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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file Number: 0-14016
MAXTOR CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 77-0123732
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
510 Cottonwood Drive, Milpitas, CA 95035
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (408) 432-1700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 5.75% Convertible Subordinated Debentures,
due March 1, 2012
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Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
As of March 1, 1998, 88,059,701 shares of the registrant's Series A Preferred
Stock, $.01 par value, and 15,125 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, and there was no public market
for the Company's equity securities.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS 106 PAGES OF WHICH THIS IS NUMBER 1.
THE INDEX TO EXHIBITS BEGINS ON PAGE 66.
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PART I
ITEM 1. BUSINESS
This report includes forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those discussed in Item 1. Business, "Products", "Marketing and
Customers", "Manufacturing and Suppliers", "Research and Development", and
Competition"; Item 7. Management Discussions and Analysis of Financial
Condition and Results of Operations, "Results of Operations" and "Liquidity and
Capital Resources"; and elsewhere in this report, that could cause actual
results to differ materially from historical results or those anticipated. In
this report, the words "anticipates," "believes," "expects," "intends," "future"
and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
Maxtor is a registered trademark and DiamondMax, 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.
GENERAL
Maxtor Corporation (Maxtor or the Company) was organized in 1982 and is
incorporated in the state of Delaware. Maxtor develops, manufactures and
markets hard disk drive storage products for personal computer systems. The
Company sells 3.5-inch desktop storage products in capacities from 1.0 gigabyte
up to 11.5 gigabytes.
The Company's products are designed for desktop applications to meet both value
and high-performance needs of customers. Customers include original equipment
manufacturers (OEMs), distributors, and national retailers. Additionally,
several smaller retailers and value-added resellers (VARs) carry Maxtor products
purchased through Maxtor's distribution network. The Company relies on suppliers
for components including heads, media (disks) and custom integrated circuits.
All the Company's products are manufactured by Maxtor at its manufacturing
facility in Singapore and sold in North America, Europe and Asia.
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BACKGROUND
A hard disk drive (HDD) is a magnetic data storage device that reads, writes and
stores digital data. The main components are the head disk assembly (HDA) and
printed circuit board assembly (PCBA). The HDA includes the head, media
(disks), head positioning mechanism (actuator) and spin motor. The PCBA
includes custom integrated circuits, an interface connector to the main computer
and a power connector. The components are contained in a hard base plate
protective package in a contamination-free environment. HDDs are more cost
effective than a computer's random access memory because HDDs can hold a
substantially higher volume of data at a lower cost per megabyte. Additionally,
HDDs continue to store and retrieve data faster than other storage devices such
as optical, floppy or magnetic tape.
The basic operation of a HDD has not changed since its introduction in the
1950's. One or more disks (one to four for Maxtor products) are positioned
around a spindle hub that rotates the disks by a spin motor. Disks are made of
a smooth aluminum substrate to which a thin coating of magnetic material has
been applied. Each disk has a slider suspended directly above it, holding an
electromagnetic device (head) that can read or write data to the disk while the
disk spins. The head flies over the disk on a thin layer of air. A key measure
in the HDD industry is areal density. Areal density is a measure of stored bits
per square inch on the recording surface of the disk. An increase in areal
density provides for greater storage capacity from the drive without increasing
the number of heads and disks, allowing companies to deliver higher capacity
devices at lower costs. To achieve ever higher areal densities, every
successive generation of drives uses a combination of improved head positioning
(servo mechanisms), lower "flying heights" and other new technologies.
The HDD's integrated circuits include a drive interface and a controller. The
drive interface "talks" to the user's computer, receiving instructions, while
the controller directs the flow of data to and from the disks, and controls the
movement of the heads. The location of data is logically maintained in tracks,
divided into sectors, on each disk. The user's computer sends instructions to
read or write data on the disks based on track and sector locations. In order
to "speak" the same language between the HDD and the main computer, industry
standard interfaces are utilized. Maxtor utilizes EIDE standard interfaces for
all its products.
Maxtor has continually designed and implemented new HDD technologies, especially
related to heads and disks, in order to optimize performance, reliability,
durability and areal density. Performance is generally measured by average seek
time in milliseconds (ms) to position the head over a selected track, the data
transfer rate in megabytes per second, and the spindle speed in rotations per
minute (rpm). Reliability measures expected life of the HDD. Durability
relates to the HDDs ability to withstand changing temperatures, humidity,
altitudes, vibration and shock. Physical size is measured by standard form
factors (or package size) in inches, which is important to OEMs who require
compact components for their personal computer products. The optimization of
these metrics have resulted in higher capacity products at lower costs.
The personal computer industry has been consistently driven by increased storage
needs caused by the increasing size and complexity of software applications.
The result in the storage industry in which Maxtor competes has been short
product life cycles, ranging from six to 12 months.
PRODUCTS
Maxtor currently offers two families of products, CrystalMax and DiamondMax.
The CrystalMax family is the Company's value product line, while the
DiamondMax family of HDDs offer power users high capacity and performance. In
the fourth quarter of 1996. Maxtor incorporated a new high-reliability four-disk
HDA, Formula 4, and digital signal processor (DSP) technology in its product
designs. The DSP technology combines the processor and drive interface circuits
onto one chip. Both technologies have increased the inherent reliability of the
drive. Mean time between failure is greater than 500,000 hours compared to
greater than 300,000 hours for Maxtor's previous product families. The
DiamondMax and CrystalMax series of drives both utilize Formula 4 HDA, which
allows for improved performance and reliability. The Company has achieved
improved production economies by building on a common, advanced platform.
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The CrystalMax family of HDD's was introduced in September 1996 as a follow-on
to Maxtor's 7000 Series product family which was designed to the needs of the
highly price-sensitive entry level to mid-range desktop PC market. Capacities
range from 875 MB on one disk to 3.5 GB on four disks, meeting the increasing
demand for data storage. Volume shipments commenced in the fourth calendar
quarter of 1996 for the 1.7 GB 81750A, 2.6 GB 82625A, and 3.5 GB 83500A
products. The CrystalMax products shipped in volume through the second quarter
of 1997.
In February 1997, Maxtor announced its CrystalMax 1080 series of hard drives, in
capacities of 2.1 GB 82100A, 3.2 GB 83201A and 4.3 GB 84320A. CrystalMax 1080
products utilize thin film media with inductive heads and the DSP-based
architecture from the series, resulting in increased aerial density of 1080 MB
per disk. Seek time also improved at sub-11 ms and buffer size is increased to
256K cache. This family offers users all the benefits of the initial CrystalMax
series with additional performance. Volume shipments commenced in the first
quarter of 1997.
In October 1996, the Company announced its 3.5-inch, high performance DiamondMax
family of HDDs for the desktop. Product offerings for this first generation of
DiamondMax products were 2.5 GB 82560A, 3.8 GB 83840A and 5.1 GB 85120A,
providing 1.28 GB of storage space per disk. Volume shipments commenced on the
5.1 GB in the fourth calendar quarter of 1996.
The DiamondMax family is Maxtor's first to use MR (magneto-resistive) heads and
PRML (Partial Response Maximum Likelihood) read channels. MR heads provide more
signal than older inductive head technologies at today's high densities. PRML
read channels further improve the usability of small data signals and contribute
to the product's fast internal data transfer rate of 8 to 13 MB per second. The
DiamondMax family has ANSI ATA-3 Enhanced IDE interface, host transfer rates of
16.67 MB per second, less than 10 ms seek time, 5,400 rpm spindle speed and
contains 256K cache. Like the CrystalMax family, these drives also feature the
custom on-the-fly Error Correction Code logic, are compliant with the S.M.A.R.T.
specification, have low power consumption and ATA power saving commands
supporting Green PC standards. The DiamondMax family of products are designed
for power users who require high capacity and maximum performance from a HDD.
In June of 1997, Maxtor announced its second generation of MR technology based
drives for the desktop PC market. The DiamondMax 1750 Series has capacities
ranging from 1.75 GB up to 7.0 GB of storage. These products were targeted to
address the broad range of desktop storage requirements in both the commercial
and consumer segments. The 7.0 GB capacity of the DiamondMax 1750 was featured
by several PC vendors in their summer 1997 system announcements. This second
generation of DiamondMax products introduces support for UDMA 33 interface and
has host transfer rates of up to 33 MB per second.
In September of 1997, Maxtor announced the DiamondMax 2160, its third generation
of MR based hard drives for desktop PC applications. With capacities ranging
from 2.16 GB to 8.6 GB the drive is well positioned to address all of the most
popular storage capacities. The timely introduction and fast production ramp of
the DiamondMax 2160 enabled Maxtor to be an industry leader at this capacity
point. This Time to Volume leadership is key to Maxtor's continued success in
the market.
In February 1998, Maxtor announced its fourth generation of MR product storage
drives. The DiamondMax 2880 offers capacities from 2.88 GB to 11.5 GB. The
Company began volume production of this product in the first quarter of 1998.
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IMPACT OF INDUSTRY CHARACTERISTICS ON THE COMPANY'S PRODUCTS
Competitive areal densities are continuing to increase dramatically. Several
larger competitors have already focused their desktop drive products on MR
technology. Currently, the Company believes this more aggressive MR-based areal
density curve is dictating the capacities of choice at major OEM accounts. The
Company's strategy is to introduce desktop products which incorporate MR
technology and which are increasingly less expensive to manufacture.
Short product life cycles also increase the importance of the Company's ability
to successfully manage product transitions. Although the Company successfully
managed product transitions in the recent past, the Company has historically
experienced difficulties with some product transitions and there can be no
assurance that product transitions will be successfully managed in the future.
New products introduced by competitors, as well as those introduced by the
Company, tend to displace older products. The failure to adequately manage
product transitions could result in the loss of market opportunities, decreased
sales of existing products, cancellation of products or product lines, the
accumulation of obsolete and excess inventory, and unanticipated charges related
to obsolete inventories and capital equipment. The Company's ability to
anticipate market trends and to successfully develop, manufacture in volume and
sell new products in a timely manner and at favorable gross margins will be
important factors affecting the Company's future results.
MARKETING AND CUSTOMERS
The Company has a direct sales force of approximately 100 sales professionals
that market the Company's products to OEMs, distributors and certain key
retailers in the personal computer (PC) industry. Sales offices are located
throughout the U.S., and in Germany, Hong Kong, Great Britain, France,
Singapore, Taiwan, South Korea, Australia and Japan. Market demand for the
Company's products generally follows the annual demand cycles experienced in the
PC industry, which typically rise during the late summer and fall months, peak
during the winter months and drop off in the spring and early summer months.
However, market demand is highly volatile and there can be no assurances that
future demand cycles will follow historical trends.
CUSTOMER INFORMATION
During the year ended December 27, 1997 two customers, Compaq and Dell
Computer, accounted for more than 21% and 10%, respectively, of the Company's
revenue. During the nine months ended December 28, 1996 one customer, Southern
Electronics Distribution accounted for 11% of the Company's revenue. During
the year ended March 30, 1996 no customer accounted for more than 10% of the
Company's revenue.
For financial data relating to major customers, export sales and geographic
information (foreign and domestic operations) refer to Part II, Item 8, Footnote
6, on PAGE 35.
ORIGINAL EQUIPMENT MANUFACTURERS (OEMs)
A majority of industry's HDDs are sold into the OEM channel. OEM customers
select HDD vendors seasonally based on the price, capacity and operational
specifications required for their PC product lines. Once the vendor's HDD is
qualified, the OEM will generally purchase quantities in large blocks for the
life of that PC product. An OEM will usually qualify several HDD vendors to
ensure adequate supply. In order to be chosen as a qualified vendor, the
Company must be able to provide high quality, low cost products within the OEM's
requested time-frames. Time-to-market and product quality are essential to
securing and maintaining the OEM relationship. If a qualification opportunity
is missed, the HDD manufacturer may not have another opportunity to do business
with the OEM until the next generation of the manufacturer's products are
introduced.
The PC industry exhibits volatile business conditions, generally related to
market share and price competition. In addition, the industry has had a trend
toward consolidation among PC manufacturers, Accordingly, maintaining long-term
vendor relationships with OEMs can be difficult. The Company believes that its
success depends on its ability to develop excellent OEM customer relationships
and provide products that fit the needs of the OEM channel. OEMs accounted for
64% of the Company's revenue for the fiscal year ended December 27, 1997, 52% of
revenue for the nine months ended December 28, 1996 and 50% of revenue for the
fiscal year ended March 1996.
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The Company generally negotiates pricing, volume discounts, order lead times,
product support requirements and other terms and conditions prior to receiving
the OEM's first purchase order. Terms generally range from six months to two
years. Shipments are not scheduled until purchase orders are received and
cancellation of purchase orders may occur without significant penalty.
Historically, the Company has experienced cancellations for orders, which had a
material adverse impact on the financial results of the Company during the nine
months ended December 28, 1996 and the year ended March 30, 1996.
DISTRIBUTORS
The Company is also dependent upon sales to the commercial distribution channel.
Its distributors are located worldwide, and generally market the Company's
products to VARs (value-added resellers), dealers, smaller retailers, system
integrators and small OEMs. 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.
Distributors have limited rights to return product on a rotation basis.
Distributors (including smaller retailers) accounted for 36% of revenue for the
year ended December 27, 1997, 48% of revenue for the nine months ended December
28, 1996 and 39% of revenue for the fiscal year ended March 30, 1996.
Because distributors are constrained by low overhead requirements, providing
competitive pricing and sales incentives are key to selling product through
distribution. Price protection and sales incentive programs are the industry's
method of quickly effecting price corrections in the channel. The industry has
and continues to experience volatile price erosion in the distribution channel.
The Company believes price erosion is inherent with each product capacity point
introduced to the market. Therefore, the Company also believes it must
introduce its new products before or at the same time as its competitors in
order to minimize the negative impact of price erosion on its financial results.
In 1998, the Company will continue to focus on time-to-market product
introductions and linearity of product flow into its sales channels to reduce
the negative impact of price erosion.
RETAILERS
The Company sells its retail-packaged products directly to major retail sectors
such as computer superstores, warehouse clubs and computer electronic stores.
Its retail customer base is in the United States and Canada. Retailers accounted
for 9% of revenue for the year ended December 27, 1997, 8% of revenue for the
nine months ended December 28, 1996 and 5% of revenue for the fiscal year
ended March 30, 1996.
It appears that the demand for end-users to have more PC storage space will
continue due to a number of factors, including larger and more powerful software
applications, new capabilities (such as desktop video editing) and the wealth of
information available from the Internet and on-line services. As a result, the
Company believes the retail channel complements its other sales channels.
Retailers supply to the aftermarket "upgrade" sector where end-users purchase
and install products to upgrade their computers.
WARRANTY AND SERVICE
The Company currently warrants its products against defects in parts or labor
from the date of shipment. Products currently in production are warranted for a
period of 36 months after shipment. Products are generally repaired or
refurbished by the Company's Singapore facility. 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 the World
Wide Web. The Company also believes that sales through the retail channel
increases brand awareness. In 1998, the Company will continue to support the
growth of the retail channel.
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BACKLOG
The Company generally sells standard products according to standard purchase
order terms. Delivery dates are specified by purchase orders. Such orders may
be subject to change or cancellation by the customer without significant
penalties. The quantity actually purchased and shipment schedules are
frequently revised to reflect changes in the customer's needs. At times, when
price competition is intense and price moves are frequent, the Company believes
most customers may place purchase orders below their projected needs, delay
placing orders or even cancel purchase orders with the expectation that future
price reductions may occur. Conversely, at times when industry-wide production
is believed to be insufficient to meet demand, the Company believes that certain
customers may place purchase orders beyond their projected needs in order to
maintain a greater portion of product allocation.
In addition, orders for the Company's products are filled for several large
customers from JIT ("just in time") inventory stocked 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 JIT 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 revenues for any succeeding period, and,
therefore, is not necessarily an accurate barometer of the Company's future
revenue.
MANUFACTURING AND SUPPLIERS
The Company's disk drive manufacturing operations consist primarily of the final
assembly of high-level subassemblies and testing of completed products. The
Company manufactures disk drive products in volume production at its
manufacturing facility located in Singapore. The majority of all PCB assembly
is performed by an affiliate of the Company, International Manufacturing
Services, Inc. (IMS), under the terms of a manufacturing services agreement.
Maxtor owns 16% of the outstanding shares of IMS (See Management Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity, on page
23, for financial information regarding IMS). 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. A disruption
of the Company's manufacturing operations could have an adverse effect on its
results of operations and customer relations.
Pilot production of the Company's products, as well as cost reduction, quality
and product improvement engineering on current products are conducted in the
Company's Longmont, Colorado facilities. When a new product or a design change
to a current product is ready for volume production, it is transferred from the
Longmont pilot line to the Company's Singapore manufacturing facilities.
The Company seeks to maintain the flexibility necessary to accommodate the
continuous changes in product mix and volume requirements that result from the
characteristically short product life cycles of the disk drive industry. The
Company accomplishes this by closely managing its vendor relationships for raw
materials and utilizes its capital equipment for the manufacture of multiple
product lines.
The Company's manufacturing processes require large volumes of leading edge,
high-quality components supplied by outside vendors. Generally, the Company
does not have long-term supply agreements with its vendors, some of which have
limited financial and operational resources. The Company has qualified multiple
vendors for components where practical. However, some leading edge components
for the Company's new generation of products are available either only from
single sources or, even if potentially available from multiple sources, involve
relatively long lead times to manufacture, such that the Company cannot quickly
obtain additional supply or can do so only by incurring significant incremental
costs. The Company has periodically received notices from vendors that they are
unable to supply required volumes of certain key components. Vendor
cancellations can adversely impact the Company's ability to ship products as
scheduled to its customers. While the Company has qualified and continues to
qualify multiple vendors for many components, it is reliant on, and will
continue to be reliant on, the availability of supply from its vendors for many
semi-custom and custom integrated circuits, heads, media and other key
components. In light of current industry conditions, including consolidation of
competitors, the Company is focused on developing excellent business
relationships with its vendors and utilizing strategic alliances for certain
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components where practical. There can be no assurance, however, that the
Company will be successful in such efforts or that in the future the Company's
vendors will meet the Company's needs for required volumes of high-quality
components in a timely and cost effective manner. The Company's inability to
obtain sufficient quantities of components required, or to develop alternative
manufacturing capability if and as required in the future, could result in
delays or reductions in product shipments that could materially and adversely
affect the Company's business, results of operations and financial condition.
RESEARCH AND DEVELOPMENT
The Company participates in an industry that is characterized by rapid
technological change and short product life cycles. The Company's ability to
compete effectively will depend on, among other things, its ability to
anticipate such change. To compete effectively, the Company has and will
continue to devote substantial personnel and capital resources to develop
high-quality products which can be produced in volume on a cost effective basis.
The Company believes that common architectures, vertical integration and new
technologies are among the key areas in which to direct its focus.
In order to develop cost effective products, the Company has focused on
implementing common architectures. Because the Company believes that sharing
common mechanics and electronics between product families will decrease the
product development period, thus enable it to compete more effectively, the
Company will continue to focus its efforts on implementing common architectures
where technologically feasible. Common architectures utilized in the Company's
current products include the HDA, custom electronics and firmware. The HDA is
the four-disk HDA, Formula 4 which represents a marked improvement in the shock
resistance and reliability of Maxtor products. First in the industry, DSP-based
drive electronics and common PCBAs reduce product costs. Further utilization
of a common firmware architecture allows for faster product development.
The Company is highly dependent upon its vendors for components. The Company
believes that vertical integration for certain components is necessary in order
to effectively compete in the market. Vertical integration allows for joint
development of technology, provides a more robust component supply and allows
the Company an advance view of new components. There can be no assurance that
the Company will be able to adequately vertically integrate as required by
market conditions.
The Company believes that increasing storage capacities, increasing performance
and lowering cost depends on developing and incorporating new data storage
technologies into the Company's products. New technologies are difficult to
implement due to short product life cycles, without sufficient research and
development resources. In the past, the Company has experienced difficulty
moving product from design to production with satisfactory yields. During 1997,
the Company launched a new design effort for server class products. In
addition, the Company will focus on developing new technologies to address areal
density targets, media tribology limitations and shock resistance issues, among
others, in order to provide high performance products.
For the year ended December 27, 1997, the nine months ended December 28, 1996,
and fiscal year ended March 30, 1996 the Company's research and development
expenses were $106.2 million, $87.8 million and $94.7 million, respectively. In
order to effectively implement its product strategy, the Company intends to
continue to make significant investments in research and development.
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COMPETITION
The Company presently competes primarily with manufacturers of 3.5-inch disk
drives, including International Business Machines, Corporation; Quantum
Corporation; Seagate Technology, Inc; and Western Digital Corporation; each of
which have larger market shares than the Company. Seagate Technology, Inc, is
the dominant competitor in the 3.5-inch market. Potential entrants include other
major OEMs. If such customers successfully develop disk drive manufacturing
capabilities, the Company's market share could be reduced.
The principal methods of competition are timing of product introductions, price,
product capacity and performance. When competitors introduce products which
offer lower prices, greater capacity and better performance, or any combination
of these factors, or when the Company's new products are not brought to market
on a timely basis, the selling price of its older products generally must be
reduced in order to compete effectively with competitors' new products. The
Company believes price erosion is an inherent factor for each product capacity
point introduced to the market. Therefore, it believes it must introduce its
new products before or at the same time as its competitors in order to reduce
the negative impact of price erosion on its financial results. In 1998, the
Company will focus on time-to-market product introductions and linearity of
product flow into its sales channels in order to reduce the negative impact of
price erosion. There can be no assurance that the Company will be successful in
its efforts.
