<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1999
REGISTRATION NO. 333-69307
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3572 77-0123732
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
510 COTTONWOOD DRIVE
MILPITAS, CALIFORNIA 95035
(408) 432-1700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL R. CANNON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAXTOR CORPORATION
510 COTTONWOOD DRIVE
MILPITAS, CALIFORNIA 95035
(408) 432-1700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
GREGORY M. GALLO, ESQ. RAYMOND B. CHECK, ESQ.
DIANE HOLT FRANKLE, ESQ. DAVID W. HIRSCH, ESQ.
JEFFREY D. BALL, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON
GRAY CARY WARE & FREIDENRICH LLP ONE LIBERTY PLAZA
400 HAMILTON AVENUE NEW YORK, NEW YORK 10006
PALO ALTO, CALIFORNIA 94301-1825 (212) 225-2000
(650) 328-6561
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE AGGREGATE PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE REGISTRATION FEE(2)
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock,
$0.01 par value(3)........ $156,414,375 $43,483
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Common Stock,
$0.01 par value(4)........ $310,823,438 $86,409
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</TABLE>
(1) Includes shares which the underwriters have the option to purchase to cover
overallotments, if any.
(2) Computed pursuant to Rule 457(o) based upon the maximum aggregate offering
price of all of the securities listed in this table. The registration fee
previously was paid by the Registrant.
(3) Common stock which may be offered by Maxtor Corporation or Hyundai
Electronics America.
(4) Common stock which may be delivered by DECS Trust IV pursuant to certain
beneficial interests in the trust which may be offered by DECS Trust IV as
described herein.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (1) a
prospectus relating to an offer by Maxtor to sell newly issued shares of common
stock and an offer by Hyundai Electronics America to sell outstanding shares of
Maxtor common stock; and (2) a prospectus relating to the delivery by DECS Trust
IV of shares of Maxtor common stock owned by Hyundai Electronics America that
may be delivered on February 15, 2002, pursuant to the terms of certain
beneficial interests in DECS Trust IV.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 9, 1999
PROSPECTUS
9,000,000 SHARES
[MAXTOR CORPORATION LOGO]
COMMON STOCK
$ PER SHARE
-------------------------
Maxtor Corporation is selling 7,800,000 shares of its common stock and
Hyundai Electronics America is selling 1,200,000 shares of Maxtor common stock.
The underwriters named in this prospectus may purchase up to 1,170,000
additional newly-issued shares of common stock from Maxtor and up to 180,000
additional shares of Maxtor common stock from Hyundai Electronics America under
certain circumstances.
In a separate offering, DECS Trust IV is offering 15,500,000 DECS. The
terms of the DECS provide that DECS Trust IV may distribute shares of Maxtor
common stock owned by Hyundai Electronics America to DECS holders on or about
February 15, 2002, or upon earlier liquidation of DECS Trust IV under certain
circumstances. DECS Trust IV may distribute up to an additional 2,325,000 shares
of Maxtor common stock owned by Hyundai Electronics America to cover rights to
purchase additional DECS granted to the underwriters of the DECS offering.
Maxtor will not receive any of the proceeds from the sale of DECS or the
delivery of the Maxtor common stock owned by Hyundai Electronics America.
Maxtor's common stock is quoted on the Nasdaq National Market under the
symbol "MXTR." The last reported sale price of the common stock on the Nasdaq
National Market on February 8, 1999, was $14.44 per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts...................................... $ $
Proceeds to Maxtor (before expenses)........................ $ $
Proceeds to Hyundai Electronics America (before expense).... $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
------------------------
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1999
<PAGE> 4
[MAXTOR GRAPHIC]
References in this prospectus to "Korea" are to the Republic of Korea.
Certain technical terms used throughout this prospectus are defined in the
Glossary appearing immediately prior to the consolidated financial statements at
the end of this prospectus. Maxtor(R) and No Quibble(R) are registered
trademarks of Maxtor. The Maxtor logo, DiamondMax(TM) and Formula 4(TM) are
trademarks of Maxtor. All other brand names and trademarks appearing in this
prospectus are the property of their respective holders.
<PAGE> 5
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THIS PROSPECTUS IS NOT AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Relationship Between Maxtor and Hyundai..................... 20
Where You Can Find More Information......................... 25
Price Range of Our Common Stock............................. 26
Dividend Policy............................................. 26
Capitalization.............................................. 27
Dilution.................................................... 28
Selected Consolidated Financial Data........................ 29
Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 30
Business.................................................... 42
Management.................................................. 55
Certain Transactions........................................ 69
Selling Stockholder......................................... 73
Underwriting................................................ 74
Legal Matters............................................... 76
Experts..................................................... 76
Glossary.................................................... 77
Index to Consolidated Financial Statements.................. F-1
</TABLE>
<PAGE> 6
PROSPECTUS SUMMARY
You should read the following summary together with the information set
forth under the heading "Risk Factors" and in the financial statements and
accompanying notes appearing elsewhere in this prospectus.
MAXTOR CORPORATION
We are a leading provider of hard disk drives for desktop computers. Our
DiamondMax product family consists of 3.5 inch hard disk drives with storage
capacities which range from 3.4 gigabytes to 17.2 gigabytes and provides
industry-leading performance. Our customers are desktop computer manufacturers,
including Compaq, Dell and IBM; distributors, including Bell Micro and Ingram;
and retailers, including Best Buy, CompUSA and Staples.
OUR TURNAROUND
During the mid-1980's, we were a leading technology innovator in the hard
disk drive industry. We completed an initial public offering of our common stock
in 1986. An overly complex business strategy led to a dramatic decline in our
financial performance during the late 1980's and early 1990's. Hyundai
Electronics America acquired all of the outstanding stock of Maxtor through a
series of transactions in 1994 and 1996.
In July 1996, we hired Michael R. Cannon, our current Chief Executive
Officer and President and a 20 year veteran of the hard disk drive industry, to
lead our turnaround. Mr. Cannon immediately took a number of steps to position
us to become a significant provider of hard disk drives to leading computer
manufacturers. These steps included:
- improving product performance and quality;
- improving the timeliness of our new product introductions (also known as
time-to-market introduction);
- reducing the amount of time required to produce new products in large
volume (also known as time-to-volume production); and
- refocusing our sales and marketing efforts.
As a result of these actions, our performance has improved significantly
during a difficult period in the hard disk drive industry. Our turnaround
achievements include:
- time-to-market leadership in storage capacity with our DiamondMax 2880
(2.8 gigabytes per disk), DiamondMax 3400 (3.4 gigabytes per disk) and
DiamondMax 4320 (4.3 gigabytes per disk) hard disk drives;
- significantly improved time-to-volume production results in the first
full quarter of production of our DiamondMax 2160 (1.4 million units),
DiamondMax 2880 (1.3 million units) and DiamondMax 3400 (2.8 million
units);
- increased revenues from leading computer manufacturers, including Compaq,
Dell and IBM, from 3.8% of total revenue in the second quarter of 1996 to
52.0% of total revenue in the fourth quarter of 1998;
- increased units shipped per quarter from 1.3 million units in the first
quarter of 1997 to 5.3 million units in the fourth quarter of 1998;
- increased market share of the desktop hard disk drive market in terms of
units shipped from 5.6% in the first quarter of 1997 to 16.7% in the
fourth quarter of 1998, according to International Data Corporation; and
1
<PAGE> 7
- among the lowest selling, general and administrative costs as a
percentage of revenue in the hard disk drive industry for the 1997 and
1998 fiscal years.
Cumulatively, these changes have led to significantly improved financial
results. From 1997 to 1998, our revenue grew by 69.1% from $1,424.3 million to
$2,408.5 million, while gross margins improved from 5.0% to 12.5% over the same
period.
OUR STRATEGY
We seek to be the dominant provider of hard disk drives to leading desktop
computer manufacturers, distributors and retailers. Our strategy to achieve this
goal includes:
- effectively integrating new technology;
- leveraging design excellence;
- capitalizing on flexible manufacturing;
- increasing market share with leading desktop computer manufacturers;
- maintaining customer satisfaction; and
- broadening our product portfolio.
OUR RECENT PUBLIC OFFERING
In the third quarter of 1998, we completed a public offering of
approximately 49.7 million shares of our common stock. Our net proceeds from the
offering were approximately $328.8 million.
OUR RELATIONSHIP WITH HYUNDAI
Hyundai Electronics America owns approximately 46.7% of our common stock
prior to this stock offering. Hyundai Electronics America will own approximately
42.0% of our common stock after this offering (assuming the underwriters do not
exercise their right to purchase any additional shares of our common stock in
the stock offering). We have a number of agreements with Hyundai Electronics
America and its parent and subsidiary corporations that address ongoing
relationships.
HOW TO REACH US
Maxtor is incorporated in Delaware. Our principal executive offices are
located at 510 Cottonwood Drive, Milpitas, California 95035. Our telephone
number at that address is (408) 432-1700.
2
<PAGE> 8
THE STOCK OFFERING
<TABLE>
<S> <C> <C>
Common stock offered by Maxtor.............................. 7,800,000 shares
Common stock offered by Hyundai Electronics America......... 1,200,000 shares
-----------
Total common stock offered........................ 9,000,000 shares
Common stock outstanding after the stock offering(1)(2)..... 102,093,499 shares
Common stock held by Hyundai Electronics America immediately
after the stock offering(2)............................... 42,829,850 shares
Nasdaq National Market symbol............................... "MXTR"
</TABLE>
- -------------------------
(1) Based on the number of shares outstanding as of December 26, 1998. Excludes
9,305,959 shares of our common stock issuable upon the exercise of options
outstanding as of December 26, 1998 under our Amended and Restated 1996
Stock Option Plan with a weighted average exercise price of $8.46 per share.
(2) Assumes no exercise of the underwriters' right to purchase additional shares
in the stock offering.
THE DECS OFFERING
DECS Trust IV is offering for sale in a separate, concurrent offering
15,500,000 DECS, plus up to an additional 2,325,000 DECS to be sold only under
certain circumstances. On or about February 15, 2002, or upon earlier
liquidation of DECS Trust IV in certain circumstances, DECS Trust IV will
distribute Maxtor common stock owned by Hyundai Electronics America (or, at
Hyundai Electronics America's option, the cash equivalent) and/or such other
consideration as is delivered by Hyundai Electronics America to DECS Trust IV
under its purchase agreement with the DECS Trust IV, to the holders of the DECS,
at the rate specified in the DECS prospectus.
USE OF PROCEEDS
Our anticipated net proceeds from the sale of our common stock in the stock
offering are estimated to be approximately $ million (approximately $
million if the underwriters fully exercise their right to purchase additional
shares of common stock in the stock offering), after deducting the underwriting
discounts and estimated offering expenses payable by Maxtor. We will not receive
any proceeds from the sale of shares by Hyundai Electronics America or from the
sale of the DECS.
We will use up to approximately $55.0 million of the net proceeds from the
stock offering to prepay without penalty outstanding aggregate principal
indebtedness of $55.0 million owing to Hyundai Electronics America under a
subordinated note due July 31, 2001. The subordinated note bears interest at
LIBOR plus 2% (currently 7.65%), due semiannually.
The remaining approximately $ million of the net proceeds from the
stock offering (approximately $ million if the underwriters fully exercise
their right to purchase additional shares of common stock in the stock offering)
will be used for capital expenditures, working capital and general corporate
purposes. Pending such uses, we will invest the net proceeds of the stock
offering in investment grade, interest-bearing securities.
3
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996(1) 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 798.9 $1,424.3 $2,408.5
Gross profit (loss)......................................... (90.0) 71.4 300.4
Total operating expenses.................................... 148.5 168.8 240.3(2)
Income (loss) from operations............................... (238.5) (97.4) 60.1(2)
Interest expense............................................ (18.0) (36.5) (28.8)
Net income (loss)........................................... (256.3) (109.9)(3) 31.2(2)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------------
JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27, SEPTEMBER 26, DECEMBER 26,
1997 1997 1997 1998 1998 1998 1998
----------- ------------- ------------ ----------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenue................... $283.1 $392.2 $502.0 $549.6 $531.3 $599.8 $727.8
Gross profit.............. 2.8 21.5 54.2 62.3 62.4 73.2 102.5
Total operating
expenses................ 40.9 42.2 44.2 64.0 50.3 60.0 66.0
Income (loss) from
operations.............. (38.1) (20.7) 10.0 (1.7) 12.1 13.2 36.5
Interest expense.......... (8.7) (10.9) (9.0) (8.8) (8.7) (6.6) (4.7)
Net income (loss)......... (46.6) (31.4) 23.1(3) (10.3) 5.4 6.1 30.0
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 26, 1998
----------------------------
ACTUAL AS ADJUSTED(4)
----------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $214.1
Total assets................................................ 863.4
Short-term borrowings, including current portion of
long-term debt............................................ 5.3
Total current liabilities................................... 548.9
Long-term debt and capital lease obligations due after one
year...................................................... 145.0
Total stockholders' equity.................................. 169.4
</TABLE>
- -------------------------
(1) We changed our fiscal year during the period ended December 28, 1996 to
conform to the fiscal year of Hyundai Electronics America.
(2) Total operating expenses, income from operations and net income for the year
ended December 26, 1998 reflect a $12.1 million compensation charge related
to certain variable accounting features of our 1996 Stock Option Plan.
Without this compensation charge, we would have had total operating expenses
of $228.2 million, income from operations of $72.2 million and net income of
$43.3 million. We amended and restated our 1996 Stock Option Plan to remove
the variable features and to provide for fixed award options.
(3) Includes recovery of a $20.0 million fully-reserved note from International
Manufacturing Services.
(4) As adjusted to reflect the sale of 7,800,000 shares of our common stock in
the stock offering at the public offering price, after deducting
underwriting discounts and commissions and estimated offering expenses
payable by Maxtor and the application of the estimated net proceeds
therefrom. Pursuant to an agreement with Hyundai Electronics America, Maxtor
has the right to reimbursement from Hyundai Electronics America for up to
50% of its actual expenses incurred in connection with the stock offering.
4
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones that we face. Additional risks and uncertainties that we do not know
about or that we currently think are immaterial also may impair our business
operations.
Any of the following risks, if they actually occur, could materially and
adversely affect our business, financial condition or results of operations. In
such an event, the trading price of our common stock could decline, and you
could lose all or part of your investment.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $741.8 MILLION
We have a history of significant losses. During each of the 19 consecutive
quarters ended September 27, 1997, we incurred significant operating losses
ranging from $125.5 million to $3.1 million per quarter, with net losses ranging
from $130.2 million to $4.5 million. These losses were primarily a result of the
following:
- delayed product introductions;
- product performance and quality problems;
- low manufacturing yields and under-utilization of manufacturing capacity;
- high operating and interest expenses; and
- overall market conditions in the hard disk drive industry, including
fluctuations in demand and declining average selling prices.
As of December 26, 1998, we had an accumulated deficit of approximately
$741.8 million. If we do not address successfully the factors that led to our
history of losses, we will not be profitable in the future. Even if we
successfully address these factors, we still may not be profitable in the
future.
OUR AVERAGE SELLING PRICES ARE DECLINING
It is very difficult to achieve and maintain profitability and revenue
growth in the hard disk drive industry because the average selling price of a
hard disk drive rapidly declines over its commercial life. This is true even for
those products that are competitive and introduced into the market in a timely
manner. Average selling prices decline even further when, as is often the case
in the hard disk drive industry, competitors lower prices to absorb excess
capacity, liquidate excess inventories, restructure or attempt to gain market
share. We anticipate that average selling prices of our products will continue
to decline for the foreseeable future.
UNLESS WE CONSISTENTLY EXECUTE, WE WILL HAVE SIGNIFICANT LOSSES
Most of our products are sold to desktop computer manufacturers. Such
manufacturers use the quality, storage capacity, performance and price
characteristics of hard disk drives to select, or qualify, their hard disk drive
suppliers. Such manufacturers typically seek to qualify three or four suppliers
for each hard disk drive product generation. To qualify consistently with these
manufacturers, and thus succeed in the desktop hard disk drive industry, we must
execute consistently on our product development and manufacturing processes to
be among the first-to-market introduction and first-to-volume production at
leading storage capacity per disk with competitive prices and high quality. Once
a manufacturer has chosen its hard disk drive suppliers for a given desktop
computer product, it generally will purchase hard disk drives from those
suppliers for the commercial life of that product line. If we miss a qualifica-
5
<PAGE> 11
tion opportunity, we may not have another opportunity to do business with that
manufacturer until we introduce our next generation of products. The effect of
missing a product qualification opportunity is magnified by the limited number
of high volume manufacturers of personal computers. If we do not reach the
market or deliver volume production in a timely manner, we may lose
opportunities to qualify our products, our gross margins probably will decline
due to rapidly declining average selling prices, and we probably will lose
market share.
SUBSTANTIAL DEPENDENCE ON THE DESKTOP COMPUTER MARKET
While there has been significant growth in the demand for desktop computers
over the past several years, according to International Data Corporation, the
growth rate in the desktop computer market has slowed in recent quarters.
Because of our reliance on the desktop segment of the personal computer market,
we will be affected more by changes in market conditions for desktop computers
than would a company with a broader range of products. Any decrease in the
demand for desktop computers could cause a decrease in the demand for our
products.
Although our current products are designed for the largest segment of the
hard disk drive market, the desktop computer market, demand may shift to other
market segments over time. We also believe that to remain a significant supplier
of hard disk drives to major manufacturers of personal computers, we will need
to offer a broader range of hard disk drive products to our customers.
Therefore, we will need to develop and manufacture new products that address
additional hard disk drive market segments and emerging technologies to remain
competitive in the hard disk drive industry. Examples of potentially important
market segments that our current products are not designed to address include:
- the client-server market;
- lower cost, lower performance personal computer systems (typically below
$699); and
- laptop personal computers.
To specifically address these or additional market segments, we would have
to reengineer some of our existing technology and develop new technology.
Certain of our competitors have significant advantages over us in one or more of
these and other potentially significant new or growing market segments. Any
failure by us to successfully develop and introduce new products to address
specifically these additional market segments could have a material adverse
effect on our business, financial condition and results of operations.
A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS
We sell most of our products to a limited number of customers. During the
year ended December 26, 1998, three customers, Dell, Compaq and IBM, accounted
for approximately 26.6%, 12.2% and 14.6%, respectively, of our revenue, and our
top ten customers accounted for approximately 72.7% of our revenue. During the
fiscal year ended December 27, 1997, two customers, Compaq and Dell, accounted
for approximately 20.9% and 10.4%, respectively, of our revenue, and our top ten
customers accounted for approximately 60.0% of our revenue.
We believe that a relatively small number of customers will continue to
account for a significant portion of our revenue for the foreseeable future, and
that the proportion of our revenue from such customers could continue to
increase in the future. These customers have a wide variety of suppliers to
choose from and therefore can make substantial
6
<PAGE> 12
demands on us. Even if we successfully qualify a product for a given customer,
such customer generally is not obligated to purchase any minimum volume of
products from us and generally is able to terminate its relationship with us at
any time. Our ability to maintain strong relationships with our principal
customers is essential to our future performance. If we lose a key customer or
if any of our key customers reduce their orders of our products or require us to
reduce our prices before we are able to reduce costs, our business, financial
condition and results of operations could be materially and adversely affected.
OUR QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY
Our recent revenue growth rates may not be sustainable. You should not use
our past results to predict future performance. Our quarterly operating results
have fluctuated significantly in the past and may fluctuate significantly in the
future. Our future performance will depend on many factors, including the
following:
- our ability to be consistently among the first-to-volume production with
competitive products;
- fluctuations in the demand for hard disk drives as a result of the
cyclical and seasonal nature of the desktop computer industry;
- the availability of and efficient use of manufacturing capacity;
- changes in product or customer mix;
- our existing competitors introducing better products at competitive
prices before we do;
- new competitors entering our market;
- our ability to manage successfully the complex and difficult process of
qualifying our products with our customers;
- our customers canceling, rescheduling or deferring significant orders for
our products, particularly in anticipation of new products or
enhancements from us or our competitors;
- the ability of certain of our distribution and retail customers to return
unsold products for credit;
- the ability of certain of our distribution and retail customers to
receive lower prices retroactively on their inventory of our products
when we lower prices on our products;
- our ability to purchase enough components and raw materials at
competitive prices which allow us to make a profit;
- the availability of adequate capital resources;
- increases in research and development expenditures, particularly as a
percentage of revenue, required to maintain our competitive position;
- changes in our strategy;
- personnel changes; and
- other general economic and competitive factors.
Many of our operating expenses are relatively fixed and difficult to reduce
or modify. As a result, the fixed nature of our operating expenses will magnify
any adverse effect of a decrease in revenue on our results of operations.
As a result of these and other factors, we believe that period to period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
7
<PAGE> 13
WE MUST MANAGE OUR GROWTH
In July 1996, we began to modify our management and operational structures.
