
assignment or power of attorney properly executed, and with such proof of
authority or authenticity of signature as the corporation or its transfer agent
may reasonably require. Except as may be otherwise required by law, by the
Certificate of Incorporation or by the By-Laws, the Corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock until the shares have been transferred on the books of
the Corporation in accordance with the requirements of these By-Laws.
Section 3. Record Date. The Board of Directors may fix in advance a date
as a record date for the determination of the stockholders entitled to notice of
or to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, concession or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than sixty (60) nor less than ten
(10) days before the date of such meeting, nor more than sixty (60) days prior
to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed. The record date for determining stockholders
for any other purpose shall be at the close of
11
<PAGE> 12
business on the day on which the Board of Directors adopts the resolution
relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and registration
of certificates of stock shall be governed by such other regulations as the
Board of Directors may establish.
ARTICLE VI
NOTICES
Section 1. Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid
telegram, mailgram, telecopy or commercial courier service. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his or her last known address as the same appears on the books of the
Corporation. The time when such notice is received by such stockholder,
director, officer, employee or agent, or by any person accepting such notice on
behalf of such person, if hand delivered, or dispatched, if delivered through
the mails or by prepaid telegram, mailgram, telecopy or commercial courier
service, shall be the time of the giving of the notice.
Section 2. Waivers. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
12
<PAGE> 13
Section 2. Corporate Seal. The Board of Directors may provide a suitable
seal, containing the name of the Corporation, which seal shall be in the charge
of the Secretary. If and when so directed by the Board of Directors or a
committee thereof, duplicates of the seal may be kept and used by the Treasurer
or by an Assistant Secretary or Assistant Treasurer.
Section 3. Reliance Upon Books, Reports and Records. Each director, each
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his duties, be fully protected
in relying in good faith upon the books of account or other records of the
Corporation, including reports made to the Corporation by any of its officers,
by an independent certified public accountant, or by an appraiser selected with
reasonable care.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
fixed by the Board of Directors.
Section 5. Time Periods. In applying any provision of these Bylaws which
require that an act be done or not done a specified number of days prior to an
event or that an act be done during a period of a specified number of days prior
to an event, calendar days shall be used, the day of the doing of the act shall
be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
while serving as a director, officer or employee, shall, to the extent such
person is an officer or director of the Corporation, and may otherwise on the
resolution of the Board of Directors, be indemnified and held harmless by the
Corporation to the fullest extent authorized by Delaware Law, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said Law permitted the Corporation to provide prior
to such amendment) against all expenses, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid
or to be paid in settlement and amounts expended in seeking indemnification
granted to such person under applicable law, this by-law or any agreement with
the Corporation) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer or employee and shall inure to the benefit of his or
her heirs, executors and administrators; provided, however, that, except as
provided in Section 2 of this Article VIII, the
13
<PAGE> 14
Corporation shall indemnify any such person seeking indemnity in connection with
an action, suit or proceeding (or part thereof) initiated by such person only if
such action, suit or proceeding (or part thereof) was authorized by the board of
directors of the Corporation. Such right shall be a contract right and shall
include the right to be paid by the Corporation expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the Delaware General Corporation Law then so requires, the payment of
such expenses incurred by a director or officer of the Corporation in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of such proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it should be determined ultimately that such
director or officer is not entitled to be indemnified under this Section or
otherwise.
Section 2. Right of Claimant to Bring Suit. If a claim under Section 1
is not paid in full by the Corporation within twenty (20) days after a written
claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if such suit is not frivolous or brought in bad faith, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any, has been tendered
to this Corporation) that the claimant has not met the standards of conduct
which make it permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
Section 3. Non-Exclusivity of Rights. The rights conferred on any person
in Sections 1 and 2 shall not be exclusive of any other right which such persons
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
Section 4. Indemnification Contracts. The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VIII.
14
<PAGE> 15
Section 5. Insurance. The Corporation shall maintain insurance to the
extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
Section 6. Effect of Amendment. Any amendment, repeal or modification of
any provision of this Article VIII by the stockholders and the directors of the
Corporation shall not adversely affect any right or protection of a director or
officer of the Corporation existing at the time of such amendment, repeal or
modification.
ARTICLE IX
AMENDMENTS
Section 1. By the Board of Directors. Except as is otherwise set forth
in these By-laws, these By-laws may be altered, amended or repealed or new
By-laws may be adopted by the affirmative vote of a majority of the directors
present at any regular or special meeting of the Board of Directors at which a
quorum is present.
Section 2. By the Stockholders. Except as otherwise set forth in these
By-laws, these By-laws may be altered, amended or repealed or new By-laws may be
adopted by the affirmative By-laws may be altered, amended or repealed or new
By-laws may be adopted by the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the shares of the capital stock of
the corporation issued and outstanding and entitled to vote at any annual
meeting of stockholders, or at any special meeting of stockholders, provided
notice of such alteration, amendment, repeal or adoption of new By-laws shall
have been stated in the notice of such special meeting.
