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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file Number: 0-14016
MAXTOR CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0123732
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 Cottonwood Drive, Milpitas, California 95035
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including (408) 432-1700
area code:
Securities registered pursuant to Common Stock,
Section 12(b) of the Act: par value $.01 per share
Securities registered pursuant to 5.75% Convertible
Section 12(g) of the Act: Subordinated Debentures, due
March 1, 2012
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 27, 1998, 88,059,701 shares of the registrant's Series A
Preferred Stock, $.01 par value, and 445,148 shares of the registrant's Common
Stock, $.01 par value, were issued and outstanding, respectively. As of such
date, all of the outstanding shares of Series A Preferred Stock were held by the
parent of the registrant, all outstanding shares of Common Stock were issued to
employees of registrant pursuant to its stock option plan or restricted stock
plan, and there was no public market for the Company's equity securities.
THIS ANNUAL REPORT ON FORM 10-K/A CONTAINS 91 PAGES OF WHICH THIS IS
NUMBER 1. THE INDEX TO EXHIBITS BEGINS ON PAGE 87.
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PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of
the U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future, are forward-looking statements
including those discussed in Item 1, Business, "Products", "Marketing and
Customers", "Manufacturing and Suppliers", "Research and Development", and
"Competition"; Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, "Results of Operations", "Liquidity and
Capital Resources" and "Certain Factors Affecting Future Performance"; and
elsewhere in this report. In this report, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions also identify
forward-looking statements. The Company makes these forward-looking statements
based upon information available on the date hereof, and assumes no obligation
to update any such forward-looking statements. The Company's actual results
could differ materially from those anticipated in this report as a result of
certain factors including, but not limited to, those set forth in the following
risk factors and elsewhere in this report.
<PAGE> 3
Maxtor is a leading provider of hard disk drive ("HDD") storage products
for desktop personal computer ("PC") systems. The Maxtor DiamondMax product
family consists of 3.5-inch form factor HDDs with storage capacities which range
from 2.1 gigabyte ("GB") to 13.6 GB. These products have high speed interfaces
for greater data throughput, a robust mechanical design for improved
reliability, magneto-resistive ("MR") head technology and a digital signal
processor ("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
original equipment manufacturers ("OEMs"), including Compaq Computer Corporation
("Compaq"), Dell Computer Corporation ("Dell") and International Business
Machines Corporation ("IBM"); distributors, including Ingram; and retailers,
including Best Buy and CompUSA, Inc. ("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 average
selling prices ("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 Hyundai Electronics Industries
Co., Ltd. ("HEI") and its affiliates in 1994.
THE MAXTOR TURNAROUND
In early 1996, Hyundai Electronics America ("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 Corporation ("Quantum")
and SyQuest. These
<PAGE> 4
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
International Manufacturing Services, Inc. ("IMS"), its former printed circuit
board ("PCB") division, to certain members of IMS management and institutional
investors. These actions helped reduce the Company's workforce by approximately
54% by October 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 selling, general &
administrative expenses ("SG&A") as a percentage of revenue were among the
lowest in the industry for the 1997 fiscal year.
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
<PAGE> 5
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 3.5 million
units in first quarter of 1998, and increase its share of the desktop HDD market
in terms of units shipped from 5.6% to 13.4% for the same periods.
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% of total revenues in the second quarter of 1996 to 51.8% of
the Company's total revenue in the first quarter of 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 122.5%, from
$247.0 million to $549.6 million for the first fiscal quarters of 1997 and 1998,
respectively, and improved gross margins from (2.9)% to 11.3% for the same
periods.
INDUSTRY BACKGROUND
The Desktop HDD Market. According to International Data Consultants
("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. MR heads have discrete
read and write structures which provide more signal than the older thin-film
inductive
<PAGE> 6
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 quarter 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 "Certain Factors Affecting Future Performance -- 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.
<PAGE> 7
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. As of June 30, 1998, 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 51.8% in the quarter ended March
28, 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. 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
<PAGE> 8
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 giant MR ("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 units of the DiamondMax 2160,
during the first full quarter of production. See "Certain Factors Affecting
Future Performance -- 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.
<PAGE> 9
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 in
and IBM and IBM Gateway and IBM qualification
with others
</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 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 "Certain Factors Affecting Performance-- 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, the twelve month period
ended December 27, 1997, the nine month period ended December 28, 1996 and the
twelve month period ended March 30, 1996, the Company made capital expenditures
of $36.6 million, $82.5 million, $53.8 million and $72.7 million, respectively.
<PAGE> 10
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 a 450,000 square foot manufacturing
facility in Dalian, China (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 "Certain Factors Affecting Future Performance -- Need for Additional
Capital," "-- Control by and Dependence on Hyundai," "-- Single Manufacturing
Facility; Future Need for Additional Capacity," "-- Dependance on International
Operation; Risks from International Sales" 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.
<PAGE> 11
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 "Certain Factors Affecting Future Performance -- Control by and
Dependence on Hyundai," "-- Control by and Dependence on Hyundai," "--
Dependence on Suppliers of Components and Sub-Assemblies," "-- Dependence on
International Operations; Risks from International Sales" 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
<PAGE> 12
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 approximately 31% in the quarter ended December 27, 1997.
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 "Certain Factors Affecting Future Performance -- 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. 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 International Holdings, Inc. ("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. 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., CompUSA, and Staples. See "Certain
Factors Affecting Future Performance -- Customer Concentration."
SALES AND MARKETING
The Company employs approximately 206 (as of March 28, 1998) 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
<PAGE> 13
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 "Certain Factors Affecting Future Performance -- 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 Limited ("Fujitsu"), 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 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
<PAGE> 14
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 "Certain Factors Affecting Future Performance -- 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.
<PAGE> 15
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 "Certain Factors Affecting Future Performance -- Limited Protection of
Intellectual Property; Risk of Third Party Claims of Infringement," "--
Dependence on International Operations; Risks of International Sales" and "--
Control by and Dependence on Hyundai"
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 March 28, 1998, the Company had 5,660
employees worldwide, of which 714 were engaged in engineering, research and
development; 206 in marketing, sales and customer support; 4,389 in
manufacturing; and 351 in general management and administration. The Company has
4,389 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 "Certain Factors Affecting Future Performance--
Dependence on and Integration of Key Personnel; Hiring Additional Skilled
Personnel."
<PAGE> 16
Maxtor is a registered trademark and DiamondMax, and CrystalMax and
Formula 4 are trademarks of Maxtor Corporation. All other brand names and
trademarks appearing in this Report are the property of their respective
holders.
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.
GENERAL
BACKGROUND
ITEM 2. PROPERTIES
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 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.
<PAGE> 17
ITEM 3. 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 25, 1998, the Company's sole stockholder authorized by written
consent an Amended and Restated 1996 Stock Option Plan, effective October 1,
1997 and an increase to 6,136,084 as the maximum number of shares reserved for
issuance thereunder.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In January 1996, the Company became a wholly owned subsidiary of Hyundai
Electronics America ("HEA"). As of the acquisition, 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, $100,000,000 in aggregate principal
amount, remain publicly traded.
In June 1996, the Company entered into an exchange agreement with HEA
whereby HEA exchanged 300 shares of Common Stock 58,208,955 shares of Series A
Preferred Stock, par value $.01 per share. In December 1997,
<PAGE> 18
the Company and HEA entered into a Debt Payment and Stock Purchase Agreement
pursuant to which HEA accepted 29,850,746 new shares of the Corporation's
preferred stock as payment for $200,000,000 owed to HEA by the Corporation. As
of December 27, 1997, 88,059,701 shares of Series A Preferred Stock and 7,563
shares of Common Stock, $.01 par value, were issued and outstanding. As of June
27, 1998, all of the outstanding shares of Series A Preferred Stock were held by
the parent of the registrant and all outstanding shares of Common Stock were
held by 35 individuals who obtained shares either upon exercise of options
granted under the Company's 1996 Stock Option Plan or pursuant to restricted
stock grants under the Company's 1998 Restricted Stock Plan.
DIVIDEND POLICY
The holders of shares of Series A Preferred Stock are entitled to
non-cumulative dividends of $0.40 per share, when and as declared by the Board
of Directors, in preference of the holders of shares of the Common Stock. No
such dividends were declared in 1997. The Company has never paid cash dividends
on its capital stock. The Company does not anticipate paying cash dividends in
the near future. Under the terms of the Company's line of credit facilities, the
Company may not declare or pay any dividends without the prior consent of its
lenders.
<PAGE> 19
ITEM 6. SELECTED FINANCIAL INFORMATION
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.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR NINE MONTHS FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 26, MARCH 25, MARCH 30, DECEMBER 28, DECEMBER 27,
1994 1995 1996 1996(1) 1997
----------- ----------- ----------- ------------ ------------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 1,152.6 $ 906.8 $ 1,269.0 $ 798.9 $ 1,424.3
Cost of revenue........................... 1,205.0 850.7 1,196.3 888.9 1,352.9
----------- ----------- ----------- ----------- -----------
Gross profit (loss)................... (52.4) 56.1 72.7 (90.0) 71.4
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development................ 97.2 60.7 94.7 87.8 106.2
Selling, general and administrative..... 78.9 81.6 82.8 60.7 62.6
Other................................... 19.5 (10.2) 4.5 -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses.............. 195.6 132.1 182.0 148.5 168.8
----------- ----------- ----------- ----------- -----------
Loss from operations...................... (248.0) (76.0) (109.3) (238.5) (97.4)
Interest expense.......................... (10.0) (8.4) (11.8) (18.1) (36.5)
Interest and other income................. 2.3 4.2 1.1 1.0 25.0(2)
----------- ----------- ----------- ----------- -----------
Loss before income taxes.................. (255.7) (80.2) (120.0) (255.6) (108.9)
Provision for income taxes................ 1.9 2.0 2.8 0.8 1.0
----------- ----------- ----------- ----------- -----------
Net loss.................................. $ (257.6) $ (82.2) $ (122.8) $ (256.4) $ (109.9)(2)
=========== =========== =========== =========== ===========
Net loss per share -- basic and
diluted(3).............................. $ (16.00) $ (3.25) $ (5.94) $ -- $ --
=========== =========== =========== =========== ===========
Shares used in per share calculation (in
thousands).............................. 16,102 25,292 20,677 -- 2
=========== =========== =========== =========== ===========
Pro forma net loss per share(4)........... $ -- $ -- $ -- $ (17.62) $ (3.62)
=========== =========== =========== =========== ===========
Shares used in pro forma share calculation
(in thousands).......................... -- -- -- 14,552 30,350
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Total assets.............................. $ 492.4 $ 381.8 $ 442.5 $ 314.5 $ 555.5
Total current liabilities................. 265.7 236.0 413.1 412.9 552.2
Long-term debt and capital lease
obligations due after one year.......... 107.4 102.0 100.2 229.1 224.3
Total stockholders' equity (deficit)...... 119.2 43.9 (71.1) (327.5) (221.0)
</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) Includes recovery of a $20.0 million fully-reserved note from IMS. See
"Certain Transactions."