Our revenues generally have been growing since the first quarter of 1997. Our
restructuring activities and revenue growth have placed, and we expect will
continue to place, a significant strain on our personnel and resources. Our
ability to maintain the advantages of the restructuring and to manage future
growth will depend on our ability to:
- continue to improve our information and control systems;
- hire, train, retain, manage and motivate an expanding employee base; and
- maintain effective cost controls.
OUR CUSTOMERS ARE PLACING NEW AND COSTLY DEMANDS ON US
Our customers are adopting more sophisticated business models that place
additional strains on our business. For example, many personal computer
manufacturers, including some of our largest personal computer manufacturing
customers, are starting to adopt build-to-order manufacturing models that reduce
their component inventories and related costs and enable them to tailor their
products more specifically to the needs of their customers.
Some of our personal computer manufacturing customers also are considering
or have implemented a "channel assembly" model in which the manufacturer ships a
minimal computer system to the dealer or other assembler, and component
suppliers (including hard disk drive manufacturers such as us) ship parts
directly to the dealer or other assembler for installation at its location.
Finally, certain of our manufacturing customers have adopted just-in-time
inventory management processes that require component suppliers to maintain
inventory at or near the customer's production facility. These new business
models require us to hold our products in inventory longer, which increases our
risk of inventory obsolescence and average selling price decline. These changing
models also increase our capital requirements and costs, complicate our
inventory management strategies, and make it difficult for us to match our
manufacturing plans with projected customer demand.
THE HARD DISK DRIVE MARKET IS HIGHLY COMPETITIVE
Although our share of the desktop hard disk drive market has increased
steadily since the first quarter of 1997, this market segment and the hard disk
drive market in general are intensely competitive even during periods when
demand is stable. We compete primarily with manufacturers of 3.5-inch hard disk
drives for the personal computer industry, including:
- Fujitsu Limited;
- Quantum Corporation;
- Samsung Electronic Company Limited;
- Seagate Technology, Inc.; and
- Western Digital Corporation.
We also could face significant competition from other companies, such as
International Business Machines Corporation, in our current markets or in other
markets into which we may expand our product portfolio.
Many of our competitors have a number of significant advantages over us,
including:
- a larger market share;
- a broader array of product lines;
- preferred vendor status with some of our customers;
- extensive name recognition and marketing power; and
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- significantly greater financial, technical and manufacturing resources.
Unlike us, some of our competitors make many of their own components which
may provide them with certain benefits including lower costs. Our competitors
also may:
- consolidate or establish strategic relationships among themselves to
lower their product costs or to otherwise compete more effectively
against us;
- lower their product prices to gain market share; or
- bundle their products with other products to increase demand for their
products.
In addition, new competitors could emerge and rapidly capture market share.
If we fail to compete successfully against current or future competitors,
our business, operating results and financial condition may be materially and
adversely affected.
DEMAND FOR OUR PRODUCTS FLUCTUATES
We currently offer a single product family that is designed for desktop
computers. As a result, the demand for our products depends on the overall
demand for desktop computers. The desktop computer and hard disk drive markets
tend to go through periods of rapid growth followed by periods of oversupply and
rapid price and gross margin erosion. This environment makes it difficult for us
and our customers to reliably forecast demand for our products. We do not have
long-term supply contracts with our customers, and our customers often can defer
or cancel orders with limited notice and without significant penalty.
WE MUST EFFECTIVELY RESPOND TO CHANGING TECHNOLOGY; WE MUST EFFECTIVELY
TRANSITION TO GIANT MAGNETO-RESISTIVE HEAD TECHNOLOGY
Our future performance will depend on our ability to enhance current
products and to develop and introduce volume production of new competitive
products on a timely and cost-effective basis. We also must keep pace with and
correctly anticipate technological developments and evolving industry standards
and methodologies. Advances in magnetic, optical or other technologies, or the
development of entirely new technologies, could lead to new competitive products
that have better performance and/or lower prices than our products. Examples of
such new technologies include giant magneto-resistive head technology (which
already has been introduced by IBM and Fujitsu and which Western Digital
reportedly will use in its products under an agreement with IBM) and
optically-assisted recording technologies (which currently are being developed
by companies such as TeraStor Corporation and Seagate). We intend to incorporate
giant magneto-resistive head technology into future products. We have decided
not to pursue optically-assisted recording technologies at this time. Our
inability to introduce or achieve volume production of new competitive products,
(regardless of whether they include giant magneto-resistive head technology) on
a timely and cost-effective basis has in the past and in the future could have a
material adverse effect on our business, financial condition and results of
operations.
TO DEVELOP NEW PRODUCTS, WE MUST EFFECTIVELY INTEGRATE PARTS FROM THIRD PARTIES
Unlike some of our competitors, we do not manufacture any of the parts used
in our products. Instead, our products incorporate parts designed by and
purchased from third parties. Conse-
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quently, the success of our products depends on our ability to gain access to
and integrate parts that use leading-edge technology. To successfully manage
these integration projects we must:
- obtain high quality parts;
- hire skilled personnel;
- effectively integrate different products from a variety of vendors; and
- manage difficult scheduling and delivery problems.
Our success will depend on our ability to develop and maintain
relationships with key suppliers.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS
A number of the parts used in our products are available from only one or a
limited number of outside suppliers. Currently, we purchase digital signal
processor/controller and spin/servo integrated circuits only from Texas
Instruments, Inc. and purchase channel integrated circuits only from Lucent
Technologies, Inc. As we have experienced in the past, some of the parts we
require may periodically be in short supply. As a result, we must allow for
significant ordering lead times for certain parts. In addition, we may have to
pay significant cancellation charges to suppliers if we cancel orders for parts
because we reduce production due to production cut-backs caused by market
oversupply, reduced demand, transition to new products or technologies or for
other reasons. We order the majority of our parts on a purchase order basis and
only have limited long-term volume purchase agreements with certain existing
suppliers. If we cannot obtain sufficient quantities of high quality parts when
we need them, our business, financial condition and results of operations could
be materially and adversely affected.
WE DEPEND ON MICHAEL R. CANNON AND OUR OTHER KEY PERSONNEL; WE COULD BE SUED
OVER OUR HIRING PRACTICES
Our success depends upon the continued contributions of our key employees
many of whom, and in particular Michael R. Cannon, our President and Chief
Executive Officer, would be extremely difficult to replace. We do not have
employment contracts with any of our key personnel other than:
- Mr. Cannon;
- Paul J. Tufano, our Senior Vice President, Finance and Chief Financial
Officer;
- William F. Roach, our Senior Vice President, Worldwide Sales and
Marketing;
- Dr. Victor B. Jipson, our Senior Vice President, Engineering;
- Phillip C. Duncan, our Vice President, Human Resources; and
- K.H. Teh, our Vice President, Worldwide Manufacturing.
We also do not have key person life insurance on any of our personnel. Most
of our senior management and a significant number of our other employees have
been with us for less than three years. Worldwide competition for skilled
employees in the hard disk drive industry is extremely intense. We believe that
some of our competitors recently have made targeted efforts to recruit employees
from us and such efforts have resulted in us losing some skilled managers. If we
are unable to retain our existing employees or to hire and integrate new
employees, our business, financial condition and results of operations could be
materially and adversely affected.
Companies in the hard disk drive industry whose employees accept positions
with competitors often claim that such competitors have engaged in unfair hiring
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practices. We may receive such claims in the future as we seek to hire qualified
employees. We could incur substantial costs in defending ourselves against any
such claims.
OUR TAX LIABILITY IS EXPECTED TO INCREASE IN THE FUTURE
Due to our net operating losses ("NOLs"), NOL carryforwards and favorable
tax status in Singapore, we have not incurred any significant foreign, U.S.
federal, state or local income taxes for any recent fiscal periods. There has
been a significant reduction in the NOL carryforwards available to us for U.S.
federal, state and local income tax purposes as a result of recent events. As a
result, our U.S. tax liability is expected to increase substantially in the
future.
Events resulting in reduction of our NOL carryforwards include:
- use of our NOLs to offset our income resulting from our receipt of a $400
million dividend in June 1998 from our Singapore subsidiary, Maxtor
Peripherals (S) Pte Ltd.;
- use of our NOLs to offset income of Hyundai Electronics America and/or
other Hyundai Electronics America affiliates with respect to consolidated
or combined tax returns for periods from early 1996 to August 1998 (the
"Affiliation Period") during which we were a member of a consolidated or
combined tax group with Hyundai Electronics America (the "HEA Tax Group")
for U.S. state and local income tax purposes; and
- the July 1998 public offering of our common stock, which caused an
"ownership change" for U.S. federal income tax purposes, resulting in a
limitation on the amount of NOL carryforwards that may be used annually
to offset our income with respect to our post-Affiliation Period income
tax returns. The annual limitation is based on the value of all of our
outstanding stock immediately before the ownership change multiplied by
5.15%.
In December 1997, Maxtor Peripherals was granted pioneer tax status in
Singapore, thus exempting it from paying Singapore income taxes until June 30,
2003, subject to the ongoing satisfaction of certain conditions. Maxtor
Peripherals is eligible for up to two additional two-year extensions of this
pioneer tax status, subject to the satisfaction of certain additional
conditions. Maxtor Peripherals may not be able to satisfy or, if satisfied, to
maintain compliance with, the required conditions. If Maxtor Peripherals is
unable to satisfy and maintain compliance with the required conditions and is
unable to obtain a waiver of any such failure, it would lose its pioneer tax
status, or would be ineligible for such extensions, which could have a material
adverse effect on our business, financial condition and results of operations.
During the Affiliation Period, members of the HEA Tax Group filed separate
income tax returns in certain foreign countries and certain U.S. state and local
jurisdictions. Under an agreement among the members of the HEA Tax Group (the
"Tax Allocation Agreement"), we agreed to pay our allocable share of the total
consolidated or combined tax return liability for returns related to the
Affiliation Period, we allowed Hyundai Electronics America and other Hyundai
Electronics America affiliates to take advantage of our tax attributes, such as
our NOLs and tax credits and we were entitled to use Hyundai Electronics
America's tax attributes.
The HEA Tax Group has used substantial amounts of our NOLs and other tax
attributes. Under the Tax Allocation Agreement, neither Hyundai Elec-
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tronics America nor Maxtor was required to reimburse the other for any
utilization of the other member's NOLs or other tax attributes, except that each
party must reimburse the other for any additional use of the party's tax
attributes as a result of any return or amended return related to the
Affiliation Period filed after September 15, 1999, or as a result of any taxing
authority adjustment to Affiliation Period returns made after September 15,
1999.
We remain liable for our share of the total consolidated or combined tax
return liability incurred during the Affiliation Period. There can be no
assurance that our share of the consolidated or combined tax liability will not
be increased as a result of subsequent events, such as taxing authority audit
adjustments or the filing of amended returns affecting either our items of gain,
income, loss, deduction or credit or another member's items of gain, income,
loss, deduction or credit. We have agreed to indemnify or reimburse Hyundai
Electronics America if there is any increase in our share of the consolidated or
combined tax return liability resulting from revisions to our taxable income or
revisions to another HEA Tax Group member's taxable income, except to the extent
such revisions to another HEA Tax Group member's taxable income are made after
September 15, 1999.
Hyundai Electronics America recently sold all of the stock which it
formerly owned of Symbios, Inc. and TV/COM International, Inc., causing these
entities to cease to be members of the HEA Tax Group. Under agreements related
to these sales, Hyundai Electronics America agreed that Symbios and TV/COM no
longer have any obligations under the Tax Allocation Agreement. Because we did
not agree to assume any additional liability related to these sales, Hyundai
Electronics America should bear the burden of any of Symbios' and TV/COM's
former liabilities under the Tax Allocation Agreement.
Taxing authorities may, by law, generally assess us for the total amount,
and not just our share, of any consolidated or combined tax return deficiencies
of the entire HEA Tax Group which relate to the Affiliation Period. There can be
no assurance that the HEA Tax Group will satisfy all of its tax obligations or
that additional liabilities will not be assessed for such periods. Hyundai
Electronics America has agreed to indemnify and reimburse us if we are required
to pay any tax, interest or penalty to any taxing authority related to any
separate tax return of any member of the HEA Tax Group other than us, and if we
are required to pay to any taxing authority any amount in excess of our share of
the consolidated or combined tax return liability.
WE HAVE SIGNIFICANT DEBT
We historically have operated with a significant amount of debt as compared
to our equity. At December 26, 1998, we had outstanding approximately $150.3
million in principal amount of indebtedness. We incurred $28.8 million in
interest expense in the fiscal year ended December 26, 1998 and $36.5 million in
the fiscal year ended December 27, 1997. We also have an asset securitization
program under which we sell our accounts receivable on a non-recourse basis. At
December 26, 1998, $100.0 million of accounts receivable was securitized under
the program. We must meet certain conditions in order to continue this program.
Following the stock offering and the repayment of indebtedness to Hyundai
Electronics America from the proceeds of the stock offering, we will continue to
be subject to the risks associated with a large amount of debt, including:
- principal and interest repayment obligations that require the expenditure
of substantial amounts of cash;
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- our potential inability to repay principal or interest when due;
- our potential violation of loan covenants that could result in a default
on the debt, such debt becoming immediately payable and legal actions
against us; and
- adverse effects of interest expense on our business, financial condition
and results of operations.
WE HAVE ONLY ONE MANUFACTURING FACILITY AND WILL NEED ADDITIONAL CAPACITY IN THE
FUTURE
Our volume manufacturing operations currently are based in a single
facility in Singapore. A fire, flood, earthquake or other disaster or condition
affecting our facility could have a material adverse effect on our business,
financial condition and results of operations.
We may need additional manufacturing capacity beyond the capabilities of
our current facility as early as the beginning of the year 2000. Although we
believe that manufacturing facilities will be available, our inability to obtain
a facility or facilities which allow us to meet our customers' demands in a
timely manner may limit our growth and could have a material adverse effect on
our business, financial condition and results of operations.
WE MAY NEED MORE CAPITAL IN THE FUTURE BECAUSE THE HARD DISK DRIVE BUSINESS IS
CAPITAL INTENSIVE
Our business is capital intensive, and we may need more capital in the
future. Our future capital requirements will depend on many factors, including:
- the rate of our sales growth;
- the level of our profits or losses;
- the timing and extent of our spending to support facilities upgrades and
product development efforts;
- the timing and size of business or technology acquisitions; and
- the timing of introductions of new products and enhancements to our
existing products.
We may issue additional equity to raise capital. Any future equity
financing will decrease existing stockholders' percentage equity ownership and
may, depending on the price at which the equity is sold, result in significant
economic dilution to such stockholders. Furthermore, our board of directors is
authorized under our charter documents to issue preferred stock with rights,
preferences or privileges senior to those of our common stock without
stockholder approval.
While we currently do not have a revolving credit facility, it is our goal
to obtain one in the near future. However, we believe that current market
conditions for such facilities are not as favorable as they have been at certain
times in the past, that for various reasons the number of potential lenders
actively providing credit facilities to companies in the data storage industry
has decreased recently, and that the terms on which the remaining potential
lenders are willing to offer such facilities, in many cases, are restrictive
and/or costly. Consequently, the terms and conditions under which we might
obtain such a facility are uncertain. Any failure to obtain adequate credit
facilities on acceptable terms could have a material and adverse effect on our
business, financial condition and results of operations.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE FACE RISK OF THIRD PARTY
CLAIMS OF INFRINGEMENT
We have patent protection on some of our technology. We may not receive
patents for our current or future patent applications, and any patents that we
have or that are issued to us may be invalidated, circumvented or challenged.
Moreover, the rights granted under any such
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patents may not provide us with any competitive advantages. Finally, our
competitors may develop or otherwise acquire equivalent or superior technology.
We also rely on trade secret, copyright and trademark laws, as well as the
terms of our contracts to protect our proprietary rights. We may have to
litigate to enforce patents issued or licensed to us, to protect trade secrets
or know-how owned by us or to determine the enforceability, scope and validity
of our proprietary rights and the proprietary rights of others. Enforcing or
defending our proprietary rights could be expensive and might not bring us
timely and effective relief.
We may have to obtain licenses of other parties' intellectual property and
pay royalties. If we are unable to obtain such licenses, we may have to stop
production of our products or alter our products. In addition, the laws of
certain countries in which we sell and manufacture our products, including
various countries in Asia, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our
protective measures in these countries may be inadequate to protect our
proprietary rights. Any failure to enforce and protect our intellectual property
rights could have a material adverse effect on our business, financial condition
and results of operations.
When we were a majority-owned subsidiary of Hyundai Electronics America, we
had the benefit of certain third party intellectual property rights on terms
that may have been more favorable than would have been available to us if we had
not been a majority-owned subsidiary of Hyundai Electronics America. We may not
be able to obtain similar rights in the future on terms as favorable.
Similar to certain other providers of hard disk drives, we have received
correspondence from Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of a number of hard disk drive motor patents. In
particular, on February 3, 1999, we received correspondence from Papst notifying
us that they have moved to add us as a defendant to a lawsuit pending in the
United States District Court for the Northern District of California. This
lawsuit relates to the alleged infringement of 15 of the hard disk drive motor
patents described above. The patents in question relate to motors that we
purchase from motor vendors and the use of such motors in hard disk drives.
While we believe that we have valid defenses if a lawsuit is filed or if we are
added successfully to any existing lawsuit, the results of any litigation are
inherently uncertain and there is no assurance that Papst will not assert other
infringement claims relating to current patents, pending patent applications and
future patents or patent applications. Additionally, there is no assurance that
Papst will not initiate a lawsuit against us or successfully add us to an
existing lawsuit, or that we will be able to successfully defend ourselves
against such a lawsuit. A favorable outcome for Papst in such a lawsuit could
result in the issuance of an injunction against us or our products and/or the
payment of monetary damages equal to a reasonable royalty or recovered lost
profits or, in the case of a finding of a willful infringement, treble damages
and could have a material adverse effect on our business, financial condition
and results of operations.
WE ARE DEPENDENT ON OUR INTERNATIONAL OPERATIONS; WE FACE RISKS FROM OUR
INTERNATIONAL SALES
We conduct most of our manufacturing and testing operations and purchase a
substantial portion of our key parts outside the U.S. We also sell a significant
portion of products to foreign distributors and retailers. Our dependence on
revenue from international sales and our need to manage international operations
each
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involves a number of inherent risks, including:
- economic slowdown and/or downturn in the computer industry in such
foreign markets;
- international currency fluctuations;
- general strikes or other disruptions in working conditions;
- political instability;
- trade restrictions;
- changes in tariffs;
- the difficulties associated with staffing and managing international
operations;
- generally longer periods to collect receivables;
- unexpected changes in or impositions of legislative or regulatory
requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse taxes; and
- delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers.
The specific economic conditions in each country will impact our
international sales. For example, our international contracts are denominated
primarily in U.S. dollars. Significant downward fluctuations in currency
exchange rates against the U.S. dollar could cause our products to become
relatively more expensive to distributors and retailers in those countries. In
addition, we attempt to manage the impact of foreign currency exchange rate
changes by entering into short-term, foreign exchange contracts. If we do not
effectively manage the risks associated with international operations and sales,
our business, financial condition and results of operations could be materially
and adversely affected.
WE ARE THE SUBJECT OF LEGAL
PROCEEDINGS AND CLAIMS
We currently are involved in a lawsuit with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among us, StorMedia and Hyundai
Electronics Industries Co. Ltd. that became effective on November 17, 1995. In
that agreement, StorMedia agreed to supply disk media to us. StorMedia's disk
media did not meet our specifications and functional requirements as required by
the agreement and we ultimately terminated the agreement.
After certain of StorMedia's stockholders filed a lawsuit against it in
September 1996 which alleged, in part, that StorMedia failed to perform under
the agreement with Maxtor and Hyundai Electronics America, StorMedia sued
Hyundai Electronics Industries, Mong Hun Chung (Hyundai Electronics Industries'
Chairman), Dr. Chong Sup Park (Hyundai Electronics America's President and our
then President who signed the agreement on our behalf) and K.S. Yoo (the
individual who signed the agreement on behalf of Hyundai Electronics Industries)
(collectively the "Original Defendants") in federal court (the "Federal Suit").
In the Federal Suit, StorMedia alleged that at the time Hyundai Electronics
Industries entered into the agreement, it knew that it would not and could not
purchase the volume of products that it committed to purchase, and that failure
to do so caused damages to StorMedia in excess of $206 million.