The disk drive industry has been subject to significant consolidation in the
past two years. A number of companies, including Maxtor, have either merged or
been acquired and the number of competitors in the market have been reduced.
Subsequent to the industry consolidation, some competitors remain better
positioned than Maxtor from a market share and financial resources availability
perspective.
The Company believes that in order to successfully increase its market share and
improve its financial position, the Company must continue to lower its product
costs and introduce its products before or at the same time as its competitors.
However, there can be no assurance that the Company's efforts will be successful
in the new competitive environment.
PATENTS AND LICENSES
The Company has been granted approximately 170 U.S. and foreign patents related
to disk drive products and technologies, and has additional patent applications
pending in the United States and foreign countries. The Company has entered into
cross-license agreements with certain of its competitors and conducted
discussions with others concerning cross-license relationships.
The Company further relies on trade secrets, copyrights, trademarks and
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 have not or will not independently
develop or otherwise acquire equivalent or superior technology, or that the
Company will not be required to obtain royalty-bearing licenses to use other
intellectual property in order to utilize the inventions embodied in the patents
owned or currently 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. In addition, the laws of certain countries in which the Company's
products are or may be assembled, tested or 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. 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.
The computer storage industry, like many technology-based industries, is
characterized by frequent claims and litigation involving patent and other
intellectual property rights. The Company from time to time may be notified by
third parties that the Company may be infringing patents owned by or proprietary
rights of third parties. If necessary, the Company may have to seek a license
under such patent or proprietary rights, or redesign or modify their products
and processes in order to avoid infringement of such patent or proprietary
rights. There can be no assurance that such a license would be available on
acceptable terms, if at all, or that the Company could so avoid infringement of
such patent or proprietary rights, in which case the Company's business
financial condition and
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results of operations could be materially and adversely
affected. Additionally, litigation may be necessary to protect the Company's
proprietary rights. Any claims or litigation involving the Company's owned or
licensed patents or other intellectual property rights may be time consuming and
costly, or cause product shipment delays, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operation.
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EMPLOYEES
As of March 1, 1998, the Company had approximately 5,700 employees worldwide.
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 are represented by a labor
organization. The Company believes that its employee relations are positive.
ITEM 2. PROPERTIES
The Company's administrative offices and new advanced technology operations are
located in Milpitas, California. The Company currently plans to use the
additional floor space for expansion of the advanced technology operation. The
Company also maintains engineering and pilot production facilities in Longmont,
Colorado. All the Company's domestic facilities are leased.
The Company's manufacturing facilities are located in Singapore. The Company
owns and occupies 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). All the Company's sales offices, located in the United States, Europe
and Asia Pacific, are leased.
The Company believes as it pursues its growth strategy its requirements for
facilities are constantly under review and consideration and will be added as
the need arises.
ITEM 3. LEGAL PROCEEDINGS
STORMEDIA LITIGATION
The dispute between StorMedia and the Company arises out of the Agreement
between the Company and StorMedia which became effective on November 17, 1995,
under which StorMedia agreed to supply disk media, a key component of hard disk
drives, to the Company. StorMedia's supply of disk media did not meet the
Company's specifications and functional requirements and, as a result, after
negotiations, the Company terminated the Agreement.
On September 18, 1996 a class action securities lawsuit was filed against
StorMedia Incorporated ("StorMedia") and certain of its officers in Superior
Court of the State of California, County of Santa Clara. Among the allegations
against StorMedia was the assertion that StorMedia failed to perform under a
November 17,1995 Purchase Agreement ("Agreement") with Maxtor Corporation ("the
Company") and that StorMedia's failure to sue the Company for breach of the
Agreement was evidence that StorMedia had breached the Agreement. (A concurrent
class action was later filed in the U.S. District Court for the Northern
District of California by the same parties.)
One week later, on September 25,1996, StorMedia commenced an action in the U.S.
District Court for the Northern District of California entitled, STORMEDIA
INCORPORATED V. HYUNDAI ELECTRONICS INDUSTRIES CO., LTD., ET AL., U.S. District
Court, Northern District, No. C-96 20805 RMW (EAI) (the "Federal Action"),
against Hyundai Electronics Industries Co., Ltd. ("HEI")-- the Company's Korean
grandparent -- which also signed the Agreement. StorMedia also sued M.H. Chung,
HEI's chairman; K.S. Yoo, the individual who signed the Agreement on behalf of
the Company. StorMedia, however, did not sue the Company.
StorMedia filed an Amended Complaint of February 14,1997 in the Federal Action.
The Amended Complaint alleged Fraud and Deceit (against all Defendants);
Negligent Misrepresentation (against all Defendants); Breach of Contract
(against HEI); Breach of Contract--Covenant Not to Compete (Against HEI); Breach
of the Implied Covenant of Good Faith and Fair Dealing (against HEI); and
Unlawful, Unfair or Fraudulent Business Practices (against HEI). The plaintiff
alleged that HEI entered into a volume purchase agreement with StorMedia
Pursuant to which HEI and the Company committed to purchase rigid discs for use
in the Company's drives. At the time HEI entered the Agreement, plaintiff
contends that HEI knew that it could not and would not purchase the volume of
products which it committed to purchase. Plaintiff further contends that HEI
entered the contract in order to secure a source of components for the Company
only long enough for HEI to develop its own internal disc manufacturing capacity
and that it and the other defendants never intended to fully perform the
Agreement.
11
<PAGE>
Plaintiff sought damages in excess of $206 million dollars, punitive
damages, injunctive relief, attorneys' fees, pre-judgment and post-judgment
interest, and costs.
12
<PAGE>
On December 20, 1996, the Company filed a Complaint in Colorado state court
entitled MAXTOR CORPORATION V. STORMEDIA INC. ET AL., District Court, County of
Boulder Colorado, No. 96CV 161 ("Colorado Action"), against StorMedia
Incorporated, StorMedia International Ltd., and William J. Almon, StorMedia's
CEO. The complaint alleges Breach of Contract (against all Defendants except
Almon), Breach of the Implied Warranty of Fitness (against all Defendants except
Almon), Breach of the Implied Warranty of Merchantability (against all
Defendants except Almon), Fraud (against all Defendants), and Negligent
Misrepresentation (against all Defendants). The Company seeks damages in excess
of $100 million dollars, punitive damages, reasonable attorneys' fees and costs.
In March, 1997, the Colorado Action was stayed.
On October 24, 1997, the Company filed a Motion to Intervene in the Federal
Action. HEI moved to dismiss the action for failure to join the Company as a
party. On February 18, 1998, the U.S. District dismissed the Federal Action in
its entirety. Accordingly, on February 20, 1998, the Company filed a Motion for
Relief from Stay in the Colorado action. On February 24, STORMEDIA
INTERNATIONAL LTD. V. HYUNDAI ELECTRONICS INDUSTRIES CO., LTD., ET AL., in the
Superior Court of California, County of Santa Clara, Case No. CV 772103
("California Action"). This new complaint alleges Fraud and Deceit (against all
Defendants), Negligent Misrepresentation (against HEI and the Company).
Plaintiff seeks damages in excess of $206 million dollars, punitive damages,
injunctive relief, attorneys' fees, pre-judgment and post-judgment interest, and
costs. On March 26, 1998, the Company moved to stay the California Action in
light of the substantially identical action pending in Colorado.
There has been no discovery in the Colorado Action or the recently filed
California Action. There has been some initial discovery exchanged in the
now dismissed Federal Action. No depositions on the merits of the claims
have been taken. The Company believes that it has meritorious defenses to
such claims and intends to defend the litigation vigorously. However, due to
the nature of the litigation and because the pending lawsuits are in the very
early pre-trial stages, the Company cannot determine the possible loss, if
any, that may ultimately be incurred either in the context of a trial or as a
result of a negotiated settlement. The two pending litigations could result
in significant diversion of time by the Company's technical personnel. While
after consideration of the nature of the claims and facts relating to the
litigation, including the results of preliminary discovery, management
believes that the resolution of this matter will not have a material adverse
effect on the Company's business, operating results and financial conditions,
the results of these proceedings, including any potential settlement are
uncertain and there can be no assurance that they will not have a material
adverse effect on the Company's business, operating results, and financial
condition.
The Company has been notified of certain other claims, including claims of
patent infringement. While the ultimate outcome of these claims and the claims
described above is not determinable, it is reasonably possible that resolution
of these matters could have a material impact on the financial condition,
results of operations or cash flows of the Company. No amounts related to any
claims or action have been accrued in the accompanying financial statements.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting was held August 13, 1997, at which its then sole
stockholder reelected Charles H. Christ and Y.H. Kim as Class II directors
each, to hold office for a three-year term, and ratified the appointment of
Coopers & Lybrand L.L.P. as the Company's independent accounting firm for the
year ended December 27, 1997. On February 25, 1998, the Company's sole
shareholder authorized by written consent an Amended and Restated 1996 Stock
Option Plan, effective October 1, 1997 and an increase to 12,272,168 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 600 shares of Common Stock for 58,208,955 shares of Series A
Preferred Stock, $.01 par value. 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 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 15,125 shares of Common Stock,
$.01 par value, were issued and outstanding. At March 1, 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 three
individuals who obtained shares upon exercise of options granted under the
Company's 1996 Stock Option 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.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 27, December 28, December 28, March 30, March 25, March 26,
FISCAL YEAR ENDED 1997 1996 1996 1996 1995 1994
(twelve months)(twelve months)(nine months)
(unaudited)(1)
-------------- --------------- ------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $1,424,320 $1,113,842 $798,884 $1,268,998 $906,799 $1,152,615
Gross margin 71,384 (77,929) (89,974) 72,693 56,130 (52,399)
Operating expenses:
Research and development 106,249 113,053 87,752 94,717 60,769 97,168
Selling, general and administrative 62,520 82,944 60,701 82,775 81,600 78,854
Other - (69) - 4,460 (10,213) 19,500
Loss from operations (97,385) (273,857) (238,427) (109,259) (76,026) (247,921)
Interest expense 36,502 22,096 18,075 11,849 8,379 10,087
Interest and other income 25,031 1,333 1,000 1,169 4,216 2,283
Provision for income taxes 1,035 1,523 824 2,826 2,033 1,864
Net Loss (109,891) (296,143) (256,326) (122,765) (82,222) (257,589)
Total assets 555,472 314,539 314,539 442,487 381,847 492,375
Long-term debt and capital lease
obligations due after one year 224,313 229,109 229,109 100,181 101,967 107,393
Cash dividends declared - - - - - -
</TABLE>
(1) Unaudited information for the twelve months ended December 28, 1996 is
provided to compare with the twelve months ended December 27, 1997
in Item 7: Management's Discussion and Analysis.
15
<PAGE>
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.
CHANGE IN FISCAL YEAR END
During 1996, the Company changed its fiscal year end to be consistent with
the year end of its parent, Hyundai Electronics America ("HEA"). The fiscal
year end changed from the last Saturday of March, the date used in the
Company's prior filings of its Form 10-K with the Securities and Exchange
Commission, to the last Saturday of December conforming to its 52/53-week
year methodology.
The current fiscal period ended on December 27, 1997 comprises twelve months
or 52 weeks. For discussion and analysis purposes, the twelve months ended
December 27, 1997, comprising 52 weeks, are compared to the unaudited twelve
months ended December 28, 1996, also comprising 52 weeks. The nine months
ended December 28, 1996 comprises 39 weeks and is compared to the nine months
ended December 30, 1995, comprising 40 weeks.
RESULTS OF OPERATIONS
Twelve months ended December 27, 1997 compared to twelve months ended
December 28, 1996
REVENUE AND GROSS PROFIT (LOSS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(IN MILLIONS) December 27, December 28,
TWELVE MONTHS ENDED 1997 1996 Change
- --------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Revenue $1,424.3 $1,113.8 $ 310.5
Gross profit (loss) $ 71.4 $ (77.9) $ 149.3
As a percentage of revenue 5.0% (7.0%)
Net loss $ (109.9) $ (296.1) $ 186.2
- --------------------------------------------------------------------------
</TABLE>
REVENUE
Revenue increased 28% in 1997, primarily due to an increase in unit shipments
of approximately 48%, while average unit prices were lower by 14%. Revenue
from the OEM channel increased 56% even though the 1996 results included $44
million in revenues from the Company's IMS affiliate, which is not included
in the Company's 1997 results. The increase in OEM revenues was offset by a
4% decline in year over year revenues from the Company's Distributor Channel.
Revenue and unit volume growth in 1997 were favorably impacted by better
time to market performance, strengthening of the customer base and a
continued trend to shipping higher capacity drives. This was offset somewhat
by continued pricing pressures which resulted in lower year over year average
unit selling prices.
GROSS PROFIT (LOSS)
Gross profit as a percentage of revenue improved consistently, quarter over
quarter, throughout 1997. The increase in gross profit is due mainly to the
increase in unit volumes and the introduction of new products which achieved
market acceptance due to a return to competitive aerial density. As mentioned
above, the increase in revenues and profits due to increased shipment volumes
was somewhat offset in 1997 by continued pricing pressures which resulted in
lower year over year average unit selling prices.
The Company will continue its efforts to increase gross profit by reducing its
average unit manufacturing costs. However, there can be no assurance that
average unit selling prices will not decline at a more rapid rate or that the
Company will be successful in its efforts to continue to gain improvements in
gross profit percentages.
16
<PAGE>
OPERATING EXPENSES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(IN MILLIONS) December 27, December 28,
TWELVE MONTHS ENDED 1997 1996 Change
- --------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Research and development $ 106.2 $ 113.1 $ (6.9)
As a percentage of revenue 7.5% 10.1%
Selling, general and administrative $ 62.5 $ 82.9 $ (20.4)
As a percentage of revenue 4.4% 7.4%
- --------------------------------------------------------------------------
</TABLE>
In 1997 the Company continued to make substantial investments in research and
development (R&D) related to new technology for its products. Although R&D
as a percentage of revenue decreased from 1996, the absolute dollar level of
investment in R&D remained close to 1996 levels. The decrease in percentage
of R&D expenditures compared to 1996 was expected partly because the Company
redefined its products and technology road map to focus on its core desk top
business (see discussion under Desktop Computer Products, page 4).
Additionally during 1996, the Company established the new advanced technology
group in Milpitas and a new production engineering group in Singapore.
During 1998, the Company will focus on controlling spending while continuing R&D
activities that support timely product introduction and transition to volume
production. There can be no assurances that the Company will be successful in
its efforts.
Selling, general and administrative expenses (SG&A) decreased as a percentage of
revenue and in absolute dollars due to the Company's ongoing efforts to control
costs. Reductions in overall headcount and controlled marketing expenses
contributed to lower SG&A expenses throughout 1997.
INTEREST EXPENSE AND INTEREST INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
(IN MILLIONS) December 27, December 28,
TWELVE MONTHS ENDED 1997 1996 Change
- --------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Interest expense $ 36.5 $ 22.1 $ 14.4
Interest and other income $ 25.0 $ 1.3 $ 23.7
- --------------------------------------------------------------------
</TABLE>
Interest expense increased due to an increase in borrowings required during
the first three quarters, in order to fund the Company's operations and an
increase in the cost to borrow due to changes in the economic environment in
Korea. The Company's debt is guaranteed by Hyundai Electronics Industries,
Co., Ltd. (HEI) and the rate at which the Company can borrow is substantially
affected by the borrowing rates available to HEI. The Company had $159.8
million of short-term and $129 million of long-term lines of credit
borrowings outstanding at December 27, 1997. The Company expects to maintain
approximately the same or higher levels of borrowings during the next fiscal
year.
Interest and other income increased because of a one time gain associated with
the reversal of a $20 million fully-reserved note which was paid in full by IMS.
However, cash availability overall has and will continue to be constrained in
1998 due to funding required for the Company's operations.
17
<PAGE>
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(IN MILLIONS) December 27, December 28,
TWELVE MONTHS ENDED 1997 1996 Change
- ---------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Provision for income taxes $ 1.0 $ 1.5 $ (0.5)
- ---------------------------------------------------------------------
</TABLE>
The provision for income taxes consists primarily of foreign taxes. The
decrease of $0.5 million is due to elimination of taxes in Hong Kong due to the
sale of a majority interest in IMS to certain IMS management and other investors
in June 1996.
The Company's effective tax rate for the periods 1997 and 1996 differs from the
combined federal and state rates due to the repatriation of foreign earnings
absorbed by current year domestic losses, and the Company's U.S. operating
losses not providing current tax benefits, offset in part by the tax savings
associated with the Company's Singapore operations and valuation of temporary
differences. Income from the Singapore operation is not taxable as a result of
the Company's pioneer tax status in Singapore.
18
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 28, 1996 COMPARED TO NINE MONTHS ENDED
DECEMBER 30, 1995
REVENUE AND GROSS PROFIT (LOSS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(IN MILLIONS) December 28, December 30,
NINE MONTHS ENDED 1996 1995 Change
- -----------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Revenue $ 798.9 $ 954.0 $ (155.1)
Gross profit (loss) $ (90.0) $ 60.6 $ (150.6)
As a percentage of revenue (11.3%) 6.4%
Net loss $ (256.3) $ (82.9) $ (173.4)
- -----------------------------------------------------------------------
</TABLE>
Revenue decreased primarily due to a decrease in unit shipments of approximately
22%, while average unit prices for the nine months were comparable. The
decrease in shipments was a result of a 32% decrease in revenue from the OEM
channel, partially offset by an increase in distribution revenue of 17%.
Shipments to the OEM channel in the third quarter of 1996 were lower than
expected due to a shortage of qualified components from vendors.
As expected in the disk drive industry, products sold during the 1996 period
were higher in capacity than in the 1995 period. However, prices for the higher
capacity products (1.3 to 2.0 GB) in 1996 remained relatively flat with the
products in 1995 (which ranged from 540 MB to 1.6 GB).
Part of the revenue decrease is also attributed to the sale of International
Manufacturing Services, Inc. (IMS) in June 1996. IMS revenue decreased by $25
million from the prior period. Revenue for 1995 also reflects a 40-week period
as compared to a 39-week period for 1996. The first quarter of 1995 was
extended to realign the fiscal year ended March 30, 1996.
Gross margin decreased primarily due to the decrease in unit shipments discussed
above and a substantial drop in average unit selling prices for lower capacity
products during the quarter ended June 29, 1996. In June 1996, the Company
incurred a $42.3 million charge for products in inventory and scheduled to be
built over the following six months which had market prices lower than cost.
Although the shift in sales of the Company's products was toward higher capacity
products, which generally had higher average selling prices per unit, the
increase in margins which resulted from this shift was more than offset by
intense pricing pressures on certain lower capacity products without
corresponding decreases in manufacturing costs. Furthermore, the Company
incurred one-time charges of $6.5 million to consolidate certain manufacturing
activities in 1996, including the closure of a head stack assembly plant in
Thailand and a reduction in production shifts in Singapore.
19
<PAGE>
OPERATING EXPENSES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(IN MILLIONS) December 28, December 30,
NINE MONTHS ENDED 1996 1995 Change
- ---------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Research and development $ 87.8 $ 69.4 $ 18.4
As a percentage of revenue 11.0% 7.3%
Selling, general and administrative $ 60.7 $ 60.5 $ 0.2
As a percentage of revenue 7.6% 6.3%
Other $ - $ 4.5 $ (4.5)
As a percentage of revenue 0.0% (0.5%)
- ----------------------------------------------------------------------------
</TABLE>
R&D expenses increased primarily due to the Company's continued commitment to
make substantial investments in new technology for its products. Additionally,
the Company established the new advanced technology group in Milpitas and a new
production engineering group in Singapore during 1996. In the third quarter of
the 1996 period, 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 (SG&A) expenses increased as a percentage of
revenue primarily due to the decrease in the revenue base. SG&A spending in
absolute dollars was relatively unchanged due to the Company's ongoing effort to
control costs and expenditures. Certain SG&A expenses decreased during the 1996
period due to an overall reduction in force and controlled spending in
marketing. However, the decrease was offset by a substantial change in
executive staff and related severance costs incurred throughout the nine month
period.
Other expenses decreased due to $4.5 million of professional fees incurred in
1995 related to the acquisition of the Company by HEA. Effective January 1996,
HEA acquired by a cash tender offer of $6.70 per share all of the outstanding
shares of the Company's common stock which were not previously owned by HEA or
its affiliates and the Company became a wholly owned subsidiary of HEA.
20
<PAGE>
INTEREST EXPENSE AND INTEREST INCOME
<TABLE>
<CAPTION>
(IN MILLIONS) December 28, December 30,
NINE MONTHS ENDED 1996 1995 Change
- ------------------- ------------ ------------ ------
(unaudited)
<S> <C> <C> <C>
Interest expense $ 18.1 $ 7.8 $ 10.3
Interest income $ 1.0 $ 0.8 $ 0.2
</TABLE>
Interest expense increased due to a substantial increase in short-term and
long-term borrowings required in order to fund the Company's operations. The
Company had $149.8 million of short-term and $129 million of long-term lines
of credit borrowings outstanding at December 28, 1996, whereas $99 million of
short-term borrowings were outstanding at December 30, 1995.