(3) Net loss per share information for the fiscal periods ended December 28,
1996 and December 27, 1997 have not been presented since such information is
not meaningful due to the limited number of shares of Common Stock
outstanding.
(4) Pro forma net loss per share information assumes conversion of all
outstanding Series A Preferred Stock.
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ITEM 1:
BUSINESS, ITEM 6: SELECTED FINANCIAL INFORMATION AND ITEM 8: CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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 $65.0 million owing to HEA as of December
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 "Certain Factors
Affecting Future Performance -- 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. 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
<PAGE> 21
goals 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. 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 fiscal year ended December 27, 1997,
the Company's quarterly revenue grew by 27.9%, increasing from $1,113.8 million
in 1996 to $1,424.3 million in 1997. For the same period, gross margins
increased from (7.0)% to 5.0%. 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 "Certain Factors Affecting Future Performance --
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. During 1997 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
17.6% in 1996 to 11.9% in 1997. The Company anticipates that in future periods,
operating expenses will grow in absolute dollars as a consequence of supporting
efforts to
<PAGE> 22
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 Expenses
- -- Stock Compensation Expenses," "Certain Factors Affecting Future Performance
- -- 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 "Certain Factors Affecting Future Performance -- 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. 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 "Certain
Factors Affecting Future Performance -- 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 net operating loss ("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, 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 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
<PAGE> 23
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. 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").
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 more than 50% of the
Company's outstanding capital stock is acquired then the amount of the Company's
U.S. federal taxable income for any tax year ending after the date of such
acquisition which may be offset by the Company's NOL carryforwards remaining
after deconsolidation from the HEA Tax Group will be limited to an amount equal
to the aggregate value of the Common Stock and the Series A Preferred Stock
immediately before the ownership change multiplied by the long-term tax exempt
rate then in effect (e.g., 5.15% for ownership changes occurring during July
1998).
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
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.
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.
At such time as HEA ceases to own at least 80% of the total voting power and at
least 80% of the total value of the Company's capital stock the Company will
cease to be a member of the HEA Tax Group; however, the Company will remain
liable for its allocable share of the consolidated or combined tax return
liability and for tax deficiencies of the entire HEA Tax Group which relate to
the period during which the Company was a member of the HEA Tax Group. There can
be no assurance that the HEA Tax Group will satisfy all tax obligations for such
periods or that additional liabilities will not be assessed for such periods. In
addition, there can be no assurance that the Company's share of the consolidated
or combined tax liability will not be increased as a result of subsequent
events, such as taxing authority audit adjustments or the filing of amended
returns affecting either the Company's items of gain, income, loss, deduction or
credit or another member's items of gain, income, loss, deduction or credit. The
Company has agreed to indemnify and reimburse HEA if any member of the HEA Tax
Group is required 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
<PAGE> 24
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.
<PAGE> 25
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.
<PAGE> 26
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 Storage Dimensions, Inc. ("SDI"),
and a $20.0 million fully-reserved note issued to the Company by IMS.
<PAGE> 27
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 33.0% 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.
<PAGE> 28
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 $41.3 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 a new enterprise-wide information
system (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
<PAGE> 29
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
report 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.
LIQUIDITY AND CAPITAL RESOURCES
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 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.
Net cash used in investing activities was primarily attributable to $82.5
million of capital expenditures offset by the collection of the $20 million note
receivable from the Company's IMS affiliate that was fully reserved (see
discussion of IMS transactions below). A majority of the capital expenditures
activity related to the acquisition of manufacturing and engineering equipment
to develop new products and enhance the productivity of the Singapore
manufacturing facility.
In November 1994, the Company formed a wholly-owned subsidiary, IMS
International Manufacturing Services, Ltd. whose primary business was contract
manufacturing for electronic original equipment manufacturers. The Company's
printed circuit board ("PCB") assembly plant in Hong Kong formed the foundation
of the business, and a second plant was added in Thailand in May 1995. In early
June 1996 the Company reorganized all of the operations under a wholly-owned
Delaware subsidiary, International Manufacturing Services, Inc. ("IMS"). IMS not
only supplies the Company, but a variety of external customers, with PCB
assemblies, sub-assemblies and fully integrated box products. In May 1996 the
Company entered into an agreement to sell a majority interest in IMS to certain
IMS management and other Investors ("Buyer"). At the completion of the
transaction in June 1996, the Company received $25 million in cash and $20
million in notes from IMS, and retained a 23.5% ownership interest in IMS.
Pursuant to the agreements, the Company made various representations and
warranties as to itself and IMS and has agreed to indemnify Buyer for any
breaches thereof. Generally, in the event that losses from such breaches when
aggregated exceed $500,000, Buyer shall be entitled to indemnification for all
losses, including the first $500,000 up to a maximum of $17,500,000, provided
that tax and environmental representations are not subject to the liability
limit.
In October 1997, IMS completed an initial public offering of 5 million
shares of common stock at $11.50 per share. Under the terms of the note issued
by IMS to the Company, IMS was required to pay the outstanding principal balance
and all accrued and unpaid interest, aggregating $20.1 million, and IMS made the
payment in full on October 28, 1997. In connection with these transactions, the
Company revalued its investment and recorded a $16.3 million unrealized gain in
IMS to reflect its 16% ownership interest (as of December 27, 1998).
Net cash provided by financing activities results mainly from an issuance
of $200.0 million in preferred stock of the Company to the Company's parent,
HEA. In December 1997, the Company and HEA entered into a Debt Payment and Stock
Purchase Agreement pursuant to which HEA accepted 29,850,746 new shares of the
Company's preferred stock as payment for $200 million owed to HEA by the
Company. As of December 27, 1997, 88,059,701 shares of Series A Preferred Stock
and 15,125 shares of Common Stock, par value $.01 par share, were issued and
outstanding. In addition, cash increased due to a new increase in borrowings of
$10.0 million in 1997.
At December 27, 1997, the Company had $389.4 million of short-term and
long-term unsecured debt comprised of $224.4 million of credit facilities from
various banks, $65.0 million of inter-company debt from HEA and $100.0 million
of publicly-traded convertible debt.
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.
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 for 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 March 28, 1998, $55.0 million was
outstanding under this facility (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 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 March 28, 1998, $129.0
million of borrowings under this line were outstanding. 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 March 28,
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 and bear
interest at rates ranging from 6.27% to 7.88%. In January 1998, one $10.0
million facility was retired and all principal, owing has been paid. As of March
28, 1998, $40.0 million of borrowings under this line of credit were outstanding
(unaudited).
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
<PAGE> 30
devaluations of the Korean won versus the U.S. dollar, HEI's reported financial
condition as of year-end 1997 was not in compliance with certain financial
covenants applicable to HEI as guarantor under such revolving credit facilities,
and such non-compliance constituted a default by the Company under such
revolving credit facilities and also a default (through a cross-default clause)
under an uncommitted credit facility of the Company that is repayable on demand
of the lender, is not guaranteed and had an outstanding principal amount of
$30.0 million as of March 28, 1998. The default under the revolving credit
facilities was waived by the lending banks in June 1998 in exchange for HHI
becoming the guarantor under such facilities in place of HEI and an increase in
pricing to reflect borrowing rates based on HHI's current credit rating. To
date, the lender under the demand facility has not demanded repayment of the
$30.0 million outstanding under that facility. The Company believes that current
market conditions for credit facilities are not as favorable as they have been
at certain times in the past, and that for various reasons the number of
potential lenders actively providing credit facilities to companies in the data
storage industry may have decreased recently, and that the terms on which the
remaining potential lenders are willing to offer such facilities have become
significantly more restrictive and/or costly. Consequently, there can be no
assurance that the Company will be able to obtain or retain adequate credit
facilities or as to the terms and amount of any such facilities. Any failure to
retain or 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, the Company and HEA have agreed that they
will replace the Company's revolving line of credit from HEA, which as of March
28, 1998, had an outstanding principal balance of $55 million, with a long-term,
subordinated note in the same principal amount. In addition, as a majority-owned
subsidiary of HEA, the Company had the benefit of a letter of support from HEI
under which HEI agreed to provide sufficient financial support to ensure that
the Company would continue as a going concern. The Company believes that it will
no longer have the benefit of the support letter.
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. Under this program the
Company could sell its qualified trade accounts receivable up to $100.0 million
on a non-recourse basis. The face amount of the eligible receivables are
discounted based on the Corporate Receivables Corporation commercial paper rate,
5.85% as of December 27, 1997 and 5.60% as of March 26, 1998 (unaudited) plus
commission and is subject to a 10% retention. As of December 27, 1997, $79.8
million of advances related to sales of accounts receivable were included in
accrued and other liabilities. As of March 28, 1998, this amount was $86.6
million (unaudited). The Company's asset securitization program was subject to
certain conditions, among which was a condition that all of HEI's long-term
public senior debt securities achieve a specified rating. This condition was not
met in February 1998, and the Company obtained waivers of this condition through
April 8, 1998.
The Company completed a new asset securitization program dated as of April
8, 1998 (the "New Program") arranged by Citicorp to replace the existing
program. Under the New Program, the Company sells all of its trade accounts
receivable through a special purpose vehicle with a purchase limit of $100.0
million on a non-recourse basis, subject to increase to $150.0 million, upon the
fulfillment of the conditions subsequent described below. On April 8, 1998, the
uncollected purchase price under the existing program, in the amount of
approximately $100.0 million, was transferred to represent the purchased
interest of Citicorp's Corporate Receivables Corporation ("CRC") under the New
Program. Continuance of the New Program is subject to certain conditions,
including a condition that all of the long-term public senior debt securities of
HHI, an affiliated company, achieve a specific rating. Continuance of the
program is subject to certain conditions, including a condition that all of the
long-term public senior debt securities of HHI not fall below a specified
rating. The Company has begun negotiations with respect to a $200 million asset
securitization program which does not require any support from HEA or any of its
affiliates. The Company believes it will be able to close this program and
terminate its existing program by July 31, 1998. In addition, the Company is
exploring alternatives to establish a replacement revolving credit facility
which does not require any support from HEA or any of its affiliates. Failure of
the Company to close the replacement asset securitization program or obtain
alternative financing would have a material adverse impact on the Company's
business, financial condition and results of operations.
The Company has been investing significant amounts of capital to increase
the capacity and enhance the productivity of its Singapore manufacturing
facility. In the twelve month period ended December 27, 1997, the nine month
period ended December 28, 1996 and the twelve month period ended March 30, 1996,
the Company made capital expenditures, net of disposals, of $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 50
<PAGE> 31
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 Company's Board of Directors (the "Board").
Moreover, any such agreement would be conditioned on the transfer of HEI's
business license for the Dalian Facility and the transfer of HEI's tax holiday
status and other regulatory concessions in Dalian to the Company. If the Company
is unable to reach agreement with HEI on acceptable terms or obtain the tax
holiday status and other regulatory concessions and the applicable business
license, the Company may need to acquire additional manufacturing capacity at
other sites. In addition to the Dalian Facility, the Company currently is
investigating other manufacturing facilities within Asia. Although the Company
believes that alternative manufacturing facilities will be available, a failure
by the Company to obtain, on a timely basis, a facility or facilities which
allow the Company to meet its customers' demands will limit the Company's growth
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
At December 27, 1997 the Company expected that it would require alternative
sources of liquidity, including additional sources of financing in fiscal 1998.