In December 1996, we filed a complaint against StorMedia and William Almon
(StorMedia's Chairman and Chief Executive Officer) in a Colorado state court
seeking approximately $100 million in damages and alleging, among other claims,
breach of contract, breach of implied warranty of fitness and fraud under the
StorMedia Agreement (the "Colorado Suit"). This proceeding was stayed pending
resolution of the Federal
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Suit. The Federal Suit was permanently dismissed early in February 1998. On
February 24, 1998, StorMedia filed a new complaint in a California state court
for $206 million, alleging fraud and deceit against the Original Defendants and
negligent misrepresentation against Hyundai Electronics Industries and us (the
"California Suit"). On May 18, 1998, the stay on the Colorado Suit was lifted by
the Colorado state court. Our motion to dismiss, or in the alternative, stay the
California Suit, is pending. On September 9, 1998, the California Suit was
stayed pending resolution of the Colorado Suit. On October 11, 1998, StorMedia
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act.
This bankruptcy filing caused an automatic stay of proceedings against
StorMedia, including the Colorado Suit. StorMedia has not prosecuted its claims
against us since it filed for bankruptcy protection.
We believe we have valid defenses against the claims alleged by StorMedia
and intend to defend ourselves vigorously. However, due to the nature of
litigation and because the pending lawsuits are in the very early pre-trial
stages, we cannot determine the possible loss, if any, that ultimately may be
incurred either in the context of a trial or as a result of a negotiated
settlement. The litigation could result in significant diversion of time by our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this litigation will not have a material adverse effect on our
business, financial condition or results of operations. However, the results of
these proceedings, including any potential settlement, are uncertain. Any
resolution against us could have a material adverse effect on our business,
financial condition and results of operations.
We have been notified of other claims, including claims of patent
infringement. While the final outcome of these claims cannot be determined at
this time, we believe that resolution of these claims will not have a material
adverse effect on our business, financial condition or results of operations. We
have not reserved any amounts in our financial statements for any legal claims
or actions.
WE HAVE EXPOSURE FROM OUR WARRANTIES
Our products may contain defects. We generally warrant our products for
three years. Our standard warranty contains a limit on damages and an exclusion
of liability for consequential damages and for negligent or improper use of the
product. We establish a reserve, at the time of product shipment, in an amount
equal to our estimated warranty expenses. We had warranty reserves of $22.7
million and $41.8 million as of December 27, 1997 and December 26, 1998,
respectively. While we believe that our warranty reserves will be sufficient,
the failure to maintain sufficient warranty reserves or the unenforceability of
our liability limitations could have a material adverse effect on our business,
financial condition and results of operations.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE
Our stock price and the number of shares traded each day has varied
greatly. We expect these fluctuations to continue due to factors including:
- quarterly fluctuations in operating results;
- announcements of new products by us or our competitors;
- gains or losses of significant customers;
- changes in stock market analysts' estimates;
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- the presence or absence of short-selling of our common stock; and
- events affecting other companies that the market deems comparable to us.
Our stock price also may be affected by events relating to Hyundai
Electronics America and Hyundai Electronics Industries, including sales of our
common stock by Hyundai Electronics America or the perception that such sales
may occur (due to the financial condition of Hyundai Electronics America or
otherwise). There have been reports that Hyundai Electronics Industries is
planning to sell some operations that do not directly relate to its core
semiconductor business. Hyundai Electronics America and Hyundai Electronics
Industries have informed Maxtor that following the closing of the stock offering
and the expiration of the 90-day period during which Hyundai Electronics America
has agreed not to offer or sell additional shares without the consent of Salomon
Smith Barney Inc., they may consider selling additional Maxtor shares at a time
they deem appropriate. Finally, our stock price may be subject to extreme
fluctuations in response to general economic conditions in the U.S., Korea,
Southeast Asia and elsewhere, such as interest rates, inflation rates, exchange
rates, unemployment rates, and trade surpluses and deficits. It is likely that
in some future quarter or quarters our operating results will be below the
expectations of stock market analysts or investors. In such event, our stock
price probably will decline.
Additionally, we do not know how or whether investors in the DECS offering
will resell the DECS. Any market that develops for the DECS could reduce the
demand for our common stock or otherwise negatively affect the market for our
common stock.
WE COULD BE SUBJECT TO
ENVIRONMENTAL LIABILITIES
We use only a limited variety of chemicals in our manufacturing and
research operations. However, we are subject to a wide range of environmental
protection regulations in the U.S. and Singapore. While we have not experienced
any material adverse effect on our operations as a result of such laws, future
regulations may have a material adverse effect on our business, financial
condition and results of operations. We believe that we are in compliance in all
material respects with all present environmental regulations. In the U.S.,
environmental regulations often require parties to fund remedial action
regardless of fault. As a consequence, it often is difficult to estimate the
future impact of environmental matters, including potential liabilities. If we
have to make significant capital expenditures or pay significant expenses in
connection with future remedial actions or to continue to comply with applicable
environmental laws, our business, financial condition and results of operations
could be materially and adversely affected.
ANTITAKEOVER PROVISIONS COULD AFFECT STOCKHOLDERS
We have a number of protective provisions in place designed to provide our
board of directors with time to consider whether a hostile takeover offer is in
our best interests and the best interests of our stockholders. These provisions,
however, could discourage potential acquisition proposals and could delay or
prevent a change in control of Maxtor. Such provisions also could diminish the
opportunities for a holder of our common stock to participate in tender offers,
including tender offers at a price above the then-current market price for our
common stock. Such provisions also may inhibit fluctuations in our stock price
that could result from takeover attempts.
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The first of these provisions is Section 203 of the Delaware General
Corporation Law. Section 203 places significant restrictions on a public
Delaware corporation's ability to engage in any merger, asset or stock sale, or
other transaction resulting in a financial benefit to a stockholder holding 15%
or more of the corporation's voting stock.
In addition, our charter documents allow our board of directors to issue up
to 95 million shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the stockholders. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of
Maxtor, thereby delaying, deferring or preventing a change in control of Maxtor.
Furthermore, such preferred stock may have other rights, including economic
rights, senior to our common stock, and as a result, the issuance of such
preferred stock could have a material adverse effect on our stock price. We
currently do not plan to issue shares of preferred stock.
Our charter documents also contain a number of protective measures
including provisions:
- dividing our board of directors into three classes serving staggered
three-year terms with only one of the three classes being elected each
year;
- requiring cause to remove directors;
- granting our board of directors the exclusive right to set the authorized
number of directors and to fill vacancies on our board of directors;
- requiring that any action required or permitted to be taken by our
stockholders be effected at a duly called annual or special meeting of
the stockholders instead of by a consent in writing;
- providing that only our board of directors, the Chairman of our board of
directors, or the Chief Executive Officer can call special meetings of
the stockholders;
- requiring advance notice for stockholder proposals or director
nominations by stockholders; and
- requiring the affirmative vote of at least two-thirds of our outstanding
voting stock, voting as a single class to amend the above provisions.
In addition, we have entered into a Stockholder Agreement with Hyundai
Electronics America which grants Hyundai Electronics America certain rights to
designate directors for nomination, requires Hyundai Electronics America to vote
in favor of other board of director nominees so long as Hyundai Electronics
America's rights to designate nominees are honored, and restricts Hyundai
Electronics America's right to solicit proxies or acquire additional shares of
our common stock.
THERE ARE SUBSTANTIAL SHARES ELIGIBLE FOR SALE; THE SALE OF SUCH SHARES MAY
DEPRESS OUR STOCK PRICE
Hyundai Electronics America, Maxtor and Maxtor's executive officers and
directors have agreed that, during the period beginning from the date of this
prospectus and continuing to and including the date 90 days after the date of
this prospectus, they will not, with certain exceptions, offer, sell or
otherwise dispose of any of our securities without the prior written consent of
Salomon Smith Barney Inc.
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options) in the public market
following the stock offering, our stock price could fall. Such sales also might
make it more difficult for us to sell equity
18
<PAGE> 24
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of the stock offering, we will have outstanding
102,093,499 shares of common stock (based upon shares outstanding as of December
26, 1998), assuming the underwriters do not exercise their right to purchase
additional shares of our common stock and excluding the 9,305,959 shares subject
to options outstanding as of December 26, 1998. Of these shares, the 7,800,000
shares sold in the stock offering and the 49,731,225 shares sold in our July
1998 public offering are freely tradable.
Any shares distributed by DECS Trust IV will be freely tradable and may be
resold without further registration with the SEC.
There have been reports that Hyundai Electronics Industries is planning to
sell some operations that do not directly relate to its core semiconductor
business. Hyundai Electronics America and Hyundai Electronics Industries have
informed Maxtor that following the closing of the stock offering and the
expiration of the 90-day period during which Hyundai Electronics America has
agreed not to offer or sell additional shares without the consent of Salomon
Smith Barney Inc., they may consider selling additional Maxtor shares at a time
they deem appropriate. Under the terms of our stockholder agreement with Hyundai
Electronics America, we are required to register, under certain circumstances,
shares of our common stock held by Hyundai Electronics America under the
Securities Act. Upon registration, such shares would become freely tradable and
could negatively affect the market for our common stock.
19
<PAGE> 25
RELATIONSHIP BETWEEN MAXTOR AND HYUNDAI
In 1994, Hyundai Electronics Industries and certain of its affiliates
purchased 40% of our outstanding common stock for $150.0 million in cash. In
early 1996, Hyundai Electronics America acquired all of the remaining shares of
our publicly-held common stock in a tender offer and merger for $215.0 million
in cash and also acquired all of our common stock held by Hyundai Electronics
Industries and its affiliates. Immediately following the stock offering, Hyundai
Electronics America will own approximately 42.0% of our outstanding common stock
(approximately 41.3% if the underwriters fully exercise their right to purchase
additional shares in the stock offering).
Hyundai Electronics Industries, Hyundai Electronics America and Maxtor have
entered into certain agreements described below governing certain relationships
between the parties. Because Hyundai Electronics America controlled Maxtor at
the time these agreements were negotiated, these agreements did not result from
"arms' length" negotiations. In addition, many of the agreements relate to
matters that inherently arise only between a company and its parent or
affiliated companies, and so are not susceptible to comparison to similar
agreements negotiated at arms' length. These agreements resulted from
negotiations between our management representatives and representatives of
Hyundai Electronics America and Hyundai Electronics Industries, with the
participation of each parties' respective legal counsel and other advisors. The
agreements were intended, when taken together, to reflect reasonable tradeoffs
and benefits for all parties. In negotiating these agreements the parties sought
to take into account, to the extent available, terms of arms' length agreements
and the terms that already had been negotiated between Hyundai Electronics
Industries (and its affiliates) and Maxtor at the time of Hyundai Electronics
Industries' initial investment in Maxtor. We might have received more favorable
terms from an unaffiliated party in some or all of the agreements, although we
believe some of the agreements may have more favorable terms than those
available from unaffiliated parties.
Conflicts of interest may arise from time to time in the future between
Maxtor and Hyundai Electronics America or its affiliates in a number of areas
relating to their past and ongoing relationships, including potential
competitive business activities, corporate opportunities, tax matters,
intellectual property matters, indemnity agreements, registration rights, sales
or distributions by Hyundai Electronics America of all or any portion of its
ownership interest in Maxtor or Hyundai Electronics America's attempt to assert
control over the management and affairs of Maxtor. We may not be able to resolve
any potential conflict and if the conflict is resolved, we might have had a more
favorable resolution if we were dealing with an unaffiliated party.
Our board of directors has established an affiliated transactions committee
which is comprised entirely of directors who are not employed by Hyundai
Electronics America, any affiliate thereof or Maxtor. Our board of directors has
adopted resolutions requiring this Affiliated Transactions Committee to review
any material transactions between Maxtor on the one hand, and Hyundai
Electronics America or its affiliates on the other. We also have certain
provisions in our Amended and Restated Certificate of Incorporation concerning
the conduct of certain affairs of Maxtor as they may involve Hyundai Electronics
America and its affiliates on the one hand and Maxtor on the other.
Hyundai Electronics America could decide to sell or otherwise dispose of
all or a portion of its holdings of our common stock at some future date
following the stock offering and the DECS offering, subject to certain
agreements between Hyundai Electronics America and the underwriters. Holders of
our common stock other than
20
<PAGE> 26
Hyundai Electronics America might not be allowed to participate in any
transaction involving a transfer of a controlling interest in Maxtor by Hyundai
Electronics America. Such a transaction could adversely affect the trading price
of our common stock or the interests of the holders of our common stock who do
not participate in such transaction.
The documents we summarize below are filed with the SEC as exhibits to our
registration statement in connection with our July 1998 public offering. You
should read the full text of the documents if you want a complete description of
their terms.
INDEBTEDNESS TO HYUNDAI ELECTRONICS AMERICA
Hyundai Electronics America occasionally advanced cash to us for working
capital prior to our July 1998 public offering. We had outstanding aggregate
principal indebtedness of $55.0 million owing to Hyundai Electronics America as
of December 26, 1998 under a subordinated note due July 31, 2001, currently
bearing interest at 7.65%, due semi-annually. We propose to prepay this note in
full with a portion of the net proceeds we will receive in the stock offering.
IBM LICENSE AND LICENSE FEES
Hyundai Electronics Industries has licenses to certain IBM patents under a
license agreement with IBM and Hyundai Electronics Industries sublicensed Maxtor
under this agreement prior to our July 1998 public offering. IBM agreed to
provide a royalty-free license to an entity that ceased to be a majority-owned
subsidiary of Hyundai Electronics Industries, as long as a request was timely
made and certain other conditions were met. After our July 1998 public offering,
we ceased to be a majority-owned subsidiary of Hyundai Electronics America,
which is a majority-owned subsidiary of Hyundai Electronics Industries.
Accordingly, Hyundai Electronics America and Maxtor requested a license
agreement for Maxtor from IBM, and Maxtor and IBM have entered into a license
agreement licensing certain patents, effective from the date we ceased to be a
majority-owned subsidiary of Hyundai Electronics America. Hyundai Electronics
Industries is required under the IBM license agreement to pay IBM a license fee,
payable in annual installments through 2007. Although the license agreement
between IBM and Maxtor is royalty-free, under the sublicense agreement between
Hyundai Electronics Industries and us, we agreed to pay IBM a portion of the
license fee otherwise due from Hyundai Electronics Industries under the license
agreement between Hyundai Electronics Industries and IBM, when such amounts are
due from Hyundai Electronics Industries to IBM.
CERTAIN INTELLECTUAL PROPERTY INDEMNIFICATION AND PATENT CROSS LICENSE BETWEEN
HYUNDAI ELECTRONICS INDUSTRIES AND MAXTOR
Hyundai Electronics Industries agreed to indemnify us for any losses from
third party claims arising after we ceased to be a majority-owned subsidiary of
Hyundai Electronics America, if those claims would have been covered under
patent license agreements between Hyundai Electronics Industries or its
affiliates other than Maxtor and such third party, and which were in existence
at the time Maxtor was a majority-owned subsidiary of Hyundai Electronics
America. We ceased to be a majority-owned subsidiary of Hyundai Electronics
America on the date of the closing of our July 1998 public offering. These
indemnifications survive through July 2001, and the maximum dollar amount for
which Hyundai Electronics Industries is liable under the indemnification
provisions is $25.0 million. In addition, Hyundai Electronics Industries and
Maxtor have granted each other royalty-free patent licenses covering patents
owned, or licensable without the payment of royalties or other consideration to
third parties, by each party through
21
<PAGE> 27
August 31, 2003 relating to certain fields of use. Maxtor and Hyundai
Electronics Industries also have agreed to indemnify each other for losses from
the other party's action or inaction under the license agreement between Hyundai
Electronics Industries and IBM including any nonpayment of license fees.
Maxtor's maximum liability under this indemnity agreement is the total amount of
money due to IBM under the sublicense agreement and actual interest costs and/or
exchange rate losses incurred by Hyundai Electronics Industries.
STOCKHOLDER AGREEMENT
Hyundai Electronics America, Hyundai Electronics Industries and Maxtor are
parties to a stockholder agreement. The stockholder agreement does not bind any
Hyundai entity other than Hyundai Electronics America, Hyundai Electronics
Industries, their successors and entities controlled by either of them ("Hyundai
Affiliates"), Maxtor and/or entities controlled by Maxtor. Hyundai Electronics
America owns approximately 46.7% of our common stock prior to the stock
offering. Hyundai Electronics America will own approximately 42.0% of our common
stock after the stock offering (assuming the underwriters do not exercise their
right to purchase any additional shares of our common stock in the stock
offering). The number of shares of common stock owned by Hyundai Electronics
America includes shares subject to the DECS. Hyundai Electronics America will
retain beneficial ownership and retain the right to vote and to receive
dividends with respect to such shares unless such shares are delivered pursuant
to the DECS. Delivery of such shares is expected on or about February 15, 2002
unless Hyundai Electronics America exercises its right to deliver cash in lieu
of such shares (in which case Hyundai Electronics America will retain beneficial
ownership of such shares) or unless DECS Trust IV is liquidated, and such shares
are delivered on an earlier date.
Registration Rights. Under the terms of the stockholder agreement, if we
propose to register any of our securities under the Securities Act of 1933,
either for our own account or the account of other stockholders exercising
registration rights, Hyundai Electronics America and its transferees are
entitled to notice of such registration and are entitled to include shares of
such common stock therein. However, the underwriters of any offering have the
right to limit the number of shares included in such registration. In addition,
Hyundai Electronics America and certain transferees may require us, on not more
than five occasions, to file a registration statement under the Securities Act
with respect to minimum specified amounts and value of shares held by Hyundai
Electronics America or such transferees. We are required to use reasonable
commercial efforts to effect such registration, subject to certain conditions
and limitations. Registration of such shares under the Securities Act would
result in such shares becoming freely tradable and could have an adverse effect
on the market price for our common stock. On January 19, 1999, Hyundai
Electronics America entered into an agreement with us supplementing and
modifying the terms of Hyundai Electronics America's registration rights
relating to the stock offering and DECS offering, to allocate expenses for such
offerings, to provide for indemnification to Maxtor relating to the DECS
offering, to agree to the allocation of the over-allotment option, if exercised,
and certain other matters.
Rights Regarding Our Board of Directors. When the Hyundai Affiliates
beneficially own less than a majority, but at least 30% of our outstanding
voting stock, Hyundai Electronics America has the right to designate for
nomination one director in each of the three classes of our board of directors.
Such designee must be reasonably satisfactory to the nominating committee of the
board of directors. The remaining directors are to be nominated by the
nominating committee, subject to the approval of a majority of our
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<PAGE> 28
directors who are not employed by or serving as paid consultants for Hyundai
Electronics America, Maxtor or either of their affiliates. Hyundai Electronics
America has the right to designate for nomination one director in each of two
classes at any time when the Hyundai Affiliates beneficially own less than 30%
but at least 20% of our outstanding voting stock, and one director if the
Hyundai Affiliates beneficially own less than 20% but at least 10% of our
outstanding voting stock. Again, each designee must be reasonably satisfactory
to the nominating committee. If a vacancy occurs with respect to a director
which Hyundai Electronics America had the right to designate initially, and
Hyundai Electronics America has the right at such time to designate a director
for nomination in such director's class, Hyundai Electronics America is entitled
to designate a director to fill the vacancy. If we nominate for election those
persons designated by Hyundai Electronics America, the Hyundai Affiliates are
required to vote their shares of voting stock in favor of all directors
nominated in accordance with the stockholder agreement. Hyundai Electronics
America's right to designate directors for nomination terminates when the
Hyundai Affiliates beneficially own less than 10% of the outstanding voting
stock.
Three of our eight directors are employees of Hyundai Electronics America
or Hyundai Electronics Industries.
Prohibition on Certain Proxy Solicitations. The Hyundai Affiliates are not
permitted to make any solicitation of proxies either with regard to the election
of directors or other proposals, except in response to a solicitation of proxies
by a person other than our management in an election contest or otherwise. This
prohibition on proxy solicitation terminates when the Hyundai Affiliates
beneficially own less than 20% of the outstanding voting stock.
Standstill and Right to Maintain Ownership; Substantial Stock
Ownership. Hyundai Affiliates are not permitted to acquire additional shares of
our voting stock except for two reasons. First, Hyundai Affiliates may purchase
voting stock if a third party makes a tender offer or exchange offer for at
least 40% of our voting stock or accumulates more than 20% of our voting stock,
unless these actions by the third party have been approved by a majority of our
directors who are not employees of any Hyundai entity or Maxtor. Second, Hyundai
Affiliates may purchase voting stock through December 31, 2000, if as a result
of an issuance of common stock or other equity securities by us, Hyundai
Affiliates will own in the aggregate less than 30% of our outstanding voting
stock, plus one share (the "Minimum Ownership") following such issuance. In the
second case, Hyundai Electronics America is permitted to purchase shares of our
common stock in the open market, subject to our trading window policies, only to
the extent necessary to maintain the Minimum Ownership. Unless such purchases
are made or Hyundai Electronics America otherwise directs, we will automatically
sell Hyundai Electronics America the number of shares of common stock necessary
to allow Hyundai Affiliates in the aggregate to maintain the Minimum Ownership,
at fair market value as determined under the stockholder agreement. The
prohibition on Hyundai Affiliates' acquisition of our voting stock terminates on
the earlier of December 31, 2001 or such time as the Hyundai Affiliates
beneficially own less than 20% of our outstanding voting stock.