Interest income increased slightly due to the availability of cash for
investing purposes.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
(IN MILLIONS) December 28, December 30,
NINE MONTHS ENDED 1996 1995 Change
- ------------------- ------------ ------------ ------
(unaudited)
<S> <C> <C> <C>
Provision for income taxes $ 0.8 $ 2.1 $ (1.3)
</TABLE>
The provision for income taxes consists primarily of foreign taxes. The
decrease of $1.3 million is due to elimination of taxes in Hong Kong due to
the sale of a majority interest in IMS to certain IMS management and other
investors in June 1996.
The Company's effective tax rate for the periods 1996 and 1995 differs from
the combined federal and state rates due to the repatriation of foreign
earnings absorbed by current year losses, and the Company's U.S. operating
losses not providing current tax benefits, offset in part by the tax savings
associated with the Company's Singapore operations and valuation of temporary
differences. Income from the Singapore operation is not taxable as a result
of the Company's pioneer tax status in Singapore.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance. The Company has evaluated
its level of exposure to the risks and costs associate with Year 2000
problems and is currently in the process of updating its information systems
to be Year 2000 compliant. The Company expects its information systems to be
Year 2000 compliant by the end of fiscal 1999, and anticipates no disruptions
in the manufacturing services it provides to its customers as a result of
Year 2000 problems; however, no assurance can be given that such updates will
be fully completed in a timely manner or that such disruptions will not
occur. Any disruption in manufacturing services provided by the Company as a
result of Year 2000 noncompliance would materially adversely affect the
Company's business, financial condition and results of operations. Moreover,
the Company could be adversely impacted by Year 2000 issues faced by major
distributors, suppliers, customers, vendors and financial service
organizations with which the Company interacts.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
As of and for
the twelve months ended
December 27,
(IN MILLIONS) 1997
- -------------- -----------------------
<S> <C>
Cash and cash equivalents $ 16.9
Net cash used in operating activities $ (146.7)
Net cash used in investing activities $ (61.3)
Net cash provided by financing activities $ 193.6
Short-term credit borrowings $ 159.8
Long-term credit borrowings $ 129.0
</TABLE>
As of December 27, 1997, the Company had cash and cash equivalents of $16.9
million as compared to $31.3 million as of December 28, 1996, a decrease of
$14.4 million. The decrease in the Company's cash and cash equivalents was
primarily the result of operating losses and capital expenditures offset by
external financing to fund those activities.
Net cash used in operating activities was primarily attributable to the net
loss less non-cash depreciation and amortization totaling approximately $65.6
million an increase in accounts receivable and inventories of $142.9 million
and $74.4 million, respectively, and an increase in accrued and other
liabilities of $15.9 million. These uses of cash in operating activities
were offset by an increase in accounts payable of $102.1 million and increases
in payables to affiliates of $11.6 million. In addition, the net loss
included a gain of $20 million from the payment on a note from an affiliate,
International Manufacturing Systems (IMS), Inc., that had been fully reserved.
The increases in accounts receivable and inventories, as well as the
offsetting increases in accounts payable and payables to affiliates result
from the increase in shipment volumes and resulting increases in revenue in
1997 as compared to 1996.
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. Under this program the
Company could sell its qualified trade accounts receivable up to $100 million
on a non-recourse basis. The face amount of the eligible receivables are
discounted based on the Corporate Receivables Corporation commercial paper
rate (5.85% as of December 27, 1997) plus commission and is subject to a 10%
retention. As of December 27, 1997, $79.8 million in sales of accounts
receivable, for which proceeds had not yet been received, were included in
accounts receivable and $79.8 million in collections of accounts receivable
not yet remitted were included in accrued and other liabilities. The
Company's asset securitization program was subject to certain conditions,
among which was a condition that all of HEI's long-term public senior debt
securities achieve a specified rating. This condition was not met in February
1998, and the Company obtained waivers of this condition through April 8,
1998.
The Company completed a new asset securitization program dated as of April 8,
1998 (the "New Program") arranged by Citicorp to replace the existing
program. Under the New Program, the Company sells all of its trade accounts
receivable through a special purpose vehicle with a purchase limit of $100
million on a non-recourse basis, subject to increase to $150 million upon the
fulfillment of the conditions subsequent described below. On April 8, 1998,
the uncollected purchase price under the existing program, in the amount of
approximately $100 million, was transferred to represent the purchased
interest of Citicorp's Corporate Receivables Corporation ("CRC") under the
New Program. Continuance of the New Program is subject to certain conditions,
including a condition that all of the long-term public senior debt securities
of Hyundai Heavy Industries, Inc. ("HHI") achieve a specified rating. In
addition, the New Program remains subject to certain conditions subsequent
related to obtaining appropriate waivers as may be necessary from lenders of
the Company's credit facilities, or effecting a cure, of any outstanding
defaults under such credit facilities of the Company and obtaining a
performance guarantee from HHI of the obligations of the Company and Maxtor
Receivables Corporation under the New Program. This performance guarantee is
similar to the arrangement that HEI provided under the Original Program. The
Company must satisfy these conditions subsequent by May 4, 1998 and presently
believes that it will be able to successfully satisfy these conditions.
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.
22
<PAGE>
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
(OEMs). 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 an 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 current 16% ownership interest.
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 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 15,125 shares of Common Stock, $.01 par value, were
issued and outstanding. In addition, cash increased due to a net increase in
borrowings of $10.0 million in 1997.
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. This credit facility is guaranteed by HEI and all
outstanding amounts of principal and accrued interest were payable on January
30, 1998. In January 1998, this facility was retired and all principal and
interest owed under this facility have been paid. As of December 27, 1997,
$13.8 million of borrowings under this line were outstanding.
On April 10, 1997, the Company obtained a $150 million intercompany line of
credit from HEA. This line of credit allows for draw downs up to $150
million and interest is payable quarterly. All outstanding amounts of
principal and accrued interest are due and payable on April 10, 1998. As of
December 27, 1997 $65 million was outstanding under this facility. In March
1998, this intercompany line was reduced to $100 million.
On August 29, 1996, the Company established two uncollateralized, revolving
lines of credit totaling $215 million (the "Facilities") through Citibank,
N.A. and syndicated among fifteen banks. In September 1996, the Facilities
were increased $10 million to a total of $225 million. The Facilities are
guaranteed by HEI and a total of $129 million of the Facilities is a three
year committed Facility that is used primarily for general operating purposes
and bears interest at a rate based on LIBOR plus 0.53 percent. As of
December 27, 1997, $129 million of borrowings under this line were
outstanding. A total of $96 million of the Facility is a 364-day committed
facility, renewable annually at the option of the syndicate banks. On August
28, 1997, this Facility was amended and reduced to $31 million. The Facility
is primarily for general operating purposes and bears interest at a rate
based on LIBOR plus 0.53 percent. As of December 27, 1997, $31 million under
this line of credit were outstanding.
The Company has credit facilities amounting to $50 million in the aggregate
from three banks. The facilities, which are guaranteed by HEI, will be used
primarily for general operating purposes and bear interest at a rate ranging
from 6.27 percent to 7.88 percent. As of December 27, 1997, $50 million of
borrowings under this line of credit were outstanding. In January 1998 one
$10 million facility was retired and all principal owing has been paid.
HEI is the guarantor of an aggregate $170 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 believes that that HEI may be found not to be in compliance with
certain financial covenants. 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. In the event HEI is not able to
comply with its obligations as guarantor, there will be a default under the
terms of the guaranty which will constitute a default under the Company's
credit facilities guaranteed by HEI and a default under a credit facility
with $30 million outstanding as of December 27, 1997 not guaranteed by HEI.
The Company will endeavor to seek any necessary waivers; although there can
be no such assurance, the Company believes that such waivers can be obtained.
The Company has a commitment from an affiliated company to provide an
equivalent long-term facility in the event the waivers are not successfully
obtained. Consequently, the Company has not reclassified the debt
outstanding under the credit facilities as a current liability.
23
<PAGE>
The liquidity of the Company continued to be adversely affected during the
fiscal year ended December 27, 1997 by significant losses from operations.
The Company is implementing ongoing measures with that focus on a return to
profitability and improved liquidity. In addition to attempting to improve
operating margins on product sales through the introduction of new products
and reduction of manufacturing costs, the Company remains focused on
controlling other operating expenses. However, the Company believes that it
must continue to make substantial investments in R&D since the timely
introduction and transition to volume production of new products is essential
to its future success.
The Company expects that it will require alternative sources of liquidity,
including additional sources of financing in fiscal 1998. The Company is
engaged in ongoing discussions with various parties regarding additional
sources of financing. While the Company believes that additional sources of
financing will be available, there can be no assurance that financing will be
available on terms which are favorable to the Company.
Subject to unforeseen changes in general business conditions, the Company
believes that the combination of the measures described above and other
available actions, together with its balances of cash and cash equivalents,
equipment financing and line of credit borrowing capabilities (supported by
HEI and HEA), will be sufficient to fund the Company's working capital and
capital expenditure requirements through fiscal year 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
24
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
<S> <C>
Financial Statements:
Consolidated Balance Sheets -
December 27, 1997 and December 28, 1996 26
Consolidated Statements of Operations -
Fiscal year ended December 28, 1997, nine months ended
December 28, 1996 and fiscal year ended March 30, 1996 27
Consolidated Statements of Stockholders' Equity (Deficit) -
Fiscal year ended December 28, 1997, nine months ended
December 28, 1996 and fiscal year ended March 30, 1996 28
Consolidated Statements of Cash Flows -
Fiscal year ended December 28, 1997, nine months ended
December 28, 1996 and fiscal year ended March 30, 1996 29 - 30
Notes to Consolidated Financial Statements 31 - 45
Report of Coopers & Lybrand L.L.P., Independent Accountants 46
Report of Ernst & Young LLP, Independent Auditors 47
Financial Statement Schedules:
</TABLE>
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.
25
<PAGE>
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 27, December 28,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,925 $ 31,313
Accounts receivable, net of allowance for doubtful accounts
of $3,573 at December 27, 1997 and $5,255 at December 28, 1996 241,777 82,876
Accounts receivable from affiliates 5,870 6,248
Inventories 155,312 80,878
Prepaid expenses and other 20,814 5,239
---------- ----------
Total current assets 440,698 206,554
Net property, plant and equipment 99,336 92,073
OTHER ASSETS 15,438 15,912
---------- ----------
$ 555,472 $ 314,539
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term borrowings $ 100,057 $ 149,800
Short-term borrowings due to affiliates 65,000 --
Accounts payable 206,563 109,956
Accounts payable to affiliates 25,022 13,459
Accrued and other liabilities 155,563 139,678
---------- ----------
Total current liabilities 552,205 412,893
Long-term debt and capital lease obligations due after one year 224,313 229,109
Commitments and contingencies (Note 8) -- --
Stockholder's deficit:
Series A Preferred Stock, $0.01 par value, 95,000,000
shares authorized; 88,059,701 shares issued and
outstanding at December 27, 1997; 58,208,955 issued and
outstanding at December 28, 1996; aggregated liquidation value
$590,000 at December 27, 1997 and $390,000 at December 28, 1996 880 582
Common Stock, $0.01 par value, 110,000,000 shares authorized;
15,125 shares issued and outstanding at December, 27, 1997;
no shares issued and outstanding at December 28, 1996 -- --
Additional paid-in capital 534,765 335,017
Unrealized gain on investment in equity securities 16,262 --
Accumulated deficit (772,953) (663,062)
---------- ----------
Total stockholders' deficit (221,046) (327,463)
---------- ----------
$555,472 $314,539
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 27, DECEMBER 28, MARCH 30,
1997 1996 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Revenue $1,384,799 $771,655 $1,264,627
Revenue from affiliates 39,521 27,229 4,371
-------------- --------------- --------------
Total revenue 1,424,320 798,884 1,268,998
-------------- --------------- --------------
Cost of revenue 1,316,774 861,551 1,192,403
Cost of revenue from affiliates 36,162 27,307 3,902
-------------- --------------- --------------
Total cost of revenue 1,352,936 888,858 1,196,305
-------------- --------------- --------------
Gross profit (loss) 71,384 (89,974) 72,693
-------------- --------------- --------------
Operating expenses:
Research and development 106,249 87,752 94,717
Selling, general and administrative 62,520 60,701 82,775
Other -- -- 4,460
-------------- --------------- --------------
Total operating expenses 168,769 148,453 181,952
-------------- --------------- --------------
Loss from operations (97,385) (238,427) (109,259)
Interest expense (36,502) (18,075) (11,849)
Interest and Other Income 25,031 1,000 1,169
-------------- --------------- --------------
Loss before income taxes (108,856) (255,502) (119,939)
Provision for income taxes 1,035 824 2,826
-------------- --------------- --------------
Net loss $(109,891) $(256,326) $(122,765)
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Preferred stock Common stock Additional
--------------------- ------------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit
----------- ---------- ------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 25, 1995 -- $ -- 51,697,287 $517 $327,357 $(283,971)
Issuance of common stock under stock
option plans -- -- 1,134,805 11 4,734 -
Issuance of common stock under stock
purchase plan -- -- 800,426 8 2,972 -
Shares canceled resulting from
acquisition by HEA -- -- (53,631,918) (536) 536 -
Net Loss -- -- -- -- -- (122,765)
----------- ---------- ------------- ---------- ------------ ---------------
Balance, March 30, 1996 -- -- 600 -- 335,599 (406,736)
Exchange of common shares for
Series A Preferred 58,208,955 582 (600) -- (582) -
Net loss -- -- -- -- -- (256,326)
------------- ---------- ------------- ---------- ------------ ---------------
Balance, December 28, 1996 58,208,955 582 -- -- 335,017 (663,062)
Issuance of additional Series A
Preferred to parent in exchange
for debt 29,850,746 298 -- -- 199,702
Issuance of stock under stock
option plan and related benefits 15,125 46
Change in unrealized gain on
equity investment --
Net loss (109,891)
------------- ---------- ------------- ---------- ------------ ---------------
Balance, December 27, 1997 88,059,701 $880 15,125 $-- $534,765 $(772,953 )
------------- ---------- ------------- ---------- ------------ ---------------
------------- ---------- ------------- ---------- ------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized Gain Total
on Investment stockholder's
in Equity equity
Securities (deficit)
--------------- --------------
<S> <C> <C>
Balance, March 25, 1995 $- $43,903
Issuance of common stock under stock
option plans - 4,745
Issuance of common stock under stock
purchase plan - 2,980
Shares canceled resulting from
acquisition by HEA -
Net loss - (122,765)
--------------- --------------
Balance, March 30, 1996 - (71,137)
Exchange of common shares for
Series A Preferred - -
Net loss - (256,326)
--------------- --------------
Balance, December 28, 1996 - (327,463)
Issuance of additional Series A
Preferred to parent in exchange
for debt - 200,000
Issuance of stock under stock
option plan and related benefits 46
Change in unrealized gain on
equity investment 16,262 16,262
Net loss (109,891)
--------------- --------------
Balance, December 27, 1997 $16,262 $(221,046)
--------------- --------------
--------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
28
<PAGE>
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
December 27, December 28, March 30,
1997 1996 1996
------------- ------------- -----------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $(109,891) $(256,326) $(122,765)
------------- ------------- -----------
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 65,642 47,064 45,200
Reserves for lower of cost or market -- 15,194 --
Change in non-current deferred tax liabilities -- -- 300
Loss on disposal of property, plant and equipment 4,366 700 669
Gain on sale of subsidiary -- (2,385) --
Gain on fully reserved note receivable from
affiliate (20,000) -- --
Other (157) (589) --
Changes in assets and liabilities:
Accounts receivable (142,860) 62,786 (12,485)
Accounts receivable from affiliates 378 (1,822) (2,229)
Net collections of accounts receivable
sold to financing company -- 16,327 --
Inventories (74,434) 45,955 (66,255)
Prepaid expenses and other 687 3,839 (2,947)
Accounts payable 102,108 (37,297) 18,407
Accounts payable to affiliates 11,563 4,803 8,656
Accrued and other liabilities 15,885 13,015 637
------------- ------------- -----------
Total adjustments (36,822) 167,590 (10,047)
------------- ------------- -----------
Net cash used in operating activities (146,713) (88,736) (132,812)
------------- ------------- -----------
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 (82,489) (53,780) (72,656)
Proceeds from disposals of property, plant and equipment 609 363 354
Other assets 621 (7,599) (928)
------------- ------------- -----------
Net cash used in investing activities (61,259) (36,016) (61,232)
------------- ------------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt, including short-term borrowings 319,363 410,715 145,595
Principal payments on debt, including capital lease obligations (309,784) (307,444) (3,000)
Proceeds from issuance of common stock, net of issuance
of notes receivable and stock repurchase 46 -- 7,725
Proceeds from intercompany notes issued to parent 200,000 -- --
Net payments under accounts receivable securitization (16,041) -- --
------------- ------------- -----------
Net cash provided by financing activities 193,584 103,271 150,320
------------- ------------- -----------
Net decrease in cash and cash equivalents (14,388) (21,481) (43,724)
Cash and cash equivalents at beginning of period 31,313 52,794 96,518
------------- ------------- -----------
Cash and cash equivalents at end of period $16,925 $31,313 $52,794
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Nine months Year
ended ended ended
December 27, December 28, March 30,
1997 1996 1996
------------- ------------- ---------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $26,540 $13,444 $ 9,362
Income taxes 1,025 2,009 1,801
Income tax refunds -- -- (3,173)
Supplemental information on noncash investing and financing activities:
Purchase of property, plant and equipment financed by accounts payable 2,670 8,171 4,949
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 in equity investments 16,262 -- --
------------- ------------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
30
<PAGE>
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 year end of its parent, HEA. The fiscal year end changed from the last
Saturday of March, the date used in the Company's prior filing of its Form
10-K with the Securities and Exchange Commission, to the last Saturday of
December conforming to its 52/53-week year methodology. The current year
ended on December 27, 1997 comprises 52 weeks. Fiscal period ended on
December 28, 1996 comprised 39 weeks. Fiscal year ended March 30, 1996
comprised 53 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 national retailers. Additionally,
several smaller retailers and value-added resellers (VARs) carry Maxtor
products purchased through Maxtor's distribution network. 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 in North America, Europe and Asia.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
The actual results with regard to warranty expenditures could have a material
unfavorable impact on the Company if the actual rate of unit failure or the
cost to repair a unit is greater than what the Company has used in estimating
its warranty expense accrual.
Given the volatility of the market for disk drives and for the Company's
products, the Company makes adjustments to the value of inventories based on
estimates of potentially excess and obsolete inventories and negative margin
products after considering forecasted demand and forecasted average selling
prices. However, forecasts are always subject to revisions, cancellations,
and rescheduling. Actual demand will inevitably differ from such anticipated
demand and such differences may have a material impact on the financial
statements.
RISKS AND UNCERTAINTIES
The Company's business entails a number of risks. As is typical in the disk
drive industry, the Company must utilize leading edge components for its new
generation of products which may only be available from a limited number of
suppliers. While the Company has qualified and continues to qualify multiple
sources for many components, it is reliant on, and will continue to be
reliant on, the availability of supply from its vendors for many semi-custom
and custom integrated circuits, heads, media and other key components. Any
de-commitments from customers for product or delays of components from
vendors could have an adverse impact on the Company's ability to ship products
as scheduled to its customers.
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 is guaranteed by HEI, and the Company is
currently dependent upon the HEI guarantees. The Company currently has a
written letter of support from HEI to support operations through May 31, 1999.
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 to
continue to guarantee the debt of the Company. While the Company believes
that other sources of credit would be available, and has obtained a
commitment from an affiliate company for certain debt, there is no assurance
that such other credit would be available, either in the amount or at the
rates currently available to the Company.
31
<PAGE>
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 fair value. Unrealized gains and
losses on securities classified as available-for-sale, when material, are
reported net of taxes as a separate component of stockholder's equity.
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.
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 a disposal, the Company removes the asset and
accumulated depreciation from its records and recognises 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 is subject to agreements providing limited rights of return, as
well as price protection on unsold merchandise. Accordingly, the Company
records reserves upon shipment for estimated returns, exchanges and credits
for price protection. The Company also provides for the estimated cost to
repair or replace products under warranty at the time of sale. The Company
currently warrants its products against defects in parts and labor from the
date of shipment with an additional three months allowed for distributors to
account for "shelf life". All products currently in production are warranted
for a period of 36 months 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 December 27, 1997, the nine months
ended December 28, 1996 and the fiscal year ended March 30, 1996,
respectively.
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The Company is
required to adjust its deferred tax liabilities in the period when tax rates
or the provisions of the income tax laws change. Valuation allowances are
established to reduce deferred tax assets to the amounts expected to be
realized.
FOREIGN CURRENCY TRANSLATION
The functional currency for all foreign operations is the U.S. dollar. As
such, all material foreign exchange gains or losses are included in the
determination of net loss. Net foreign exchange losses included in net loss
for the fiscal year ended December 27, 1997, the nine months ended
December 28, 1996 and the fiscal year ended March 30, 1996 were immaterial.
32
<PAGE>
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's products are sold worldwide to original equipment
manufacturers, 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. 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. As of
December 27, 1997, the Company had one customer who accounted for more than
10% of the outstanding trade receivables. One customer accounted for more
than 10% of outstanding trade receivables at March 30, 1996. If the customer
fails to perform its obligations to the Company, such failure would have
adverse effects upon the Company's financial position, results of operations,
cash flows, and liquidity.