The Company engaged in ongoing discussions with various parties regarding
additional sources of financing, including a contemplated public offering of the
Company's Common Stock (the "Offering") in connection with which the Company
filed a registration statement in Form S-1 with the Securities and Exchange
Commission (File No. 333-56099) (the "Offering").
The Company currently believes that the proceeds of the Offering, if
successfully completed, together with cash generated from operations and
borrowing capacity, will be sufficient to fund its operations through at least
the next 12 months from the date hereof. The Company requires substantial
working capital to fund its business, particularly to finance accounts
receivables and inventory, and to invest in property and equipment. The Company
may seek long-term financing arrangements, including a line of credit to fund
its future capacity expansion plans, as necessary. However, the Company's cash
needs will depend on, among other things, demand in the desktop HDD market and
pricing conditions. There can be no assurance that lower than expected revenue,
increased expenses, decisions to increase capacity or other events, including
the acquisition of technology, products or businesses, will not cause the
Company to seek more capital, or to seek capital sooner than currently expected.
If the Company needs additional capital, there can be no assurance that such
additional financing can be obtained, or, if obtained, that it will be available
on satisfactory terms. The failure to obtain additional financing on
satisfactory terms would also hinder the Company's ability to invest in capital
expenditures or in R&D and would have a material adverse effect on the Company's
business, financial condition and results of operations.
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 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.
<PAGE> 32
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
HISTORY OF OPERATING AND NET LOSSES; ACCUMULATED DEFICIT
During each of the 19 consecutive quarters ended September 27, 1997, the
Company incurred significant operating losses ranging from $125.5 million to
$3.1 million per quarter, with net losses ranging from $130.2 million to $4.5
million, primarily as a result of delayed product introductions, product
performance and quality problems, low manufacturing yields and under-utilization
of manufacturing capacity, high operating expenses and overall market conditions
in the HDD industry, including fluctuations in demand and declining average
selling prices ("ASPs"). As of December 27, 1997, the Company had a
stockholders' deficit of approximately $663.1 and as of June 27, 1998, the
Company had a stockholders' deficit of approximately $777.9 million. While the
Company achieved operating profits and positive net income for the quarter ended
December 27, 1997, it recorded operating and net losses for the fiscal year
ended December 27, 1997. There can be no assurance that the factors that led to
the Company's history of operating losses have been overcome or that the Company
will achieve profitability on either an operating or net income basis in any
future quarterly or annual periods. Consequently, recent operating results
should not be considered indicative of future financial performance. See "--
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
<PAGE> 33
otherwise will be magnified by the fixed nature of such operating expenses and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the HDD industry is characterized by rapidly declining ASPs
over the life of a product even for those products which are competitive and
timely-to-market. The Company anticipates that this market characteristic will
continue for the foreseeable future. In general, the ASP for a given product in
the desktop HDD market decreases over time as increases in the supply of
competitive products and cost reductions occur and as technological advancements
are achieved. The rate of ASP decline accelerates when, as is currently the case
in the HDD industry, some competitors lower prices to absorb excess capacity,
liquidate excess inventories, restructure or attempt to gain market share. The
Company expects ASPs to continue to decline for the second quarter of 1998 and
the remainder of the year. This continuing price erosion could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In July 1996, the Company began to modify its management and operational
structures. From the first quarter of 1997 to the first quarter of 1998, the
Company's timely introduction and volume production of competitive products
resulted in quarterly revenue growth. Such restructuring activities and revenue
growth placed and are expected in the future to place a significant strain on
the Company's personnel and resources. The Company's ability to maintain the
advantages of the restructuring and to manage future growth, if any, will depend
on its ability to: (i) continue to implement and improve its operational,
financial and management information and control systems on a timely basis; (ii)
hire, train, retain and manage an expanding employee base; and (iii) maintain
effective cost controls, all while being among the first-to-volume production
with competitive products. The inability of the Company's management to maintain
the advantages of the restructuring, to manage future growth effectively and to
continue to be among the first-to-volume production with competitive products
could have a material adverse effect on the Company's business, financial
condition and results of operations.
See "-- Risks of Failed Execution; Changing Customer Business Models" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS OF FAILED EXECUTION; CHANGING CUSTOMER BUSINESS MODELS
PC original equipment manufacturers ("OEMs") compete in a market that is
consolidating market share among the top ten PC OEMs, which accounted for
greater than 50% of all PC units shipped during 1997 and the first six months of
1998. A majority of the Company's HDDs are sold to PC OEMs, which accounted for
72.2% of the Company's revenues for the second quarter of 1998. The process of
qualifying the Company's products with these PC OEM customers can be complex and
difficult. These PC OEMs use the quality, storage capacity and performance
characteristics of HDDs to select their HDD providers. PC OEMs typically seek to
qualify three or four providers for a given HDD product generation. To qualify
consistently with PC OEMs and thus succeed in the desktop HDD industry, an HDD
provider must consistently execute on its product development and manufacturing
processes in order to be among the first-to-market entry and first-to-volume
production at leading storage capacity per disk with competitive prices. Once a
PC OEM has chosen its qualified HDD vendors for a given PC product, it generally
will purchase HDDs from those vendors for the life of that product. If a
qualification opportunity is missed, the Company may not have another
opportunity to do business with that PC OEM until the next generation of the
Company's products is introduced. The effect of missing a product qualification
opportunity is magnified by the limited number of high volume PC OEMs. Failure
to reach the market on time or to deliver timely volume production usually
results in significantly decreased gross margins due to rapidly declining ASPs
and dramatic losses in market share. Failure to obtain significant PC OEM
customer qualifications for new or existing products in a timely manner would
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition to developing and qualifying new products, the Company must
address the increasingly changing and sophisticated business needs of its
customers. For example, PC OEMs and other PC suppliers are starting to adopt
build-to-order manufacturing models which reduce their component inventories and
related costs and enable them to tailor their products more specifically to the
needs of their customers. Various PC OEM customers also are considering or have
implemented a "channel assembly" model in which the PC OEM ships a minimal
computer system to the dealer or other assembler, and component suppliers
(including
<PAGE> 34
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
<PAGE> 35
the overall market for desktop PCs which, in turn, is dependent on PC life
cycles, demand by end-users for increased PC performance and functionality at
lower prices (including increased storage capacity), availability of substitute
products, including laptop PCs, and overall foreign and domestic economic
conditions. The desktop PC and HDD markets are characterized by periods of rapid
growth followed by periods of oversupply, and by rapid price and gross margin
erosion. This environment makes it difficult for the Company and its PC OEM
customers to reliably forecast demand for the Company's products. The Company
does not enter into long-term supply contracts with its PC OEM customers, and
such customers often have the right to defer or cancel orders with limited
notice and without significant penalty. If demand for desktop PCs falls below
the customers' forecasts, or if customers do not manage inventories effectively,
they may cancel or defer shipments previously ordered from the Company.
Moreover, while there has been significant growth in the demand for desktop PCs
over the past several years, according to International Data Corporation
("IDC"), the growth rate in the desktop PC market has slowed in recent quarters.
Because of the Company's reliance on the desktop segment of the PC market, the
Company will be more strongly affected by changes in market conditions for
desktop PCs than would a company with a broader range of products. Any decrease
in the demand for desktop PCs could lead in turn to a decrease in the demand for
the Company's HDD products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Although the desktop PC segment is currently the largest segment of the HDD
market, the Company believes that over time, market demand may shift to other
market segments that may experience significantly faster growth. In addition,
the Company believes that to remain a significant provider of HDDs to major PC
OEMs, the Company will need to offer a broader range of HDD products for the
existing and new product categories of its PC OEM customers. For these reasons,
the Company will need to develop and manufacture new products which address
additional HDD market segments and emerging technologies to remain competitive
in the HDD industry. Examples of potentially important market segments that the
Company's current products are not positioned to address include: (i) the
client-server market, which may continue to grow in part as a result of the
emerging market trend toward "network computers" (which utilize central servers
for data storage and thereby reduce the need for desktop storage); (ii) lower
cost (typically below $1,000), lower performance PC systems principally for the
consumer marketplace; and (iii) laptop PCs. Significant technological innovation
and re-engineering will be required for the Company to produce products that
effectively compete in these and other new or growing segments of the HDD
market, and there can be no assurance that the Company will be able to design or
produce such new products on a timely or cost-effective basis, if at all, while
maintaining the required product quality or that such products or other future
products will attain market acceptance. Certain of the Company's competitors
have significant advantages over the Company in one or more of these and other
potentially significant new or growing market segments.
See "-- Highly Competitive Industry," "-- Customer Concentration" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" 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
<PAGE> 36
GMR head technology into future products and is evaluating the various
approaches to and timing of such a transition. The Company has decided not to
pursue optically-assisted recording technologies at this time.
There can be no assurance that the Company's existing markets will not be
eroded by technological developments; that the Company will be successful in
developing, manufacturing and marketing product enhancements or new products
that respond to and anticipate technological change, such as the transition to
GMR head technology and changing customer requirements; or that its new products
and product enhancements will be introduced or manufactured in volume on a
timely basis and will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. Inability to introduce or
achieve volume production of competitive products on a timely basis has in the
past and could in the future have a material adverse effect on the Company's
business, financial condition and results of operations.
Unlike some of its competitors, the Company does not manufacture any of the
components used in its HDDs, including key components such as heads, disks and
PCBs. The Company's product development process therefore involves incorporating
components designed by and purchased from third party suppliers. As a
consequence, the success of the Company's products is in great part dependent on
the Company's ability to gain access to and integrate components which utilize
leading-edge technology. The successful management of these integration projects
depends on the timely availability and quality of key components, the
availability of appropriately skilled personnel, the ability to integrate
different products from a variety of vendors effectively, and the management of
difficult scheduling and delivery problems. There can be no assurance that the
Company will be able to manage successfully the various complexities encountered
in integration projects. The Company's success will depend in part on its
relationships with key component suppliers, and there can be no assurance that
such relationships will develop, that the Company will identify the most
advantageous suppliers with which to establish such relationships, or that
existing or future relationships with component suppliers will continue for any
significant time period.
See "-- Dependence on Suppliers of Components and Sub-Assemblies,"
"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 the SAP System provided by SAP, AG
("SAP"), in the fourth quarter of 1998. The SAP System is designed to automate
more fully the Company's business processes and will affect most of the
Company's functional areas including, without limitation, finance, procurement,
inventory control, collections, order processing and manufacturing, and its
implementation will require certain upgrades in the Company's existing computer
hardware systems. Historically, there have been substantial delays in the
implementation of such systems at other companies. Unlike most companies, which
implement new information systems in stages over time, the Company has chosen to
install and activate the SAP System across most functional areas of the Company
simultaneously. The Company believes it is among the first to undertake such a
broad, simultaneous implementation of the SAP System. This approach may
substantially increase the risk of delay or failure in the SAP System's
implementation.