So long as Hyundai Electronics America owns a substantial percentage of our
voting stock, it may be able to influence corporate policy decisions and
determine the outcome of any matters submitted to our stockholders. A favorable
vote of two-thirds of our outstanding voting stock is required to approve
certain types of amendments to our Amended and Restated Certificate of
Incorporation and stockholder-proposed amendments to our Amended and Restated
Bylaws. Consequently, Hyundai Electronics America will be
23
<PAGE> 29
able to block such amendments so long as it owns at least one-third of our
common stock, and will make approval of any such amendment more difficult to
achieve if it disapproves of such amendment even if its ownership drops below
one-third.
Agreement Not to Compete. Hyundai Electronics America and Hyundai
Electronics Industries also have agreed not to compete with us in the design,
development, manufacture, marketing or sale of hard disk drives through July
2003. Despite this agreement, Hyundai Affiliates are permitted to make
investments of up to 3% of the outstanding stock of a publicly traded
corporation.
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<PAGE> 30
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
public reference facilities of the SEC in Washington, D.C., Chicago, Illinois
and New York, New York. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings also are available to
the public from the SEC's web site at http:\\www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and any later information that we file
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any additional documents
we file with the SEC until the offering of the common stock is terminated. This
prospectus is part of a registration statement on the Form S-3 that we filed
with the SEC. The documents we incorporate by reference are:
(1) Maxtor's Annual Report on Form 10-K/A for the fiscal year ended
December 27, 1997;
(2) Maxtor's Quarterly Report on Form 10-Q for the quarters ended March 28,
1998, June 27, 1998 and September 26, 1998 and Maxtor's Quarterly
Report on Form 10-Q/A for the quarter ended September 26, 1998;
(3) The description of our common stock that is contained in our
Registration Statement on Form 8-A filed on July 28, 1998; and
(4) Maxtor's Current Reports on Form 8-K filed on January 20, 1999 and on
January 22, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Investor Relations
Maxtor Corporation
510 Cottonwood Drive
Milpitas, California 95035
(408) 432-1700
In addition, we will deliver a copy of our (1) Annual Report on Form 10-K/A
for the fiscal year ended December 27, 1997 and (2) most recent Form 10-Q and
Form 10-Q/A, without charge, to each person receiving a copy of this prospectus.
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<PAGE> 31
PRICE RANGE OF OUR COMMON STOCK
Our common stock has been trading publicly on the Nasdaq National Market
under the symbol "MXTR" since July 31, 1998. The table below sets forth the
range of quarterly high and low closing sales prices for our common stock on the
Nasdaq National Market. Our fiscal year end is the last Saturday of December,
conforming to a 52/53-week year methodology.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1999 First Quarter (through February 8, 1999)........ $19.56 $12.63
Fiscal 1998 Fourth Quarter.................................. 15.63 7.63
Fiscal 1998 Third Quarter (from July 31, 1998).............. 11.63 6.81
</TABLE>
On February 8, 1999, the closing price of our common stock as reported by
the Nasdaq National Market was $14.44 per share. As of February 8, 1999, there
were approximately 100 stockholders of record of our common stock including The
Depository Trust Company which holds shares of Maxtor common stock on behalf of
an indeterminate number of beneficial owners.
DIVIDEND POLICY
We have never paid cash dividends on our stock. We do not anticipate paying
cash dividends on our stock, including our common stock, in the near future.
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<PAGE> 32
CAPITALIZATION
The following table sets forth our capitalization as of December 26, 1998,
(1) on an actual basis and (2) on a pro forma basis as adjusted to reflect the
sale of our common stock offered by us in the stock offering at the public
offering price and the receipt and application of the proceeds therefrom, after
deducting the estimated underwriting discount and offering expenses payable by
us. This information should be read in conjunction with our consolidated
financial statements and the notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 26, 1998
------------------------
AS
ACTUAL ADJUSTED
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings, including current portion of
long-term debt....................................... $ 5,261 $
========= ==========
Long-term debt:
Long-term debt due affiliate......................... $ 55,000 $ --
Long-term debt....................................... 90,046
--------- ----------
Total long-term debt......................... 145,046
--------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value, 95,000,000 shares
authorized; no shares issued and outstanding,
actual; no shares issued and outstanding, as
adjusted.......................................... -- --
Common stock, $0.01 par value, 250,000,000 shares
authorized; 94,293,499 shares issued and
outstanding, actual; shares issued
and outstanding, as adjusted...................... 943
Additional paid-in capital............................. 880,175
Unrealized gain on investments in equity securities.... 30,094
Accumulated deficit.................................... (741,780)
--------- ----------
Total stockholders' equity........................ 169,432
--------- ----------
Total capitalization.............................. $ 314,478 $
========= ==========
</TABLE>
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<PAGE> 33
DILUTION
As of December 26, 1998, our net tangible book value was approximately
$169.4 million or $1.80 per share of common stock, based on 94,293,499 shares of
common stock outstanding. Net tangible book value per share is equal to our
total tangible assets less our total liabilities, divided by the total number of
shares of common stock outstanding. After giving effect to our sale of 7,800,000
shares of our common stock in the stock offering at the public offering price,
and after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our as adjusted net tangible book
value as of December 26, 1998 would have been approximately $ million,
or $ per share. This represents an immediate increase in net tangible book
value of $ per share of common stock to existing stockholders and an
immediate dilution in net tangible book value of $ per share to investors
purchasing shares of common stock in the stock offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............. $
------
Net tangible book value per share as of December 26,
1998............................................... $ 1.80
Increase in net tangible book value per share
attributable to new investors......................
------
Net tangible book value per share after stock
offering...........................................
------
Dilution per share to new investors.................. $
======
</TABLE>
The calculation of net tangible book value and other computations above
assume no exercise of outstanding options. As of December 26, 1998, 9,305,959
shares of common stock were issuable upon exercise of outstanding stock options
at a weighted average exercise price of $8.46 per share. To the extent the
outstanding options are exercised with exercise prices below the public offering
price, there will be further dilution to new investors.
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<PAGE> 34
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
thereto included elsewhere in this prospectus. The table below sets forth our
selected consolidated financial data for, and as of the end of, each of the
fiscal periods indicated. The selected consolidated financial data for the
fiscal years ended March 25, 1995 and March 30, 1996 have been derived from our
consolidated financial statements audited by Ernst & Young LLP. The selected
consolidated financial data for the nine-month period ended December 28, 1996
and the fiscal years ended December 27, 1997 and December 26, 1998 have been
derived from our consolidated financial statements audited by
PricewaterhouseCoopers LLP, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR NINE MONTHS FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 25, MARCH 30, DECEMBER 28, DECEMBER 27, DECEMBER 26,
1995 1996 1996(1) 1997 1998
----------- ----------- ------------ ------------ ------------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.................................................. $ 906.8 $1,269.0 $ 798.9 $1,424.3 $2,408.5
Cost of revenue.......................................... 850.7 1,196.3 888.9 1,352.9 2,108.1
------- -------- ------- -------- --------
Gross profit (loss)................................ 56.1 72.7 (90.0) 71.4 300.4
------- -------- ------- -------- --------
Operating expenses:
Research and development............................... 60.7 94.7 87.8 106.2 152.4
Selling, general and administrative.................... 81.6 82.8 60.7 62.6 75.8
Stock compensation expense............................. -- -- -- -- 12.1(2)
Other.................................................. (10.2) 4.5 -- -- --
------- -------- ------- -------- --------
Total operating expenses........................... 132.1 182.0 148.5 168.8 240.3(2)
------- -------- ------- -------- --------
Income (loss) from operations............................ (76.0) (109.3) (238.5) (97.4) 60.1(2)
Interest expense......................................... (8.4) (11.8) (18.0) (36.5) (28.8)
Interest and other income................................ 4.2 1.1 1.0 25.0(3) 7.4
------- -------- ------- -------- --------
Income (loss) before income taxes........................ (80.2) (120.0) (255.5) (108.9) 38.7(2)
Provision for income taxes............................... 2.0 2.8 0.8 1.0 7.5
------- -------- ------- -------- --------
Net income (loss)........................................ $ (82.2) $ (122.8) $(256.3) $ (109.9)(3) $ 31.2(2)
======= ======== ======= ======== ========
Net income (loss) per share -- diluted(4)................ $ (3.25) $ (5.94) $ -- $ -- $ 0.47
======= ======== ======= ======== ========
Shares used in per share calculation (in thousands)...... 25,292 20,677 -- -- 65,814
======= ======== ======= ======== ========
Pro forma net loss per share -- diluted.................. $ -- $ -- $(17.62) $ (3.62) $ 0.47
======= ======== ======= ======== ========
Shares used in pro forma share calculation (in
thousands)............................................. -- -- 14,552 30,350 65,814
======= ======== ======= ======== ========
BALANCE SHEET DATA:
Total assets............................................. $ 381.8 $ 442.5 $ 314.5 $ 555.5 $ 863.4
Total current liabilities................................ 236.0 413.1 412.9 552.2 548.9
Long-term debt........................................... 102.0 100.2 229.1 224.3 145.0
Total stockholders' equity (deficit)..................... 43.9 (71.1) (327.5) (221.0) 169.4
</TABLE>
- -------------------------
(1) We changed our fiscal year during the period ended December 28, 1996 to
conform our fiscal year to that of Hyundai Electronics America.
(2) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. Without such charge, we would have had total operating expenses
of $228.2 million, income from operations of $72.2 million, income before
income taxes of $50.8 million and net income of $43.3 million. Our 1996
Stock Option Plan was amended and restated to remove the variable features
and provide for fixed award options. See Note 9 of notes to consolidated
financial statements.
(3) Includes recovery of a $20.0 million fully-reserved note from International
Manufacturing Services.
(4) Net loss per share information for the fiscal periods ended December 28,
1996 and December 27, 1997 have not been presented since such information is
not meaningful due to the limited number of shares of common stock
outstanding at that time.
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<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and the notes thereto which appear elsewhere in this prospectus. This
prospectus contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and elsewhere
in this prospectus, particularly in "Risk Factors." In addition to the other
information in this prospectus, investors should consider carefully the
following discussion and the information set forth under "Risk Factors" in
evaluating us and our business before purchasing our common stock in the stock
offering.
We are a leading provider of hard disk drives for desktop computers. Our
DiamondMax product family consists of 3.5 inch hard disk drives with storage
capacities which range from 3.4 gigabytes to 17.2 gigabytes and provides
industry-leading performance.
CHANGE IN FISCAL YEAR
During 1996, we changed our fiscal year end to be consistent with the
fiscal year end of Hyundai Electronics America. The fiscal year end changed from
the last Saturday of March, the date used in our previous filings of our Form
10-K with the SEC, to the last Saturday of December, conforming to a 52/53-week
year methodology.
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<PAGE> 36
RESULTS OF OPERATIONS
Quarterly Results of Operations
The following table sets forth certain quarterly financial information for
each of the seven quarters in the period ended December 26, 1998. This
information is derived from our unaudited consolidated financial statements,
prepared on a basis consistent with our audited consolidated financial
statements which appear elsewhere in this prospectus. In the opinion of our
management, this information includes all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of such information.
Past quarterly operating results are not necessarily indicative of the results
that may be expected for future periods. The data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information of Maxtor included elsewhere in this prospectus. Quarterly results
are based on fiscal quarters of thirteen weeks in duration ending on the last
Saturday of each quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27,
1997 1997 1997 1998 1998
----------- ------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue................ $283.1 $392.2 $502.0 $549.6 $531.3
Cost of revenue........ 280.3 370.7 447.8 487.3 468.9
------ ------ ------ ------ ------
Gross profit..... 2.8 21.5 54.2 62.3 62.4
------ ------ ------ ------ ------
Operating expenses:
Research and
development........ 25.5 26.7 27.6 33.4 36.7
Selling, general and
administrative..... 15.4 15.5 16.6 15.9 18.4
Stock compensation
expense............ -- -- -- 14.7(1) (4.8)(1)
------ ------ ------ ------ ------
Total operating
expenses....... 40.9 42.2 44.2 64.0(1) 50.3(1)
------ ------ ------ ------ ------
Income (loss) from
operations........... (38.1) (20.7) 10.0 (1.7)(1) 12.1(1)
Interest expense....... (8.7) (10.9) (9.0) (8.8) (8.7)
Interest and other
income............... 0.4 0.4 22.4(2) 0.3 2.1
------ ------ ------ ------ ------
Income (loss) before
income taxes......... (46.4) (31.2) 23.4(2) (10.2)(1) 5.5(1)
Provision for income
taxes................ 0.2 0.2 0.3 0.1 0.1
------ ------ ------ ------ ------
Net income (loss)...... $(46.6) $(31.4) $ 23.1(2) $(10.3)(1) $ 5.4(1)
====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 26, DECEMBER 26,
1998 1998
------------- ------------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue................ $599.8 $727.8
Cost of revenue........ 526.6 625.3
------ ------
Gross profit..... 73.2 102.5
------ ------
Operating expenses:
Research and
development........ 40.2 42.1
Selling, general and
administrative..... 18.6 22.9
Stock compensation
expense............ 1.2(1) 1.0(1)
------ ------
Total operating
expenses....... 60.0(1) 66.0(1)
------ ------
Income (loss) from
operations........... 13.2(1) 36.5(1)
Interest expense....... (6.6) (4.7)
Interest and other
income............... 1.5 3.5
------ ------
Income (loss) before
income taxes......... 8.2(1) 35.3(1)
Provision for income
taxes................ 2.1 5.3
------ ------
Net income (loss)...... $ 6.1(1) $ 30.0(1)
====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27,
1997 1997 1997 1998 1998
----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF
REVENUE:
Revenue................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue........ 99.0 94.5 89.2 88.7 88.3
----- ----- ----- ----- -----
Gross profit..... 1.0 5.5 10.8 11.3 11.7
----- ----- ----- ----- -----
Operating expenses:
Research and
development........ 9.0 6.8 5.5 6.0 6.9
Selling, general and
administrative..... 5.5 4.0 3.3 2.9 3.5
Stock compensation
expense............ -- -- -- 2.7(1) (0.9)(1)
----- ----- ----- ----- -----
Total operating
expenses....... 14.5 10.8 8.8 11.6(1) 9.5(1)
----- ----- ----- ----- -----
Income (loss) from
operations........... (13.5) (5.3) 2.0 (0.3)(1) 2.2(1)
Interest expense....... (3.0) (2.7) (1.8) (1.7) (1.6)
Interest and other
income............... 0.1 0.1 4.5(2) 0.1 0.4
----- ----- ----- ----- -----
Income (loss) before
income taxes......... (16.4) (7.9) 4.7(2) (1.9)(1) 1.0(1)
Provision for income
taxes................ 0.1 0.1 0.1 -- --
----- ----- ----- ----- -----
Net income (loss)...... (16.5) (8.0) 4.6(2) (1.9)(1) 1.0(1)
===== ===== ===== ===== =====
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 26, DECEMBER 26,
1998 1998
------------- ------------
<S> <C> <C>
AS A PERCENTAGE OF
REVENUE:
Revenue................ 100.0% 100.0%
Cost of revenue........ 87.8 85.9
----- -----
Gross profit..... 12.2 14.1
----- -----
Operating expenses:
Research and
development........ 6.7 5.8
Selling, general and
administrative..... 3.1 3.2
Stock compensation
expense............ 0.2(1) 0.1(1)
----- -----
Total operating
expenses....... 10.0(1) 9.1(1)
----- -----
Income (loss) from
operations........... 2.2(1) 5.0(1)
Interest expense....... (1.1) (0.6)
Interest and other
income............... 0.3 0.4
----- -----
Income (loss) before
income taxes......... 1.4(1) 4.8(1)
Provision for income
taxes................ 0.4 0.7
----- -----
Net income (loss)...... 1.0(1) 4.1(1)
===== =====
</TABLE>
31
<PAGE> 37
- -------------------------
(1) Total operating expenses, loss from operations, loss before income taxes and
net loss for the three months ended March 28, 1998 reflect a $14.7 million
compensation charge related to certain variable accounting features of our
1996 Stock Option Plan. Without such charge, we would have had total
operating expenses of $49.3 million, income from operations of $13.0
million, income before income taxes of $4.5 million and net income of $4.4
million. During the second quarter of 1998, variable plan accounting
adjustments resulted in a benefit of $4.8 million. Without such benefit, the
quarter ended June 27, 1998 would have reflected total operating expenses of
$55.1 million, income from operations of $7.3 million, income before income
taxes of $0.7 million and net income of $0.6 million. During the third and
fourth quarters of 1998, adjustments which related to the amortization of
compensation costs incurred when our 1996 Stock Option Plan was variable
resulted in a charge of $1.2 million and $1.0 million, respectively. Our
1996 Stock Option Plan was amended and restated to remove the variable
features and provide for fixed award options. See Note 9 of notes to
consolidated financial statements.
(2) Includes recovery of a $20.0 million fully-reserved note from International
Manufacturing Services.
Revenue. During the seven quarter period ended December 26, 1998, our
revenue grew by 157.0%, increasing from $283.1 million in the second quarter of
1997 to $727.8 million in the fourth quarter of 1998. The increase in revenue is
attributable primarily to an increase in unit shipments arising from improved
time-to-market introduction and time-to-volume production and a shift in our
customer base to desktop computer manufacturers. During most of this period,
revenue growth from increased unit shipments was offset partially by rapid price
erosion in the hard disk drive market as a whole, which resulted in declining
average selling prices. We believe that the effect of hard disk drive market
average selling price declines on our average selling prices was mitigated
partially by our improved time-to-market introduction and time-to-volume
production and by a Maxtor trend toward shipping higher-capacity hard disk
drives, which tend to have higher initial average selling prices. While we
experienced a decrease in the rate of decline in average selling prices during
the quarter ended December 26, 1998, we believe that the rate of decline in
average selling prices is likely to increase again in the future, which could
partially offset any future revenue growth from any increase in unit shipments.
Cost of Revenue; Gross Profit. Cost of revenue consists principally of the
cost of hard disk drive components purchased from outside vendors, labor and
manufacturing overhead. During the seven quarter period ended December 26, 1998,
gross profit improved from a profit of $2.8 million in the second quarter of
1997 to a profit of $102.5 million in the fourth quarter of 1998. Gross margin
improved, quarter-over-quarter during this period, increasing from 1.0% in the
second quarter of 1997 to 14.1% in the fourth quarter of 1998. The
quarter-over-quarter improvement in gross margin is due primarily to the timely
introduction of new, higher margin products that achieved market acceptance and
higher manufacturing yields. Gross margin also was affected favorably by
improved product designs that led to improved manufacturing yields and lower
component costs. During most of this period, however, growth of our gross
margins was constrained partially by continued price erosion in the hard disk
drive market as a whole that resulted in declining average selling prices for
our products. While we experienced a decrease in the rate of decline in average
selling prices during the quarter ended December 26, 1998, we believe that the
rate of decline in average selling prices is likely to increase again in the
future, which could constrain any future growth in gross margins.
Operating Expenses
Research and Development Expense. During each of the quarters in the seven
quarter period ended December 26, 1998, we made substantial R&D investments. Our
R&D expense as a percentage of revenue decreased from 9.0% in the second quarter
of 1997 to 5.5% in the fourth quarter of 1997, while the absolute dollar level
of R&D spending during the last two quarters of the 1997 fiscal year remained
relatively constant. The decrease in
32
<PAGE> 38
R&D expense as a percentage of revenue was due to an increase in our revenue.
During 1998, however, R&D spending increased to $42.1 million, or 5.8% of
revenue, in the fourth quarter of 1998 from $27.6 million, or 5.5% of revenue,
in the fourth quarter of 1997. This increase was due to our efforts to develop
new products for the desktop computer market and future products in other hard
disk drive market segments. We anticipate that R&D expenses will continue to
increase in absolute dollars during 1999 due to continuing efforts to diversify
our product portfolio.
Selling, General and Administrative Expense. SG&A expenses consist mainly
of employee-related expenses, including sales commissions and outside services.
During the seven quarter period ended December 26, 1998, our SG&A expenses as a
percentage of revenue decreased from a high of 5.5% in the second quarter of
1997 to 3.2% in the fourth quarter of 1998. The decrease in SG&A expenses as a
percentage of revenue during this seven quarter period is due to the increase in
our revenue combined with our ongoing cost control efforts. We anticipate that
SG&A expenses will increase in absolute dollars during 1999 due to continuing
expenses related to expected increased sales activity.