LONG-LIVED ASSETS
The Company reviews property and equipment and other long lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is
measured by comparison of its carrying amount to future net cash flows the
assets are expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which
the carrying amount of the asset exceeds the present value of the future net
cash flows.
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". Accordingly, no compensation cost for the Company's 1996
Stock Option Plan has been recognized.
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".
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
issued SFAS No. 130, "Reporting Comprehensive Income". This statement
establishes requirements for disclosure of comprehensive income and is
effective for financial statements issued for fiscal years beginning after
December 15, 1997, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes
in stockholder's equity except those resulting from investments or
contributions by stockholders. The Company is evaluating alternative formats
for presenting this information, but does not expect this pronouncement to
materially impact the Company's results of operations.
33
<PAGE>
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.
2. SUPPLEMENTAL FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
----------- ------------
(In thousands)
<S> <C> <C>
Inventories:
Raw materials $48,834 $33,012
Work-in-process 15,177 15,674
Finished Goods 91,301 32,192
--------- ---------
$155,312 $80,878
--------- ---------
--------- ---------
Prepaid expenses and other:
Investment in equity security, at fair value $16,262 $ --
Prepaid expenses and other 4,552 5,239
--------- ---------
$20,814 $5,239
--------- ---------
--------- ---------
Property, plant and equipment, at cost:
Buildings $32,453 $29,512
Machinery and equipment 220,213 194,644
Furniture and fixtures 11,374 13,300
Leasehold Improvements 9,012 12,695
--------- ---------
273,052 250,151
Less accumulated depreciation and amortization (173,716) (158,078)
--------- ---------
Net property, plant and equipment $99,336 $92,073
--------- ---------
--------- ---------
Accrued and other liabilities:
Income taxes payable $2,416 $5,088
Accrued payroll and payroll-related expenses 29,116 17,159
Accrued warranty 22,716 20,194
Accrued expenses 21,561 42,780
Advances under securitization 79,754 54,386
--------- ---------
$155,563 $139,607
--------- ---------
--------- ---------
</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.
34
<PAGE>
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 of 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 year ended December 27, 1997 and fiscal
period December 28, 1996 respectively.
The carrying values and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 27, 1997 December 28, 1996
------------------------ ----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $16,925 $16,925 $31,313 $31,313
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 210,570 210,570 265,000 265,000
debt from parent -- fixed rates 65,000 65,000 -- --
Convertible subordinated debentures 100,000 70,000 100,000 68,000
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into currency forward contracts to manage foreign currency
exchange risk associated with the Company's manufacturing operations in
Singapore. 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 $0 and $17,286,000, as
of December 27, 1997 and December 28, 1996, respectively.
5. DISPOSALS OF OPERATIONS
INTERNATIONAL MANUFACTURING SERVICES
In May 1996, the Company entered into an agreement to sell a majority
interest in International Manufacturing Services, Inc. (IMS) to certain IMS
management and other investors. At 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. 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 27, 1997 and the fiscal
period ended December 28, 1996 were not material to the Company's results of
operations for either period presented.
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
other emerging sales channels such as computer specialty retailers and
computer superstores.
During the year ended December 27, 1997 two customers, Compaq and Dell
Computer, accounted for more than 21% and 10%, respectively, of the
Company's revenue. During the nine months ended December 28, 1996 one
customer, Southern Electronics Distribution accounted for 11% of the
Company's revenue. During the year ended March 30, 1996 no customer
accounted for more than 10% of the Company's revenue.
35
<PAGE>
The Company's export sales represented 40%, 48% and 41% of total revenue for
the year ended December 27, 1997, the nine months ended December 28, 1996 and
the year ended March 30, 1996, respectively. Approximately 57%, 38% and 60%,
of export sales were to Europe, while 36%, 55%, and 35% of export sales were
to Asia Pacific for the year ended December 27, 1997, the nine months ended
December 28, 1996 and year ended March 30, 1996, 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 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) --
---------- --------- ---------- ----------
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
---------- --------- ---------- ----------
NINE MONTHS ENDED DECEMBER 28, 1996
- -----------------------------------
<S> <C> <C> <C> <C>
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) --
---------- --------- ---------- ----------
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 MARCH 30, 1996
- -------------------------
<S> <C> <C> <C> <C>
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) --
---------- --------- ---------- ----------
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
---------- --------- ---------- ----------
</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.
36
<PAGE>
7. LINES OF CREDIT, DEBT AND CAPITAL LEASE OBLIGATIONS
Lines of credit, debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 27, December 28,
(IN THOUSANDS) 1997 1996
-------- --------
<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 80,967 136,000
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 603 180
389,370 378,980
LESS AMOUNTS DUE WITHIN ONE YEAR 165,057 149,871
-------- --------
Due after one year $224,313 $229,109
-------- --------
-------- --------
</TABLE>
Future aggregate maturities 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 $5,000,000 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.
37
<PAGE>
On March 30, 1996, the Company entered into an accounts receivable
securitization program with Citicorp Securities, Inc. Under this program the
Company could sell its qualified trade accounts receivable up to $100 million
on a non-recourse basis. The face amount of the eligible receivables are
discounted based on the Corporate Receivables Corporation commercial paper
rate (5.85% as of December 27, 1997) plus commission and is subject to a 10%
retention. As of December 27, 1997, $79.8 million in sales of accounts
receivable, for which proceeds had not yet been received, were included in
accounts receivable and $79.8 million in collections of accounts receivable
not yet remitted were included in accrued and other liabilities. The
Company's asset securitization program was subject to certain conditions,
among which was a condition that all of HEI's long-term public senior debt
securities achieve a specified rating. This condition was not met in
February 1998, and the Company obtained waivers of this condition through
April 8, 1998.
The Company completed a new asset securitization program dated as of April 8,
1998 (the "New Program") arranged by Citicorp to replace the existing
program. Under the New Program, the Company sells all of its trade accounts
receivable through a special purpose vehicle with a purchase limit of $100
million on a non-recourse basis, subject to increase to $150 million, upon the
fulfillment of the conditions subsequent described below. On April 8, 1998,
the uncollected purchase price under the existing program, in the amount of
approximately $100 million, was transferred to represent the purchased
interest of Citicorp's Corporate Receivables Corporation ("CRC") under the
New Program. Continuance of the New Program is subject to certain
conditions, including a condition that all of the long-term public senior
debt securities of Hyundai Heavy Industries, Inc. ("HHI") achieve a specified
rating. In addition, the New Program remains subject to certain conditions
subsequent related to obtaining appropriate waivers as may be necessary from
lenders of the Company's credit facilities, or effecting a cure, of any
outstanding defaults under such credit facilities of the Company and
obtaining a performance guarantee from HHI of the obligations of the Company
and Maxtor Receivables Corporation under the New Program. This performance
guarantee is similar to the arrangement that HEI provided under the Original
Program. The Company must satisfy these conditions subsequent by May 4, 1998
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. This credit facility is guaranteed by HEI and all outstanding amounts
of principal and accrued interest were payable on January 30, 1998. In January
1998, this facility was retired and all principal and interest owed under this
facility have been paid. As of December 27, 1997, $13.8 million was
outstanding.
On April 10, 1997, the Company obtained a $150 million intercompany line of
credit from HEA. This line of credit allows for draw downs up to $150 million
and interest is payable quarterly. All outstanding amounts of principal and
accrued interest are due and payable on April 10, 1998. As of December 27,
1997, $65 million was outstanding under this facility. In March 1998, this
line was reduced to $100 million.
On August 29, 1996, the Company established two uncollateralized, revolving
lines of credit totaling $215 million (the "Facilities") through Citibank,
N.A. and syndicated among fifteen banks. In September 1996, the Facilities
were increased $10 million to a total of $225 million. The Facilities are
guaranteed by HEI and a total of $129 million of the Facilities is a three
year committed Facility that is used primarily for general operating purposes
and bears interest at a rate based on LIBOR plus 0.53 percent. As of
December 27, 1997, $129 million of borrowings under this line were
outstanding. A total of $96 million of the Facility is a 364-day committed
facility, renewable annually at the option of the syndicate banks. On August
28, 1997, this Facility was amended and reduced to $31 million. The Facility
is primarily for general operating purposes and bears interest at a rate
based on LIBOR plus 0.53 percent. As of December 27, 1997, $31 million under
this line of credit were outstanding.
The Company has credit facilities amounting to $50 million in the aggregate from
three banks. The facilities, which are guaranteed by HEI, are used primarily
for general operating purposes and bear interest at rates ranging from 6.27
percent to 7.88 percent. As of December 27, 1997, $50 million of borrowings
under this line of credit were outstanding. In January 1998 one $10 million
facility was retired and all principal owing has been paid.
HEI is the guarantor of an aggregate $170 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 believes that HEI may be found not to be in compliance with certain
financial covenants. 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. In the event HEI is not able to comply with its
obligations as guarantor, there will be a default under the terms of the
guaranty which will constitute a default under the Company's credit
facilities guaranteed by HEI and a default under a credit facility with $30
million outstanding as of December 27, 1997 not guaranteed by HEI. The
Company will endeavor to seek any necessary waivers; although there can be no
such assurance, the Company believes that such waivers can be obtained. The
Company has a commitment from an affiliated company to provide an equivalent
long-term facility in the event the waivers are not successfully obtained.
Consequently, the Company has not reclassified the debt outstanding under the
credit facilities as a current liability.
Under the terms of the Company's line of credit facilities, the Company may not
declare or pay any dividends without the prior consent of its lenders.
38
<PAGE>
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>
COMMITMENTS AND CONTINGENCIES
The above commitments extend through fiscal year 2016. Rental expense was
approximately $10,654,000 for the year ended December 27, 1997, $8,905,000 for
the nine months ended December 28, 1996 and $11,960,000 for the year ended March
30, 1996.
LEGAL PROCEEDINGS
The dispute between StorMedia and the Company arises out of the Agreement
between the Company and StorMedia which became effective on November 17, 1995,
under which StorMedia agreed to supply disk media, a key component of hard disk
drives, to the Company. StorMedia's supply of disk media did not meet the
Company's specifications and functional requirements and , as a result, after
negotiations, the Company terminated the Agreement.
On September 18, 1996 a class action securities lawsuit was filed against
StorMedia Incorporated ("StorMedia") and certain of its officers in Superior
Court of the State of California, County of Santa Clara. Among the allegations
against StorMedia was the assertion that StorMedia failed to perform under the
November 17,1995 Purchase Agreement ("Agreement") with Maxtor Corporation ("the
Company") and that StorMedia's failure to sue the Company for breach of the
Agreement was evidence that StorMedia had breached the Agreement. (A concurrent
class action was later filed in the U.S. District Court for the Northern
District of California by the same parties.)
One week later, on September 25,1996, StorMedia commenced an action in the U.S.
District Court for the Northern District of California entitled, STORMEDIA
INCORPORATED V. HYUNDAI ELECTRONICS INDUSTRIES CO., LTD., ET AL., U.S. District
Court, Northern District, No. C-96 20805 RMW (EAI) (the "Federal Action"),
against Hyundai Electronics Industries Co., Ltd. ("HEI")-- the Company's Korean
grandparent -- which also signed the Agreement. StorMedia also sued M.H. Chung,
HEI's chairman; K.S. Yoo, the individual who signed the Agreement on behalf of
the Company. StorMedia, however, did not sue the Company.
StorMedia filed an Amended Complaint of February 14,1997 in the Federal Action.
The Amended Complaint alleged Fraud and Deceit (against all Defendants);
Negligent Misrepresentation (against all Defendants); Breach of Contract
(against HEI); Breach of Contract--Covenant Not to Compete (Against HEI); Breach
of the Implied Covenant of Good Faith and Fair Dealing (against HEI); and
Unlawful, Unfair or Fraudulent Business Practices (against HEI). The plaintiff
alleged that HEI entered into a volume purchase agreement with StorMedia
Pursuant to which HEI and the Company committed to purchase rigid discs for use
in the Company's drives. At the time HEI entered the Agreement, plaintiff
contends that HEI knew that it could not and would not purchase the volume of
products which it committed to purchase. Plaintiff further contends that HEI
entered the contract in order to secure a source of components for the Company
only long enough for HEI to develop its own internal disc manufacturing capacity
and that it and the other defendants never intended to fully perform the
Agreement. Plaintiff sought damages in excess of $206 million dollars, punitive
damages, injunctive relief, attorneys' fees, pre-judgment and post-judgment
interest, and costs.
39
<PAGE>
On December 20, 1996, the Company filed a Complaint in Colorado state court
entitled MAXTOR CORPORATION V. STORMEDIA INC. ET AL., District Court, County
of Boulder Colorado, No. 96CV 161 ("Colorado Action"), against StorMedia
Incorporated, StorMedia International Ltd., and William J. Almon, StorMedia's
CEO. The complaint alleges Breach of Contract (against all Defendants except
Almon), Breach of the Implied Warranty of Fitness (against all Defendants
except Almon), Breach of the Implied Warranty of Merchantability (against all
Defendants except Almon), Fraud ( against all Defendants, and Negligent
Misrepresentation (against all Defendants). The Company seeks damages in
excess of $100 million dollars, punitive damages, reasonable attorneys' fees
and costs. In March, 1997, the Colorado Action was stayed.
On October 24, 1997, the Company filed a Motion to Intervene in the Federal
Action. HEI moved to dismiss the action for failure to join the Company as a
party. On February 18, 1998, the U.S. District dismissed the Federal Action in
its entirety. Accordingly, on February 20, 1998, the Company filed a Motion for
Relied from Stay in the Colorado action. On February 24, STORMEDIA
INTERNATIONAL LTD. V. HYUNDAI ELECTRONICS INDUSTRIES CO., LTD., ET AL., in the
Superior Court of California, County of Santa Clara, Case No. CV 772103
("California Action"). This new complaint alleges Fraud and Deceit (against all
Defendants), Negligent Misrepresentation (against HEI and the Company).
Plaintiff seeks damages in excess of $206 million dollars, punitive damages,
injunctive relief, attorneys' fees, pre-judgment and post-judgment interest, and
costs. On March 26, 1998, the Company moved to stay the California Action in
light of the substantially identical action pending in Colorado.
There has been no discovery in the Colorado Action or the recently filed
California Action. There has been some initial discovery exchanged in the now
dismissed Federal Action. No depositions on the merits of the claims have been
take. The Company believes that it has meritorious defenses to such claims and
intends to defend the litigation vigorously. However, due to the nature of the
litigation and because the pending lawsuits are in the very early pre-trial
stages, the Company cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. The two pending litigations could result in significant
diversion of time by the Company's technical personnel. While after
consideration of the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, management believes that the
resolution of this matter will not have a material adverse effect on the
Company's business, operating results and financial conditions, the results of
these proceedings, including any potential settlement are uncertain and there
can be no assurance that they will not have a material adverse effect on the
Company's business, operating results, and financial condition.
The Company has been notified of certain other claims, including claims of
patent infringement. While the ultimate outcome of these claims and the claims
described above is not determinable, it is reasonably possible that resolution
of these matters could have a material impact on the financial condition,
results of operations or cash flows of the Company. No amounts related to any
action has been accrued for the accompanying financial statements.
40
<PAGE>
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 committed to provide the financial support necessary for the Company to
continue operations on an ongoing basis.
The company purchased certain component parts from its parent (HEA) amounting
to $15.5 million during 1997.
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.
Holders of Series A preferred stock are entitled to dividends, when and as
declared by the Board of Directors, 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 600 shares of Common Stock for 58,208,955 shares of Series A
Preferred Stock, $.01 par value. As of December 27, 1997, 88,059,701 shares of
Series A Preferred Stock and 15,125 shares of Common Stock, $.01 par value, 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 million of debt to 29,850,746 million shares of Series A
Preferred Stock.
41
<PAGE>
STOCK OPTIONS
Effective as of the acquisition by HEA, the Company's Fiscal 1988, 1992, 1995
Stock Option Plans and the 1986 and 1996 Outside Directors Stock Option Plans
terminated and were subsequently replaced by the Company's 1996 Stock Option
Plan (the Plan). The Plan was approved by the Board of Directors in May 1996
and provides for a maximum of 10,272,168 shares to be reserved for grant.
Options under the Plan expire ten years from the date of grant. On February
25, 1998 the Company's Board of Directors approved an additional 2 million
common shares for issuance under its 1996 stock option plan.
The Plan generally provides for non-qualified stock options and incentive stock
options to be granted to eligible employees, consultants, affiliates and
directors 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 of Directors. The Board of
Directors 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 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 hiring
date, whichever is later.
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) has 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 (the "Company's Repurchase Rights"). 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 $700,000,000, 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 the Company's common stock.
In February 1998, the Company adopted an Amended and Restated 1996 Stock
Option Plan, effective October 1, 1997, which eliminated the Company's
Repurchase Rights and the Pseudo-IPO Purchase provisions.
The following table summarizes option activity through December 27, 1997:
<TABLE>
<CAPTION>
Options outstanding
-----------------------------------------
Shares Average
(In Thousands, Except Share available price per Aggregate
and Per Share Amounts) for grant Shares share value
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Balance at March 25, 1995 3,180,512 6,152,965 $5.99 $ 36,833
Options granted (1,940,547) 1,940,547 4.75 9,226
Options exercised - (1,134,805) 4.18 (4,745)
Options canceled 992,862 (992,862) 5.56 (5,519)
Plan shares expired (151,886) - - -
Options canceled due to acquisition (2,080,941) (5,965,845) 6.00 (35,795)
----------- ----------- --------- ---------
Balance at March 30, 1996 -- -- -- --
Shares reserved 10,272,168 -- -- --
Options granted (9,322,198) 9,322,198 3.00 27,966
Option canceled 2,216,698 (2,216,698) 3.00 (6,650)
----------- ----------- --------- ---------
Balance at December 28, 1996 3,166,668 7,105,500 3.00 21,316
----------- ----------- --------- ---------
Options granted (3,244,750) 3,244,750 3.00 9,734
Options excercised - (15,125) 3.00 (45)
Options canceled 1,519,290 (1,519,290) 3.00 (4,558)
----------- ----------- --------- ---------
Balance at December 27, 1997 1,441,208 8,815,835 $3.00 $ 26,447
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
There were 2,458,162 shares vested as of December 27, 1997 at a weighted
average exercise price of $3.00 and no shares vested as of December 28, 1996
and March 30, 1996. There were 15,125 shares outstanding subject to
repurchase as of December 27, 1997 and no shares outstanding subject to
repurchase as of December 28, 1996 and March 30, 1996.
42
<PAGE>
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 year ended
December 27, 1997 and nine months ended December 28,1996 is as follows.
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>
YEAR ENDED DECEMBER 27, 1997
(IN THOUSANDS) As reported Pro forma
- ---------------------------- ----------- ---------
<S> <C> <C>
Net loss $109,891 $111,613
- ---------------------------- ----------- ---------
- ---------------------------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 28, 1996
(IN THOUSANDS) As reported Pro forma
- ---------------------------- ----------- ---------
<S> <C> <C>
Net loss $256,326 $257,488
- ---------------------------- ----------- ---------
- ---------------------------- ----------- ---------
</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
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Risk-free interest rate 5.69% 6.14% 6.02% 6.21%
Weighted average expected life 4 years 4 years 5 years 5 years
</TABLE>
No dividend yield and no price volatility are assumed because the Company's
equity security isn't 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>
$3.00 8,815,835 8.81 $3.00 2,458,162 $3.00
- -------- ----------- ----------- -------- ----------- --------
- -------- ----------- ----------- -------- ----------- --------
</TABLE>
<PAGE>
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED December 27, December 28, March 30,
(In thousands) 1997 1996 1996
--------------- -------------- -----------
<S> <C> <C> <C>
Current:
Foreign $1,035 $1,124 $2,526
--------------- -------------- -----------
1,035 1,124 2,526
Deferred:
Foreign - (300) 300
--------------- -------------- -----------
Total $1,035 $ 824 $2,826
--------------- -------------- -----------
--------------- -------------- -----------
</TABLE>
The provision for income taxes differs from the amount computed by applying
the U.S. statutory rate of 35% for the twelve months ended December 27, 1997,
the nine months ended December 28, 1996 and the twelve months ended March 30,
1996 loss before income taxes. The principal reasons for this difference are
as follows:
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED December 27, December 28, March 30,
(In thousands) 1997 1996 1996
--------------- -------------- -----------
<S> <C> <C> <C>
Tax at U.S. statutory rate $(38,100) $(89,442) $(41,982)
Tax savings from foreign operations (63,487) (27,104) (30,757)
Repatriated foreign earnings absorbed
by current year losses - - 11,624
U.S. loss not providing current tax benefit 100,748 52,722 27,325
Valuation of temporary differences 2,361 64,492 36,550
Other (487) 156 66
--------------- -------------- -----------
Total $ 1,035 $ 824 $ 2,826
--------------- -------------- -----------
--------------- -------------- -----------
</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:
<TABLE>
<CAPTION>
December 27, December 28,
(IN THOUSANDS) 1997 1996
--------------- ----------------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and accruals $ 8,975 $ 16,211
Depreciation 6,149 5,423
Sales related reserves 11,006 10,836
Net operating loss carryforwards 218,718 152,519
Tax credit carryforwards 19,335 18,252
Capitalized research and development 102,049 77,466
Notes receivable reserve 1,220 7,561
Other 10,965 2,496
--------------- ----------------
Total deferred tax assets 378,417 290,764
Valuation allowance for deferred tax assets (289,832) (251,464)
--------------- ----------------
Net deferred tax assets $ 88,585 $ 39,300
--------------- ----------------
--------------- ----------------
Deferred tax liabilities:
Unremitted earnings of certain foreign
entities $ 88,585 $ 39,300
--------------- ----------------
Total deferred tax liabilities $ 88,585 $ 39,300
--------------- ----------------
--------------- ----------------
</TABLE>
Pre-tax income from foreign operations was approximately $86,000,000,
$79,000,000 and $95,900,000 for the twelve months ended December 27, 1997,
nine months ended December 28,1996 and twelve months ended March 30, 1996,
respectively. 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 31, 1997 the valuation allowance for deferred
tax assets increased by $38,368,000.