Implementation of the SAP System will be complex, expensive and time
intensive and its successful implementation could be adversely affected by
various factors including: (i) any failure to provide adequate training to
employees; (ii) any failure to retain skilled members of the implementation team
or to find suitable replacements for such personnel; (iii) the scope of the
implementation plan being expanded by unanticipated changes in the Company's
business; (iv) any inability to extract data from the Company's existing
information system and convert that data into a format that can be accepted by
the SAP System; (v) any failure to devise and run appropriate testing procedures
that accurately reflect the demands that will be placed on the SAP System
following its implementation; and (vi) any failure to develop and implement
adequate fall-back procedures in the event that difficulties or delays arise
during the initial start-up phase of the SAP System.
In connection with the implementation of the SAP System, the Company may
experience functional and performance problems, including problems relating to
the SAP System's response time and data integrity. In
<PAGE> 37
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."
<PAGE> 38
CONTROL BY AND DEPENDENCE ON HYUNDAI
HEA owns approximately 99.8% of the shares of the outstanding Common Stock.
Five out of the seven members of the Company's Board of Directors (the "Board")
are currently employees of HEA or one of its affiliates. After HEA owns less
than a majority of the Company's voting stock, HEA will have the contractual
right to designate one person for nomination to serve as a director in each of
the three classes of the Board. Accordingly, HEA will be able to influence or
control major decisions of corporate policy and to determine the outcome of any
major transaction or other matter submitted to the Company's stockholders or
directors, including borrowings, issuances of additional Common Stock and other
securities of the Company, the declaration and payment of any dividends on
Common Stock, potential mergers or acquisitions involving the Company,
amendments to the Company's Amended and Restated Certificate of Incorporation
(the "Amended and Restated Certificate of Incorporation") and Bylaws (the
"Bylaws") and other corporate governance issues. In particular, the affirmative
vote of two-thirds of the outstanding voting stock is required to approve
certain types of amendments to the Amended and Restated Certificate of
Incorporation. Consequently, HEA will be able to block approval of any such
amendments that may be proposed in the future as long as it owns at least
one-third of the Common Stock and may be able to make it difficult to achieve
approval of any such amendment for as long as it owns a significant amount of
Common Stock even if its ownership falls below one-third. The Company has
granted HEA the contractual right to maintain its ownership interest at 30%
through 2000. Stockholders other than HEA therefore are likely to have little or
no influence on decisions regarding such matters. HEA and the Company have
entered into a Stockholder Agreement under which the Company has granted HEA
certain rights to require the Company to register HEA's shares of Common Stock
and the right to designate for nomination up to three members of the Board so
long as ownership by HEA and certain of its affiliates is between 50% and 10% of
the outstanding voting securities of the Company. In a Stockholder Agreement by
and among HEI, HEA and the Company (the "Stockholder Agreement"), HEA has
agreed to certain restrictions on its rights to solicit proxies, to acquire
additional shares of Common Stock and to compete with the Company.
Conflicts of interest may arise from time to time between the Company and
HEA or its affiliates in a number of areas relating to their past and ongoing
relationships, including potential competitive business activities, corporate
opportunities, tax matters, intellectual property matters, indemnity agreements,
registration rights, sales or distributions by HEA of all or any portion of its
ownership interest in the Company or HEA's ability to control the management and
affairs of the Company. There can be no assurance that HEA and the Company will
be able to resolve any potential conflict or that, if resolved, the Company
would not receive more favorable resolution if it were dealing with an
unaffiliated party. The Amended and Restated Certificate of Incorporation
specifies certain circumstances in which a transaction between the Company and
HEA or an affiliated entity will be deemed fair to the Company and its
stockholders, and prescribes guidelines under which HEA and its affiliates will
be deemed not to have breached any fiduciary duty or duty of loyalty to the
Company, or to have usurped a corporate opportunity available to the Company, if
specified conditions are met.
HEI served as guarantor for the Company's borrowings under various
revolving bank credit facilities from August 1995 through June 1998. At December
27, 1997, aggregate indebtedness of the Company guaranteed by HEI under such
facilities was $170.0 million. Due to the economic conditions in Korea and
significant recent devaluations of the Korean won versus the U.S. dollar, HEI's
reported financial condition as of year-end 1997 was not in compliance with
certain financial covenants applicable to HEI as guarantor under such revolving
credit facilities, and such non-compliance constituted a default by the Company
under such revolving credit facilities and also a default (through a
cross-default clause) under an uncommitted credit facility of the Company that
is repayable on demand of the lender, is not guaranteed and had an outstanding
principal amount of $30.0 million as of December 27, 1997. The default under the
revolving credit facilities was waived by the lending banks in June 1998 in
exchange for Hyundai Heavy Industries Co., Ltd. ("HHI"), a partial owner of HEA,
becoming the guarantor under such facilities in place of HEI and an increase in
pricing to reflect borrowing rates based on HHI's current credit rating. As of
June 27, 1998, aggregate indebtedness of $170.0 million under the revolving
credit facilities was guaranteed by HHI. To date, the lender under the demand
facility has not demanded repayment of the $30.0 million outstanding under that
facility.
<PAGE> 39
However, the Company believes that current market conditions for such facilities
are not as favorable as they have been at certain times in the past, that for
various reasons the number of potential lenders actively providing credit
facilities to companies in the data storage industry may have decreased
recently, and that the terms on which the remaining potential lenders are
willing to offer such facilities have become significantly more restrictive
and/or costly. Consequently, there can be no assurance that the Company will be
able to obtain or retain adequate credit facilities or as to the terms and
amount of any such facilities. Any failure to obtain or retain adequate credit
facilities on acceptable terms would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
as a majority-owned subsidiary of HEA, the Company had the benefit of a letter
of support from HEI under which HEI agreed to provide sufficient financial
support to ensure that the Company would continue as a going concern. The
Company believes that it will no longer have the benefit of the support letter.
HEA could decide to sell or otherwise dispose of all or a portion of its
shares of Common Stock at some future date, and there can be no assurance that
HEI or HEA will maintain any past or future relationships or arrangements with
the Company following any transfer by HEA of a controlling or substantial
interest in the Company or that other holders of Common Stock will be allowed to
participate in such transaction. Sales by HEA of substantial amounts of Common
Stock in the public market could adversely affect prevailing market prices for
the Common Stock.
Since 1996, the Company has been a member of the HEA U.S. consolidated tax
group for U.S. federal income tax purposes. Certain material tax consequences
result from such affiliation.
HEI and IBM are parties to a patent cross license agreement (the "IBM
License Agreement"), under which HEI and its subsidiaries, including the
Company, are licensed with respect to certain IBM patents. HEI is required under
the IBM License Agreement to pay IBM a license fee, payable in installments
through 2007. HEI has entered into a sublicense with the Company (the
"Sublicense Agreement") pursuant to which the Company is obligated to pay IBM a
portion of the license fee otherwise due from HEI under the IBM License
Agreement, payable in annual installments, when such amounts are due from HEI to
IBM. Under the IBM License Agreement, if Maxtor ceases to be a majority-owned
subsidiary of HEA, the Company can obtain a royalty-free license under the same
terms from IBM upon the joint request of HEI and the Company and the fulfillment
of certain conditions. Pursuant to the Sublicense Agreement, HEI has agreed to
cooperate to obtain such a license for the Company once the Company ceases to be
a majority-owned subsidiary, and the Company has agreed to continue to pay IBM
the Company's allocated portion of the license fee following the grant of such a
license from IBM. The Company intends to obtain such a license if the Company no
longer is a majority owned subsidiary of HEA. HEI and the Company have
indemnified each other for certain liabilities arising from their acts or
omissions relating to the IBM License Agreement.
As discussed more fully above in "-- Transition to and Dependence on
Information Systems; Year 2000 Problem," the Company is preparing to implement
the SAP System. The Company's rights to the SAP System are governed by a license
agreement between Hyundai Information Technology Co., Ltd. ("HIT"), an affiliate
of HEI, and SAP, which provides that the Company will have the right to use
existing software releases so long as the Company remains an affiliate of HIT.
The Company currently is discussing with SAP the terms under which the Company
could obtain a direct license with SAP. In the event the Company is no longer a
majority-owned subsidiary of HEA and is not able to obtain a direct license with
SAP, the Company will not be entitled to receive new releases of SAP's
information system software or expand the system for other functions. As a
result, the Company would not be able to effectively utilize its new information
system in the future, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
See "-- Transition to and Dependence on Information Systems; Year 2000
Problem," "-- Risks Associated with Leverage," "-- Certain Tax Risks,"
"-- Single Manufacturing Facility; Future Need for Additional Capacity,"
"-- Expected Volatility of Stock Price; Absence of Current Trading Market for
the Common Stock," "Business -- Intellectual Property" and "Certain
Transactions."
<PAGE> 40
CERTAIN TAX RISKS
Due to the Company's operating losses, its net operating loss ("NOL")
carryforwards and its favorable tax status in Singapore, the Company's tax
expense historically has represented only a small percentage of the Company's
expenses. The Company's foreign and U.S. tax liability will increase
substantially in future periods if the Company attains profitability.
In December 1997, Maxtor Singapore was granted pioneer tax status in
Singapore, thus exempting it from paying Singapore income taxes until June 30,
2003, subject to the ongoing satisfaction of certain conditions. Maxtor
Singapore is eligible for up to two additional two-year extensions of this
pioneer tax status, subject to the satisfaction of certain additional
conditions. There can be no assurance that Maxtor Singapore will be able to
satisfy or, if satisfied, to maintain compliance with, the required conditions.
If Maxtor Singapore is unable to satisfy and maintain compliance with the
required conditions and is unable to obtain a waiver of any such failure, it
would lose its pioneer tax status, or would be ineligible for such extensions,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Since 1996, the Company has been a member of the HEA Tax Group for U.S.
federal income tax purposes. On December 27, 1997, for federal income tax
purposes, the Company had NOL carryforwards of approximately $616.7 million and
tax credit carryforwards of approximately $18.8 million which will expire
beginning in fiscal year 1999. In June, 1998 the Company caused Maxtor Singapore
to pay a $400.0 dividend which will utilize a substantial portion of the
Company's NOL carryforwards. In addition, a substantial portion of the remaining
NOL carryforwards likely will be utilized by the HEA Tax Group for the 1998 tax
year and in connection with amendments to returns for prior years. As a result,
there will be a significant reduction in the NOL carryforwards available to the
Company for federal income tax purposes for subsequent tax years. Utilization
and payment for the Company's NOL carryforwards by the HEA Tax Group is governed
by the Tax Allocation Agreement. Under the Tax Allocation Agreement, neither HEA
nor the Company shall reimburse the other for any utilization of the other
member's NOLs or other tax attributes in the consolidated or combined income tax
returns, except that each party shall reimburse the other for any use of the
other party's tax attributes as a result of any return or amended return filed
after September 15, 1999 or by a taxing authority adjustment after September 15,
1999.