Stock Compensation Expense. In 1996, we adopted our 1996 Stock Option Plan
pursuant to which substantially all of our domestic employees and certain
international employees received options that were required to be accounted for
as variable options. These options, which were granted between May 1996 and
October 1997, required remeasurement of any intrinsic compensation element at
each reporting date determined by the difference between the estimated current
fair value of our stock and the exercise price of the options. In the first
quarter of 1998, we amended and restated our 1996 Stock Option Plan to remove
the variable features and all grants subsequent to October 1997 have been
subject to fixed terms. In the second quarter of 1998, we offered and re-issued
new fixed award options in exchange for options previously issued under variable
terms, thereby eliminating the requirement to remeasure these options in
subsequent periods. Compensation expense has been reflected in our financial
statements in accordance with Financial Accounting Standards Board
Interpretation No. 28, "Accounting for Appreciation Rights and Other Variable
Stock Option or Award Plans." Accordingly, we recorded non-cash compensation
expense of $1.0 million and $12.1 million for the three month period and year
ended December 26, 1998, respectively. The remaining unrecognized compensation
element related to these options will be reflected in quarterly charges,
decreasing sequentially from the third quarter of 1998 through the second
quarter of 2001. During 1997, we also granted options to the employees of MMC
Technology, a wholly owned subsidiary of Hyundai Electronics America. MMC
Technology has agreed to reimburse us for any compensation expense arising from
such grants.
Interest Expense. During the seven quarter period ended December 26, 1998,
our interest expense as a percentage of revenue declined from a high of 3.0% in
the second quarter of 1997 to a low of 0.6% in the fourth quarter of 1998.
During the second and third quarters of 1997, our interest expense in absolute
dollars increased due to a growth in short-term borrowings used to fund our
operations. For the year ended December 26, 1998, our interest expense in
absolute dollars declined due to conversion of $200.0 million of subordinated
debt held by Hyundai Electronics America into equity in Maxtor with an
associated reduction in interest payments, and a reduction in other debt of
$239.1 million, approximately $200.0 million of which was paid using proceeds
from our July 1998 public offering. The benefits derived from such debt
reductions were, however, partially offset prior to our July 1998 public
offering by an increase in our interest expense due to higher interest rates
applied to our intercompany loan from Hyundai Electronics America and
33
<PAGE> 39
bank credit facilities, in each case as a result of the higher cost of borrowing
resulting from changes in the economic environment in Korea.
Interest and Other Income. During the seven quarter period ended December
26, 1998, our interest and other income as a percentage of revenue ranged from
0.1% to 0.4%, except for a one time event in the fourth quarter of 1997 which
related to a $20.0 million fully-reserved note issued to us by International
Manufacturing Services. Interest and other income increased in the second
quarter of 1998 due to a one time event related to the recovery of $1.8 million
interest receivable on the International Manufacturing Services note. During the
quarter ended December 26, 1998, our interest and other income increased
primarily due to the increase in cash and cash equivalents and marketable
securities generated from the July 1998 public offering.
Year ended December 27, 1997 compared to the year ended December 26, 1998
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
DECEMBER 27, DECEMBER 26,
1997 1998
------------- -------------
(IN MILLIONS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue.............................................. $1,424.3 $2,408.5
Cost of revenue...................................... 1,352.9 2,108.1
-------- --------
Gross profit............................... 71.4 300.4
-------- --------
Operating expenses:
Research and development........................... 106.2 152.4
Selling, general and administrative................ 62.6 75.8
Stock compensation expense......................... -- 12.1(1)
-------- --------
Total operating expenses................... 168.8 240.3(1)
-------- --------
Income (loss) from operations........................ (97.4) 60.1(1)
Interest expense..................................... (36.5) (28.8)
Interest and other income............................ 25.0 7.4
-------- --------
Income (loss) before income taxes.................... (108.9) 38.7(1)
Provision for income taxes........................... 1.0 7.5
-------- --------
Net income (loss).................................... $ (109.9) $ 31.2(1)
======== ========
</TABLE>
34
<PAGE> 40
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue............................................... 100.0% 100.0%
Cost of revenue....................................... 95.0 87.5
----- -----
Gross profit................................ 5.0 12.5
----- -----
Operating expenses:
Research and development............................ 7.5 6.3
Selling, general and administrative................. 4.4 3.2
Stock compensation expense.......................... -- 0.5(1)
----- -----
Total operating expenses.................... 11.9 10.0(1)
----- -----
Income (loss) from operations......................... (6.8) 2.5(1)
Interest expense...................................... (2.6) (1.2)
Interest and other income............................. 1.8 0.3
----- -----
Income (loss) before income taxes..................... (7.6) 1.6(1)
Provision for income taxes............................ 0.1 0.3
----- -----
Net income (loss)..................................... (7.7) 1.3(1)
===== =====
</TABLE>
- -------------------------
(1) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
1996 Stock Option Plan. Without such charge, we would have had total
operating expenses of $228.2 million, income from operations of $72.2
million, income before income taxes of $50.8 million and net income of $43.3
million. Our 1996 Stock Option Plan has been amended and restated to remove
the variable features and provide for fixed award options. See Note 9 of
notes to consolidated financial statements.
Revenue. From 1997 to 1998, revenue grew by 69.1%, increasing from $1,424.3
million to $2,408.5 million, respectively. This increase in revenue is
attributable primarily to an increase in unit shipments arising from improved
time-to-market introduction and time-to-volume production and a shift in our
customer base to desktop computer manufacturers. During the first three quarters
of 1998, revenue growth from increased unit shipments was partially offset by
rapid price erosion in the hard disk drive market as a whole, which resulted in
declining average selling prices. We believe that the effect of hard disk drive
market average selling price declines on our average selling prices was
contained partially by our improved time-to-market introduction and
time-to-volume production and by a Maxtor trend toward shipping higher-capacity
hard disk drives, which tend to have higher initial average selling prices.
While we experienced a decrease in the rate of decline in average selling prices
during the quarter ended December 26, 1998, we believe that the rate of decline
in average selling prices is likely to increase again in the future, which could
partially offset any future revenue growth from any increase in unit shipments.
From 1997 to 1998, revenue from sales to desktop computer manufacturers
increased from 64.4% to 76.5% of our revenue. During this period, sales to three
of the largest desktop computer manufacturers, Compaq, Dell and IBM, increased
from 37.8% to 53.4% of our revenue.
Gross Profit. Gross profit improved from a profit of $71.4 million for 1997
to a profit of $300.4 million in 1998. Gross margin increased from 5.0% in 1997
to 12.5% in 1998.
35
<PAGE> 41
The improvement in gross margin is due to the timely introduction of new, higher
margin products which achieved market acceptance and higher manufacturing
yields. Gross margin also was favorably affected by improved product designs
which led to improved manufacturing yields and lower component costs. During the
first three quarters of 1998, growth of our gross margin, however, was
constrained partially by continued rapid price erosion in the hard disk drive
market as a whole, which resulted in declining average selling prices for our
products. While we experienced a decrease in the rate of decline in average
selling prices during the quarter ended December 26, 1998, we believe that the
rate of decline in average selling prices is likely to increase again in the
future, which could constrain any future growth in gross margins.
Operating Expenses
Research and Development Expense. R&D expense as a percentage of revenue
decreased from 7.5% in 1997 to 6.3% in 1998, while the absolute dollar level of
R&D spending during the same periods increased from $106.2 million to $152.4
million. This increase in absolute dollars was due to our efforts to develop new
products for the desktop computer market and future products in other hard disk
drive market segments.
Selling, General and Administrative Expense. SG&A expense as a percentage
of revenue declined from 4.4% in 1997 to 3.2% during 1998, while the absolute
dollar level of SG&A expenses increased from $62.6 million to $75.8 million,
respectively. The decrease in SG&A expenses as a percentage of revenue between
these periods was due to the increase in our revenues combined with our ongoing
cost control efforts.
Stock Compensation Expense. In 1996, we adopted our 1996 Stock Option Plan,
pursuant to which substantially all of our domestic employees and certain
international employees received options which were required to be accounted for
as variable options. As a consequence, we recorded non-cash compensation expense
of $12.1 million in 1998, related to the difference between the estimated fair
market value of our stock and the exercise price of the options granted under
our 1996 Stock Option Plan between May 1996 and October 1997. If this expense
were not incurred, we would have realized net income of $43.3 million for 1998.
In the second quarter of 1998, we amended and restated our 1996 Stock Option
Plan to remove the features which resulted in variable accounting.
Interest Expense. Interest expense as a percentage of revenue declined from
2.6% in 1997 to 1.2% in 1998, while the absolute dollar level of interest
expense decreased from $36.5 million in 1997 to $28.8 million in 1998. The
decrease in the absolute dollar amount of our interest expense between 1997 and
1998 was due primarily to a reduction in debt of $239.1 million, approximately
$200.0 million of which was paid using proceeds from our July 1998 public
offering. We had $165.1 million of short-term (including current portion of
long-term debt) and $224.3 million of long-term credit borrowings outstanding at
December 27, 1997, as compared to $5.3 million current portion of long-term debt
and $145.0 million of long-term borrowings outstanding at December 26, 1998.
Interest and Other Income. Interest and other income decreased as a
percentage of revenue from 1.8% to 0.3% due principally to a one time event in
the fourth quarter of 1997 which related to a $20.0 million fully-reserved note
issued to us by International Manufacturing Services.
36
<PAGE> 42
YEAR 2000 COMPLIANCE
Year 2000 Issue Described
Many currently installed computer systems and software products are coded
to accept, store or report only two digit entries in date code fields. 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. This is the "Year
2000 Issue." As a result, computer systems and/or software used by many
companies, including Maxtor and our vendors and customers, will need to be
upgraded to comply with such Year 2000 requirements. We could be impacted by
Year 2000 Issues occurring in our own infrastructure or faced by our major
distributors, suppliers, customers, vendors and financial service organizations.
Such Year 2000 Issues could include information errors, significant information
system failures, or failures of equipment, vendors, suppliers or customers. Any
disruption in our operations as a result of Year 2000 Issues, whether by us or a
third party, could have a material adverse effect on our business, financial
condition and results of operations.
Our Hard Disk Drives Comply
Our hard disk drives are able to operate in the Year 2000 and beyond. The
Year 2000 Issue is only relevant to hardware and software components that use or
affect time and date data or system settings. In the case of our hard disk
drives, the ability to operate correctly in the next century is dependent on the
software and programming loaded on our hard disk drives by the system. Since our
hard disk drives have no inherent time or date function, they will not determine
whether a given system, or any software on a given system, will operate
correctly or incorrectly in the next century. As a result, all of our hard disk
drives are able to receive, store and retrieve data, and operate with a system
or software that is Year 2000 compliant without modification.
Our State of Readiness
Overview. To address Year 2000 readiness, we have implemented a corporate
program to coordinate efforts across all business functions and geographic
areas, which includes addressing risks associated with business partners and
other third-party relationships. Our internal Year 2000 readiness program is
separated into four phases: (1) Awareness, (2) Inventory, (3) Assessment and (4)
Resolution. We are currently in the "assessment" phase and expect to have
substantially completed all four phases by the end of 1999. Additionally, we
have formed a Year 2000 Project Office to coordinate the foregoing corporate
program and also have begun to engage external Year 2000 consultants to assist
with methodology and process of the inventory, assessment and resolution phases.
We target substantial completion of "assessment" by the end of the first quarter
of 1999. There can be no assurance that we will be able to complete all four
phases in a timely manner, if at all, or that the process will adequately
address the Year 2000 Issue.
Core IT Systems. We have implemented the R3 system from SAP A.G. The SAP
system is designed to automate more fully our business processes and is
certified by SAP A.G. as Year 2000 compliant. The initial step of this
implementation was completed in early October 1998 and included most of the
major functional areas of our business.
Other Information Technology Systems. Our other information technology
systems include factory information and control systems, computer aided design
systems, banking interface systems, electronic data interchange systems, credit
card processing, customer call management, human resources systems, non-United
States payroll processing, and shipment and just in time delivery management
systems. We have determined that most of
37
<PAGE> 43
our human resources systems, factory information systems, call management
system, non-United States payroll processing and supplier just-in-time delivery
management systems are not Year 2000 compliant. We have completed our assessment
of our human resources and United States payroll processing systems and have
engaged vendors to repair or replace these systems. We have not finished
assessing our other information technology systems. We will continue to assess
these systems to determine the level of risk of business interruption for each
system and to prioritize our resolution activities. We will assign the highest
resolution priority to repair or replacement of items that affect new product
development, volume production and distribution.
Non-Information Technology Systems. Our non-information technology systems
include departmental and personal automated applications used in all of our
functional areas, building systems such as heating, cooling, and air
purification, component and hard disk drive test equipment, and manufacturing
equipment. We currently are assessing our non-information technology systems to
determine the level of risk of business interruption associated with a failure
of each system and to prioritize our resolution activities. We will assign the
highest resolution priority to repair or replacement of items that affect new
product development, volume production and distribution.
Vendors and Suppliers. Our vendors and suppliers include the sources of
materials used in our hard disk drives, the sources of the equipment and
supplies used by us in the conduct of our business, as well as our landlords,
financial institutions, and other service providers. Inventory of our suppliers
is underway. Assessment will include determination of the level of risk of
business interruption associated with a failure of a vendor or supplier because
of the Year 2000 Issue and assignment of priority to resolution activities. We
intend to seek written assurance of Year 2000 compliance from our vendors and
suppliers whose Year 2000 compliance is important to our business.
Customers. Our assessment of our Year 2000 issues with our customers will
dovetail with similar activities which our customers will engage in with respect
to Maxtor. Several of our customers, including Compaq, Dell and IBM, have begun
the process of asking us for written assurances that our hard disk drives do not
have Year 2000 Issues and that our business will not be affected by the Year
2000 Issue.
The Costs to Address Our Year 2000 Issues
We have not determined historic or period costs which may have been
incurred in connection with the resolution of Year 2000 Issues. We do not have
any projections of costs which may be incurred in future periods to resolve Year
2000 Issues. We have not determined whether such costs would be material.
The Risks of Our Year 2000 Issues
We believe that resolution of our Year 2000 Issues has been and will be
complex, expensive and time intensive. In addition, resolution of our Year 2000
Issues could be adversely affected by various risk factors, including without
limit:
- any failure to provide adequate training to employees;
- any failure to retain skilled personnel to implement the SAP system
or find suitable replacements for such personnel;
- any expansion of the scope of the implementation plan due to
unanticipated changes in our business or unanticipated findings in
the Awareness, Inventory or Assessment phases of our Year 2000
readiness program;
38
<PAGE> 44
- any failure to devise and run appropriate testing procedures that
accurately reflect the demands that will be placed on new systems
following implementation;
- any failures by vendors or other third parties to accurately assess
their own Year 2000 readiness or the Year 2000 readiness of their
respective vendors and other third parties and any resulting
failures; and
- any failure to develop and implement adequate fall-back, work around
or other contingency plans in the event that difficulties or delays
arise.
It has been widely predicted that a significant amount of litigation
surrounding business interruptions will arise out of Year 2000 Issues. It is
uncertain whether, or to what extent, we may be affected by such litigation.
Because our hard disk drives are able to operate in the Year 2000 and beyond, we
do not anticipate exposure to material product defect or similar litigation. Any
such litigation, however, could have a material adverse effect on our business,
financial condition and results of operations. We also may not receive any
assistance, damages or other relief as a result of our initiation of any
litigation related to the Year 2000 Issue. Our inability to implement our Year
2000 plans or to otherwise address Year 2000 Issues in a timely manner could
have a material adverse effect on our business, financial condition and results
of operations.
Our Contingency Plans
As part of the four-step process outlined above, specific contingency plans
will be developed in connection with the assessment and resolution of the risks
identified. We have established certain information technology contingency
plans, and we are continuing to develop such plans regarding each specific area
of risk associated with the Year 2000 Issue. There is no assurance that we will
complete contingency plans that address risks which actually arise or that any
such contingency plans will properly address their intended purposes if they are
implemented. In addition, we do not have and do not anticipate obtaining any
insurance policy which contains material coverage for potential injuries or
damages related to or caused by the Year 2000 Issue.
LIQUIDITY AND CAPITAL RESOURCES
At December 26, 1998, we had $227.6 million in cash, cash equivalents and
marketable securities as compared to $16.9 million at December 27, 1997. In
August 1998, we completed an underwritten public offering of 49,731,225 shares
of our common stock. We received $328.8 million, net of offering costs and
underwriters' commissions.
Operating activities provided net cash of $288.1 million for year ended
December 26, 1998 as compared to utilizing net cash of $146.7 million for the
year ended December 27, 1997. Cash provided by operating activities for the year
ended December 26, 1998 was generated principally by operations and an increase
in accounts payable which was partially offset by an increase in accounts
receivable. The increase in cash generated from operations was due primarily to
increased sales and improved margins. We used $101.8 million in investing
activities during 1998, principally for the purchase of property, plant and
equipment. During 1998, we reduced short and long-term debt by $239.1 million
using approximately $200.0 million of the proceeds from our July 1998 public
offering and cash from operations.
At December 26, 1998, we had approximately $145.0 million of long-term
unsecured debt and $5.3 million in current portion of long term debt which were
comprised of
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<PAGE> 45
$55.0 million evidenced by a three year subordinated note issued to Hyundai
Electronics America and $95.0 million of publicly-traded Subordinated
Debentures, due March 1, 2012. Our outstanding 5.75% Subordinated Debentures are
entitled to annual sinking fund payments of $5.0 million which commenced March
1, 1998. These debentures no longer are convertible into our common stock or any
other security of Maxtor. The $55.0 million note was issued to Hyundai
Electronics America to replace an existing revolving line of credit from Hyundai
Electronics America in the same principal amount. This note is due on July 31,
2001 and bears interest at LIBOR plus 2.0% (currently 7.65%), due semiannually;
we propose to prepay this note in full with a portion of the net proceeds we
will receive in the stock offering.
We also have a $200.0 million asset securitization program with Fleet
National Bank under which we sell our eligible trade accounts receivable on a
non-recourse basis through a special purpose entity. At December 26, 1998,
$100.0 million of accounts receivable was securitized under the program.
We have been investing significant amounts of capital to increase the
capacity and enhance the productivity of our manufacturing facilities and update
our information technology systems. During the years ended December 26, 1998 and
December 27, 1997, we made total capital expenditures of $95.2 million and $82.5
million, respectively. During 1999, capital expenditures are expected to be
between approximately $130.0 million and $145.0 million, to be used principally
for adding manufacturing capacity and implementing new and updating existing
information technology systems.
We believe that the proceeds that we will receive in the stock offering,
together with cash generated from operations and borrowing capacity, will be
sufficient to fund our operations through at least the next 12 months. We
require substantial working capital to fund our business, particularly to
finance accounts receivable and inventory, and to invest in property, plant and
equipment. We intend to seek long-term financing arrangements, including a line
of credit, to fund our future capacity expansion plans, as necessary. However,
our cash needs will depend on, among other things, demand in the desktop hard
disk drive market and pricing conditions. There can be no assurance that lower
than expected revenue, increased expenses, decisions to increase capacity or
other events, including the acquisition of technology, products or businesses,
will not cause us to seek more capital, or to seek capital sooner than currently
expected. If we need additional capital, there can be no assurance that such
additional financing can be obtained, or, if obtained, that it will be available
on satisfactory terms. The failure to obtain additional financing on
satisfactory terms would also hinder our ability to invest in capital
expenditures or in research and development and could have a material adverse
effect on our business, financial condition and results of operations.
Intellectual Property
When we were a majority-owned subsidiary of Hyundai Electronics America, we
had the benefit of certain third-party intellectual property rights on terms
that may have been more favorable than would have been available to us if we had
not been a majority-owned subsidiary of Hyundai Electronics America. On June 25,
1998, we entered into an agreement with Hyundai Electronics America whereby we
agreed to pay an allocated share of the license fees associated with certain
third party rights in annual installments ranging from $1.0 million to $2.3
million through 2007. For the year ended December 26, 1998, we recorded expense
of $1.1 million in connection with this commitment. There can be no
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<PAGE> 46
assurance that we will be able to obtain similar rights in the future on terms
as favorable as those currently available to us.
NEW ACCOUNTING STANDARDS
In March 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on when costs related to software
developed or obtained for internal use should be capitalized or expensed. The
SOP is effective for transactions entered into for fiscal years beginning after
December 15, 1998. We have reviewed the provisions of the SOP and do not believe
adoption of this standard will have a material effect upon our results of
operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities, ("SFAS 133")." This standard requires us to recognize
all derivatives on our balance sheet at fair value. Derivatives which are not
hedges must be adjusted to fair value through net income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be recognized
immediately in earnings. SFAS 133 is effective for fiscal years beginning after
June 15, 1999, but companies can adopt SFAS 133 earlier. We are evaluating the
requirements of SFAS 133, but do not expect this pronouncement to materially
impact our financial position or results of operations.