44
<PAGE>
At December 27, 1997, for federal income tax purposes, the Company had net
operating loss carryforwards of $616,700,000 and tax credit carryforwards of
approximately $18,800,000 which will expire beginning in fiscal year 1999.
Certain changes in stock ownership can result in a limitation on the amount
of net operating loss and tax credit carryovers that can be utilized each
year. The Company determined it had undergone such an ownership change.
Consequently, utilization of approximately $253,000,000 of net operating loss
carryforwards and the deduction equivalent of approximately $18,300,000 of
tax credit carryforwards will be limited to approximately $22,400,000 per
year.
The acquisition of the Company by Hyundai Electronics America (HEA) resulted
in the Company becoming part of the HEA consolidated group for federal income
tax purposes during January 1996. As a result, the Company's tax loss for
the post-acquisition period has been computed on a separate tax return basis.
The Company has not recorded any tax benefit in its financial statements for
the amount of the post-change net operating loss to be included in the HEA
consolidated income tax return.
45
<PAGE>
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 58 of this Form 10-K as of December 27,
1997 and December 28, 1996 and for the year ended December 27, 1997 and the
nine month period ended December 28, 1996. 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 27, 1997 and December 28, 1996, and the
consolidated results of its operations and its cash flows for the year ended
December 27, 1997 and the nine month period ended December 28, 1996, 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.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 3, 1998, except for Notes 7 and 10 for which
the date is April 9, 1998
46
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying consolidated statement of operations,
stockholders' equity (deficit) and cash flows for the year ended March 30,
1996 of Maxtor Corporation (a wholly-owned subsidiary of Hyundai Electronics
America). Our audit also included the financial statement schedule for the
year ended March 30, 1996 listed in the Index at Item 14(a). 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 audits.
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.
ERNST & YOUNG LLP
San Jose, California
April 25, 1996
47
<PAGE>
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 following table lists the directors and executive officers of the Company
and their ages as of March 25, 1998. There are no family relationships
between any director or executive officer of the Company. Executive officers
serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Mong Hun Chung 49 Chairman of the Board
Dr. Chong Sup Park 50 Vice Chairman and Director
Michael R. Cannon 45 President, Chief Executive Officer and Director
Charles F. Christ 59 Director
Charles Hill 61 Director
Y.H. Kim 55 Director
Philip S. Paul 59 Director
Victor B. Jipson 45 Senior Vice President, Engineering
Paul J. Tufano 44 Vice President, Finance, and Chief Financial Officer
William F. Roach 54 Senior Vice President, Worldwide Sales and Marketing
Glenn H. Stevens 47 Vice President, General Counsel and Secretary
Phillip C. Duncan 47 Vice President, Human Resources
John Hagerman 43 Vice President, Strategic Initiatives
K. K. Kim 46 Vice President, Strategic Alliances
Misha Rozenberg 36 Vice President, Quality
K. H. The 44 Vice President, Worldwide Manufacturing
David A. Wickersham 42 Vice President, Worldwide Materials
</TABLE>
Mong Hun Chung was elected Chairman of the Board in February 1994. Mr. Chung
has been Chairman of the Board of Directors of Hyundai Electronics Industries
Co., Ltd. in Korea since January 1992. He was President and Representative
Director of Hyundai Electronics Industries Co., Ltd. in Korea from February
1984 to December 1991. Currently, Mr. Chung is also Vice Chairman of Hyundai
Merchant Marine Co., Ltd. and holds directorship positions on the boards of
other Hyundai Business Group companies.
C.S. Park was appointed Vice Chairman of the Company's Board of Directors in
June 1996, and in September 1996 assumed the position of President and Chief
Executive Officer of HEA. Dr. Park had 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, he was
President and Chief Executive Officer and a director of Axil Computer, Inc.,
a workstation computer manufacturer and a Hyundai Business Group company, in
Santa Clara, California. Dr. Park remains a member of Axil's Board, and also
holds directorship positions on the boards of other Hyundai Business Group
companies. He was formerly in various management positions with Hyundai
Electronics Industries Co., Ltd., including the position of Senior Vice
President, Semiconductor Sales and Marketing, which he held from 1990 to
1992. From 1985 to 1989, Dr. Park was President and Chief Executive Officer
of Hyundai Electronics America. He is currently a director of Storage
Dimensions, Inc., an independent vendor of high-availability disk and tape
storage systems.
Michael R. Cannon was appointed President, Chief Executive Officer and
Director of the Company in July 1996. From January 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;
48
<PAGE>
and vice president, worldwide operations. From May 1991 to January 1993, he
served as senior vice president of Syquest Technology Inc., and earlier held
the position of vice president, Southeast Asia operations, with Imprimis
Technology.
Charles F. Christ has been President, Chief Executive Officer and a director
of Symbios Logic Inc. since September 1997. From 1994 to 1997, Mr. Christ
was Vice President and General Manager of the Components Division of Digital
Equipment Corporation. Prior to joining Digital Equipment Corporation in
1990, Mr. Christ was a senior partner with the management consulting group of
Coopers & Lybrand from 1989 to 1990. Previously, he was President and Chief
Executive Officer of Digital Sound Corporation, a telecommunications voice
processing company, from 1986 to 1988.
Charles Hill has been a Senior Research Fellow at the Hoover Institution
since 1989. From 1982 to 1989, he served as Chief of Staff of the U.S. State
Department and Executive Assistant to former U.S. Secretary of State George
P. Shultz. From 1990 to 1996, Mr. Hill was Special Consultant to the
Secretary General of the United Nations. Presently, he is
Diplomat-in-Residence at Yale University.
Y. H. Kim was appointed president and resident director of Hyundai
Electronics Industries Co., Ltd. in October, 1996. Previously, Mr. Kim had
been chief executive officer, president, and a director of HEA since 1990.
He continues to be a member of HEA's board of directors, and also holds
directorship positions on the boards of Symbios Logic Inc., TV/COM
International, Inc., and Hyundai Semiconductors America (Hyundai Group
Companies).
Philip S. Paul was elected director of the Company in March 1998. Since
1991, he has managed Paul Capital Partners, 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 has served as
a Director of Symbios Logic, an information storage company, since April 1995.
Victor B. Jipson became Senior Vice President, Engineering in 1995. Before
joining the Company, he was General Manager of IBM's Optical Storage
Solutions business unit from 1991 to 1995. He also held key management
positions in research, technical strategy, product strategy and research and
development with IBM from 1975 to 1991.
William F. Roach joined the Company as Senior Vice President, Worldwide Sales
and Marketing in January 1997. From 1989 to 1996, he held various sales and
marketing positions with Quantum Corporation, an information storage products
company, including Executive Vice President, Worldwide Sales, from 1994 to
1996. Mr. Roach also held sales and marketing positions with Intel Corp., a
semiconductor company, from 1977 to 1989.
Paul J. Tufano became the Company's Vice President, Finance and Chief
Financial Officer in August 1996. Prior to joining Maxtor, Mr. Tufano held a
variety of management positions at IBM over a 17 year period from March 1979
to July 1996. Just prior to his Maxtor appointment, Mr. Tufano was manager of
worldwide logistics for IBM's storage systems division from October 1995 to
July 1996. 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
International Manufacturing Services, Inc., a major electronic manufacturing
service company.
Glenn H. Stevens joined the Company as Vice President, General Counsel and
Secretary in June 1994. From August 1992 to May 1994, Mr. Stevens had a
private law practice. From 1979 to August 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 companies.
Philip C. Duncan has been Vice President, Human Resources since August 1996.
Before joining the Company, he was Vice President, International Sales and
Marketing and Human Resources of Berkeley Systems from June 1994 to July
1996. He has also held senior human resources management positions at Syquest
Technology from May 1992 to June 1994, and at Cirrus Logic from April 1990
to May 1992.
John Hagerman joined the Company in 1992 as Director, Mobile Products. From
1993 to June 1996 Mr. Hagerman was Vice President, Mobile Products; from
February 1996 to June 1996, he was Vice President, Strategic Planning;
49
<PAGE>
from June 1996 to October 1997, he was Vice President, Marketing and
Strategic Planning and he became Vice President, Strategic Alliances in
October 1997.
K. K. Kim became the Company's Vice President, Strategic Alliances in May
1994. Prior to joining the Company, Mr. Kim was Director of Corporate
Planning Office, Hyundai Electronics Industries Co., Ltd. from 1991 to 1994.
Prior to 1991, he held various management positions with other Hyundai Group
companies.
Misha Rozenberg joined the Company in May 1996 as Vice President, Supplier
Quality, and became Vice President, Quality in March 1998. From 1994 to
1996, Mr. Rozenberg was a Senior Director with Conner Peripherals, Inc. He
was a manager with Apple Computer from 1993 to 1994.
K. H. Teh joined the Company in May 1997 as Vice President, Worldwide
Manufacturing. Previously he was with Iomega Corp., where he been Managing
Director of its Malaysia manufacturing facility since September 1996. From
1994 to 1996, he was a Managing Director, Malaysia Manufacturing, with
Quantum Corp., and had been a Senior Director with Syquest Technology from
1993 to 1994.
David A. Wickersham joined the Company in March 1996 as Vice President of
Materials, Services and Logistics and became Vice President, Worldwide
Materials in March 1997. From 1993 to 1996, Mr. Wickersham was Director,
Corporate Materials of Exabyte Corp., a data storage and interchange
applications company. Prior to 1993, he held various management positions
with IBM, Storage Systems Division, including Site Materials Manager from
1991 to 1993.
50
<PAGE>
ITEM 11. DIRECTORS AND EXECUTIVE COMPENSATION
DIRECTORS
Non-employee members of the Company's Board of Directors receive the
following compensation: (i) $22,000 per year; (ii) $1,000 per year for
service as a committee chairperson; (iii) $1,500 per full-day quarterly Board
meeting; and (iv) an initial grant of a nonqualified stock option to
purchase 40,000 shares of the Corporation's Common Stock pursuant to the
Corporation's 1996 Stock Option Plan or Amended and Restated 1996 Stock
Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid to the Company's Chief
Executive Officer and the Company's four most highly paid senior executive
officers during the fiscal year ended December 27, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
---------------------------------------------------------------- COMPENSATION
AWARDS
OTHER ANNUAL ------------- ALL OTHER
NAME AND FISCAL YR. SALARY BONUS COMPENSA- OPTIONS COMPENSATION
PRINCIPAL POSITION ENDED (10) $ $ TION($) (SHARES #) ($)(11)
- ------------------ ------------- ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Cannon(1) Dec. 27, 1997 500,000 500,000(2) -- -- --
President, and Chief Dec. 28, 1996 240,387 200,000(2) -- 900,000 --
Executive Officer Mar. 30, 1996 -- -- -- -- --
William Roach (3) Dec. 27, 1997 339,242 -- 116,667(4) 250,000 --
Senior VP, Worldwide Dec. 28, 1996 -- -- -- -- --
Sales and Marketing Mar. 30, 1996 -- -- -- -- --
Dr. Victor B. Jipson (5) Dec. 27, 1997 258,846 50,000 -- -- 5,375
Senior VP, Dec. 28, 1996 176,924 107,500 -- 100,000 3,173
Engineering Mar. 30, 1996 70,768 166,490 -- -- 1,326
Paul J. Tufano (6) Dec. 27, 1997 229,986 50,000(7) -- -- 5,937
VP, Finance and Dec. 28, 1996 92,879 50,000(7) -- 100,000 2,322
Chief Financial Officer Mar. 30, 1996 -- -- -- -- --
Phillip Duncan (8) Dec. 27, 1997 220,000 -- -- -- 5,224
VP, Human Dec. 28, 1996 84,615 80,000(9) -- 80,000 2,094
Resources Mar. 30, 1996 -- -- -- -- --
</TABLE>
51
<PAGE>
(1) Mr.Cannon joined the Company as President and Chief Executive Officer in
July 1996.
(2) Represents bonuses paid in accordance with the Company's offer letter to
Mr. Cannon.
(3) Mr. Roach joined the Company as Senior Vice President, Worldwide Sales and
Marketing in January 1997.
(4) Represents forgiveness of a loan over a three year period in accordance
with the Company's offer letter to Mr. Roach.
(5) Represents bonus paid in accordance with the Company's offer letter to
Mr. Jipson.
(6) Mr. Tufano joined the Company as Vice President, Finance and Chief
Financial Officer in August 1996.
(7) Represents bonus paid in accordance with the Company's offer letter to
Mr. Tufano.
(8) Mr. Duncan joined the Company as Vice President, Human Resources in
August, 1996.
(9) Represents bonus paid in accordance with the Company's offer letter to
Mr. Duncan.
(10) As a result of the Company's change in fiscal year end, the fiscal
period ended December 28, 1996 comprises nine months.
(11) 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.
AGREEMENTS WITH EXECUTIVE OFFICERS
In July 1996, the Company entered into a letter agreement with Mr. Michael
R. Cannon, its current President and Chief Executive Officer, 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
$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 900,000 shares of the Company's Common Stock vesting over a four
(4) 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 August 1996, the Company entered into a letter agreement with Mr. Paul J.
Tufano, its current Vice President, Finance and Chief Financial Officer,
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 $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 100,000 shares of the Company's Common Stock vesting over a four (4)
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. William
Roach, its Senior Vice President, Worldwide Sales and Marketing, relating to
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, forgivable on a prorated basis over a
three-year term; a one-time annual bonus between approximately $175,000 and
$350,000; and the grant of options to purchase 250,000 shares of the
Company's Common Stock vesting over a
52
<PAGE>
four (4) 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 Maxtor on each such
date. In addition, the promissory note shall be forgiven in full in the
event of his termination by the Company for any reason other than willful
misconduct of a culpable nature. In the event Mr. Roach voluntarily
terminates his employment with the Company, the balance then due shall become
immediately due and payable.
53
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted during the fiscal year ended December 27, 1997 to each of the
executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION FOR
NUMBER OF GRANTED TO 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 -- -- -- -- -- --
William F. Roach 250,000 7.70% $3.00 01/02/07 $ 471,671 $ 1,195,307
Victor B. Jipson -- -- -- -- -- --
Paul J. Tufano -- -- -- -- --- --
Phillip C. Duncan -- -- -- -- --- --
</TABLE>
- ------------------------
(1) All options were granted under the Company's 1996 Stock Option Plan
("Plan"). Options granted under the 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 hiring date, whichever is later. Vested options are
subject to repurchase by the Company. The Board retains discretion to
modify the terms, including the price of outstanding options.
(2) In January 1996, the Company became a wholly owned subsidiary of HEA. As
of the acquisition and merger, 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 potential realizable value was determined
by the Company based on calculations of estimated stock appreciation at
annual growth of 5% and 10%.
54
<PAGE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding year-end stock option
values for each of the executive officers named in the Summary Compensation
Table for the fiscal year ended December 27, 1997:
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END (1) FISCAL YEAR END (2)
------------------------- --------------------------
NAME UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Michael R. Cannon 675,000 225,000 -- --
William F. Roach 250,000 -- -- --
Victor B. Jipson 75,000 25,000 -- --
Paul J. Tufano 75,000 25,000 -- --
Phillip C. Duncan 60,000 20,000 -- --
</TABLE>
There were no option exercises during the twelve months ended December 27,
1997.
(1) All options were granted under the Company's 1996 Stock Option Plan
("Plan"). Options granted under the 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 hiring date, whichever is later.
(2) As of December 27, 1997, the exercise price per share was equal to the fair
market value per share, as determined by the Board of Directors.
Therefore, there was no value for unexercised in-the-money options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 600 shares of Common Stock for 58,208,955 shares of Series A
Preferred Stock, $.01 par value. 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 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 15,125 shares of
Common Stock, $.01 par value, were issued and outstanding. At March 1,
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 three individuals who obtained shares upon exercise of options
granted under the Company's 1996 Stock Option Plan.
In January 1996, the Company became a wholly owned subsidiary of 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, remain publicly traded.
55
<PAGE>
STOCK OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of March 1, 1998, with
respect to the beneficial ownership of Series A Preferred Stock and Common
Stock of Maxtor by (i) all persons known to Maxtor to be the beneficial
owners of five percent or more of the outstanding shares of Series A
Preferred Stock or Common Stock of Maxtor, (ii) each of Maxtor's directors
and nominees, (iii) each of the executive officers named in the Summary
Compensation Table and (iv) all executive officers and directors of Maxtor as
a group.
<TABLE>
<CAPTION>
Number of Shares Percent of
Beneficially Owned Stock Outstanding
------------------------- ---------------------
Name or Identity of Series A
Beneficial Owner (1) Preferred Common Preferred Common (2)
- -------------------- ---------- ---------- --------- ------
<S> <C> <C> <C> <C>
Hyundai Electronics 88,059,701 88,059,701 100.0% 96.4%
America, 3101 N. First
Street, San Jose, CA 95134
Mong Hun Chung (3) -- 20,000 -- *
Dr. Chong Sup Park (3) -- 20,000 -- *
Charles Hill (3) -- 20,000 -- *
Y. H. Kim (3) -- 20,000 -- *
Charles F. Christ (3) -- 20,000 -- *
Michael R. Cannon (4) -- 393,750 -- *
Victor B. Jipson (4) -- 50,000 -- *
William F. Roach (4) -- 78,125 -- *
Phillip C. Duncan (4) -- 30,000 -- *
Paul J. Tufano (4) -- 43,750 -- *
All executive officers
and directors as a
group (17 persons) -- 780,625 -- *
</TABLE>
* Less than one percent (1%)
- ------------------------
(1) The persons named in the table have sole voting and investment power
with respect to all shares of Series A Preferred Stock and Common Stock shown
as beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes to this table.
(2) Calculated based on the total number of shares of Common Stock
outstanding, Series A Preferred Stock outstanding which are convertible into
shares of Common Stock, and shares subject to options granted under the
Company's 1996 Stock Option Plan which are exercisable through May 1, 1998.
(3) Includes 20,000 shares subject to an option granted under the Company's
1996 Plan exercisable February 1998 and are subject to a right of repurchase
by the Company.
(4) All shares subject to an option granted under the Company's 1996 Plan
and are subject to a right of repurchase by the Company.
56
<PAGE>
For stock options issued to Directors and Officers under the 1996 Stock
Option Plan, see Item 11: Directors and Executive Compensation on page 50.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning related party financing arrangements with HEA,
refer to Part II, Item 8, Footnotes to Consolidated Financial Statements,
Footnote 7, pages 32 - 33.
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 Corporation's preferred stock as payment for $200,000,000 owed to HEA by
the Corporation. In June 1996, the Company entered into an exchange
agreement with HEA whereby HEA exchanged 600 shares of Common Stock for
58,208,955 shares of Series A Preferred Stock, $.01 par value. As of March
1, 1998, 88,059,701shares of Series A Preferred Stock and 15,125 shares of
Common Stock, $.01 par value, were issued and outstanding. As of March 1,
1998, all outstanding shares of Series A Preferred Stock were held by HEA,
and all outstanding shares of Common Stock issued pursuant to the Corporation
1996 Stock Option Plan were held by three individuals.
In May 1996, the Company entered into an agreement to sell a majority
interest in International Manufacturing Services, Inc. (IMS) to certain IMS
management and other investors (Buyer). At 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. On October 22,
1997, IMS completed am Initial Public Offering (IPO) of 5 million common
shares at a price of $11.50 per share. Under the terms of the note due to
the Company, if the proceeds of the IPO are in excess of 45 million, IMS
would be required to pay both principal and interest on the note. The note
and its related interest, which aggregated $20.1 million, was paid in full as
of October 28, 1997. As of December 27, 1997 the Company's ownership
interest in IMS was 16%.
IMS supplies the Company with printed circuit board assemblies (PCBA),
sub-assemblies and fully integrated box-build products under a manufacturing
services agreement. Former officers of the Company, Robert Behlman
(President and CEO of IMS) and Nathan Kawaye (formerly Vice President and
Chief Financial Officer of the Company), have left the Company and hold
executive positions at IMS.
It is the Company's policy to enter into indemnification agreements with its
officers and directors, (the "Agreements"). Pursuant to the Agreements, the
Company has agreed to indemnify its officers and directors to the maximum
extent permitted under Delaware law.
For information concerning severance and indebtedness arrangements with
officers of the Company, refer to Part III, Item 11, Director and Executive
Compensation, pages 44 - 45.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements and Financial Statement Schedules - See Index to
Consolidated Financial Statements under Item 8 on page 20 of this
report.
(2) Exhibits
See Index to Exhibits on pages 61 TO 72 hereof.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Milpitas, State of California, on the 9th day of April, 1998.