As a result of the Company's acquisition by HEA, utilization of
approximately $253.0 million of the Company's NOL carryforwards and the
deduction equivalent of approximately $18.3 million of tax credit carryforwards
is limited to approximately $22.4 million per year. If more than 50% of the
Company's outstanding capital stock is acquired, then the amount of the
Company's U.S. federal taxable income for any tax year ending after the date of
such acquisition which may be offset by the Company's NOL carryforwards
remaining after deconsolidation from the HEA Tax Group will be limited to an
amount equal to the aggregate value of the Common Stock and the Series A
Preferred Stock immediately before the ownership change multiplied by the
long-term tax exempt rate then in effect (e.g., 5.15% for ownership changes
occurring during July 1998).
For periods during which the Company is or was a member of the HEA Tax
Group, the Company and its subsidiaries have filed or will file tax returns as
part of the HEA Tax Group. At such time as HEA ceases to own at least 80% of the
total voting power and at least 80% of the total value of the Company's capital
stock, the Company will cease to be a member of the HEA Tax Group; however, the
Company will remain liable for its allocable share of the consolidated or
combined tax return liability and for tax deficiencies of the entire HEA Tax
Group which relate to the period during which the Company was a member of the
HEA Tax Group. There can be no assurance that the HEA Tax Group will satisfy all
tax obligations for such periods or that additional liabilities will not be
assessed for such periods. In addition, there can be no assurance that the
Company's share of the consolidated or combined tax liability will not be
increased as a result of subsequent events, such as taxing authority audit
adjustments or the filing of amended returns affecting either the Company's
items of gain, income, loss, deduction or credit or another member's items of
gain, income, loss, deduction or credit. The Company has agreed to indemnify and
reimburse HEA if any member of the HEA Tax Group is required
<PAGE> 41
to pay any tax, interest or penalty to any taxing authority related to any
additional Company separate tax return liability and if there is any increase in
the consolidated or combined tax return liability resulting from revisions to
the Company's taxable income or revisions to another HEA Tax Group Member's
taxable income, except to the extent such revisions to another HEA Tax Group
Member's taxable income are made after September 15, 1999. HEA has agreed to
indemnify and reimburse the Company if the Company or any of its subsidiaries is
required to pay any tax, interest or penalty to any taxing authority related to
any separate tax return of any member of the HEA Tax Group other than the
Company or its subsidiaries, and if the Company or any of its subsidiaries is
required to pay to any taxing authority any amount in excess of the Company's
share of the consolidated or combined tax return liability.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Tax Matters."
RISKS ASSOCIATED WITH LEVERAGE
The Company historically has operated with significant amounts of debt as
compared to its equity. At June 27, 1998, the Company had outstanding
approximately $350.5 million in principal amount of indebtedness. In the first
six months of 1998 and for the fiscal year ended December 31, 1997 and nine
months ended December 28, 1996, the Company's interest payments were $10.0
million, $26.5 million and $13.4 million, respectively. During the first quarter
of 1998, the Company repaid $5.0 million of principal under long term debt
agreements. The Company also has an asset securitization program under which the
Company sells its accounts receivable on a non-recourse basis. At June 27, 1998,
$100.0 million of accounts receivable was securitized under the program.
Continuance of the program is subject to certain conditions, including a
condition that all of the long-term public senior debt securities of HHI not
fall below a specified rating. The Company has begun negotiations with respect
to a $200 million asset securitization program which does not require any
support from HEA or any of its affiliates and the Company believes it will be
able to close this program and terminate its existing securitization program by
July 31, 1998. However, there can be no assurance that the Company will be able
to obtain commitments to enter into such a program or will be able to implement
successfully the new securitization program. Failure of the Company to close the
replacement asset securitization program or to obtain alternative financing
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company will continue to be subject to the risks associated with
leverage, which include: (i) principal and interest repayment obligations which
require the expenditure of substantial amounts of cash, the availability of
which will be dependent on the Company's future performance; (ii) the inability
to repay principal or interest when due or violation of loan covenants, which
could result in a default on the debt, acceleration of its principal amount and
legal actions against the Company; and (iii) adverse effects of interest
expense on the Company's business, financial condition and results of
operations.
See "-- Control By and Dependence on Hyundai," "-- Single Manufacturing
Facility; Future Need for Additional Capacity," "-- Need for Additional
Capital," "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.
<PAGE> 42
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.
In the future the Company may require alternative sources of liquidity. The
unavailability of, or delays in obtaining, any necessary financing could prevent
or delay the continued development and marketing of the Company's products and
may require curtailment of various operations of the Company and, if adequate
funds were not available from operating profits, would have a material adverse
effect on the Company's business, financial condition and results of operations.
<PAGE> 43
See "-- Control by and Dependence on Hyundai," "-- Risks Associated with
Leverage," "-- Single Manufacturing Facility; Future Need for Additional
Capacity," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" 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 and IBM, accounted for approximately
27% and 17% respectively, of the Company's revenues, and the Company's top ten
customers accounted for approximately 74% of the Company's revenue. During the
fiscal year ended December 27, 1997, two PC OEM customers, Compaq and Dell,
accounted for approximately 21% and 10%, respectively, of the Company's revenue,
and the Company's top ten customers accounted for approximately 60% of the
Company's revenue. During the fiscal year ended December 28, 1996, one customer,
SED International Holdings, Inc. ("SED"), a distributor, accounted for
approximately 11% of the Company's revenue and the Company's top ten customers
accounted for approximately 68% of the Company's revenue. During the fiscal year
ended March 30, 1996, while no customer accounted for more than 10% of the
Company's revenue, the Company's top ten customers accounted for approximately
51% of the Company's revenue.
The Company anticipates that a relatively small number of customers will
continue to account for a significant portion of its revenue for the foreseeable
future, and that the proportion of its revenue derived from such customers may
continue to increase in the future. The ability of the Company to maintain
strong relationships with its principal customers, including in particular its
PC OEM customers, is essential to the ongoing success and profitability of the
Company. Although the Company believes its relationships with key customers
generally are good, in order to maintain its customer relationships,
particularly with PC OEMs, the Company must be among the first-to-volume
production with competitive products. The concentration of sales in a relatively
small number of major customers represents a business risk that loss of one or
more accounts, or a decrease in the volume of products sold to such accounts,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Due to the intense competition in the HDD market, customers may choose from
various suppliers and therefore can make substantial demands on their chosen
suppliers. The Company's customers generally are not obligated to purchase any
minimum volume and generally are able to terminate their relationship with the
Company at will. Consequently, major customers have significant leverage over
the Company and may attempt to change the terms, including pricing and delivery
terms, upon which the Company sells its products. Moreover, as the Company's PC
OEM, distributor and retail customers are pressured to reduce prices in response
to competitive factors, the Company may be required to reduce the prices of its
products before it knows how, or if, internal cost reductions can be obtained.
If the Company is forced to change the terms, including pricing, upon which the
Company sells its products or is unable to achieve required cost reductions in
connection with reductions in the prices of its products, the Company's
operating margins could decline and such decline could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Risks of Failed Execution; Changing Customer Business Models,"
"- Fluctuation in Product Demand; Focus on a Single Market," "-- 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, including heads, head stack
assemblies, media and integrated circuits. A number of the key components used
by the Company in its products are available from only one or a limited number
of outside suppliers. Currently, the Company purchases DSP/controller and
spin/servo integrated circuits only from Texas
<PAGE> 44
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 as the laws of the
United States, and there can be no assurance that such laws will be enforced in
an effective manner. The failure of the Company to enforce and protect its
intellectual property rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
<PAGE> 45
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," "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. For example, the Company's international contracts are denominated
primarily in U.S. dollars. Significant fluctuations in currency exchange rates
against the U.S. dollar, particularly the recent significant depreciation in the
currencies of Japan, Korea, Taiwan and Singapore relative to the U.S. dollar,
have caused the Company's products to become relatively more expensive to
distributors and retailers in those countries, and
<PAGE> 46
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," "Business -- Manufacturing/Quality"
and "-- Materials and Supplies."
STORMEDIA; LEGAL PROCEEDINGS
The Company currently is involved in a dispute with StorMedia, which arises
out of an agreement among the Company, StorMedia and HEI which became effective
on November 17, 1995. Pursuant to the StorMedia Agreement, StorMedia agreed to
supply disk media to the Company. StorMedia's disk media did not meet the
Company's specifications and functional requirements as required by the
StorMedia Agreement and the Company ultimately terminated the StorMedia
Agreement. After a class action securities lawsuit was filed against StorMedia
by certain of its shareholders in September 1996 which alleged, in part, that
StorMedia failed to perform under the StorMedia Agreement, StorMedia sued the
Original Defendants in the U.S. District Court for the Northern District of
California. In the Federal Suit, StorMedia alleged that at the time HEI entered
into the StorMedia Agreement, it knew that it would not and could not purchase
the volume of products which it committed to purchase, and that failure to do so
caused damages to StorMedia in excess of $206 million.
In December 1996, the Company filed a complaint against StorMedia and
William Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado
state court seeking approximately $100 million in damages and alleging, among
other claims, breach of contract, breach of implied warranty of fitness and
fraud under the StorMedia Agreement. This proceeding was stayed pending
resolution of the Federal Suit. The Federal Suit was permanently dismissed early
in February 1998. On February 24, 1998, StorMedia filed a new complaint in Santa
Clara County Superior Court for the State of California for $206 million,
alleging fraud and deceit against the Original Defendants and negligent
misrepresentation against HEI and the Company. On May 18, 1998, the stay on the
Colorado Suit was lifted by the Colorado state court. The Company's motion to
dismiss, or in the alternative, stay the California Suit, is pending.
The Company believes that it has meritorious defenses against the claims
alleged by StorMedia and intends to defend itself vigorously. However, due to
the nature of litigation and because the pending lawsuits are in the very early
pre-trial stages, the Company cannot determine the possible loss, if any, that
may ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. The litigation could result in significant diversion of
time by the Company's technical personnel, as well as substantial expenditures
for future legal fees. After consideration of the nature of the claims and facts
relating to the litigation, including the results of preliminary discovery, the
Company's management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition or
results of operations. However, the results of these proceedings, including any
potential settlement, are uncertain and there can be no assurance that they will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has been notified of certain other claims, including claims of
patent infringement. While the ultimate outcome of these claims and the claims
described above is not determinable, the Company does not believe that
resolution of these matters will have a material adverse effect on the Company's
business, financial condition and results of operations. No amounts related to
any claims or actions have been reserved in the Company's financial statements.
<PAGE> 47
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.
ENVIRONMENTAL MATTERS
Although the Company uses only a limited variety of chemicals in its
manufacturing and research operations, the Company is still subject to a wide
range of environmental protection regulations in the U.S. and Singapore. While
the Company has not experienced any material adverse effect on its operations as
a result of such laws, there can be no assurance that future regulations would
not have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its activities
conform to all present environmental regulations in all material aspects. In the
U.S., environmental regulations often require parties to fund remedial action
regardless of fault. As a consequence, it is often difficult to estimate the
future impact of environmental matters, including potential liabilities. There
can be no
<PAGE> 48
assurance that the amount of capital expenditures and other expenses which might
be required to complete remedial actions and to continue to comply with
applicable environmental laws will not have a material adverse effect on the
Company's business, financial condition and results of operations.