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<PAGE> 47
BUSINESS
We are a leading provider of hard disk drive storage products for desktop
computer systems. Our DiamondMax product family consists of 3.5-inch hard disk
drives with storage capacities which range from 3.4 gigabytes to 17.2 gigabytes.
These products have high speed interfaces for greater data throughput, a robust
mechanical design for improved reliability, magneto-resistive head technology
and a digital signal processor-based electronic architecture that, when
combined, provide industry-leading benchmark performance. On October 1, 1998, we
announced our newest hard disk drive product, the DiamondMax 4320. The
DiamondMax 4320 is our seventh hard disk drive using magneto-resistive head
technology, our eighth hard disk drive utilizing our digital signal
processor-based electronic architecture and our tenth hard disk drive based on
our Formula 4 mechanical structure. Our customers are desktop computer
manufacturers, including Compaq, Dell and IBM; distributors, including Bell
Micro and Ingram; and retailers, including Best Buy, CompUSA and Staples.
COMPANY BACKGROUND
We were founded in 1982 and completed an initial public offering of common
stock in 1986. In the mid-1980's, we were a leading technology innovator in the
hard disk drive industry. As is true today, the hard disk drive industry during
the 1980's was intensely competitive and characterized by rapid technological
change, rapid rates of product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant erosion of average
selling prices. In an effort to mitigate the risks associated with these
factors, we pursued all major product segments in the hard disk drive market,
utilizing multiple product families and technology platforms. This costly
strategy added significant complexity to the business which caused us to delay
or miss a number of key product introductions and ultimately led to the
deterioration of our overall financial condition. As a result of this
deterioration, we sold 40% of our outstanding common stock to Hyundai
Electronics Industries and its affiliates in 1994.
THE MAXTOR TURNAROUND
In early 1996, Hyundai Electronics America acquired all of the remaining
publicly-held shares of our common stock as well as all of our common stock then
held by Hyundai Electronics Industries and its affiliates. Shortly thereafter,
Hyundai Electronics America invested in renewed efforts to revitalize Maxtor. In
July 1996, we hired Michael R. Cannon, our current Chief Executive Officer and
President and a 20 year veteran of the hard disk drive industry, who had
previously served in senior management positions in the systems storage division
at IBM, SyQuest Technology and Control Data Corporation. With a view toward
capturing business at leading desktop computer manufacturers, Mr. Cannon
identified four key areas requiring improvement:
Corporate Leadership. To provide strong leadership and the required focus
on execution, we recruited seasoned, industry veterans for key senior management
positions. In addition to Mr. Cannon, key management position additions
included:
- Paul J. Tufano, our Senior Vice President, Finance, and Chief Financial
Officer, who previously had spent more than 17 years in a variety of
management positions at IBM;
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<PAGE> 48
- William F. Roach, our Senior Vice President, Worldwide Sales and
Marketing, who previously had spent 20 years in a variety of sales and
marketing management positions at Quantum and Intel; and
- K.H. Teh, our Vice President, Worldwide Manufacturing, who previously had
spent 20 years in a variety of manufacturing management positions at
Iomega, Quantum and SyQuest.
These new senior managers joined Dr. Victor B. Jipson, our Senior Vice
President, Engineering, who has been at Maxtor since December 1995 and had
previously spent 16 years at IBM in a variety of research, technical strategy,
product strategy, research and development, and general management positions. In
addition, we added personnel with significant industry experience to our
engineering, manufacturing, procurement, human resources and sales and marketing
departments.
Cost Competitiveness. In the third quarter of 1996, we aggressively moved
to reduce our cost structure. We stopped using a hard disk drive manufacturing
facility owned and operated by Hyundai Electronics Industries in Korea and
consolidated our volume hard disk drive manufacturing facilities in Singapore.
We also closed our sub-assembly manufacturing facility in Thailand and sold our
majority interest in International Manufacturing Services, our former printed
circuit board division, to certain members of International Manufacturing
Services management and institutional investors. These actions helped reduce our
workforce by approximately 54% by October of 1996. We also removed layers of
management and implemented strict discretionary expense controls. In addition,
we improved the productivity of our research and development expenditures by
simplifying our technology and product roadmap to focus on desktop computer hard
disk drives using a single core technology platform.
Timely Introduction of New Products. Our new management team took a number
of steps designed to improve time-to-market introduction, time-to-volume
production, quality, performance and manufacturability of our products, and the
effectiveness and efficiency of our research and development expenditures. In
particular, we:
- simplified our product and technology roadmap by canceling our 5.25-inch
and 2.5-inch programs;
- focused our research and development efforts on a single core technology
platform that includes magneto-resistive head technology and a digital
signal processor-based electronic architecture, which we believe are
capable of supporting rapid extension of our product and technology
roadmap; and
- restructured our product development process by creating an advanced
technology group, which is responsible for assessing new technology
viability, developing early prototypes and exploiting common design
architectures, and by strengthening our existing product design teams,
which are responsible for taking the building blocks provided by the
advanced technology group and designing high performance, highly
manufacturable, cost-effective products which meet customer
specifications.
Customer/Channel Mix. Recognizing that the vast majority of the growth in
the desktop computer market was being captured by a limited number of leading
personal computer manufacturers, our new management team simplified our sales
channels and focused our sales and marketing resources on establishing Maxtor as
a preferred supplier to leading desktop computer manufacturers and a limited
number of leading distributors and retailers. To improve overall customer
satisfaction and capture accounts with leading
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desktop computer manufacturers, we took a number of steps to improve product
quality and created dedicated account support teams for our major desktop
computer manufacturer clients, emphasizing senior management involvement in
developing and maintaining customer relationships.
TURNAROUND RESULTS
As a result of the changes described above, our performance has improved
significantly during a period of severe fluctuations in the overall hard disk
drive market.
Timely Introduction of New Products. Our restructured manufacturing and
product development processes, as well as a simplified product and technology
roadmap, enabled us to complete one of the fastest transitions in the industry
from hard disk drives utilizing thin-film head technology to 100% use of
magneto-resistive head technology by the end of the fourth quarter of 1997. With
our DiamondMax 2160, 2880 and 3400, we demonstrated significantly improved
time-to-volume manufacturing in the fourth quarter of 1997, second quarter of
1998 and the third quarter of 1998 by producing 1.4, 1.3 and 2.8 million units
of these products, respectively, during their first full quarters of production.
In the first quarter of 1998, we established ourselves as a time-to-market entry
leader with our 2.8 gigabytes per disk hard disk drive, the DiamondMax 2880. In
the second quarter of 1998, we continued our trend of being a time-to-market
leader with a 3.4 gigabytes per disk hard disk drive, the DiamondMax 3400, and
the DiamondMax Plus 2500, our first 7200 RPM product. Our time-to-market
leadership continued in the fourth quarter of 1998 with the introduction of our
4.3 gigabytes per disk hard disk drive, the DiamondMax 4320. These improvements,
in turn, enabled us to increase our units shipped per quarter from 1.3 million
units during the first quarter of 1997 to 5.3 million units in the fourth
quarter of 1998, and increased our share of the desktop hard disk drive market
in terms of units shipped from 5.6% in the first quarter of 1997 to 16.7% in the
fourth quarter of 1998, according to International Data Corporation.
Customer/Channel Mix. Our new focus on leading desktop computer
manufacturers led to significant improvements in our customer/channel mix. For
example, our revenue from shipments to Compaq, Dell and IBM have increased from
approximately 3.8% of total revenue in the second quarter of 1996 to 52.0% of
our total revenue in the fourth quarter of 1998. We also became a leading
supplier of desktop hard disk drives to Dell in less than 6 months and were a
leading provider of desktop hard disk drives shipped to the domestic retail
channel during 1997. Cumulatively, these changes have resulted in significantly
improved financial results. We increased revenues by 69.1%, from $1,424.3
million to $2,408.5 million for 1997 and 1998, respectively, and improved gross
margins from 5.0% to 12.5% for the same periods.
Cost Competitiveness. Our cost competitiveness initiatives led to a
significant reduction of operating expenses. Our selling, general and
administrative expense as a percentage of revenue was among the lowest in the
industry for the 1997 and 1998 fiscal years.
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INDUSTRY BACKGROUND
The Desktop Hard Disk Drive Market. According to International Data
Corporation, the desktop computer segment is the largest segment of the
worldwide personal computer market, accounting for approximately 80% of global
personal computer shipments in 1997. As a result, desktop computers were the
leading source of demand for hard disk drives, accounting for more than 75% of
all hard disk drive units shipped worldwide in 1997, according to International
Data Corporation. The demand for desktop computers and, therefore, desktop
computer hard disk drives, continues to grow in part due to:
- continued improvements in desktop computing price to performance ratios,
including the emergence of the sub-$1,000 desktop computer;
- the rapid accumulation of data resulting from the digitization of
information previously stored in paper form;
- larger file sizes created by multimedia-intensive applications;
- the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of collaborative computing;
and
- increased demand for desktop computer upgrades as a result of Year 2000
compliance efforts.
Future demand growth for hard disk drives also may be driven by new and
emerging hard disk drive markets. In November 1998, International Data
Corporation forecasted that the worldwide desktop computer segment of the hard
disk drive market would grow from approximately 107 million units in 1998 to 192
million units in 2002, reflecting a compound annual growth rate of approximately
15.6%.
Hard Disk Drive Technology. The basic operation of a hard disk drive has
not changed materially since its introduction in the 1950's. To improve the
performance of hard disk drives, hard disk drive manufacturers have concentrated
their efforts on optimizing the performance of the various components of the
hard disk drive.
The main components of the hard disk drive are the head disk assembly and
the printed circuit board. The head disk assembly includes the head, media
(disks), head positioning mechanism (actuator) and spin motor. These components
are contained in a hard base plate protective package in a contamination-free
environment. The printed circuit board includes custom integrated circuits, an
interface connector to the host computer and a power connector.
The head disk assembly is comprised of one or more disks positioned around
a spindle hub that rotates the disks by a spin motor. Disks are made of a smooth
substrate to which a thin coating of magnetic materials is applied. Each disk
has a head suspended directly above it, which can read data from or write data
to the spinning disk. The sensor element of the head, also known as the slider,
is getting progressively smaller, resulting in reduced material costs.
The integrated circuits on the printed circuit board typically include a
drive interface and a controller. The drive interface receives instructions from
the computer, while the controller directs the flow of data to or from the
disks, and controls the heads. The location of data on each disk is logically
maintained in tracks, divided into sectors. The computer sends instructions to
read data from or write data to the disks based on track and sector locations.
Industry standard interfaces are utilized to allow the disk drive to communicate
with the computer.
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A key performance metric in the hard disk drive industry is "areal
density," which is the measure of stored bits per square inch on the recording
surface of a disk. An increase in areal density allows a hard disk drive
provider to decrease the price per megabyte stored by increasing overall storage
capacity per disk, thus reducing product costs through reduced component
requirements. During 1996 and 1997, certain hard disk drive providers began
transitioning to magneto-resistive heads. Prior to this transition, most hard
disk drives utilized thin-film inductive recording heads. Magneto-resistive
heads have discrete read and write structures which provide more signal than the
older thin-film inductive heads. This results in significantly higher areal
densities, which increases storage capacity per disk and improves manufacturing
margin and product reliability. Hard disk drive providers are evaluating or
implementing a number of technological innovations designed to further increase
hard disk drive performance and reduce product costs, including attempting to
simplify the electronic architecture by combining the traditional servo-control
functions of the digital signal processor-based electronic architecture and the
error recovery and interface management functions of traditional hard disk drive
microprocessors on a single integrated circuit. Moreover, to consistently
achieve timely introduction and rapid volume production of new products, some
hard disk drive providers are striving to simplify their product design
processes by focusing on creating extendible core technology platforms which
utilize common firmware and mechanical designs and re-use of manufacturing
tooling and application specific integrated circuits across various product
generations and product lines.
Hard Disk Drive Market Challenges. Personal computer manufacturers compete
in a consolidating market. The top ten personal computer manufacturers accounted
for greater than 50% of all personal computer units shipped during 1997 and
1998. These personal computer manufacturers use the quality, storage capacity
and performance characteristics of hard disk drives to select their hard disk
drive providers. Personal computer manufacturers typically seek to qualify three
or four providers for a given hard disk drive product generation. To qualify
consistently with personal computer manufacturers and thus succeed in the
desktop hard disk drive industry, a hard disk drive provider must consistently
execute on its product development and manufacturing processes in order to be
among the first-to-market introduction and first-to-volume production at leading
storage capacity per disk with competitive prices. Failure to reach the market
on time or to deliver timely volume production usually results in significantly
decreased gross margins due to rapidly declining average selling prices and
dramatic losses in market share. Successful achievement on the performance
parameters, however, is only part of the competitive equation. As personal
computer manufacturers seek to develop successful business models, they also are
requiring their hard disk drive vendors to maintain high levels of quality to
enable low cost of ownership and adapt their inventory management models to be
compatible with the emerging build-to-order business model in the personal
computer industry.
OUR SOLUTION
We have established ourselves as a leading provider of high quality, high
performance hard disk drives to major desktop computer manufacturers,
distributors and retailers. Our management team has extensive hard disk drive
industry experience across all functional areas. As a result, we have been able
to define and implement the key business processes necessary to fulfill the
needs of our customers. These processes focus on the efficient, timely and
cost-effective integration of leading-edge technology to create highly
manufacturable hard disk drives. Moreover, our senior management team rigorously
monitors these
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processes in an effort to ensure consistent execution and prompt response to
customer demands. We intend to strengthen our leadership position in the desktop
hard disk drive industry by consistently executing these fundamental business
processes.
OUR STRATEGY
We seek to be the dominant provider of hard disk drives to leading desktop
computer manufacturers, distributors and retailers. Our strategy to achieve this
goal includes the following elements:
Effectively Integrate New Technology. In 1996, we overhauled our research
and development process by augmenting our traditional product development teams
with a new advanced technology group. The advanced technology group's purpose is
to monitor and evaluate advancements in hard disk drive technology for possible
integration into our future products. This group also works closely with our
product development teams and strategic component vendors to:
- obtain early access to the latest hard disk drive component technology;
- allow for flexibility in choosing state-of-the-art components; and
- ensure viability of new product technologies and components prior to
product design.
Through this process, we intend to continue to integrate new technologies
into our existing core technology platform and to strengthen our ability to
introduce high quality, highly manufacturable, high performance hard disk drive
products with industry leading time-to-volume production on a consistent basis.
As a result of this process, we were able to complete one of the fastest
transitions to 100% magneto-resistive head hard disk drives in the industry by
the end of 1997.
Leverage Design Excellence. Our product development methodology reduces
risks associated with design changes by focusing on common firmware and
mechanical designs, and re-use of manufacturing tooling and application specific
integrated circuits. Through this process, we have created a technology platform
which is used as the common core of each of our current hard disk drive products
and which we believe is extendible into products for new and emerging hard disk
drive market opportunities. To reduce the overall cost of ownership of our hard
disk drive products, we use a robust mechanical architecture designed to reduce
defects that result from customer mishandling during installation. We also work
closely with leading component suppliers in an effort to ensure that adequate
tolerances are designed into our products to achieve high manufacturing yields
and product quality. By utilizing this product development methodology, we have
successfully introduced and achieved timely volume production of seven
generations of magneto-resistive head hard disk drives in less than two years.
Capitalize on Flexible Manufacturing. Our Singapore manufacturing facility
utilizes a flexible cell-based process that enables us to:
- dedicate manufacturing cells to particular customers, thereby allowing us
to identify, isolate and remedy manufacturing defects quickly, resulting
in improved product quality, faster time-to-volume production and
improved overall customer satisfaction;
- simultaneously manufacture multiple product configurations;
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- quickly reconfigure the facility to respond to customer change requests
and changes in product and customer mix;
- effectively adapt our inventory management model to the emerging
build-to-order business model employed by certain of our desktop computer
manufacturer customers; and
- add incremental capacity as needed at a relatively low cost.
This flexible cell-based process, when coupled with our product design
methodology, has enabled us to significantly improve time-to-volume production.
For example, we manufactured 2.8 million units of our DiamondMax 3400 in the
third quarter of 1998, the first full quarter of production.
Increase Market Share With Leading Desktop Computer Manufacturers. We
intend to continue to achieve leading time-to-volume production of high quality,
high performance hard disk drives to capture additional market share with
leading personal computer manufacturers. Our quarterly market share of the
desktop hard disk drive market in terms of units shipped increased from 5.6% in
the first quarter of 1997 to 16.7% in the fourth quarter of 1998, according to
International Data Corporation. Shipments to Compaq, Dell and IBM accounted for
3.8% of our total revenue in the quarter ended June 29, 1996 and increased to
52.0% in the quarter ended December 26, 1998.
Maintain Customer Satisfaction. We believe we distinguish ourselves from
our competitors by focusing on ease of doing business and overall customer
satisfaction. For example, our "No Quibble" service program has been well
received by our customers. We also have begun to place significant attention on
total supply chain management to align our business model with the evolving
build-to-order manufacturing business model of certain desktop computer
manufacturers. We use our flexible, cell-based manufacturing process coupled
with a just-in-time inventory model to rapidly respond to the changing needs of
our key desktop computer manufacturer customers. To further automate and improve
the efficiency of our total supply chain management, we are in the process of
installing new enterprise resource planning and related software.
Broaden Product Portfolio. To capture higher margin opportunities and meet
the needs of our desktop computer manufacturer customers, we intend to leverage
our existing technology platform and product development methodology to develop
hard disk drive products for the enterprise data storage market and the high
performance desktop and the low cost desktop computer market segments. To this
end, on June 15, 1998, we introduced the DiamondMax Plus 2500, our first 7200
RPM hard disk drive, which is designed for the high performance desktop computer
market. We also intend to explore opportunities in a number of other emerging
hard disk drive markets.
PRODUCT DEVELOPMENT/TECHNOLOGY
One of the most important changes undertaken as part of our turnaround was
the restructuring of our product development process to separate the enabling
technology development phase from the product design phase. In early 1996, we
suffered from poor product quality and performance and products that were late
to market. This contrasts sharply with today as we now enjoy strong customer
relationships based on excellent product quality, time-to-volume production
leadership and industry-leading performance.
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Enabling Technology Development Phase. The advanced technology group is
responsible for the enabling technology development phase, including:
- working closely with our product design teams and strategic component
suppliers to create a variety of state-of-the-art technologies to be used
in our future products;
- developing early prototypes to ascertain the stability and
manufacturability of our planned products; and
- analyzing the latest head, disk, channel, motor and application specific
integrated circuit technologies and designs to broaden and strengthen our
technology platform.
This group also focuses on leveraging our current proven technology
platform by re-using as much electronic and mechanical technology as possible in
each successive product generation. In an effort to deliver the highest product
quality possible, the advanced technology group begins its review of emerging
technologies as early as possible, normally 18 months before such technologies
might be included in our products. For example, our advanced technology group
has been evaluating giant magneto-resistive technology and pico sliders from a
variety of head suppliers for inclusion in our future products. Giant
magneto-resistive technology is designed to increase drive capacity and
reliability by significantly improving amplitude sensitivity and providing the
basis for significant future increases in areal density and improved
manufacturing margin. Pico sliders are smaller than nano sliders and are
designed to provide improved performance at lower costs.
Product Design Phase. The creation of the advanced technology group as part
of our turnaround freed our existing product design group from the
responsibility of assessing the viability of new and emerging technologies and
allowed it to concentrate on improving product performance, robustness,
manufacturability, quality and materials costs. The product design group also is
responsible, in part, for executing our new product introduction process. This
process is a highly disciplined review procedure designed to ensure that new
product designs meet clearly specified criteria in terms of yield, scrap,
quality, productivity and production ramp rates prior to release into volume
production.
PRODUCTS
We currently provide hard disk drives exclusively for the desktop computer
market. Our DiamondMax product family consists of 3.5-inch hard disk drives with
storage capacities ranging from 3.4 gigabytes to 17.2 gigabytes. Our products
have a number of features including high speed interfaces for greater data
throughput, a robust mechanical design for improved reliability,
magneto-resistive head technology and a digital signal processor-based
electronic architecture that, when combined, provides industry-leading
performance. On October 1, 1998, we announced our newest hard disk drive
product, the DiamondMax 4320. The DiamondMax 4320 is our seventh
magneto-resistive head hard disk drive, our eighth disk drive utilizing our
digital signal processor-based electronic architecture and our tenth hard disk
drive based on our Formula 4 mechanical structure.
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The table below sets forth key performance metrics for our seven
generations of magneto-resistive products introduced since December of 1996.