MAXTOR CORPORATION
(Registrant)
By /s/ Michael R. Cannon
--------------------------
Michael R. Cannon
President, Chief Executive
Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ------ -----
/s/ Michael R. Cannon President, Chief Executive April 9, 1998
- ------------------------ Officer, and Director
Michael R. Cannon
/s/ Paul J. Tufano Vice President, Finance, April 9, 1998
- ------------------------ Chief Financial Officer and
Paul J. Tufano Principal Accounting Officer
/s/ Mong Hun Chung Chairman of the Board April 9, 1998
- ------------------------
Mong Hun Chung
/s/ Chong Sup Park Vice Chairman of the Board April 9, 1998
- ------------------------
Dr. Chong Sup Park
/s/ Charles Hill Director April 9, 1998
- ------------------------
Charles Hill
/s/ Charles F. Christ Director April 9, 1998
- ------------------------
Charles F. Christ
/s/ Y. H. Kim Director April 9, 1998
- ------------------------
Y. H. Kim
/s/ Philip S. Paul Director April 9, 1998
- ------------------------
Philip S. Paul
59
<PAGE>
<TABLE>
<S> <C>
2.1 (31) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
3.1 (6) Certificate of Incorporation
3.2 (8) Certificate of Amendment of Certificate of Incorporation of
Maxtor Corporation, dated December 23, 1987
3.3 (8) By-Laws as amended July 21, 1987
3.4 (21) Amended and Restated By-Laws of Maxtor Corporation, A
Delaware Company, effective February 3, 1994
3.5 (21) Restated Certificate of Incorporation of Maxtor Corporation
effective February 3, 1994
3.6 (36) Amended and Restated Certificate of Incorporation of Maxtor
Corporation, dated June 6, 1996
3.7 (36) Amended and Restated By-Laws, effective May 14, 1996
3.8 (37) Exchange Agreement effective June 18, 1996, between Maxtor
Corporation and Hyundai Electronics America
4.1 (3) Form of Certificate of Shares of Registrant's Common Stock
4.2 (7) Maxtor Corporation Rights Plan
4.3 (22) Amendment to Rights Agreement between Registrant and the
First National Bank of Boston, dated September 10, 1993
4.4 (32) Amendment No. 2 to Rights Agreement between Registrant and the First
National Bank of Boston, dated November 2, 1995.
10.1 (1) Omnilease Corporation Master Lease Agreement No. 300362,
dated as of January 14, 1983 and addenda thereof
10.2 (1) Lease Agreement between Orchard Investment Company No. 801,
formerly Nelo, a California general partnership and Registrant,
dated March 23, 1984
10.3 (1) Lease Commitment between Walter E. Heller & Company and
Registrant, dated as of March 11, 1985
10.4 (1) Stock Purchase Agreement between Steven P. Kitrosser and
Registrant, dated May 21, 1985
10.5 (1) Stock Purchase Agreement between James McCoy and Registrant,
dated May 21, 1985
10.6 (1) Equipment Lease Agreement between Pacific Western (formerly
Pacific Valley) Bank and Registrant, dated June 26, 1985
10.7 (1) Continuing Guaranty between Maxtor Singapore Limited and
Bank of America N.T. & S.A., dated July 27, 1985
</TABLE>
60
<PAGE>
<TABLE>
<S> <C>
10.8 (9) Lease Agreement between John Arrillaga, Separate Property
Trust, Richard T. Perry, Separate Property Trust and
Registrant, dated August 27, 1986
10.9 (3) Marketing and Distribution Agreement between Ricoh Company,
Ltd. and Registrant, dated October 14, 1986
10.10 (3) Land Lease Agreement between Housing and Development
Board, Singapore and Maxtor Singapore Limited, dated
December 22, 1986
10.11 (3) Indenture dated February 16, 1987
10.12 (8) Stock Bonus Plan and Cash Bonus Plan between Storage
Dimensions, Inc. and Registrant dated June 15, 1987
10.13 (8) Merger Agreement between MAXSUB II, Inc., and Storage
Dimensions, Inc. dated October 26, 1987
10.14 (3) 1986 Outside Directors' Stock Option Plan
10.15 (3) Commitment from Union Bank to Registrant regarding letters of
credit for the benefit of the officers and directors of
the Registrant
10.16 (4) Agreement and Plan of Reorganization
10.17 (9) Revised Equipment Lease Agreement between Capital Associates
International, Inc. and Registrant, dated September 28, 1988
10.18 (9) Credit Agreement between Bank of America National Trust
and Savings Association and Registrant, dated October 18, 1988
10.19 (9) Equipment Lease Agreement between Pitney Bowes Credit
Corporation and Registrant, dated November 2, 1988
10.20 (9) Equipment Lease Agreement between Concord Leasing (Asia) Pte Ltd.
and Maxtor Singapore, Limited, dated November 16, 1988
10.21 (9) Lease Agreement between Maxtor Singapore, Limited and
Jurong Town Corporation, dated November 16, 1988
10.22 (9) Lease Agreement between Greylands Business Park Phase II and
Storage Dimensions, Inc., dated December 14, 1988
10.23 (8) Stock Purchase Agreement among Registrant, Storage Dimensions, Inc.,
David A. Eeg, Gene E. Bowles, Jr., David P. Williams and David
Lance Robinson
10.24 (8) Fiscal 1988 Stock Option Plan
10.25 (8) Employee Stock Purchase Plan
10.26 (8) Dual Currency Loan Agreement between Maxtor Singapore Limited,
Maxtor Delaware, Maxtor California and American Express Bank Limited
10.27 (8) Amended and Restated Fiscal 1985 Stock Option Plan, including the
Immediately Exercisable Incentive Stock Option Agreement and the
Immediately Exercisable Nonqualified Stock Option Agreement
</TABLE>
61
<PAGE>
<TABLE>
<S> <C>
10.28 (9) Loan Agreement between Probo Pacific Pte Ltd. and
Maxtor Singapore Limited, dated March 20, 1989
10.29 (9) Loan Agreement between Concord Leasing (Asia) Pte, Ltd.
and Maxtor Singapore Limited, dated April 14, 1989
10.30 (10) Product Discontinuance Agreement between Matsushita Communication
Industrial Co., Ltd. (MCI) and Registrant, dated August 23, 1989
10.31 (10) Equipment Lease Agreement between Capital Associates International,
Inc. and Registrant, dated October 17, 1989
10.32 (10) Maxoptix Corporation 1989 Stock Option Plan
10.33 (9) Forms for Promissory Note and Amended and Restated Promissory Note
10.34 (10) Amended and Restated Credit Agreement between Bank of America
National Trust and Savings Association and Registrant, dated
January 31, 1990
10.35 (10) Amendment to Lease Agreement between Orchard Investment Company
No. 801, formerly Nelo, a California general partnership, and
Registrant, dated February 15, 1990
10.36 (10) Sublease Agreement between RACAL-VADIC, a Division of
Racal Data Communications, Inc. ("Sublessor"), and Storage
Dimensions, Inc. ("Sublessee"), dated February 16, 1990
10.37 (10) Collateral Sharing and Subordination Agreement between
Registrant and Standard Chartered Bank, dated April 5, 1990
10.38 (10) Loan and Security Agreement between Registrant and
MiniScribe Corporation, dated April 5, 1990
10.39 (11) Agreement for the Sale and Purchase of Shares in Tratford Pte. Ltd.
between the Registrant, MiniScribe Peripherals (Pte) Ltd. and
certain Individuals, dated May 8, 1990
10.40 (11) Agreement for the Sale and Purchase of Shares in Silkmount Limited
between MaxSub Corporation, Silkmount Limited and certain
Individuals, dated May 18, 1990
10.41 (11) Assignment of Debt between Registrant, MiniScribe (Hong
Kong) Limited and certain Individuals, dated May 18, 1990
10.42 (10) Asset Purchase Agreement between Registrant, MiniScribe
Corporation and Standard Chartered Bank, dated May 30, 1990
10.43 (14) License Agreement with Rodime PLC, dated December 8, 1987
assigned to Registrant on June 29, 1990
10.44 (14) Patent Cross License Agreement with IBM dated October 1, 1984
assigned to Registrant effective June 30, 1990
10.45 (14) Lease Agreement between MiniScribe Corporation and 345 Partnership
dated June 6, 1990, assigned to the Registrant effective
June 30, 1990
</TABLE>
62
<PAGE>
<TABLE>
<S> <C>
10.46 (14) Lease Agreement between Maxtor Colorado and Pratt
Partnership (Lot 1A), dated July 5, 1990
10.47 (14) Lease Agreement between Maxtor Colorado and Pratt
Partnership (Lot 1C), dated July 5, 1990
10.48 (14) Lease Agreement between Maxtor Colorado and Pratt
Partnership (Lot 4), dated July 5, 1990
10.49 (14) Agreement for the Purchase of Land and Improvements
between Registrant and Nixdorf, dated August 16, 1990
10.50 (15) Grant Agreement dated 25 October 1990 between the Industrial
Development Authority, Maxtor Ireland Limited and Registrant
10.51 (12) Amendment of Agreement between Registrant, Maxtor Colorado, Maxtor
California and Standard Chartered Bank, dated November 6, 1990
10.52 (14) Guarantee for Dastek between Registrant, Dastek and
Silicon Valley Bank, dated November 30, 1990
10.53 (10) Judgment, William Lubliner vs. Maxtor Corporation, James M. McCoy,
William J. Dobbin, B.J. Cassin, W. Charles Hazel and
George M. Scalise
10.54 (10) Settlement Agreement, William Lubliner vs. Maxtor Corporation, et al
10.55 (10) Fiscal 1991 Profit Sharing Plan Document
10.56 (10) Board of Director Compensation Approved for Fiscal 1991
10.57 (14) Resignation Agreement and General Release of Claims between
Alexander E. Malaccorto and the Registrant, dated January 11, 1991
10.58 (14) Employment Agreement between James M. McCoy and
Registrant, dated January 17, 1991
10.59 (14) Resignation Agreement and General Release of Claims between
James N. Miler and the Registrant, dated January 20, 1991
10.60 (14) Letter Agreement between George Scalise and the
Registrant, dated February 22, 1991
10.61 (14) Resignation Agreement and General Release of Claims between
Steven Strain and the Registrant, dated February 22, 1991
10.62 (14) Foothill Capital Credit Facility between Registrant, Certain of its
Subsidiaries and Foothill Capital Corporation, dated April 22, 1991
10.63 (14) Employment Agreement between Laurence Hootnick and Registrant,
dated May 3, 1991
10.64 (14) Employment Agreement between Roger Nordby and Registrant,
dated May 7, 1991
10.65 (14) Employment Agreement between Thomas F. Burniece and the Registrant,
dated May 12, 1991
</TABLE>
63
<PAGE>
<TABLE>
<S> <C>
10.66 (15) Amendment of the Registrant's Continuing Guarantee in favor of
Foothill Capital Corporation, dated July 10, 1991
10.67 (15) Settlement, Resignation and General Release of Claims between
Registrant and Taroon C. Kamdar, dated August 2, 1991
10.68 (15) Amendment of Registrant's Continuing Guarantee in favor
of Foothill Capital Corporation, dated August 9, 1991
10.69 (15) Amendment No. 1 to Lease by and between John Arrillaga,
Trustee, and Richard T. Peery, Trustee, and Registrant,
dated August 23, 1991
10.70 (15) Amendment of Registrant's Continuing Guarantee in favor
of Foothill Capital Corporation, dated September 20, 1991
10.71 (13) Amendment of Agreement between Registrant, Maxtor Colorado, Maxtor
California and Standard Chartered Bank, dated December 27, 1990,
and further amended July 26, 1991 and October 4, 1991
10.72 (15) Lease Agreement between Registrant and Devcon
Associates 31, dated December 6, 1991
10.73 (15) Deed of Partial Discharge and Release between Barclays Bank PLC
and Maxtor Singapore Limited, dated December 19, 1991
10.74 (15) Agreement for Purchase and Sale of Assets among Registrant,
Read-Rite International, Read-Rite Corporation and Maxtor
Singapore Limited, dated November 14, 1991, and amended
December 20, 1991
10.75 (15) Asset Purchase Agreement among Registrant, Storage Dimensions, Inc.
and USD Acquisition, Inc., dated December 27, 1991
10.76 (15) Resignation Agreement and General Release of Claims
between Registrant and David S. Dury, dated January 31, 1992
10.77 (15) Sublease between Registrant and Hauser Chemical
Research, Inc., dated March 23, 1992
10.78 (15) First Amendment to Lease Agreement between PCA San Jose
Associates and Registrant, dated March 25, 1992
10.79 (15) Asset Purchase Agreement among Registrant, Maxtor Singapore LTD.,
and Sequel, Inc., dated March 12, 1992, and amended March 25, 1992
10.80 (5) Fiscal 1992 Stock Option Plan
10.81 (15) Form of Indemnity Agreement between the Registrant and
each of its Directors and Executive Officers
10.82 (15) Maxtor/Sequel 8K/Panther Subcontract Manufacturing and
Warranty Services Agreement, dated March 23, 1992
10.83 (15) Maxtor Corporation 1992 Employee Stock Purchase Plan
10.84 (15) Maxtor Corporation 1991 Employee Stock Purchase Plan
10.85 (15) Maxtor Corporation FY'93 Incentive Plan Summary
</TABLE>
64
<PAGE>
<TABLE>
<S> <C>
10.86 (15) Fiscal 1992 Profit Sharing Plan Document
10.87 (17) Security Agreement between Registrant and Chrysler
Capital Corporation, dated April 14, 1992
10.88 (17) Subordination, Non-Disturbance, Estoppel and Attornment Agreement
between Loma Mortgage USA, Inc. and Registrant, dated June 4, 1992
10.89 (17) Office Lease between Cabot Associates and Registrant,
dated July 23, 1992
10.90 (17) Revolving Credit Agreement among Registrant, Barclays Bank PLC and
The First National Bank of Boston, dated as of September 9, 1992
10.91 (17) Security Agreement between Registrant and the CIT
Group/Equipment Financing, Inc., dated September 18, 1992
10.92 (17) Deed of Priorities among Maxtor (Hong Kong) Limited, Registrant and
General Electric Capital Corporation, dated September 25, 1992
10.93 (17) Lease among Dares Developments (Woking) Limited, Maxtor
Europe Limited and Registrant, dated October 1992
10.94 (16) Stock Purchase and Asset Acquisition Agreement among David A. Eeg,
Gene E. Bowles, Jr., CP Acquisition, L.P. No. 4A, CP Acquisition,
L.P. No. 4B, Capital Partners, Inc., FGS, Inc., Registrant, Storage
Dimensions, Inc. and SDI Acquisition Corporation, dated
December 4, 1992
10.95 (17) Loan and Security Agreement between Registrant and
Household Bank, f.s.b., dated December 11, 1992
10.96 (17) Global Master Rental Agreement between Comdisco, Inc.
and Registrant, dated December 16, 1992
10.97 (17) Amendment No. 1 to Lease between Devcon Associates 31
and Registrant, dated December 21, 1992
10.98 (17) Continuing Guaranty among Maxtor Peripherals (S) Pte., Ltd.,
Barclays Bank PLC and Registrant, dated January 26, 1993
10.99 (17) Amendment No. 2 to Lease between Devcon Associates 31
and Registrant, dated February 1, 1993
10.100 (17) Instrument of Resignation, Appointment and Acceptance among
Registrant, The First National Bank of Boston and Bank of America
National Trust and Savings, dated as of March 22, 1993
10.101 (17) Waiver and First Amendment to Credit Agreement among Registrant,
Barclays Bank PLC and the First National Bank of
Boston, dated as of April 16, 1993
10.102 (17) Waiver and First Amendment to Continuing Guaranty Among Registrant,
Barclays Bank PLC and the Lenders dated as of April 19, 1993
10.103 (17) Security Agreement between Registrant and Barclays Bank PLC,
dated April 16, 1993
10.104 (17) Lease Agreement between Registrant and Pratt Partnership, dated
April 30, 1993
</TABLE>
65
<PAGE>
<TABLE>
<S> <C>
10.105 (17) Agreement for Stock Transfer Services between Registrant and The
First National Bank of Boston, dated May 6, 1993
10.106 (17) Maxtor Corporation CY93 Profit Sharing Plan
10.107 (17) Maxtor Corporation Management Incentive Plan for CY93
10.108 (18) Production Agreement between International Business Machines
Corporation and Registrant, dated July 27, 1993 (with certain
information deleted and indicated by blackout text)
10.109 (19) Letter of Intent between Registrant and Hyundai
Electronics Co., Ltd., dated August 18, 1993
10.110 (20) Financing Agreement between Registrant and The CIT
Group/Business Credit, Inc., dated September 16, 1993
10.111 (21) Form Letter Agreement between Registrant and All of Its Named
Executive Officers, except Laurence Hootnick, dated
November 17, 1993
10.112 (21) Waiver to Financing Agreement among Registrant and The
CIT Group/Business Credit, Inc., dated January 12, 1994
10.113 (21) Stock Purchase Agreement between Registrant and Hyundai Electronics
Industries Co., Ltd., Hyundai Heavy Industries Co., Ltd., Hyundai
Corporation, and Hyundai Merchant Marine Co., Ltd., dated
September 10, 1993
10.114 (22) Confidential Resignation Agreement and General Release of Claims
between Registrant and Thomas F. Burniece III, dated
February 4, 1994
10.115 (22) License Agreement between Registrant and MiniStor
Peripherals Corporation, dated February 23, 1994
10.116 (22) Confidential Resignation Agreement and General Release of Claims
between Registrant and John P. Livingston, dated April 8, 1994
10.117 (22) Tenancy Agreement between Barinet Company Limited and
Maxtor (Hong Kong) Limited, dated April 26, 1994
10.118 (23) Confidential Resignation Agreement and General Release of Claims
between Registrant and Laurence R. Hootnick, dated June 14, 1994
10.119 (23) Confidential Resignation Agreement and General Release of Claims
between Registrant and Mark Chandler, dated June 28, 1994
10.120 (24) Amendment No.2 to Lease between John Arrillaga & Richard T. Peery
and Registrant, dated June 28, 1994
10.121 (24) Amendment No. 3 to Lease between Devcon Associates 31 and
Registrant, dated June 28, 1994
10.122 (24) Confidential Resignation Agreement and General Release of Claims
between Registrant and Skip Kilsdonk, dated September 7, 1994
10.123 (24) Confidential Resignation Agreement and General Release of Claims
between Registrant and Sallee Peterson, dated September 23, 1994
</TABLE>
66
<PAGE>
<TABLE>
<S> <C>
10.124 (24) Waiver to Financing Agreement among Registrant and The CIT
Group/Business Credit, Inc., dated October 11, 1994
10.125 (24) Amendment No. 1 to Financing Agreement between Registrant and
The CIT Group/Business Credit, Inc., dated October 31, 1994
10.126 (27) License agreement between Registrant and NEC Corporation,
dated October 18, 1994
10.127 (27) Lease Agreement for Premises Located at 1821 Lefthand Circle,
Suite D, between Registrant and Pratt Land Limited Liability
Company, dated October 19, 1994
10.128 (27) Lease Agreement for Premises Located at 1841 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994
10.129 (27) Lease Agreement for Premises Located at 1851 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994
10.130 (27) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994
10.131 (27) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994
10.132 (27) Confidential Resignation Agreement and General Release of
Claims between Registrant and Patricia M. Roboostoff, dated
November 30, 1994
10.133 (27) Stock Purchase Agreement between Registrant, Maxoptix
Corporation and Kubota Electronics America Corporation, dated
December 26, 1994
10.134 (28) Confidential Resignation Agreement and General Release of
Claims between Registrant and Larry J. Smart, dated February
7, 1995
10.135 (28) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995
10.136 (28) 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
10.137 (28) 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
10.138 (28) Manufacturing and Purchase Agreement by and Between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995 (with certain information deleted and
indicated by blank spaces)
10.139 (28) 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
67
<PAGE>
10.140 (29) Memorandum of Understanding concerning Guarantee by Hyundai
Electronics Co., Ltd. of Credit Facility for Registrant,
dated July 17, 1995
10.141 (29) Waiver to Financing Agreement among Registrant and The CIT
Group/Business Credit, Inc., dated August 2, 1995
10.142 (33) Credit Agreement among Registrant and The Initial Lenders and
the Issuing Bank and Citibank, N.A., dated August 31, 1995
10.143 (33) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995
10.144 (33) Waiver to Financing Agreement among Registrant and the CIT
Group/Business Credit, Inc., and Assignment Agreement among
Registrant, the CIT Group/Business Credit, Inc., and Finova
Capital Corporation, dated October 11, 1995.