EFFECT OF ANTITAKEOVER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"), which prohibits a publicly held
Delaware corporation from engaging in any "business combination" with an
"interested stockholder" for three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the corporation's board of directors approved either the business combination or
the transaction that resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding shares owned by management directors and
certain employee stock plans); or (iii) on or subsequent to such date, the
business combination is approved by the corporation's board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years prior did own, 15% or more of the corporation's voting stock.
In addition, pursuant to the Amended and Restated Certificate of
Incorporation, the Board has authority to issue up to 95 million shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares without any further vote or action by
the stockholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such preferred stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such preferred stock could have a material adverse effect on the market price of
the Common Stock. The Company has no present plan to issue shares of preferred
stock.
The Amended and Restated Certificate of Incorporation provides that the
Board will be divided into three classes of directors serving staggered
three-year terms. As a result, only one of the three classes of the Board will
be elected each year. The directors are removable only for cause upon the
affirmative vote of the holders of at least a majority of the voting power of
all outstanding shares of voting stock, voting as a single class. The Board has
the exclusive right to set the authorized number of directors and to fill
vacancies on the Board. The Amended and Restated Certificate of Incorporation
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing. In addition,
special meetings of the stockholders of the Company may be called only by the
Board, the Chairman of the Board, or the Chief Executive Officer of the Company.
Advance notice is required for stockholder proposals or director nominations by
stockholders. These provisions may be amended only by the affirmative vote of at
least two-thirds of the outstanding voting stock of the Company, voting as a
single class. In addition, the Company has entered into a Stockholder Agreement
with HEA which grants HEA certain rights to designate directors for nomination,
requires HEA to vote in favor of other Board nominees so long as HEA's rights to
designate nominees are honored, and restricts HEA's right to solicit proxies or
acquire additional shares of Common Stock.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control of the Company. Such provisions could
diminish the opportunities for a holder of Common Stock to participate in tender
offers, including tender offers at a price above the then current market price
of the Common Stock. Such provisions also may inhibit fluctuations in the market
price of the Common Stock that could result from takeover attempts.
<PAGE> 49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
<S> <C>
Financial Statements:
Consolidated Balance Sheet -
December 28, 1996 and December 27, 1997 26
Consolidated Statements of Operations -
Fiscal year ended March 30, 1996, nine months ended
December 28, 1996 and fiscal year ended December 28, 1997 27
Consolidated Statements of Stockholders' Equity (Deficit) -
Fiscal year ended March 30, 1996, nine months ended
December 28, 1996 and fiscal year ended December 28, 1997 28
Consolidated Statements of Cash Flows -
Fiscal year ended March 30, 1996, nine months ended
December 28, 1996 and fiscal year ended December 28, 1997 29 - 30
Notes to Consolidated Financial Statements 31 - 45
Report of PricewaterhouseCoopers LLP, Independent Accountants 46
Report of Ernst & Young LLP, Independent Auditors 47
</TABLE>
Financial Statement Schedules:
The following consolidated financial statement schedule of Maxtor
Corporation is filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of Maxtor
Corporation.
Schedule II Valuation and qualifying accounts S-1
Schedules not listed above have been omitted since they are not
applicable or are not required or the information required to be set
therein is included in the Consolidated Financial Statements or
notes thereto.
<PAGE> 50
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 31,313 $ 16,925
Accounts receivable, net of allowance for doubtful
accounts of $5,255 at December 28, 1996 and $3,573 at
December 27, 1997...................................... 82,876 241,777
Accounts receivable from affiliates....................... 6,248 5,870
Inventories............................................... 80,878 155,312
Prepaid expenses and other................................ 5,239 20,814
--------- ---------
Total current assets.............................. 206,554 440,698
Net property, plant and equipment........................... 92,073 99,336
Other assets................................................ 15,912 15,438
--------- ---------
$ 314,539 $ 555,472
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings, including current portion of
long-term debt......................................... $ 149,800 $ 100,057
Short-term borrowings due to affiliates................... -- 65,000
Accounts payable.......................................... 109,956 206,563
Accounts payable to affiliates............................ 13,459 25,022
Accrued and other liabilities............................. 139,678 155,563
--------- ---------
Total current liabilities......................... 412,893 552,205
Long-term debt and capital lease obligations due after one
year...................................................... 229,109 224,313
--------- ---------
Total liabilities........................................... 642,002 776,518
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 and 88,059,701 issued
and outstanding at December 27, 1997; aggregate
liquidation value $390,000 at December 28, 1996 and
$590,000 at December 27, 1997.......................... 582 880
Common Stock, $0.01 par value, 250,000,000 shares
authorized; no shares issued and outstanding at
December 28, 1996 and 7,563 shares issued and
outstanding at December 27, 1997....................... -- --
Additional paid-in capital.................................. 335,017 534,765
Cumulative other comprehensive income -- unrealized gain on
investments in equity securities.......................... -- 16,262
Accumulated deficit......................................... (663,062) (772,953)
--------- ---------
Total stockholders' deficit....................... (327,463) (221,046)
--------- ---------
$ 314,539 $ 555,472
========= =========
</TABLE>
See accompanying notes.
<PAGE> 51
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
---------- ------------ ------------
<S> <C> <C> <C>
Revenue........................... $1,264,627 $ 771,655 $ 1,384,799
Revenue from affiliates........... 4,371 27,229 39,521
---------- --------- -----------
Total revenue................ 1,268,998 798,884 1,424,320
Cost of revenue................... 1,192,403 861,551 1,316,774
Cost of revenue from affiliates... 3,902 27,307 36,162
---------- --------- -----------
Total cost of revenue........ 1,196,305 888,858 1,352,936
Gross profit (loss)............... 72,693 (89,974) 71,384
---------- --------- -----------
Operating expenses:
Research and development........ 94,717 87,752 106,249
Selling, general and
administrative............... 82,775 60,701 62,520
Other........................... 4,460 -- --
---------- --------- -----------
Total operating expenses..... 181,952 148,453 168,769
---------- --------- -----------
Loss from operations.............. (109,259) (238,427) (97,385)
Interest expense.................. (11,849) (18,075) (36,502)
Interest and other income......... 1,169 1,000 25,031
---------- --------- -----------
Loss before income taxes.......... (119,939) (255,502) (108,856)
Provision for income taxes........ 2,826 824 1,035
---------- --------- -----------
Net loss.......................... (122,765) (256,326) (109,891)
---------- --------- -----------
Other comprehensive income:
Unrealized gain on investments in
equity securities............... -- -- 16,262
---------- --------- -----------
Comprehensive loss................ $ (122,765) $(256,326) $ (93,629)
========== ========= ===========
Net loss per share -- basic and
diluted (Note 1)................ $ (5.94) $ -- $(58,112.64)
Shares used in per share
calculation -- basic and
diluted......................... 20,677,000 -- 1,891
</TABLE>
See accompanying notes.
<PAGE> 52
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)
========== ==== =========== ==== ======== ======= ========= =========
</TABLE>
See accompanying notes.
<PAGE> 53
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
YEAR MONTHS YEAR
ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
--------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(122,765) $(256,326) $(109,891)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................. 45,200 47,064 65,642
Reserves for lower of cost or market...................... -- 15,194 --
Change in deferred taxes.................................. 300 -- --
Loss (gain) on disposal of property, plant and
equipment............................................... 669 700 4,366
Gain on sale of subsidiary................................ -- (2,385) --
Gain on fully reserved note receivable from affiliate..... -- -- (20,000)
Other..................................................... -- (589) (157)
Changes in assets and liabilities:
Accounts receivable..................................... (12,485) 62,786 (142,860)
Accounts receivable from affiliates..................... (2,229) (1,822) 378
Inventories............................................. (66,255) 45,955 (74,434)
Prepaid expenses and other assets....................... (2,947) 3,839 687
Accounts payable........................................ 18,407 (37,297) 102,108
Accounts payable to affiliates.......................... 8,656 4,803 11,563
Accrued and other liabilities........................... 637 13,015 15,885
--------- --------- ---------
Total adjustments........................................... (10,047) 151,263 (36,822)
--------- --------- ---------
Net cash used in operating activities....................... (132,812) (105,063) (146,713)
--------- --------- ---------
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)
Proceeds from disposals of property, plant and
equipment............................................... 353 363 609
Other assets.............................................. (928) (7,599) 621
--------- --------- ---------
Net cash used in investing activities..................... (61,232) (36,016) (61,259)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt, including short-term
borrowings.............................................. 145,595 410,715 319,363
Principal payments on debt, including short-term debt..... (3,000) (307,444) (309,784)
Proceeds from issuance of common stock, net of issuance of
notes receivable and stock repurchase................... 7,725 -- 46
Proceeds from intercompany notes issued to parent......... -- -- 200,000
Net payments under accounts receivable securitization..... -- 16,327 (16,041)
--------- --------- ---------
Net cash provided by financing activities................. 150,320 119,598 193,584
--------- --------- ---------
Net decrease in cash and cash equivalents................. (43,724) (21,481) (14,388)
Cash and cash equivalents at beginning of period.......... 96,518 52,794 31,313
--------- --------- ---------
Cash and cash equivalents at end of period................ $ 52,794 $ 31,313 $ 16,925
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest.................................................. $ 9,362 $ 13,444 $ 26,540
Income taxes.............................................. 1,801 2,009 1,025
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
Purchase of property, plant and equipment financed by
capital leases............................................ -- -- 881
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
</TABLE>
See accompanying notes.
<PAGE> 54
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.
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.
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.
<PAGE> 55
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 (Note 14). 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
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
price protection. The Company also provides for the estimated cost to repair or
replace products under warranty at the time of sale. The Company currently
warrants its products against defects in parts and labor from the date of
shipment with an additional three months allowed for distributors to account for
"shelf life." All products currently in production are warranted for a period of
three years after shipment.
ADVERTISING EXPENSE
Cooperative advertising costs are charged as the related revenue is earned
and other advertising costs are expensed as incurred. Advertising costs were not
significant for the fiscal year ended March 30, 1996, the nine months ended
December 28, 1996 and the fiscal year ended December 27, 1997.
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 and the fiscal year ended December 27, 1997 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. 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
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
is measured as the amount by which the carrying amount of the asset exceeds the
present value of the future net cash flows.
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 is not meaningful due to the very
limited number of common shares outstanding during such period.
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.
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 27, 1997
----------------- -----------------
<S> <C> <C>
Inventories:
Raw materials.............................. $ 33,012 $ 48,834
Work-in-process............................ 15,674 15,177
Finished goods............................. 32,192 91,301
--------- ---------
$ 80,878 $ 155,312
========= =========
Prepaid expenses and other:
Investments in equity securities, at fair
value................................... $ -- $ 16,262
Prepaid expenses and other................. 5,239 4,552
--------- ---------
$ 5,239 $ 20,814
========= =========
Property, plant and equipment, at cost:
Buildings.................................. $ 29,512 $ 32,453
Machinery and equipment.................... 194,644 220,213
Furniture and fixtures..................... 13,300 11,374
Leasehold improvements..................... 12,695 9,012
--------- ---------
250,151 273,052
Less accumulated depreciation and
amortization............................... (158,078) (173,716)
--------- ---------
Net property, plant and equipment.......... $ 92,073 $ 99,336
========= =========
Accrued and other liabilities:
Income taxes payable....................... $ 5,088 $ 2,416
Accrued payroll and payroll-related
expenses................................ 17,159 29,116
Accrued warranty........................... 20,194 22,716
Accrued expenses........................... 42,851 21,561
Advances under securitization.............. 54,386 79,754
Stock compensation expense................. -- --
--------- ---------
$ 139,678 $ 155,563
========= =========
</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.