<TABLE>
<CAPTION>
DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX DIAMONDMAX
1280* 1750* 2160* 2880* 3400 PLUS 2500 4320
---------- ------------ ------------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Capacity
(GB)................ 5.12 7.00 8.40 11.52 13.6 10.0 17.2
Capacity per Disk
(GB)................ 1.28 1.75 2.16 2.88 3.40 2.50 4.32
Rotational Speed
(RPM)............... 5400 5400 5400 5400 5400 7200 5400
First Shipment
Date................ Dec. 1996 June 1997 Sept. 1997 March 1998 June 1998 June 1998 Oct. 1998
</TABLE>
- -------------------------
* No longer in volume production.
Our DiamondMax product family has won a number of recent editorial and
industry awards including:
<TABLE>
<S> <C>
WINDOWS Magazine Winlist for DiamondMax Plus 2500 -- December 1998
Computer Reseller News CRN Test Center Recommended for DiamondMax 4320
-- November 1998
Staples 1997 Products Category Development Award -- September
1998
Storage Review Editor's Choice Award for DiamondMax Plus 2500 and
DiamondMax 2880 -- Summer 1998
WINDOWS Magazine Winlist for DiamondMax 2880 -- July 1998
PC WORLD Magazine World Class Awards -- Best Hard Drive DiamondMax 2160
-- June 1998
WINDOWS Magazine Win 100 for DiamondMax 2160 -- June 1998
WINDOWS Magazine Win 100 for DiamondMax 1750 -- June 1998
VARBusiness 1998 Product Report Award for DiamondMax Family -- May
1998
Computer Reseller News CRN Test Center Recommended for DiamondMax 2880
-- April 1998
WINDOWS Magazine Winlist for DiamondMax 2160 -- February 1998
BYTE Magazine Best Overall: Server Class Drive -- DiamondMax 2160
-- February 1998
BYTE Magazine Best Overall: Desktop Drive -- DiamondMax
1280 -- February 1998
CompUSA 1997 Accessories Vendor of the Year
WINDOWS Magazine Win 100 for DiamondMax 1280 -- July 1997
Home PC Reviewer's Choice DiamondMax 1280 -- May 1997
WINDOWS Magazine Recommended List DiamondMax 1280 -- April 1997
</TABLE>
MANUFACTURING/QUALITY
To be competitive, we must manufacture high quality, highly manufacturable,
high performance hard disk drives with industry leading time-to-volume
production at competitive costs. Our hard disk drive manufacturing operations
consist primarily of the
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final assembly of high-level subassemblies built to our specifications and
testing of completed products.
Manufacturing. Pilot production of our products, as well as cost reduction,
quality and product improvement engineering on current products, are conducted
at our Longmont, Colorado facility. We manufacture our hard disk drives in
volume at a single facility in Singapore which uses a flexible, cell-based
process. The Singapore facility consists of modular production units ("MPUs"),
each of which contains a number of modular work cells ("MWCs"). Each MWC
essentially is a mini-serial production line consisting of all of the tooling
and test equipment necessary to build and test a hard disk drive. Each MPU is
responsible for managing the supply of the components and other parts required
by its MWCs. We coupled our cell-based manufacturing approach with a
sophisticated factory information system that collects data from each MWC on
various productivity and quality metrics.
We have been investing significant amounts of capital to increase the
capacity and enhance the productivity of our Singapore manufacturing facility.
We believe that we will be able to add capacity at our current facility or
another facility to provide sufficient capacity through at least the end of
1999.
We may need additional manufacturing capacity beyond the capabilities of
our current facility as early as the beginning of the year 2000. To address our
future manufacturing needs, on February 1, 1999, we purchased an option to (1)
purchase two buildings in Singapore totaling approximately 39,455 square meters
and (2) enter into a long-term lease of the underlying land from Singapore's
Housing Development Board. The property is located near our current volume
manufacturing facilities in Singapore. The option is accompanied by a sublease
of the land and buildings, allowing for occupancy prior to exercise of the
option, at our discretion. Exercise of the option is subject to a number of
conditions, including, without limitation, approval by the Singapore government.
If we do not exercise the option to purchase and lease the new Singapore
facilities, we will investigate alternative additional manufacturing facilities
in Singapore. If we are unable to locate additional manufacturing facilities
within Singapore on a timely basis and acceptable terms, we intend to seek
additional manufacturing facilities elsewhere, including, in particular, a
manufacturing facility partially constructed by Hyundai Electronics Industries
in Dalian, China, if such facility is available when we need additional
manufacturing facilities. Significant additional capital expenditures may be
required to obtain and equip any such facilities.
Quality. Consistent with our goal to establish Maxtor as a leader in
product quality and overall customer satisfaction, we have implemented a
corporate-wide quality program which focuses on the following:
- robustness of design and improved design tolerances;
- quality of incoming parts and factory process control; and
- customer feedback, failure analysis and timely response.
In addition, our quality, materials, enabling technology and product
development groups work closely with leading component vendors in an effort to
ensure sufficient tolerances are designed into our hard disk drives to achieve
high manufacturing yields and product quality. Our Singapore facility also is
ISO 9002 certified. Finally, our executives meet regularly with customers to
exchange product quality information to facilitate rapid analysis of customer
failures and timely implementation of corrective actions.
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MATERIALS AND SUPPLIES
We have developed and continue to develop strategic relationships with
leading suppliers of many of the key components for our hard disk drive
products. These relationships enable us to actively manage our supply chain to
improve flexibility in choosing state-of-the-art components and to reduce
component, inventory and overall product costs. In addition, our strategic
suppliers work closely with our advanced technology group, enabling us to gain
early access to leading-edge hard disk drive technology and to improve the
overall efficiency of our product design process.
We rely on a limited number of leading suppliers for the parts used in the
manufacturing of our products, including magneto-resistive heads and head stack
assemblies, media, custom integrated circuits, read channel integrated circuits,
printed circuit boards and motor/baseplate assemblies. In general, we seek to
have at least two or three suppliers for each of our component requirements.
Custom application specific integrated circuits, including our digital signal
processor controller chips, and channels, however, currently are sole-sourced
from Texas Instruments and Lucent, respectively. Because of their custom nature,
these products require significant design-in periods and long lead times. We
outsource a majority of our printed circuit board assembly to International
Manufacturing Services which was an affiliate of Maxtor until its merger with
Celestica Inc. on December 30, 1998.
CUSTOMERS AND SALES CHANNELS
From 1986 to 1997, chronic performance and quality issues, as well as being
late to the market, had impacted adversely our ability to win business with
leading desktop computer manufacturers. As a result, we were heavily dependent
on sales to a large number of regional distributors which limited our ability to
forecast periodic shipments and shifted our product mix toward lower
performance, lower margin products. Recognizing that the majority of the growth
in shipments in the desktop computer market was being captured by a limited
number of desktop computer manufacturers, we simplified our sales channels and
focused our sales and marketing efforts on becoming a significant provider of
hard disk drives to leading desktop computer manufacturers, including Compaq,
Dell, Gateway 2000, Inc., Hewlett-Packard and IBM, and a limited number of
leading distributors and retailers. By emphasizing overall customer
satisfaction, product quality and performance and time-to-volume production, we
believe that we have established a strong customer base.
Manufacturers. Shipments to Compaq, Dell and IBM, our three primary desktop
computer manufacturer customers, accounted for 3.8% of our total revenue in the
quarter ended June 29, 1996 and increased to 52.0% in the quarter ended December
26, 1998. We also qualified with Hewlett-Packard in the fourth quarter of 1998
and began limited shipments to Hewlett-Packard in January 1999. We believe that
our success depends on our ability to maintain and further develop strong
desktop computer manufacturer customer relationships and to provide products
that fit the needs of the desktop computer manufacturer channel.
Distributors. We use a select group of distributors to sell our products
cost-effectively to the large number of geographically dispersed customers which
tend to hold very small market shares of the overall desktop computer market,
including value-added resellers, dealers, system integrators and small desktop
computer manufacturers. Distributors accounted for 39.9% of revenue for the nine
months ended December 28, 1996; 26.4% of revenue for the year ended December 27,
1997; and 15.4% of revenue for the year ended December 26, 1998. Distributors
generally enter into non-exclusive agreements with us for purchase and
redistribution of product on a quick turnover basis. Purchase orders are
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<PAGE> 58
placed and revised on a weekly basis. We grant certain of our distributors price
protection and limited rights to return product on a rotation basis. Our major
distributors include Bell Micro and Ingram.
Retailers. To increase awareness of the Maxtor brand name and benefit from
the typically higher gross margins of the retail sales channel, we sell our
retail-packaged products directly to major retailers such as computer
superstores, warehouse clubs and computer electronics stores and authorized
sales through distributors to smaller retailers. Retailers accounted for 7.7% of
revenue for the nine-month period ended December 28, 1996; 9.2% of revenue for
the year ended December 27, 1997; and 8.1% of revenue for the year ended
December 26, 1998. Our current retail customer base is in the United States and
Canada; however, we have begun efforts to establish a retail channel presence in
the emerging retail markets in Europe and Asia. We believe the retail channel
complements other sales channels. Retailers supply the aftermarket "upgrade"
sector in which end-users purchase and install products to upgrade their
computers. We grant certain of our retailers price protection and limited rights
to return product on a rotation basis.
SALES AND MARKETING
We market and sell our products to leading desktop computer manufacturers,
distributors and retailers. Sales offices are located throughout the U.S. and in
Australia, France, Germany, Great Britain, Hong Kong, Japan, Korea, Singapore
and Taiwan. Maxtor has formed multi-disciplined, dedicated account and channel
teams focused on each of its current and target strategic desktop computer
manufacturer, distributor and retail accounts. These teams generally are
comprised of representatives from our sales, marketing, engineering and quality
organizations. Our senior management also takes an active role in our sales
efforts. Dedicated field sales and technical support personnel are located in
close proximity to the manufacturing facilities of each of our desktop computer
manufacturer customers.
Our marketing and public relations functions are performed both internally
and through outside firms. Public relations, direct marketing, worldwide
packaging and marketing materials are targeted to various end-user segments. We
utilize both consumer media and trade publications. We have programs under which
qualifying resellers are reimbursed for certain advertising expenditures. We
also have invested in direct marketing and customer satisfaction programs. We
maintain ongoing contact with end-users through primary and secondary market
research, focus groups, product registrations and technical support databases.
BACKLOG
We generally sell standard products according to standard agreements or
purchase order terms. Delivery dates are specified by purchase orders. Such
orders may be subject to change, cancellation or rescheduling by the customer
without significant penalties. The quantity actually purchased and shipment
schedules are frequently revised to reflect changes in the customer's needs. In
addition, orders for our products are filled for several large customers from
just-in-time inventory warehouses, whereby orders are not placed ahead of time
on our order entry backlog system. Instead, we receive a periodic forecast of
requirements from the customer. Upon shipment from the just-in-time warehouse,
the customer is invoiced. In light of these factors, backlog reporting as of any
particular date may not be indicative of our actual revenue for any succeeding
period and, therefore, is not necessarily an accurate predictor of our future
revenue.
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<PAGE> 59
COMPETITION
Maxtor competes primarily with manufacturers of 3.5-inch hard disk drives,
including Fujitsu, Quantum, Samsung, Seagate and Western Digital, some of which
have a larger share of the desktop hard disk drive market than Maxtor. Other
companies, such as IBM, will be significant competitors in one or more of the
markets into which we plan to expand our product portfolio, and could be
significant competitors of Maxtor in our current market should they choose to
commit substantial resources to providing desktop hard disk drives.
We believe that important competitive factors in the hard disk drive market
are quality, storage capacity, performance, price, time-to-market introduction,
time-to-volume production, desktop computer manufacturer product qualifications,
breadth of product lines, reliability and technical service and support. We
believe we compete favorably with respect to these factors.
EMPLOYEES
As part of our turnaround, we reduced our personnel from 9,330 in March
1996 to 4,330 in October 1996. Since October 1996, we have added significant
personnel to our research and development, sales and marketing and production
staffs. As of December 26, 1998, we had 6,251 employees worldwide, including 741
in engineering, research and development; 238 in marketing, sales and customer
support; 5,101 in manufacturing; and 171 in general management and
administration. As of December 26, 1998, we had 4,801 employees at our
manufacturing facilities in Singapore and 74 employees at our foreign sales
offices. None of our U.S. employees currently are represented by a labor
organization; however, in May 1997, Maxtor Singapore recognized a labor union,
the United Workers of Electronic and Electrical Industries. On November 27,
1998, Maxtor Singapore signed a three year collective bargaining agreement with
the United Workers of Electronic and Electrical Industries. We believe that our
employee relations are positive.
FACILITIES
Our sales and administrative offices and advanced technology operations are
located at a 180,087 square foot facility in Milpitas, California.
We also maintain 373,457 square feet of engineering and pilot production
facilities as well as administrative, marketing and materials facilities in
Longmont, Colorado. All of our domestic facilities are leased. Our leases for
our Longmont, Colorado facility begin to expire on December 31, 1999. We are
exploring opportunities for renewing our existing leases or entering into new
leases for space in the Longmont area. There can be no assurance that we will be
able to obtain additional space that can accommodate our needs or that, if
obtained, such additional space will be available to us on terms at least as
favorable as the terms governing our current leases.
Our volume manufacturing facilities are located in Singapore. We own 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). To address
our future manufacturing needs, on February 1, 1999, we purchased an option to
(1) purchase two buildings in Singapore totaling approximately 39,455 square
meters and (2) enter into a long-term lease of the underlying land from
Singapore's Housing Development Board. The property is located near our current
volume manufacturing facilities in Singapore. The option is accompanied by a
sublease of the land and buildings, allowing for occupancy prior to exercise of
the option, at our discretion. Exercise of the option is subject to a number of
conditions, including, without limitation, approval by the Singapore government.
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<PAGE> 60
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers as of December 26, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH MAXTOR
---- --- --------------------
<S> <C> <C>
Dr. Chong Sup Park(1).......... 51 Chairman of the Board
Michael R. Cannon(1)........... 46 President, Chief Executive Officer and Director
Charles F. Christ(2)(3)........ 59 Director
Thomas Chun(4)................. 57 Director
Chang See Chung(2)............. 46 Director
Charles Hill(1)(3)(4).......... 62 Director
Y. H. Kim...................... 56 Director
Philip S. Paul(2)(3)(4)........ 60 Director
Dr. Victor B. Jipson........... 46 Senior Vice President, Engineering
William F. Roach............... 54 Senior Vice President, Worldwide Sales and
Marketing
Paul J. Tufano................. 45 Senior Vice President, Finance and Chief
Financial Officer
Glenn H. Stevens............... 48 Vice President, General Counsel and Secretary
Phillip C. Duncan.............. 48 Vice President, Human Resources
K. K. Kim...................... 46 Vice President, Business Development
Misha Rozenberg................ 36 Vice President, Quality
K. H. Teh...................... 44 Vice President, Worldwide Manufacturing
David L. Beaver................ 44 Vice President, Materials
</TABLE>
- -------------------------
(1) Member of the Nominating Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
(4) Member of the Affiliated Transactions Committee.
Dr. Chong Sup Park has been Chairman of our board of directors since May
1998 and assumed the position of Chairman, President and Chief Executive Officer
of Hyundai Electronics America in September 1996. Dr. Park also has been
Chairman of MMC Technology's board of directors since January 1998. From
September 1996 to May 1998, Dr. Park served as Vice Chairman of our board of
directors. Dr. Park previously served as our President and Chief Executive
Officer from February 1995 until his appointment as Vice Chairman. From 1993
until joining us in 1995, he was Chairman, President and Chief Executive Officer
of Axil Computer, Inc., a workstation computer manufacturer and a Hyundai
Business Group company, in Santa Clara, California. Dr. Park is also Corporate
Executive Vice President of Hyundai Electronics Industries and formerly held
various other management positions with Hyundai Electronics Industries,
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.
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<PAGE> 61
Michael R. Cannon has been our President, Chief Executive Officer and a
member of our board of directors since July 1996. From 1993 until he joined us
in 1996, Mr. Cannon held several senior management positions with IBM's Storage
Systems division, including Vice President, Mobile and Desktop Business Unit;
Vice President, Product Design; and Vice President, Worldwide Operations. From
1991 to 1993, he served as Senior Vice President of SyQuest, a removable disk
drive company, and prior to joining SyQuest, he held the position of Vice
President, Southeast Asia Operations, with Imprimis Technology. He is also a
director of MMC Technology, a wholly owned subsidiary of Hyundai Electronics
America.
Charles F. Christ has been a member of our board of directors since August
1995. Mr. Christ has served as Chairman of the board of directors of MaxOptix
Corporation since October 1998. He was President, Chief Executive Officer and a
member of the board of directors of Symbios from 1997 to August 1998. From 1994
to 1997, Mr. Christ was Vice President and General Manager of the Components
Division of Digital Equipment Corporation. From 1989 to 1990, Mr. Christ was a
Senior Partner with the management consulting group of Coopers & Lybrand L.L.P.
From 1986 to 1988, he was President and Chief Executive Officer of Digital Sound
Corporation, a telecommunications voice processing company.
Thomas Lyman Chun has been a member of our board of directors since
December 1998. He has been President and Chief Executive Officer of Talkway,
Inc. since January 1997. From 1985 to 1996, Mr. Chun was a member of the Board
of Advisors of Logitech International S.A. and its predecessors. During 1995 and
1996, he also served Logitech in both consulting and employee roles. From 1991
to 1995, he served as Vice President, Strategy & Business Development and as
Vice President & General Counsel of SyQuest Technology. From 1989 to 1990, he
served as President and Chief Executive Officer of Cooper Software. From 1980 to
1988, he served in various capacities at Tandem Computers, including Vice
President -- Corporate Projects and Vice President -- Legal Affairs. He also was
Chairman of the Corporation for Open Systems from 1986 to 1987.
Chang See Chung has been a member of our board of directors since May 1998.
Mr. Chung has served as Senior Vice President of Hyundai Electronics America
since May 1998. From 1995 to 1998, he served as Vice President, Strategic
Planning and Corporate Coordination of Symbios. From 1976 to 1995, Mr. Chung
held various management positions with Hyundai Electronics America, Hyundai
Electronics Europe, Hyundai Electronics Industries and Hyundai Heavy Industries.
Mr. Chung was previously the Chief Financial Officer and Treasurer of Hyundai
Electronics America.
Charles Hill has been a member of our board of directors since March 1992.
He has been a Senior Research Fellow at the Hoover Institution since 1989. From
1983 to 1984, he served as Chief of Staff of the U.S. State Department and from
1982 to 1989 as Executive Assistant to former U.S. Secretary of State George P.
Shultz. From 1992 to 1996, Mr. Hill was Special Consultant to the Secretary
General of the United Nations. Presently, he is Diplomat-in-Residence and
Lecturer in International Studies at Yale University.
Y. H. Kim has been a member of our board of directors since January 1996.
He has been President and representative Director of Hyundai Electronics
Industries since September 1996. From 1989 to 1996, Mr. Kim was President and
Chief Executive Officer of Hyundai Electronics America. Mr. Kim has been
employed by the Hyundai group since 1971.
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<PAGE> 62
Philip S. Paul has been a member of our board of directors since March
1998. Since 1991, he has managed Paul Capital Partners, L.P., a private equity
firm. From 1985 to 1991, Mr. Paul was Chairman and Chief Executive Officer of
Hillman Ventures, Inc., a venture capital firm specializing in technology
investments. From 1982 to 1985, Mr. Paul was President and Chief Executive
Officer of Machine Intelligence Corp., a robotics company.
Dr. Victor B. Jipson has been our Senior Vice President, Engineering since
December 1995. From 1991 to 1995, he was General Manager of IBM's Optical
Storage Solutions business unit. From 1975 to 1991, Dr. Jipson held key
management positions in research, technical strategy, product strategy and
research and development with IBM.
William F. Roach has been our Senior Vice President, Worldwide Sales and
Marketing since January 1997. From 1989 to 1996, he held various sales and
marketing positions with Quantum, an information storage products company,
including Executive Vice President, Worldwide Sales, from 1994 to 1996. From
1977 to 1989, Mr. Roach held sales and marketing positions with Intel
Corporation, a semiconductor company.
Paul J. Tufano has been our Senior Vice President, Finance since November
30, 1998 and Chief Financial Officer since July 1996. From July 1996 to his
appointment as Senior Vice President, Finance, Mr. Tufano served as our Vice
President, Finance. From 1979 to 1996, Mr. Tufano held a variety of management
positions at IBM. From 1995 to 1996, Mr. Tufano was Manager of Worldwide
Logistics for IBM's Storage Systems division. Other management positions
included Manager of Plans and Controls for IBM's Desktop and Mobile Storage
products business unit, and Controller for IBM's San Jose, California facility.
Until December 30, 1998, Mr. Tufano was a director of International
Manufacturing Services, an electronic manufacturing service company.