10.145 (33) Amendment to the Financing Agreement among Registrant and the
CIT Group/Business Credit, Inc., dated October 17, 1995
10.146 (34) First Supplemental Indenture, dated as of January 11, 1996,
between Maxtor and State Street Bank and Trust Company
10.147 (34) Credit Agreement, dated as of December 29, 1995 between
Maxtor Corporation and Hyundai Electronics America
10.148 (25) Maxtor Corporation 1995 Stock Option Plan
10.149 (26) Maxtor Corporation Individual Stock Option Agreement, dated
November 8, 1994
10.150 (30) Maxtor Corporation 1992 Employee Stock Purchase Plan and 1996
Outside Directors Stock Option Plan, dated October 9, 1995
10.151 (36) Maxtor Corporation 1996 Stock Option Plan**
10.152 (36) Intercompany Loan Agreement, dated as of April 10, 1996,
between Maxtor Corporation and Hyundai Electronics America
10.153 (36) Excerpts from the Execution Copy of Receivables Purchase and
Sale Agreement, dated as of March 30, 1996, between Maxtor
Corporation and Corporate Receivables Corporation and
Citicorp North America, Incorporated
10.154 (35) Recapitalization Agreement among the Company, International
Manufacturing Services, Incorporated and certain investors,
dated as of May 21, 1996
10.155 (35) Redemption Agreement between Maxtor Corporation and
International Manufacturing Services, Incorporated, dated as
of May 21, 1996
10.156 (35) Manufacturing Services Agreement between Maxtor Corporation
and International Manufacturing Services, Incorporated, dated
June 13, 1996*
10.157 (37) Credit Facility, dated as of July 31, 1996, between
Maxtor Corporation and Hyundai Electronics America
10.158 (38) 364-Day Credit Agreement, dated August 29, 1996, among Maxtor
Corporation, Citibank, N.A., and Syndicate Banks
68
<PAGE>
10.159 (38) Credit Agreement, dated August 29, 1996, among Maxtor
Corporation, Citibank, N.A., and Syndicate Banks
10.160 (39) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996**
10.161 (39) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996**
10.162 (39) Employment Agreement between William Roach and Registrant,
dated December 13, 1996**
10.163 (40) Intercompany Loan Agreement, dated as of April 10, 1997,
between Maxtor Corporation and Hyundai Electronics America
10.164 Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Maxtor Corporation and Hyundai
Electronics America
10.165 Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Maxtor Corporation, Citibank, N.A.
and Syndicate Banks
10.166 Amendment and Restatement 1996 Stock Option Plan, effective
October 1, 1997
23.1 Consent of Independent Accountants
23.2 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
* Confidential treatment has been requested for portions of this
document
** Management contract, or compensatory plan or arrangement
- -------------------------------------------------------------------------
(1) Incorporated by reference to exhibits to Registration Statement No.
2-98568 effective August 7, 1985
(2) Incorporated by reference to exhibits to Registration Statement No.
33-4092 effective April 2, 1986
(3) Incorporated by reference to exhibits to Registration Statement No.
33-12123 effective February 26, 1987
(4) Incorporated by reference to exhibits to Registration Statement No.
33-12768 effective April 23, 1987
(5) Incorporated by reference to exhibits to Registration Statement No.
33-43172 effective October 7, 1992
(6) Incorporated by reference to exhibits to Registration Statement No.
33-8607 effective September 10, 1986
(7) Incorporated by reference to exhibits of Form 8-K filed February 8, 1988
(8) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 24, 1988
(9) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 24, 1989
(10) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 1, 1990
(11) Incorporated by reference to exhibits of Form 8-K filed July 13, 1990
(12) Incorporated by reference to exhibits of Form 8 filed November 13, 1990
(13) Incorporated by reference to exhibits of Form 8 filed January 8, 1991
(14) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective July 15, 1991
(15) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 25, 1992
(16) Incorporated by reference to exhibits of Form 8-K filed January 8, 1993
(17) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993
(18) Incorporated by reference to exhibits of Form 10-Q filed August 10, 1993
(19) Incorporated by reference to exhibits of Form 8-K filed August 19, 1993
(20) Incorporated by reference to exhibits of Form 10-Q filed November 8, 1993
(21) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1994
(22) Incorporated by reference to exhibits of Form 10-K filed June 24, 1994
(23) Incorporated by reference to exhibits of Form 10-Q filed August 5, 1994
(24) Incorporated by reference to exhibits of Form 10-Q filed November 8, 1994
(25) Incorporated by reference to exhibits to Registration Statement No.
33-56405 effective November 10, 1994
(26) Incorporated by reference to exhibits to Registration Statement No.
33-56407 effective November 10, 1994
(27) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995
69
<PAGE>
(28) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995
(29) Incorporated by reference to exhibits of Form 10-Q filed August 14, 1995
(30) Incorporated by reference to exhibits to Registration Statement No.
33-63295 effective October 10, 1995
(31) Incorporated by reference to exhibit III of Schedule 14D-9 filed
November 9, 1995
(32) Incorporated by reference to exhibit VI of schedule 14D-9 filed November
9, 1995
(33) Incorporated by reference to exhibits of Form 10-Q filed November 14,
1996
(34) Incorporated by reference to exhibits of Form 10-Q filed February 14,
1996
(35) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996
(36) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996
(37) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996
(38) Incorporated by reference to exhibits of Form 8-K filed September 13,
1996
(39) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997
(40) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997
70
<PAGE>
MAXTOR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS/ BALANCE AT
BEGINNING COST AND (RECOVERIES) END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES [1] PERIOD
- ----------------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
December 27, 1997 $5,255 $1,000 $2,682 $3,573
December 28, 1996 $5,196 $1,355 $1,296 $5,255
March 30, 1996 $3,850 $1,232 $(114) $5,196
</TABLE>
[1] Uncollectible accounts written off, net of recoveries
S-1
<PAGE>
Exhibit 10.164
DEBT PAYMENT AND STOCK PURCHASE AGREEMENT
THIS DEBT PAYMENT AND STOCK PURCHASE AGREEMENT (the "Agreement") is made
as of this 12th day of December, 1997, by and between Maxtor Corporation, a
Delaware corporation ("Maxtor"), and Hyundai Electronics America, a
California corporation ("HEA").
I. RECITALS
1.1 Maxtor is indebted to HEA in the principal sum of Two Hundred Sixty
Five Million ($265,000,000) ("Total Principal"), and HEA is willing to
consider $200,000,000 ("Partial Principal") as paid in full as of September 1,
1997 ("Payment Date") in exchange for issuance to HEA of Maxtor stock;
1.2 HEA is willing to consider the Total Principal to have been reduced
by the Partial Principal amount as of the Payment Date and that interest on
such Partial Principal amount to have ceased accruing thereafter.
1.3 Maxtor is authorized to issue up to 95,000,000 shares of Series A
Preferred Stock, par value $.01 (the "Series A Preferred Stock"), having the
rights and preferences set forth in Maxtor's Amended and Restated Certificate
of Incorporation;
1.4 Prior to the stock issuance contemplated herein, HEA owns
58,208,955 shares of Series A Preferred Stock, constituting all of the shares
of Maxtor Corporation Series A Preferred Stock issued and outstanding;
1.5 Maxtor and HEA now desire to enter into a stock purchase
arrangement pursuant to which the Partial Principal amount shall be
considered to be paid in full as of the Payment Date in exchange for newly
issued shares of Maxtor's Series A Preferred Stock (the "New Shares"), as
described below.
NOW, THEREFORE, in consideration of the mutual agreements herein, the
parties hereto agree as follows:
II. AGREEMENT
2.1 PAYMENT OF PARTIAL PRINCIPAL AND DELIVERY OF SHARES. At the
Closing provided for in Section 2.2 hereof, Maxtor shall deliver to HEA a
certificate evidencing the New Shares.
1
<PAGE>
2.2 CLOSING.
(a) Maxtor's delivery of the New Shares (the "Closing") shall
occur at the offices of HEA, at 10:00 a.m. on December 12, 1997, or such
other time and place as is mutually agreed upon (the "Closing Date").
(b) At the Closing:
(i) Maxtor will deliver to HEA as payment in full of the
Partial Principal amount a stock certificate representing 29,850,746 shares
of Maxtor's Series A Preferred Stock registered in the name of Hyundai
Electronics America; and
(ii) Upon delivery of the the New Shares, the Partial
Principal shall be considered to have been paid in full as of the Payment
Date.
2.3 MAXTOR'S REPRESENTATIONS AND WARRANTIES. Maxtor hereby represents
and warrants to HEA, regarding the issuance and sale of the New Shares
pursuant to this Agreement, that:
(a) Maxtor has all requisite power and authority, including that
required by law and Maxtor's Amended and Restated Certificate of
Incorporation and Bylaws, to issue and sell the New Shares; and
(b) The New Shares are free and clear of all liens, encumbrances,
charges and assessments, and are subject to no restrictions with respect to
transferability other than in compliance with applicable securities laws.
2.4 HEA'S REPRESENTATIONS AND WARRANTIES. HEA hereby represents and
warrants to Maxtor that HEA has all requisite legal power to enter into this
Agreement and to carry out and perform its obligations under the terms of
this Agreement.
2.5 MISCELLANEOUS.
(a) SUCCESSORS. This Agreement shall inure to the benefit of and
be binding upon the heirs, executors, administrators and assigns of the
parties hereto.
(b) FURTHER DOCUMENTS. Each party hereto agrees to execute and
deliver any and all documents necessary to make effective the terms and
provisions of this Agreement.
(c) ENTIRE AGREEMENT. This Agreement contains the entire
under-standing of the parties and shall not be amended except by a written
instrument hereafter signed by each of the parties hereto.
2
<PAGE>
(d) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be an original and all of which, together, shall
constitute one instrument.
(e) SEVERABILITY. If a court of competent jurisdiction holds any
portion of this Agreement to conflict with any federal, state or local law,
such portion is hereby declared null and void in such jurisdiction, and this
Agreement shall otherwise remain in full force and effect and be construed as
if such portion had never been included herein.
(f) WAIVER, DELAY. The waiver of a breach or default, or any
delay in exercising any rights under this Agreement shall not constitute a
waiver of any subsequent breach or default.
(g) GOVERNING LAW. This Agreement shall be governed by the laws
of the State of California.
IN WITNESS WHEREOF, each of the parties hereto has executed and
delivered this Agreement as of the date first above written.
MAXTOR CORPORATION
By: /s/ Raja Venatesh
-----------------
Title: Corporate Treasurer
-------------------
HYUNDAI ELECTRONICS AMERICA
By: /s/ T.J. Thomas
--------------------
Title: Vice President Finance &
Chief Financial Officer
3
<PAGE>
- ------------------------------------------------------------------------------
NUMBER A Delaware Corporation SHARES
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PS-A0002 Maxtor Corporation 29,850,746
- ------------------------------------------------------------------------------
Authorized Common Stock, 110,000,000 Shares
Authorized Preferred Stock, 95,000,000 Shares
Authorized Series A Preferred Stock, 95,000,000 Shares
This Certifies that Hyundai Electronics America is the record holder of
Twenty-Nine Million Eight Hundred Fifty Thousand Seven Hundred Forty-Six
Shares of Series A Preferred Stock of Maxtor Corporation transferable only on
the share register of the Corporation, in person or by duly authorized
Attorney, upon surrender of this Certificate properly endorsed or assigned.
This Certificate and the shares represented hereby are issued and shall be
held subject to all the provisions of the Articles of Incorporation and the
By-Laws of the Corporation and any amendments thereof, to all of which the
holder of this Certificate, by acceptance hereof, assents.
See reverse of this certificate for information on how to obtain a statement
of the rights, preferences, privileges and restrictions of each class or
series of shares.
Witness the Seal of the Corporation and the signatures of its duly authorized
officers this First day of December, A.D., 1997.
/s/ Glenn H. Stevens /s/ Michael R. Cannon
- -------------------------------- ----------------------------
Secretary President
<PAGE>
For Value Received, _____________________hereby sell, assign and transfer unto
______________________________________________________________________________
________________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute
and appoint _________________________________________________Attorney
to transfer the shares on the share register of the within named Corporation
with full power of substitution in the premises.
In presence of ______________________________________________________________
_________________________________________________Dated_______________________
NOTICE: The Signature of this assignment must correspond with the name as
written upon the face of this Certificate, in every particular,
without alteration or enlargement, of any change whatever.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH
RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING
THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
STOCKHOLDERS MAY OBTAIN, UPON REQUEST AND WITHOUT CHARGE, A STATEMENT OF THE
POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS, GRANTED TO OR IMPOSED UPON EACH CLASS OR SERIES OF
SHARES AUTHORIZED TO BE ISSUED AND UPON THE HOLDERS THEREOF FROM THE
PRINCIPAL OFFICE OF THE CORPORATION.
<PAGE>
EXHIBIT 10.165
[Citibank Letterhead]
August 27, 1997
Extending Lenders party to the
364-Day Credit Agreement
referred to below
Maxtor 364-Day Credit Agreement
Ladies and Gentlemen:
Reference is made to the 364-Day Credit Agreement dated as of August 29,
1996 among Maxtor Corporation as Borrower (the "Borrower"), the Lenders
party thereto (the "Lenders"), the Co-Agents and Manager named therein and
Citicorp, USA ("Citicorp"), as successor Agent to Citibank, N.A. (as amended,
the "Credit Agreement"). Please be advised that pursuant to Section 2.05(c)
of the Credit Agreement and, in light of current market conditions, the
Borrower submitted a formal request for the Lenders to extend their
Commitments for $96,000,000 for a further 364 days. You are hereby advised
that set forth on Schedule 1 hereto is a list of the Lenders ("Extending
Lenders") who have agreed to so extend their Commitments in response to this
request and the amount of the Commitments so extended.
By agreeing to the foregoing extension of such Commitments, the
Extending Lenders hereby consent to the variation from the notification
requirements for renewal stated in the foregoing extension provision on the
terms and conditions referred to herein.
Pursuant to the commitment letter received from you by Citicorp, please
countersign this letter, which will operate as the requisite notice of
extension, and return it by facsimile to Robert Wetrus at Citibank, N.A., FAX:
212-832-9213 by 5:00 PM New York City time on Wednesday, August 27, 1997.
<PAGE>
364-Day Lenders 2 August 27, 1997
Also enclosed is a memorandum from our attorneys, Shearman & Sterling,
noting a technical correction to the existing documentation.
Please feel free to contact Robert Wetrus of Citibank, N.A., at (212)
559-3496 if you require any further clarification.
Very truly yours
/s/ Robert Wetrus
CITICORP SECURITIES, INC.
Agreed to and accepted:
THE SUMITOMO BANK, LTD.,
SAN FRANCISCO BRANCH
- -----------------------
By:
Its:
<PAGE>
SCHEDULE 1
Extending Lender Commitment Amount
- ---------------- -----------------
ABN Amro Bank $4,000,000
Citibank, N.A. $17,000,000
Fleet Bank $6,000,000
Sumitomo Bank $4,000,000
<PAGE>
SHEARMAN & STERLING
August 27, 1997
Memorandum to: Lenders party to the 3-Year and
364-Day Credit Agreement
referred to below
Maxtor 364-Day and 3-Year Credit Agreements
-------------------------------------------
Reference is made to the 364-Day Credit Agreement and 3-Year Credit
Agreement, both dated as of August 29, 1996 among Maxtor Corporation as
Borrower (the "Borrower"), the Lenders party thereto (the "Lenders"), the
Co-Agents and Manager named therein and Citicorp, USA ("Citicorp"), as
successor Agent to Citibank, N.A. (as amended, the "Credit Agreements").
In reviewing the documentation relating to the extension of the 364-Day
Credit Agreement, it has come to our attention that Schedule 5.02(b)(iii)(A)
in some of the veinbound copies for the 364-Day and 3-Year Credit Agreements,
which agreements were executed at the same time last August, may have been
unintentionally reversed in the compilation of such documents.
In order to make sure that everyone has a correct set of documents, we
have attached hereto for each of the Credit Agreements, clearly marked for
attachment thereto, Schedules 5.02(b)(iii)(A), which should be substituted in
your copies of the 3-Year and/or 364-Day Credit Agreements.
If you have any questions, please call me at (212) 848-8287.
Philip R. Strauss
Attachments
cc: Robert Wetrus, Citibank, N.A.
Emily Berlin, Shearman & Sterling
Elizabeth Stairs, Shearman & Sterling
<PAGE>
3-Year Credit Agreement
SCHEDULE 5.02 (b)(iii)(A)
PERMITTED DEBT TRANSACTIONS
1. Non-Recourse Trade Receivables Securitization program with Citibank
Securities, Inc., to be increased by $50 Million as extended in
accordance with its terms.
2. $121 Million 364 day Credit Agreement between Maxtor Corporation and
Syndicate lenders dated August 23, 1996 as extended in accordance with
its terms.
3. $20 Million Intercompany Loan between Maxtor Corporation and Hyundai
Electronics of America as extended in accordance with its terms.
<PAGE>
364-Day Credit Agreement
SCHEDULE 5.02(b)(iii)(A)
PERMITTED DEBT TRANSACTIONS
1. Non-Recourse Trade Receivables Securitization program with Citibank
Securities Inc., to be increased by $50 Million as extended in accordance
with its terms.
2. $129 Million 3 year Credit Agreement between Maxtor Corporation and
Syndicate lenders dated August 23, 1996.
3. $20 Million Intercompany Loan between Maxtor Corporation and Hyundai
Electronics of America as extended in accordance with its terms.
<PAGE>
MAXTOR CORPORATION
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN
(a) ESTABLISHMENT. The Maxtor Corporation 1996 Stock Option Plan was
initially established effective as of May 1, 1996 (the "EFFECTIVE DATE"), and
is hereby amended and restated in its entirety as the Maxtor Corporation
Amended and Restated 1996 Stock Option Plan (the "PLAN").
(b) PURPOSE. The purpose of the Plan is to promote the long-term
interests of the Participating Company Group and its stockholders by
providing an incentive to attract, retain and reward persons performing
services for the Participating Company Group and by providing such persons
with an additional incentive to promote the financial success of the
Participating Company Group.
(c) TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board of Directors or the date on which all of the
shares of Stock available for issuance under the Plan have been issued and
all restrictions on such shares under the terms of the Plan and the
Agreements evidencing Awards granted under the Plan have lapsed. However,
all Awards shall be granted, if at all, within ten (10) years from the
Effective Date.
2. DEFINITIONS.
Unless otherwise required by the context, the following terms when used
in the Plan shall have the meanings set forth in this Section 2:
(a) "AGREEMENT": A written option agreement between the Company and
the Participant evidencing an Award in such form as approved by the Board of
Directors pursuant to the Plan.
(b) "AWARD": An award of an Option under the Plan.
(c) "BOARD OF DIRECTORS": The Board of Directors of the Company. If
one or more Committees have been appointed by the Board of Directors to
administer the Plan, "Board of Directors" also means such Committee(s).
(d) "CODE": The Internal Revenue Code of 1986, as amended from time to
time.
(e) "COMMITTEE": The Compensation Committee or other committee of the
Board of Directors duly appointed to administer the Plan and having such
powers as shall be specified by the Board of Directors. Unless the powers of
the Committee have been specifically limited, the Committee shall have all of
the powers of the Board of Directors granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to
the terms of the Plan and any applicable limitations imposed by law.
1
<PAGE>
(f) "COMPANY": Maxtor Corporation, a Delaware corporation, or any
successor thereto.
(g) "CONSULTANT": Any person, including an advisor, engaged by a
Participating Company to render services other than as an Employee or a
Director.
(h) "DIRECTOR": A member of the Board of Directors or of the board of
directors of any other Participating Company.
(i) "EMPLOYEE": Any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director
nor payment of a director's fee shall be sufficient to constitute employment
for purposes of the Plan.
(j) "EXCHANGE ACT": The Securities Exchange Act of 1934, as amended.
(k) "EXERCISE PRICE": The price per share at which the shares of Stock
subject to an Option may be purchased upon exercise of such Option.
(l) "FAIR MARKET VALUE": As applied to a specific date, the fair
market value of a share of Stock on such date as determined in good faith by
the Board of Directors in the following manner:
(i) The average of the high and low prices of the Stock (or the
mean of the closing bid and asked prices of the Stock if the Stock is so
reported instead) as reported on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") System, the NASDAQ National Market
System or such other national or regional securities exchange or market
system constituting the primary market for the Stock, on the most recent
trading day to the date in question, or if there are no reported sales on
such date, on the last preceding date on which sales were reported; or
(ii) In the absence of the foregoing, the Fair Market Value shall
be determined by the Board of Directors in its absolute discretion based on
an appraisal of the Stock and after giving consideration to the book value,
the revenues, and the earnings prospects of the Company in light of market
conditions generally.
The Fair Market Value determined under one of the preceding paragraphs shall
be final, binding and conclusive on all parties for the purposes of this Plan.
(m) "ISO": An Option intended to be and which qualifies as an
"incentive stock option", as defined in Section 422 of the Code or any
statutory provision that may replace such Section.
(n) "NQSO": An Option not intended or qualified to be an ISO.
(o) "OPTION": Any ISO or NQSO granted under the Plan.
2
<PAGE>
(p) "OUTSIDE DIRECTOR": Any Director of the Company who is not an
Employee.
(q) "PARENT CORPORATION": Any present or future "parent corporation"
of the Company, as defined in Section 424(e) of the Code.
(r) "PARTICIPANT": A person who has been granted one or more Awards
under the Plan which remain outstanding or who owns shares of Stock as a
result of the exercise of an Option.
(s) "PARTICIPATING COMPANY": The Company or any Parent Corporation or
Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP": At any point in time, all
corporations collectively which are then Participating Companies.
(u) "RULE 16b-3": Rule 16b-3 under the Exchange Act, as amended from
time to time, or any successor rule or regulation.
(v) "SEC": Securities and Exchange Commission.
(w) "SECURITIES ACT": The Securities Act of 1933, as amended.
(x) "STOCK": The common stock of the Company, as adjusted from time to
time under Section 4(b).