15
<PAGE> 16
CERTIFICATE OF SECRETARY
I, Glenn H. Stevens, hereby certify:
1. That I am the duly elected and acting Secretary of MAXTOR
CORPORATION, a Delaware corporation (the "Corporation"); and
2. That the foregoing Bylaws comprising thirteen (13) pages, constitute
the Amended and Restated Bylaws of the Corporation as duly adopted by the Board
of Directors at a meeting _____________________, 1998.
IN WITNESS WHEREOF, I have hereunder subscribed my name this ______ day
of _________________________, 1998.
________________________________________
Glenn H. Stevens, Secretary
16
<PAGE> 1
EXHIBIT 4.2
COMMON STOCK COMMON STOCK
MAXTOR CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
$0.01 PAR VALUE PER SHARE OF
MAXTOR CORPORATIONS
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation
and the facsimile signatures of its duly authorized officers
MAXTOR CORPORATION
INCORPORATED 1986
DELAWARE
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
THE BANK OF NEW YORK
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
MAXTOR CORPORATION
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, and the
number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Corporation at its principal office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-______Custodian______
TEN ENT - as tenants by the (Cust) (Minor)
entireties Under Uniform Gifts to Minors
JT TEN - as joint tenants with Act_________________________
right of survivorship (State)
and not as tenants in UNIF TAF MIN ACT-_______________
common (Cust)
CUSTODIAN(until age_____________)
________________under Uniform Transfers
(Minor)
to Minors Act__________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,__________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________________
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated__________________
_________________________________________________
NOTICE: THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER
Signature(s) Guaranteed
By_______________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE> 1
[GRAY CARY WARE FREIDENRICH LLP LETTERHEAD]
July 28, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: MAXTOR CORPORATION
REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
As counsel to Maxtor Corporation (the "Company"), we are rendering this
opinion in connection with a proposed sale of those certain shares of the
Company's newly-issued Common Stock and those certain additional shares of the
Company's Common Stock held by a certain shareholder as set forth in the
Registration Statement on Form S-1 to which this opinion is being filed as
Exhibit 5.1 (the "Shares"). We have examined all instruments, documents and
records which we deemed relevant and necessary for the basis of our opinion
hereinafter expressed. In such examination, we have assumed the genuineness of
all signatures and the authenticity of all documents submitted to us as
originals and the conformity to the originals of all documents submitted to us
as copies.
We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance, or (ii) the effect of bankruptcy,
insolvency, reorganization, moratorium or equitable principles relating to or
limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares identified
in the above-referenced Registration Statement will be, upon effectiveness of
the Registration Statement and receipt by the Company of payment therefor,
validly authorized, legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich LLP
------------------------------------
GRAY CARY WARE & FREIDENRICH LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of Maxtor
Corporation on Form S-1 (File No. 333-56099) of our report dated February 3,
1998, except for Notes 7 and 10 for which the date is April 9, 1998, the ninth
paragraphs of Notes 1 and 7, for which the date is June 3, 1998, and the first
paragraph of Note 14, for which the date is July 24, 1998, which includes an
emphasis of a matter related to the Company's ultimate parent; Hyundai
Electronics Industries, Co., Ltd., on our audits of the consolidated financial
statements and schedule of Maxtor Corporation. We also consent to the references
to our firm under the captions "Experts" and "Selected Financial Data."
PricewaterhouseCoopers LLP
San Jose, California
July 27, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
April 25, 1996, except for the first paragraph of the "Subsequent Event" note as
to which the date is July 24, 1998, with respect to the financial statements and
schedule of Maxtor Corporation included in the Registration Statement (Form S-1
Amendment No. 3) and related Prospectus of Maxtor Corporation for the
registration of shares of common stock.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
San Jose, California
July 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> JUN-27-1997
<CASH> 15,010
<SECURITIES> 0
<RECEIVABLES> 227,922
<ALLOWANCES> 5,652
<INVENTORY> 162,954
<CURRENT-ASSETS> 435,211
<PP&E> 286,396
<DEPRECIATION> 184,025
<TOTAL-ASSETS> 545,649
<CURRENT-LIABILITIES> 541,015
<BONDS> 95,000
0
880
<COMMON> 4
<OTHER-SE> (215,564)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 545,649
<SALES> 1,080,882
<TOTAL-REVENUES> 1,080,882
<CGS> 956,151
<TOTAL-COSTS> 956,151
<OTHER-EXPENSES> 114,319<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,137
<INCOME-PRETAX> (4,725)
<INCOME-TAX> 178
<INCOME-CONTINUING> (4,903)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,903)
<EPS-PRIMARY> (202.72)
<EPS-DILUTED> (202.72)
<FN>
<F1>Other SE includes Additional Paid in Capital of $537,370, unrealized gain on
investments in Equity Securities of $24,922 and Accumulated Deficit of
$777,856.
<F2>Other Expenses include research and development of $70,096, selling, general
and administrative costs of $34,315, and stock compensastion expenses of
$9,908.
</FN>
</TABLE>