<PAGE> 59
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 and $0 as of December 28, 1996 and December 27, 1997,
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
<PAGE> 60
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.
<PAGE> 61
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,
1996 1997
------------ ------------
<S> <C> <C>
5.75% Convertible Subordinated Debentures due March 1,
2012...................................................... $100,000 $100,000
Short-term borrowings; interest payable at variable rates
ranging from 6.24% to 7.88% per annum..................... 136,000 80,967
Short-term borrowings from parent; interest payable at rate
of 10.29%................................................. -- 65,000
Short-term borrowing; interest payable at a rate of 6.52%;
collateralized by equipment............................... 13,800 13,800
Long-term borrowing, interest payable at variable rates
ranging from 6.18% to 6.24% per annum..................... 129,000 129,000
Other obligations........................................... 109 603
-------- --------
378,909 389,370
Less amounts due within one year............................ 149,800 165,057
-------- --------
Due after one year.......................................... $229,109 $224,313
======== ========
</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 25 shares per
each $1,000 principal amount of debentures (equivalent to a conversion price of
$40 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 25
shares of common stock of the Company (equivalent to a conversion price of $40
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) of plus commission and is subject to a 10%
retention. As of December 27, 1997,
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$79.8 million of advances related to sales of accounts receivable were included
in accrued and other liabilities.The Company's asset securitization program was
subject to certain conditions, among which was a condition that all of HEI's
long-term public senior debt securities achieve a specified rating. This
condition was not met in February 1998, and the Company obtained waivers of this
condition through April 8, 1998.
The Company completed a new asset securitization program dated as of April
8, 1998 (the "New Program") arranged by Citicorp to replace the existing
program. Under the New Program, the Company sells all of its trade accounts
receivable through a special purpose vehicle with a purchase limit of $100.0
million on a non-recourse basis, subject to increase to $150.0 million, upon the
fulfillment of the conditions subsequent described below. On April 8, 1998, the
uncollected purchase price under the existing program, in the amount of
approximately $100.0 million, was transferred to represent the purchased
interest of Citicorp's Corporate Receivables Corporation ("CRC") under the New
Program. Continuance of the New Program is subject to certain conditions,
including a condition that all of the long-term public senior debt securities of
HHI, an affiliated company, achieve a specified rating. In addition, the New
Program remains subject to certain conditions subsequent related to obtaining
appropriate waivers as may be necessary from lenders of the Company's credit
facilities, or effecting a cure of any outstanding defaults under such credit
facilities of the Company and obtaining a performance guarantee from HHI of the
obligations of the Company under the New Program. The Company must satisfy these
conditions subsequent within 30 days of receiving undertaking documents from
Citicorp and presently believes that it will be able to successfully satisfy
these conditions.
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.
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 December 27, 1997,
$129.0 million of borrowings under this line were outstanding. 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 December
27, 1997, $31.0 million of borrowings under this line of credit were
outstanding.
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 and bear
interest at rates ranging from 6.27% to 7.88%. As of December 27, 1997, $50.0
million of borrowings under this line of credit were outstanding. In January
1998, one $10.0 million facility was retired and all principal, owing has been
paid.
HEI was the guarantor of an aggregate $170.0 million outstanding under the
Company's credit facilities as of December 27, 1997. HEI has various obligations
as guarantor, including the satisfaction of certain financial covenants. Due to
the economic conditions in the Republic of Korea and a significant recent
devaluation of the Korean won versus the U.S. dollar, the Company received
notice on April 9, 1998 from the administrative agent for the Facilities that
HEI is not in compliance with certain financial covenants. Due to HEI's
inability, as guarantor, to comply with such financial covenants,
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $30.0 million outstanding as of December 27, 1997 not guaranteed by HEI.
The Company had requested waivers of the non-compliance for the year ended
December 27, 1997, and had obtained a commitment from an affiliated company to
provide an equivalent long-term facility in the event the waivers were not
successfully obtained. Consequently, the Company did not reclassify the debt
outstanding under the credit facilities as a current liability. As of June 1,
1998, the Company obtained waivers for $160.0 million of $170.0 million of the
debt which was in default and substituted HHI as the guarantor.
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its principal facilities and certain
machinery and equipment under operating lease arrangements. The future minimum
annual rental commitments as of December 27, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
<S> <C>
1998........................................... $10,602
1999........................................... 8,401
2000........................................... 5,261
2001........................................... 4,610
2002........................................... 1,735
Later years.................................... 8,556
-------
Total........................................ $39,165
=======
</TABLE>
The above commitments extend through fiscal year 2016. Rental expense was
approximately $12.0 million for the year ended March 30, 1996, $8.9 million for
the nine months ended December 28, 1996 and $10.7 million for the year ended
December 27, 1997.
LEGAL PROCEEDINGS
The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
HEI which became effective on November 17, 1995 (the "StorMedia Agreement").
Pursuant to the StorMedia Agreement, StorMedia agreed to supply disk media to
the Company. StorMedia's disk media did not meet the Company's specifications
and functional requirements as required by the StorMedia Agreement and the
Company ultimately terminated the StorMedia Agreement. After a class action
securities lawsuit was filed against StorMedia by certain of its shareholders in
September 1996 which alleged, in part, that StorMedia failed to perform under
the StorMedia Agreement, StorMedia sued HEI, Mong Hun Chung (HEI's chairman),
Dr. Chong Sup Park (HEA's President and the individual who signed the StorMedia
Agreement on behalf of the Company) and K.S. Yoo (the individual who signed the
StorMedia Agreement on behalf of HEI) (collectively the " Original Defendants")
in the U.S. District Court for the Northern District of California (the "Federal
Suit"). In the Federal Suit, StorMedia alleged that at the time HEI entered into
the StorMedia Agreement, it knew that it would not and could not purchase the
volume of products which it committed to purchase, and that failure to do so
caused damages to StorMedia in excess of $206 million.
In December 1996, the Company filed a complaint against StorMedia and
William Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado
state court seeking approximately $100 million in damages and alleging, among
other claims, breach of contract, breach of implied warranty of fitness and
fraud under the StorMedia Agreement (the "Colorado Suit"). This proceeding was
stayed pending resolution of the Federal Suit. The Federal Suit was permanently
dismissed early in February 1998. On February 24, 1998, StorMedia filed a new
complaint in Santa Clara County Superior Court for the State of California for
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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 $13.2 million during the
year ended December 31, 1997.
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 one 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.
<PAGE> 65
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.
<PAGE> 66
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.
The following table summarizes option activity through December 27, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
PRICE PER SHARE
SHARES AND
AVAILABLE WEIGHTED AVERAGE AGGREGATE
FOR GRANT SHARES PRICE 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) 970,233 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
========== ========== ====== =======
</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.
Under SFAS No. 123, the Company is required to calculate the pro forma fair
market value of options granted and report the impact that would result from
recording the compensation expense. Pro forma net loss for the nine months ended
December 28, 1996 and the year ended December 27, 1997 is set forth in the table
below. Comparable information for the year ended March 30, 1996 is not presented
due to the termination of all formerly existing options pursuant to the January
1996 acquisition by HEA.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 28, 1996
------------------------
AS REPORTED PRO FORMA
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net Loss....................................... $256,326 $257,488
</TABLE>
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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>
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>
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the U.S. statutory rate of 35% to the loss before income taxes for the twelve
months ended March 30, 1996, the nine months ended December 28, 1996, and the
twelve months ended December 27, 1997. The principal reasons for this difference
are as follows:
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED
-----------------------------------------
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
--------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at U.S. statutory rate...................... $(41,982) $(89,442) $(38,100)
Tax savings from foreign operations..................... (30,757) (27,104) (63,487)
Repatriated foreign earnings absorbed by current year
losses................................................ 11,624 -- --
U.S. loss providing current tax benefit................. 27,325 52,722 100,748
Valuation of temporary differences...................... 36,550 64,492 2,361
Other................................................... 66 156 (487)
-------- -------- --------
Total................................................... $ 2,826 $ 824 $ 1,035
======== ======== ========
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and accruals.................... $ 16,211 $ 8,975
Depreciation....................................... 5,423 6,149
Sales related reserves............................. 10,836 11,006
Net operating loss carryforwards................... 152,519 218,718
Tax credit carryforwards........................... 18,252 19,335
Capitalized research and development............... 77,466 102,049
Notes receivable reserve........................... 7,561 1,220
Other.............................................. 2,496 10,965
------------ ---------
Total deferred tax assets.......................... 290,764 378,417
Valuation allowance for deferred tax assets........ (251,464) (289,832)
------------ ---------
Net deferred tax assets............................ $ 39,300 $ 88,585
============ =========
Deferred tax liabilities:
Unremitted earnings of certain foreign entities.... $ 39,300 $ 88,585
------------ ---------
Total deferred tax liabilities..................... $ 39,300 $ 88,585
============ =========
</TABLE>
Pre-tax income from foreign operations was approximately $95.9 million,
$79.0 million and $86.0 million for the twelve months ended March 30, 1996, nine
months ended December 28, 1996 and twelve months ended December 27, 1997,
respectively. Subject to 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
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
------------- ----------------- ------------
<S> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net loss...................... $ (122,765) $(256,326) $ (109,891)
============= ========= ===========
Net loss available to common
stockholders................ $ (122,765) $(256,326) $ (109,891)
============= ========= ===========
DENOMINATOR
Basic weighted average common
shares outstanding.......... 20,677,000 -- 1,891
Effect of dilutive
securities.................. -- -- --
------------- --------- -----------
Diluted weighted average
common shares............... 20,677,000 -- 1,891
============= ========= ===========
Basic and diluted net loss per
share (See Note 1).......... $ (5.94) $ -- $(58,112.64)
============= ========= ===========
</TABLE>
The following 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
MARCH 30, DECEMBER 28, DECEMBER 27,
1996 1996 1997
---------- ----------------- ------------
<S> <C> <C> <C>
Stock options.................. -- 3,552,000 4,408,000
Convertible subordinated
debentures................... 1,250,000 1,250,000 1,250,000
Convertible preferred stock.... -- 29,104,000 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.
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Short-Term Borrowings from Parent (unaudited)
On July 29, 1998 the Company and HEA agreed in principle to replace
short-term borrowings from HEA of $55,000,000 with a subordinated term note due
in July 31, 2001, bearing interest, due semi-annually, at LIBOR plus 2.0%. This
indebtedness will be subordinated to all other debt of the Company except for
the Company's outstanding 5.75% Convertible Subordinated Debentures. The Company
will have the right to prepay the term note, in whole or in increments of
$1,000,000 or more, without penalty.