(y) "SUBSIDIARY CORPORATION": Any present or future "subsidiary
corporation" of the Company or the Parent Corporation, as defined in Section
424(f) of the Code.
(z) "TEN PERCENT OWNER": A Participant who, at the time an Award is
granted to the Participant, owns stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of a Participating
Company within the meaning of Section 422(b)(6) of the Code.
3. PARTICIPATION
(a) PERSONS ELIGIBLE FOR AWARDS. Awards may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing
sentence, "Employees" shall include prospective Employees to whom Awards are
granted in connection with written offers of employment with the
Participating Company Group, and "Consultants" shall include prospective
Consultants to whom Awards are granted in connection with written offers of
engagement with the Participating Company Group. Eligible persons may be
granted more than one (1) Award.
(b) OUTSIDE DIRECTORS. Each person who is (i) an Outside Director on
the Effective Date, or (ii) first becomes an Outside Director after the
Effective Date, shall be granted an Award for forty thousand (40,000) shares
on the Effective Date or the date he or she first becomes an Outside
Director; provided, however, that any Director of the Company who previously
did not qualify as an Outside Director shall not receive an Award pursuant to
this Section in the event
3
<PAGE>
that such Director subsequently becomes an Outside Director as a result of
the termination of his or her status as an Employee. Notwithstanding the
foregoing, an Outside Director may also receive additional grants under the
Plan in addition to the grant described in this Section 3(b).
(c) GRANT RESTRICTIONS. Any person who is not an Employee of the
Company or a Parent Corporation or Subsidiary Corporation of the Company on
the effective date of the grant of an Award to such person may be granted
only an NQSO. An ISO granted to a prospective Employee upon the condition
that such person become an Employee shall be deemed granted on the date such
person commences service with a Participating Company, with an Exercise Price
determined as of such date in accordance with Section 5(a).
(d) FAIR MARKET VALUE LIMITATION. To the extent that the aggregate
Fair Market Value of stock with respect to which options designated as ISOs
are exercisable by a Participant for the first time during any calendar year
(under all stock option plans of the Participating Company Group, including
the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion of
such options which exceeds such amount shall be treated as NQSOs. For
purposes of this Section, options designated as ISOs shall be taken into
account in the order in which they were granted, and the Fair Market Value of
stock shall be determined as of the time the option with respect to such
stock is granted. If the Code is amended to provide for a different
limitation from that set forth in this Section, such different limitation
shall be deemed incorporated herein effective as of the date and with respect
to such Options as required or permitted by such amendment to the Code. If
an Option is treated as an ISO in part and as an NQSO in part by reason of
the limitation set forth in this Section, the Participant may designate which
portion of such Option the Participant is exercising and may request that
separate certificates representing each such portion be issued upon the
exercise of the Option. In the absence of such designation, the Participant
shall be deemed to have exercised the ISO portion of the Option first.
4. SHARES SUBJECT TO PLAN
(a) MAXIMUM SHARES. Subject to adjustment by the operation of Section
4(b) hereof, the maximum aggregate number of shares of Stock that may be
issued under the Plan shall be ten million two hundred seventy-two thousand
one hundred sixty-eight (10,272,168) and shall consist of authorized but
unissued or reacquired shares of Stock or any combination thereof. If an
outstanding Option for any reason expires or is terminated or canceled or
shares of Stock acquired upon the exercise of an Option are repurchased by
the Company, the shares of Stock allocable to the unexercised portion of such
Option, or such repurchased shares of Stock, shall again be available for
issuance under the Plan.
(b) ADJUSTMENT OF SHARES AND PRICE. In the event of any stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate equitable adjustments shall be made in the number and class of
shares subject to the Plan, in the number and class of shares subject to
future Awards granted to Outside Directors pursuant to Section 3(b) and to
any outstanding Options and in the Exercise Price per share of any
outstanding Options. Notwithstanding the foregoing, any fractional share
resulting from an adjustment pursuant to this Section 4(b) shall be rounded
up or down to the nearest whole number, as determined by the Board of
Directors, and in no event may
4
<PAGE>
the Exercise Price of any Option be decreased to an amount less than the par
value, if any, of the stock subject to the Option. The adjustments
determined by the Board of Directors pursuant to this Section 4(b) shall be
final, binding and conclusive.
5. GENERAL TERMS AND CONDITIONS OF OPTIONS
(a) GENERAL. Subject to Section 3(b), the Board of Directors shall
have full and complete authority and discretion, except as expressly limited
by the Plan, to grant Options and to provide the terms and conditions (which
need not be identical among Participants) thereof. The terms and conditions
governing any Award, as determined by the Board of Directors, shall be set
forth in an Agreement consistent with this Plan. In particular, the Board of
Directors shall prescribe the following terms and conditions:
(i) The number of shares of Stock subject to, and the expiration
date(s) of, any Option;
(ii) The vesting schedule of any Option;
(iii) The manner, time and rate (cumulative or otherwise) of
exercise of such Option;
(iv) Whether such Option is to be issued as an ISO or NQSO; and
(v) The restrictions, if any, to be placed upon such Option or
upon shares which may be issued upon exercise of such Option.
(b) EXERCISE PRICE. The Exercise Price for each Option shall be
established in the sole discretion of the Board of Directors; provided,
however, that (a) the Exercise Price for an ISO shall be not less than the
Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the Exercise Price for an NQSO shall be not less than eighty-five
percent (85%) of the Fair Market Value of a share of Stock on the effective
date of grant of the Option, and (c) no Option granted to a Ten Percent Owner
shall have an Exercise Price less than one hundred ten percent (110%) of the
Fair Market Value of a share of Stock on the effective date of grant of the
Option. Notwithstanding the foregoing, an Option (whether an ISO or an NQSO)
may be granted with an Exercise Price lower than the minimum exercise price
set forth above if such Option is granted pursuant to an assumption or
substitution for another option in a manner qualifying under the provisions
of Section 424(a) of the Code.
(c) EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board of
Directors and set forth in the Agreement evidencing such Option; provided,
however, that (i) no Option shall be exercisable after the expiration of ten
(10) years after the effective date of grant of such Option, (ii) no ISO
granted to a Ten Percent Owner shall be exercisable after the expiration of
five (5) years after the effective date of grant of such Option, and (iii)
no Option granted to a prospective Employee or prospective Consultant may
become exercisable prior to the date on which such person commences service
with a Participating Company.
5
<PAGE>
6. EXERCISE OF OPTIONS
(a) PAYMENT OF OPTION EXERCISE PRICE. Except as otherwise provided
below, payment of the Exercise Price for the number of shares of Stock being
purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by
the Participant having a Fair Market Value not less than the Exercise Price,
(iii) by the assignment of the proceeds of a sale or loan with respect to
some or all of the shares being acquired upon the exercise of the Option
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by
such other consideration as may be approved by the Board of Directors from
time to time to the extent permitted by applicable law, or (v) by any
combination thereof. The Board of Directors may at any time or from time to
time, grant Options which do not permit all of the foregoing forms of
consideration to be used in payment of the Exercise Price or which otherwise
restrict one or more forms of consideration.
(A) TENDER OF STOCK. Notwithstanding the foregoing, an
Option may not be exercised by tender to the Company of shares of Stock to
the extent such tender of Stock would constitute a violation of the
provisions of any law, regulation or agreement restricting the redemption of
the Company's stock. Unless otherwise provided by the Board of Directors, an
Option may not be exercised by tender to the Company of shares of Stock
unless such shares either have been owned by the Participant for more than
six (6) months or were not acquired, directly or indirectly, from the Company.
(B) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
(b) RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a
stockholder with respect to any shares of Stock issuable on exercise of any
Option until the date of the issuance of a stock certificate to the
Participant for shares of Stock. No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as provided in Section 4(b) hereof.
7. TRANSFER OF CONTROL OF THE COMPANY
(a) DEFINITIONS.
(i) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(A) the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
6
<PAGE>
(B) a merger or consolidation in which the Company is a party;
(C) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
(D) a liquidation or dissolution of the Company.
(ii) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting
stock immediately before the Transaction, direct or indirect beneficial
ownership of more than fifty percent (50%) of the total combined voting power
of the outstanding voting stock of the Company or the corporation or
corporations to which the assets of the Company were transferred (the
"TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one
or more corporations which, as a result of the Transaction, own the Company
or the Transferee Corporation(s), as the case may be, either directly or
through one or more subsidiary corporations. The Board of Directors shall
have the right to determine whether multiple sales or exchanges of the voting
stock of the Company or multiple Ownership Change Events are related, and its
determination shall be final, binding and conclusive.
(b) EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. In the event the
Acquiring Corporation elects not to assume or substitute for outstanding
Options in connection with a Transfer of Control, any unexercisable or
unvested portion of the outstanding Options shall be immediately exercisable
and vested in full as of the date ten (10) days prior to the date of the
Transfer of Control. The exercise or vesting of any Option that was
permissible solely by reason of this Section shall be conditioned upon the
consummation of the Transfer of Control. Except as otherwise provided herein,
any Options which are neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of
the date of the Transfer of Control shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, in the event of a Transfer of Control pursuant
to an Ownership Change Event described in Section 7.1(a)(i)(A) which occurs
prior to the initial underwritten public offering of Stock under the
Securities Act after the Effective Date and the Company is the surviving or
continuing corporation after such transaction, (i) any unexercisable or
unvested portion of the outstanding Options shall be immediately exercisable
and vested in full as of the date ten (10) days prior to the date of the
Transfer of Control (unless the Acquiring Corporation assumes the Company's
rights and obligations under the outstanding Options or substitutes for the
outstanding Options substantially equivalent options for the Acquiring
Corporation's stock) and (ii) the outstanding Options shall not terminate as
a result of the Transfer of Control.
7
<PAGE>
8. REPURCHASE OPTIONS AND OBLIGATIONS
Shares issued under the Plan may be subject to a right of first refusal,
one or more repurchase options, or other conditions and restrictions as
determined by the Board of Directors in its sole discretion at the time the
Option is granted. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then
exercisable, to one or more persons as may be selected by the Company. Upon
request by the Company, each Participant shall execute any agreement
evidencing such transfer restrictions prior to the receipt of shares of Stock
hereunder and shall promptly present to the Company any and all certificates
representing shares of Stock acquired hereunder for the placement on such
certificates of appropriate legends evidencing any such transfer restrictions.
9. RESTRICTIONS ON TRANSFERS; GOVERNMENT REGULATIONS
(a) OPTIONS NOT TRANSFERABLE. During the lifetime of the Participant,
an Option shall be exercisable only by the Participant or the Participant's
guardian or legal representative. No Option may be assigned, encumbered, or
transferred, except, in the event of the death of a Participant, by will or
the laws of descent and distribution.
(b) GOVERNMENT REGULATIONS. This Plan, the granting of Awards under
this Plan and the issuance or transfer of Stock (and/or the payment of money)
pursuant thereto are subject to all applicable foreign, federal and state
laws, rules and regulations and to such approvals by any regulatory or
governmental agency (including without limitation "no action" positions of
the SEC) which may, in the opinion of counsel for the Company, be necessary
or advisable in connection therewith. Without limiting the generality of the
foregoing, no Awards may be granted under this Plan, and no Stock shall be
issued by the Company, nor cash payments made by the Company, pursuant to or
in connection with any such Award, unless and until, in each such case, all
legal requirements applicable to the issuance or payment have, in the opinion
of counsel to the Company, been complied with. In connection with any stock
issuance or transfer, the person acquiring the shares shall, if requested by
the Company, give assurances satisfactory to counsel to the Company in
respect of such matters as the Company may deem desirable to assure
compliance with all applicable legal requirements. The granting of Awards
under this Plan and the issuance of Stock pursuant thereto are subject to
compliance with all applicable foreign, federal, and/or state laws or
regulations with respect to such securities. No Option may be exercised by a
Participant if the issuance of Stock pursuant to such Option upon such
exercise would constitute a violation of any applicable foreign, federal, or
state securities law, rule or regulation or other applicable law or
regulation. The inability of the Company to obtain from any regulatory body
having the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares subject to the Option
shall relieve the Company of any liability in respect of the failure to issue
or sell such shares as to which such requisite authority shall not have been
obtained.
10. TAX WITHHOLDING
The Company shall have the right to withhold from amounts due
Participants, or to collect from Participants directly, the amount which the
Company deems necessary to satisfy any
8
<PAGE>
taxes required by law to be withheld at any time by reason of participation
in the Plan, and the obligations of the Company under the Plan shall be
conditional on payment of such taxes. The Participant may, prior to the due
date of any taxes, pay such amounts to the Company in cash, or with the
consent of the Board of Directors, in Stock (which shall be valued at its
Fair Market Value on the date of payment). The Company shall have no
obligation to any Participant to determine either (i) the existence of any
tax or (ii) the correct amount of any tax. Without limiting the generality
of the foregoing, in any case where it determines that a tax is or will be
required to be withheld in connection with the issuance, transfer or vesting
of Stock issued under this Plan, the Company may, pursuant to such rules as
the Board of Directors may establish, reduce the number of shares of Stock so
issued or transferred by such number of Stock as the Company may deem
appropriate in its sole discretion to accomplish such withholding or make
such other arrangements as it deems satisfactory. Notwithstanding any other
provision of this Plan, the Board of Directors may impose such conditions on
the payment of any withholding obligation as may be required to satisfy
applicable regulatory requirements, including, without limitation, Rule
16b-3. The Company shall have no obligation to deliver shares of Stock,
release shares of Stock from an escrow established pursuant to an Agreement
or make any payment pursuant to the Plan until the Participating Company
Group's tax withholding obligations have been satisfied by the Participant.
11. ADMINISTRATION OF PLAN
(a) ADMINISTRATION BY THE BOARD OF DIRECTORS. The Plan shall be
administered by the Board of Directors. All decisions and determinations of
the Board of Directors shall be final, conclusive and binding upon all
Participants and upon all other persons claiming any rights under the Plan
with respect to any Options.
(b) BOARD OF DIRECTORS AUTHORITY. In amplification of the Board of
Directors' powers and duties, but not by way of limitation, the Board of
Directors shall have full authority and power to:
(i) Construe and interpret the provisions of the Plan and make
rules and regulations for the administration of the Plan not inconsistent
with the Plan;
(ii) Decide all questions of eligibility for Plan participation and
for the grant of Awards;
(iii) Adopt forms of Agreements and other documents consistent with
the Plan;
(iv) Engage agents to perform legal, accounting and other such
professional services as it may deem proper for administering the Plan; and
(v) Take such other actions as may be reasonably required or
appropriate to administer the Plan or to carry out the Board of Directors
activities contemplated by other sections of this Plan.
(c) ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to any
person whose transactions in Stock are subject to Section 16 of the Exchange
Act, at any time that any class of
9
<PAGE>
equity security of the Company is registered pursuant to Section 12 of the
Exchange Act, the Plan shall be administered in compliance with the
requirements of Rule 16b-3, if any.
(d) INDEMNIFICATION. In addition to such other rights of
indemnification as they may have, members of the Board of Directors and any
officers or employees of the Participating Company Group to whom authority to
act on behalf of the Board of Directors is delegated shall be indemnified by
the Company against the reasonable expenses, including court costs and
reasonable attorneys' fees, actually incurred in connection with the defense
of any action, suit or proceeding, or in connection with any appeal therein,
to which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any Award granted
hereunder, and against all amounts paid by them in settlement thereof or paid
by them in satisfaction of a judgment in any such action, suit or proceeding,
except where such indemnification is expressly prohibited by applicable law.
12. STOCKHOLDER APPROVAL
The Plan or any increase in the maximum number of shares of Stock
issuable thereunder as provided in Section 4(a) (the "MAXIMUM SHARES") shall
be approved by the stockholders of the Company within twelve (12) months of
the date of adoption thereof by the Board of Directors. Options granted
prior to stockholder approval of the Plan or in excess of the Maximum Shares
previously approved by the stockholders shall become exercisable no earlier
than the date of stockholder approval of the Plan or such increase in the
Maximum Shares, as the case may be.
13. AMENDMENT AND TERMINATION
The Board of Directors may terminate or amend the Plan at any time.
However, subject to changes in the law or other legal requirements that would
permit otherwise, without the approval of the Company's stockholders, there
shall be (a) no increase in the maximum aggregate number of shares of Stock
that may be issued under the Plan (except by operation of the provisions of
Section 4(b)), (b) no change in the class of persons eligible to receive
ISOs, and (c) no other amendment of the Plan which would require approval of
the Company's stockholders under any applicable law, regulation or rule. In
any event, no termination or amendment of the Plan may adversely affect any
then outstanding Option or any unexercised portion thereof, without the
consent of the Participant, unless such termination or amendment is required
to enable an Option designated as an ISO to qualify as an ISO or is necessary
to comply with any applicable law or government regulation.
14. MISCELLANEOUS
EMPLOYMENT OR SERVICE. Neither the establishment of the Plan nor any
amendments thereto, nor the granting of any Award under the Plan, shall be
construed as in any way modifying or affecting, or evidencing any intention
or understanding with respect to, the terms of the employment or service of
any Participant with the Participating Company Group. Nothing in the Plan or
any Agreement shall confer upon a Participant any right to continued
employment or service with the Participating Company Group or interfere in
any way with any
10
<PAGE>
right of the Participating Company Group to terminate the Participant's
employment or service at any time. No person shall have a right to be
granted Awards or, having been selected as a Participant for one Award, to be
so selected again.
(b) PROVISION OF INFORMATION. At least annually, copies of the
Company's balance sheet and income statement for the just completed fiscal
year shall be made available to each Participant and purchaser of shares of
Stock upon the exercise of an Option. The Company shall not be required to
provide such information to persons whose duties in connection with the
Company assure them access to equivalent information.
(c) TRANSFER OF RIGHTS. In the event any Participating Company
assigns, other than by operation of law, to a third person, other than
another Participating Company, any of the Participating Company's rights to
repurchase any shares of Stock acquired upon the exercise of an Option, the
assignee shall pay to the assigning Participating Company the value of such
right as determined by the Company in the Company's sole discretion. Such
consideration shall be paid in cash. In the event such repurchase right is
exercisable at the time of such assignment, the value of such right shall be
not less than the Fair Market Value of the shares of Stock which may be
repurchased under such right (as determined by the Company) minus the
repurchase price of such shares. The requirements of this Section 14(c)
regarding the minimum consideration to be received by the assigning
Participating Company shall not inure to the benefit of the Participant whose
shares of Stock are being repurchased. Failure of a Participating Company to
comply with the provisions of this Section 14(c) shall not constitute a
defense or otherwise prevent the exercise of the repurchase right by the
assignee of such right.
(d) NO ADVICE. The Company shall not be responsible for providing any
Participant with legal, business or tax advice. Any legal or tax liabilities
incurred by a Participant as a result of Participant's participation in the
Plan shall be the sole responsibility of the Participant. Participants
should consult their own attorneys and tax advisors with respect to any
questions regarding participation in the Plan.
(e) WRITTEN NOTICE. As used herein, any notices required hereunder
shall be in writing and shall be given on the forms, if any, provided or
specified by the Board of Directors. Written notice shall be effective upon
actual receipt by the person to whom such notice is to be given; provided,
however, that in the case of notices to Participants and their heirs,
legatees and legal representatives, notice shall be effective upon delivery
if delivered personally or three (3) business days after mailing, registered
first class postage prepaid to the last known address of the person to whom
notice is given. Written notice shall be given to the Board of Directors and
the Company at the following address or such other address as may be
specified from time to time:
Maxtor Corporation
510 Cottonwood Drive
Milpitas, California 95035
Attn: Secretary
(f) APPLICABLE LAW, SEVERABILITY. The Plan shall be governed by and
construed in all respects in accordance with the laws of the State of
California. If any provisions of the Plan
11
<PAGE>
shall be held by a court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions hereof shall continue to be fully
effective.
The undersigned Secretary of the Company hereby certifies that the
foregoing is the Maxtor Corporation Amended and Restated 1996 Stock Option
Plan as duly approved by the Board of Directors.
______________________________
12
<PAGE>
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 Note 7 and 10 for which the date is April 9,
1998 which included 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.
COOPERS & LYBRAND L.L.P.
San Jose, California
April 9, 1998
<PAGE>
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 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) for
the year ended December 27, 1997.
ERNST & YOUNG, LLP
San Jose, California
April 9, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> DEC-27-1997
<CASH> 16,925
<SECURITIES> 0
<RECEIVABLES> 251,220
<ALLOWANCES> (3,573)
<INVENTORY> 155,312
<CURRENT-ASSETS> 424,436
<PP&E> 273,052
<DEPRECIATION> (173,716)
<TOTAL-ASSETS> 555,472
<CURRENT-LIABILITIES> 552,205
<BONDS> 100,000
0
880
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> (221,926)<F1>
<SALES> 1,424,320
<TOTAL-REVENUES> 1,424,320
<CGS> 1,352,936
<TOTAL-COSTS> 1,352,936
<OTHER-EXPENSES> 168,769<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,502
<INCOME-PRETAX> (108,856)
<INCOME-TAX> 1,035
<INCOME-CONTINUING> (109,891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (109,891)
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Other-SE includes additional paid in capital of $551,027 and accumulated
deficit of $772,953
<F2>Other expenses include Research & Development exp of $106,249, Selling, General
and Administrative exp of $62,520
<F3>Earning per share is not applicable.
</FN>
</TABLE>