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Maxtor Corporation:
We have audited the consolidated financial statements and the financial
statement schedule of Maxtor Corporation (a subsidiary of Hyundai Electronics
America) listed in the index on page 49 of this Form 10-K 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. 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
<PAGE> 72
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
<PAGE> 73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated by reference to Form 8-K filed on July 26, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
<PAGE> 74
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.
<PAGE> 75
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
The Board has three standing committees: an Audit Committee, a Compensation
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 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.
<PAGE> 76
ITEM 11. DIRECTORS AND EXECUTIVE COMPENSATION
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; (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.
<PAGE> 77
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.
(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.
<PAGE> 78
(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 $6.00: Mr. Cannon received an option for 45,000 shares, Mr. Roach
received an option for 12,500 shares, Dr. Jipson received an option for
5,000 shares, Mr. Tufano received an option for 5,000 shares, and Mr. Duncan
received an option for 4,000 shares.
<PAGE> 79
There were no options exercised during the twelve months ended December 27,
1997. The following table provides the specified information concerning
unexercised options held as of December 27, 1997 by the Named Executive
Officers:
FISCAL YEAR-END VALUES OF UNEXERCISED OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 27, 1997(1) AT DECEMBER 27, 1997(2)
------------------------ ------------------------
NAME VESTED(#) UNVESTED(#) VESTED($) 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 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
<PAGE> 80
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 100,000 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.
<PAGE> 81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 1, 1998: (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
OWNED PRIOR TO OFFERINGS
-------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
------------------- ------------ ---------
<S> <C> <C>
5% STOCKHOLDER:
Hyundai Electronics America(2)............... 44,029,850 99.9%
3101 North First Street
San Jose, CA 95134
EXECUTIVE OFFICERS AND DIRECTORS:
Dr. Chong Sup Park(3)(4)..................... 12,375 *
Michael R. Cannon(3)(5)...................... 247,500 *
Charles F. Christ(3)......................... 12,375 *
Chang See Chung(4)........................... -- --
Charles Hill(3).............................. 12,375 *
Philip S. Paul (3)........................... 12,375 *
Y.H. Kim(3)(4)............................... 12,375 *
Dr. Victor B. Jipson(3)(6)................... 30,930 *
William F. Roach(3)(7)....................... 51,563 *
Paul J. Tufano(3)(8)......................... 27,500 *
Phillip C. Duncan(3)(9)...................... 19,250 *
All executives officers and directors as a
group (17 persons)(3)(4)(10)............... 512,324 1.1
</TABLE>
- ---------------
* Less than one percent (1%)
(1) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on 44,049,290 shares outstanding as of June 1,
1998. 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 1, 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 March 28, 1998.
(4) Excludes 44,029,850 shares of Common Stock beneficially owned by HEA. Each
such individual disclaims beneficial ownership of such shares.
<PAGE> 82
(5) Excludes 100,000 shares of Common Stock granted to Mr. Cannon on May 29,
1998 pursuant to the Restricted Stock Plan. See "Management -- 1998
Restricted Stock Plan."
(6) Excludes 35,000 shares of Common Stock granted to Dr. Jipson on May 29,
1998 pursuant to the Restricted Stock Plan. See "Management -- 1998
Restricted Stock Plan."
(7) Excludes 35,000 shares of Common Stock granted to Mr. Roach on May 29, 1998
pursuant to the Restricted Stock Plan. See "Management -- 1998 Restricted
Stock Plan."
(8) Excludes 35,000 shares of Common Stock granted to Mr. Tufano on May 29,
1998 pursuant to the Restricted Stock Plan. See "Management -- 1998
Restricted Stock Plan."
(9) Excludes 15,000 shares of Common Stock granted to Mr. Duncan on May 29,
1998 pursuant to the Restricted Stock Plan. See "Management -- 1998
Restricted Stock Plan."
(10) Excludes 305,000 shares of Common Stock granted to certain officers on May
29, 1998, pursuant to the Restricted Stock Plan. See "Management -- 1998
Restricted Stock Plan."
<PAGE> 83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
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. The Company
and HEA have agreed in principle to replace this revolving line of credit with
a subordinated term note, due in July 31, 2001, bearing interest, due
semi-annually, at LIBOR plus 2.0% per annum. This indebtedness will be
subordinated to all other debt of the Company except for the Company's
outstanding 5.75% Convertible Subordinated Debentures. The Company will have to
right to prepay the term note, in whole or in increments of $1,000,000 or more,
without penalty.
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.
HEA, HEI and Maxtor have entered into certain agreements governing certain
relationships between the parties.
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 more than 50% of the
Company's outstanding Common Stock is acquired, then the amount of the Company's
U.S. federal taxable income for any tax year ending after the date of such
acquisitions 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. If the Company will ceases to be a member of the HEA
Tax Group, 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 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 "Certain Factors Affecting Future Performance -- Control by and
Dependence on Hyundai," "Certain Tax Risks" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Tax Matters."
STOCKHOLDER AGREEMENT
HEI, HEA 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 "Certain Factors Affecting Future Performance -- Control By and
Dependence On Hyundai," "-- Effect of Antitakeover Provisions," "Management --
Directors and Executive Officers," and "Security Ownership of Certain Beneficial
Owners and Management."
Prohibition on Certain Proxy Solicitations. From such time 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 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 such time as HEA beneficially owns less than a
majority of the Company's outstanding Voting Stock, the Hyundai Affiliates, 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.
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 December
27, 1997, aggregate indebtedness of the Company guaranteed by HEI under such
facilities was $170.0 million. Due to the economic conditions in Korea and
significant recent devaluations of the Korean won versus the U.S. dollar, HEI's
reported financial condition as of year-end 1997 was not in compliance with
certain financial covenants applicable to HEI as guarantor under such revolving
credit facilities, and such non-compliance constituted a default by the Company
under such revolving credit facilities and also a default (through a
cross-default clause) under an uncommitted credit facility of the
<PAGE> 84
Company that is repayable on demand of the lender, is not guaranteed and had an
outstanding principal amount of $30.0 million as of December 27, 1997 and 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 believes that current market conditions for
credit facilities are not as favorable as they have been at certain times in the
past, and that for various reasons the number of potential lenders actively
providing credit facilities to companies in the data storage industry may have
decreased recently, and that the terms on which the remaining potential lenders
are willing to offer such facilities have become significantly more restrictive
and/or costly. Consequently, there can be no assurance that the Company will be
able to obtain any credit facilities or as to the terms and amount of any such
facilities. 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 had the benefit of a letter of support from HEI under which
HEI agreed to provide sufficient financial support to ensure that the Company
would continue as a going concern. The Company believes that it will no longer
have the benefit of the support letter.
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. ("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.
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 the Company purchased approximately
$24.1 million of HDDs. In October 1996, the manufacturing
<PAGE> 85
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.
HEI has agreed to indemnify the Company for any losses from third party
claims arising after the Company cease 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 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 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 "-- Certain Factors Affecting Future Performance -- Control by and
Dependence on Hyundai," "-- Limited Protection of Intellectual Property; Risk of
Third Party Claims of Infringement" and "-- StorMedia; Legal Proceedings".
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 December 27, 1997 the Company's
equity interest in IMS was 16.0% and 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. Tufano, the Company's Vice
President, Finance and Chief Executive Officer is a current director of
IMS.
See "-- Certain Factors Affecting Future Performance -- Dependence on
Suppliers of Components and Sub-Assemblies" and "Business -- Materials and
Supplies" and "Certain Transactions."
<PAGE> 86
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 "-- Certain Factors
Affecting Future Performance -- Transition to and Dependence on Information
Systems; Year 2000 Problem" 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 supplies by MMC for each family of Maxtor products was baed 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 "-- Certain Factors Affecting Future Performance -- 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.
See "-- Certain Factors Affecting Future Performance -- Control by and
Dependence on Hyundai" and "Management -- Board Committees" and "-- Employment
Agreements."
<PAGE> 87
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
3.1 (1) Amended and Restated Certificate of Incorporation of
Registrant dated June 6, 1996.
3.2 (1) Amended and Restated Certificate of Incorporation of
Registrant dated July, 1998.
3.3 Amended and Restated Bylaws of Registrant dated June 6,
1996.
3.4 (1) Amended and Restated Bylaws of Registrant dated July,
1998.
4.2 (1) Stockholder Agreement dated June 25, 1998.
10.1 (1) Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.
10.2 (1) 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.
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
10.26 (10) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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 (1) 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 (1) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.35 (1) Employment Agreement between Philip Duncan and Registrant
dated July 15, 1996.**
10.36 (1) 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 (1) Intercompany Loan Agreement dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.+
10.38 (1) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.
10.39 (1) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**
10.40 (1) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.+
10.41 (1) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*
10.42 (1) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*
10.43 (1) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.
10.44 (1) 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 (1) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.
10.46 (1) 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 (1) Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.
10.49 (1) Indemnity Agreement between HEI and Registrant dated June
25, 1998.
10.50 (1) License Agreement between Registrant and HEI dated June 25,
1998.
10.51 (14) 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.
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.53 (1) 1998 Restricted Stock Plan.**
10.54 (1) Form of Restricted Stock Grant Agreement.**
10.55 (1) Second Amended and Restated 1996 Stock Option Plan.**
10.56 (1) Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael Cannon.**
10.57 (1) Retention Agreement dated as of May 29, 1998 between
Registrant and Paul Tufano.**
10.58 (1) Form of Retention Agreement between Registrant and Executive
Officers.**
10.59 (1) Letter Agreement between Victor B. Jipson and Registrant
dated as of June 12, 1998.**
10.60 (1) Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.
10.61 (1) Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.
10.62 (1) 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 (1) 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 (1) 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 (1) 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 (1) Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
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.
(1) Incorporated by reference to exhibits to Registration Statement on Form
S-1 (Registration No. 333-56099) filed
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993.
(2) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995.
(4) Incorporated by reference to exhibit III of Schedule 14D-9 filed November
9, 1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed November 14, 1996.
(6) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(7) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
(8) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(9) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(10) Incorporated by reference to exhibits of Form 8-K filed September 13, 1996.
(11) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997.
(12) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997.
(13) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(14) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
<PAGE> 91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment no. 1 to
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Milpitas, State of California, on the 30th day of July, 1998.
MAXTOR CORPORATION
(Registrant)
By: /s/ PAUL J. TUFANO
--------------------------------------------
Paul J. Tufano
Vice President, Finance and
Chief Financial Officer
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Maxtor Corporation on Form S-8 (File No. 333-08181) 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 as of December 27, 1997
and December 28, 1996 and for the year ended December 27, 1997 and for the nine
month period ended December 28, 1996, which reports are included in this Annual
Report on Form 10-K/A.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 27, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-08181) pertaining to the Maxtor Corporation 1996 Stock Option Plan
of Maxtor Corporation 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 consolidated financial statements and schedule of Maxtor
Corporation (a wholly-owned subsidiary of Hyundai Electronics America) for the
year ended March 30, 1996 included in the Annual Report (Form 10-K/A ) for the
year ended December 27, 1997.
ERNST & YOUNG, LLP
San Jose, California
July 27, 1998