Glenn H. Stevens has been our Vice President, General Counsel and Secretary
since June 1994. From 1992 to 1994, Mr. Stevens had a private law practice. From
1979 to 1992, he held various positions within the legal department at U S WEST,
Inc., a telecommunications products and services provider, including Chief
Counsel and Secretary for its research and development organization and Chief
Intellectual Property Counsel for the family of U S WEST, Inc. companies.
Phillip C. Duncan has been our Vice President, Human Resources since August
1996. From 1994 to 1996, he was Vice President, International Sales and
Marketing and Human Resources of Berkeley Systems, a software company. From 1992
to 1994, he held senior human resources management positions at SyQuest, and
from 1990 to 1992, he held similar positions at Cirrus Logic, a semiconductor
company.
K. K. Kim has been our Vice President, Business Development since May 1994.
From 1991 to 1994, Mr. Kim was Director of Corporate Planning Office for Hyundai
Electronics Industries. Prior to 1991, he held various management positions with
other companies affiliated with Hyundai Electronics America.
Misha Rozenberg has been our Vice President, Quality since March 1998. From
1996 to 1998, he was Vice President, Supplier Engineering. From 1994 to 1996,
Mr. Rozenberg was a Senior Director of Supplier Engineering with Conner
Peripherals, Inc., a disk drive company. From 1990 to 1994, he was a Manager
with Apple Computer.
K. H. Teh has been our Vice President, Worldwide Manufacturing since May
1997. From 1996 to 1997, he was with Iomega, a removable disk drive company,
where he had been Managing Director of its Malaysia manufacturing facility. From
1994 to 1996, he was
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<PAGE> 63
a Managing Director, Malaysia Manufacturing, with Quantum, and was a Senior
Director with SyQuest from 1993 to 1994.
David L. Beaver has been our Vice President, Materials since May 1998. From
1994 to 1997, he was Director of Operations-Materials at EMASS, a data storage
company, and from 1991 to 1994, he was Director of Corporate Materials
Procurement at SyQuest.
There are no family relationships among any of our directors or executive
officers.
BOARD OF DIRECTORS
Our board of directors consists of eight (8) members and is divided into
three classes. Messrs. Chung, Hill and Paul are Class I directors, Messrs. Kim,
Christ and Chun are Class II directors, and Dr. Park and Mr. Cannon are Class
III directors. Class I, Class II and Class III directors serve until the annual
meetings of stockholders to be held in 1999, 2000 and 2001, respectively, and
until their respective successors are duly elected and qualified. Directors in a
class are elected for a term of three years to succeed the directors in such
class whose terms expire at such annual meeting.
BOARD COMMITTEES
Our board of directors currently has four standing committees: an audit
committee, a compensation committee, an affiliated transactions committee and a
nominating committee. The Audit Committee currently consists of Messrs. Christ,
Hill and Paul. The Audit Committee selects and engages, on our behalf, the
independent public accountants to audit our annual financial statements and
reviews and approves the planned scope of the annual audit. The Compensation
Committee currently consists of Messrs. Christ, Chung and Paul. The Compensation
Committee establishes compensation policies governing our executive officers,
sets bonuses and salaries for certain officers of Maxtor, including the Chief
Executive Officer, and administers or supervises the administration of our
employee benefit programs and executive compensation programs. The Affiliated
Transactions Committee currently consists of Messrs. Chun, Hill and Paul. The
Affiliated Transactions Committee is responsible for reviewing all material
transactions regarding contractual, corporate or business relations by and
between us and any related or affiliated entity of Hyundai Electronics
Industries or Hyundai Electronics America. The Nominating Committee currently
consists of Dr. Park and Messrs. Cannon and Hill. The Nominating Committee
recommends from time to time candidates for nomination for election as members
of our board of directors.
COMPENSATION OF DIRECTORS
From 1996 to May 13, 1998, each member of our board of directors who was
not our employee or an employee of Hyundai Electronics America or a subsidiary
corporation of Maxtor (an "Outside Director") received the following
compensation:
- an annual retainer of $22,000;
- $1,000 per year for service as a committee chairperson;
- $1,500 for attendance at each quarterly meeting of our board of
directors;
- reimbursement of travel and expenses for such meetings; and
- a one-time initial grant of a nonqualified stock option to purchase
20,000 shares of our common stock pursuant to our 1996 Stock Option Plan.
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In April 1998, we amended our 1996 Stock Option Plan and granted to each
Outside Director another option for 10% of the option shares already held by
such director.
From May 13, 1998 to December 31, 1998, each Outside Director received:
- an annual retainer of $22,000;
- $1,000 per year for service as a committee chairperson;
- $1,500 for attendance at each quarterly meeting of our board of
directors;
- $1,000 for attendance at each, if any, special meeting of our board of
directors;
- $1,000 for attendance at each meeting of a committee of our board of
directors that was not held on the same day as a scheduled board meeting;
- reimbursement of travel and expenses for such meetings;
- a one-time initial grant of a nonqualified stock option to purchase
20,000 shares of our common stock pursuant to our 1996 Stock Option Plan
or our Amended and Restated 1996 Stock Option Plan; and
- for so long as a director continuously remained a member of our board of
directors, an additional grant of a non-qualified stock option to
purchase 5,000 shares of our common stock each time that he or she was
reelected to our board of directors.
Members of our board of directors who participated telephonically in any of
the meetings described above received only 50% of the compensation stated for
such meeting.
In November 1998, we amended our Amended and Restated 1996 Stock Option
Plan to increase the one time initial grant of a nonqualified stock option to
each Outside Director from 20,000 to 30,000 shares and to grant a nonqualified
stock option for an additional 10,000 shares to each incumbent Outside Director
who received the original 20,000 share option.
After December 31, 1998, each Outside Director shall receive:
- an annual retainer of $30,000;
- $1,000 per year for service as a committee chairperson;
- $2,000 for attendance at each quarterly meeting of our board of
directors;
- $2,000 for attendance at each, if any, special meeting of our board of
directors;
- $1,000 for attendance at each meeting of a committee of our board of
directors that is not held on the same day as a scheduled meeting of our
board of directors;
- reimbursement of travel and expenses for such meetings;
- for an Outside Director initially elected or appointed after December 1,
1998, a one-time initial grant of a nonqualified stock option to purchase
30,000 shares of our common stock pursuant to our Amended and Restated
1996 Stock Option Plan; and
- for so long as the Outside Director continuously remains a member of our
board of directors, an additional grant of a non-qualified stock option
pursuant to our Amended and Restated 1996 Stock Option Plan to purchase
10,000 shares of our common stock every three years on the anniversary
date of the initial award.
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<PAGE> 65
Members of our board of directors who participate telephonically in any of
the meetings described above will receive only 50% of the compensation stated
for such meeting. An Outside Director may defer payment of all or a portion of
the annual retainer and meeting fees to postpone taxation on such amounts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee is composed of Messrs. Paul, Chung and Christ.
No interlocking relationship exists between any member of the Compensation
Committee and any member of any other company's board of directors or
compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us during the
fiscal years ended December 28, 1996, December 27, 1997 and December 26, 1998 to
our Chief Executive Officer and our four other most highly paid executive
officers to whom we paid more than $100,000 for services rendered to us in the
fiscal year ended December 26, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ ------------------------- ALL OTHER
OTHER ANNUAL RESTRICTED SECURITIES COMPEN-
NAME AND FISCAL YEAR SALARY BONUS COMPENSATION STOCK UNDERLYING SATION($)
PRINCIPAL POSITION ENDED(1) ($) ($) ($)(2) (#) OPTIONS(#) (3)
------------------ ------------- -------- -------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael R. Cannon(4)........... Dec. 26, 1998 500,000 375,000(5) -- 100,000 1,145,000 --
President and Chief Dec. 27, 1997 500,000 750,000(5) -- -- -- --
Executive Officer Dec. 28, 1996 240,387 250,000(5) -- -- 450,000 --
William F. Roach(6)............ Dec. 26, 1998 350,000 262,500 116,667(7) 35,000 247,500(8) --
Senior VP, Worldwide Dec. 27, 1997 339,242 -- 116,667(7) -- 125,000 --
Sales and Marketing Dec. 28, 1996 -- -- -- -- -- --
Dr. Victor B. Jipson........... Dec. 26, 1998 286,000 195,000 -- 35,000 327,500(8) 4,800
Senior VP, Dec. 27, 1997 258,846 50,000(9) -- -- -- 4,800
Engineering Dec. 28, 1996 176,924 107,500(9) -- -- 50,000 3,173
Paul J. Tufano(10)............. Dec. 26, 1998 286,000 172,500(11) -- 35,000 327,500(8) 4,800
Senior VP, Finance and Dec. 27, 1997 229,986 50,000(11) -- -- -- 4,800
Chief Financial Officer Dec. 28, 1996 92,879 50,000(11) -- -- 50,000 2,322
K.H. Teh(12)................... Dec. 26, 1998 249,102 189,135(13) -- 35,000 245,000(8) 25,532(14)
VP, Worldwide Dec. 27, 1997 173,487 64,478(13) -- -- 50,000 9,472(14)
Manufacturing Dec. 28, 1996 -- -- -- -- -- --
</TABLE>
- -------------------------
(1) Because we changed our fiscal year end, the fiscal period ended December
28, 1996 is only nine months.
(2) Unless otherwise noted, such other annual compensation did not exceed the
lesser of (i) $50,000 or (ii) 10% of such executive officer's salary and
bonus combined.
(3) Unless otherwise noted, the amounts shown in this column represent our
annual contribution to the Maxtor Savings Retirement Plan, a 401(k) plan.
All U.S. employees are eligible to participate in this plan.
(4) Mr. Cannon joined us as President and Chief Executive Officer in July 1996.
(5) Represents bonuses paid in accordance with our offer letter to Mr. Cannon.
(6) Mr. Roach joined us as Senior Vice President, Worldwide Sales and Marketing
in January 1997.
(7) Represents a portion of a $350,000 loan to be forgiven over a three year
period in accordance with our offer letter to Mr. Roach.
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(8) Includes an option to purchase an aggregate of 35,000 shares of our common
stock granted on July 30, 1998, replacing an option to purchase 35,000
shares of our common stock granted on June 26, 1998. The option granted on
June 26, 1998 was canceled in connection with the repricing.
(9) Represents bonus paid in connection with our hiring of Dr. Jipson.
(10) Mr. Tufano joined us as Vice President, Finance and Chief Financial Officer
in August 1996. He was promoted to Senior Vice President, Finance and Chief
Financial Officer in November 1998.
(11) Represents bonus paid in accordance with our offer letter to Mr. Tufano.
(12) Mr. Teh joined us as Vice President, Worldwide Manufacturing in May 1997.
(13) Includes $50,000 paid in connection with our hiring of Mr. Teh.
(14) Represents amounts contributed to Maxtor Peripherals retirement program.
The following table sets forth information regarding stock options granted
to the persons named in the prior table during the fiscal year ended December
26, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
NUMBER OF GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -------------------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------ -------------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Cannon...... 45,000 0.77% $ 6.00 2/25/08 $ 169,802 $ 430,310
100,000 1.71 6.00 1/13/08 377,337 956,245
1,000,000 17.1 13.19 11/11/08 8,293,548 21,017,479
William F. Roach....... 12,500 0.2 6.00 2/25/08 47,167 119,531
35,000(3) -- 9.50 -- -- --
35,000(4) 0.6 7.00 7/30/08 154,079 390,467
200,000 3.4 13.19 11/11/08 1,658,710 4,203,496
Dr. Victor B. Jipson... 5,000 0.1 6.00 2/25/08 18,867 47,812
37,500 0.6 6.00 2/25/08 141,501 358,592
35,000(3) -- 9.50 -- -- --
35,000(4) 0.6 7.00 7/30/08 154,079 390,467
250,000 4.3 13.19 11/11/08 2,073,387 5,254,370
Paul J. Tufano......... 5,000 0.1 6.00 2/25/08 18,867 47,812
37,500 0.7 6.00 2/25/08 141,501 358,592
35,000(3) -- 9.50 -- -- --
35,000(4) 0.6 7.00 7/30/08 154,079 390,467
250,000 4.3 13.19 11/11/08 2,073,387 5,254,370
K.H. Teh............... 5,000 0.1 6.00 2/25/08 18,867 47,812
5,000 0.1 6.00 2/25/08 18,867 47,812
35,000(3) -- 9.50 -- -- --
35,000(4) 0.6 7.00 7/30/08 154,079 390,467
200,000 3.4 13.19 11/11/08 1,658,710 4,203,496
</TABLE>
- -------------------------
(1) These options vest over a four-year period with 25% vesting at the first
anniversary date of the vest date and 6.25% each quarter thereafter. The
vesting schedule for new participants begins February 1, 1996 or on the
hiring date, whichever is later. Our board of directors retain discretion to
modify the terms, including the price of outstanding options.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% annual rates of stock price appreciation from the date of grant
to the end of the option term are provided in accordance with rules of the
Commission and do not represent our estimate or projection of the future
price of our common stock. Actual gains, if any, on stock option exercises
are dependent on the future performance of our common stock, overall market
conditions and the option holders' continued employment through the
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vesting period. This table does not take into account any actual
appreciation in the price of our common stock from the date of grant to the
present.
(3) Reflects an option that was cancelled in connection with a repricing on July
30, 1998.
(4) Reflects an option that was granted on July 30, 1998 to replace a canceled
repriced option.
The persons named in the prior table did not exercise any options during
fiscal 1998. The following table provides the specified information concerning
the value of unexercised options held as of December 26, 1998 by the persons
named in the prior table.
FISCAL 1998 YEAR-END VALUES OF UNEXERCISED OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 26, 1998(1) AT DECEMBER 26, 1998(2)
------------------------ -------------------------
NAME VESTED(#) UNVESTED(#) VESTED($) UNVESTED($)
---- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Michael R. Cannon......................... 278,437 1,316,563 $2,194,084 $1,480,500
William F. Roach.......................... 60,155 312,345 474,021 988,779
Dr. Victor B. Jipson...................... 37,812 339,688 297,959 413,925
Paul J. Tufano............................ 30,937 346,563 243,784 413,925
K.H. Teh.................................. 20,625 274,375 162,525 379,300
</TABLE>
- -------------------------
(1) These options vest over a four-year period with 25% vesting at the first
anniversary date of the vest date and 6.25% each quarter thereafter. The
vesting schedule for new participants begins February 1, 1996 or on the
hiring date, whichever is later.
(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 26, 1998 ($13.88, the
closing price reported by the Nasdaq National Market on December 24, 1998)
and the exercise price of such option.
EMPLOYMENT AGREEMENTS
In July 1996, we entered into a letter agreement with Mr. Cannon, our
current President and Chief Executive Officer, that 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;
- an option to purchase 450,000 shares of our common stock, vesting over a
four year period; and
- if Mr. Cannon is terminated without cause, payment of one year's base
salary plus any portion of the sign-on bonus remaining unpaid.
In July 1996, we entered into a letter agreement with Mr. Tufano, our
current Senior Vice President, Finance and Chief Financial Officer that 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;
- an option to purchase 50,000 shares of our common stock, vesting over a
four year period; and
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<PAGE> 68
- if Mr. Tufano is terminated without cause, payment of nine months' base
salary plus any portion of the sign-on bonus remaining unpaid.
In January 1997, we entered into a letter agreement with Mr. Roach, our
Senior Vice President, Worldwide Sales and Marketing that provides for:
- base compensation of $350,000 per year;
- a $350,000 loan, one-third of which we will forgive on each of the first
three anniversary dates of his employment, provided that he is our
employee on each such date;
- a one-time annual bonus between approximately $175,000 and $350,000; and
- an option to purchase 125,000 shares of our common stock, vesting over a
four year period.
In addition, we shall forgive the $350,000 loan in full for any reason other
than willful misconduct of a culpable nature. If Mr. Roach voluntarily
terminates his employment with us, he will have to pay us immediately the loan
amount, reduced pro rata for the period of his employment relative to the term
of the loan.
In March 1997, we entered into a letter agreement with Mr. Teh, our current
Vice President, Worldwide Manufacturing that provides for:
- base compensation of S$396,000 (Singapore dollars) per year;
- a sign-on bonus of $100,000 (U.S. dollars), payable in two installments
in March 1997 and March 1998;
- an annual wage supplement of one month's base salary payable in December
so long as Mr. Teh has completed twelve months of continued employment;
- an annual bonus opportunity of approximately S$198,000 (Singapore
dollars);
- an option to purchase 50,000 shares of our common stock, vesting over a
four year period;
- a car and payment of certain operating expenses; and
- if Mr. Teh is terminated without cause, payment of nine months' base
salary.
In June 1998, we entered into a letter agreement with Dr. Jipson, our
current Senior Vice President, Engineering, which provides that in the event Dr.
Jipson is terminated without cause, we shall pay him nine months' base salary.
BENEFIT PLANS
Amended and Restated 1996 Stock Option Plan. The Amended Plan provides for
the grant of incentive stock options ("ISOs") within the meaning of section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), to employees, and
for grants of nonstatutory stock options to employees, non-employee directors
and consultants. The Amended Plan provides that all options must be granted, if
at all, before May 1, 2006. Our board of directors has the authority to amend or
terminate the Amended Plan, provided that no such action may adversely affect
the rights of any person granted an option under the Amended Plan without such
person's consent unless such action is required to enable an option designated
as an ISO to qualify as an ISO or is necessary to comply with any applicable law
or regulation.
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<PAGE> 69
The Amended Plan's maximum share reserve is 13,799,318 shares of our common
stock. As of December 26, 1998, 142,425 shares were issued and outstanding
pursuant to exercised options under the Amended Plan, options to purchase a
total of 9,305,959 shares were outstanding at a weighted average exercise price
of $8.46 per share and 4,350,934 shares were available for future grants under
the Amended Plan.
The Amended Plan is administered by our board of directors or a committee
of our board of directors. Our board of directors has the power to select the
persons to whom options will be granted and to determine the terms of the
options (except as described below with respect to the automatic outside
director grants), including the exercise price, the number of shares subject to
each option and the exercisability thereof, and the form of consideration
payable upon exercise. However, no employee may be granted options for more than
1,200,000 shares during any fiscal year of Maxtor.
The Amended Plan provides for the automatic grant of nonstatutory stock
options to Outside Directors. The Plan provides that each Outside Director
(other than a director who became an Outside Director as a result of his or her
termination of employment), who was serving as an Outside Director on May 1,
1996 (the "Effective Date") or first became an Outside Director after the
Effective Date and prior to December 1, 1998, will be granted an option to
purchase 20,000 shares of our common stock on the Effective Date or the date he
or she became an Outside Director (the "Initial Grant"). Outside Directors first
elected or appointed on or after December 1, 1998 will receive an Initial Grant
of 30,000 shares. On November 11, 1998, each Outside Director who previously
received an Initial Grant of 20,000 shares received a special one-time grant of
10,000 shares. In addition, for so long as an Outside Director remains a member
of our board of directors, he or she shall receive an additional grant of a
nonstatutory stock option to purchase 10,000 shares of our common stock every
third anniversary of the date of the initial grant provided that he or she has
served continuously on our board of directors.
Options granted under the Amended Plan are not generally transferable by
the optionee, other than by will or the laws of descent and distribution. In
general, options granted under the Amended Plan must be exercised within 90 days
after the end of optionee's status as an employee, director or consultant of
Maxtor or a parent or subsidiary corporation of Maxtor, or within twelve months
after a termination due to death or disability, but in no event later than the
expiration of the option's expiration date. The exercise price of all incentive
stock options granted under the Amended Plan must be at least equal to the fair
market value of our common stock on the date of grant, and the exercise price of
all nonstatutory stock options granted under the Amended Plan must be at least
equal to 85% of the fair market value of our common stock on the date of grant.
With respect to any person who owns stock possessing more than 10% of the voting
power of all classes of our outstanding capital stock or a parent or a
subsidiary corporation of Maxtor, the exercise price of any ISO must equal at
least 110% of the fair market value on the grant date and if the option is an
ISO, the term of the option must not exceed five years. The term of all other
ISOs granted under the Amended Plan may not exceed ten years.
The Amended Plan provides that in the event of certain "transfer of
control" transactions involving Maxtor, each option may be assumed or an
equivalent option substituted for by the acquiring corporation. If the
outstanding options are not assumed or substituted for as described in the
preceding sentence, shares subject to the outstanding options will become fully
vested and exercisable prior to the date of the closing of such transfer of
control.
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Option Amendment Program. In the second quarter of 1998, we implemented a
stock option amendment program (the "Option Amendment Program") pursuant to
which it amended certain options granted under the Option Plan prior to October
1, 1997. The Option Amendment Program was implemented because the agreements
evidencing such options provided for a "Pseudo-IPO Repurchase Right" in favor of
the optionee, as well as certain repurchase rights in favor of Maxtor, which
required us to recognize a quarterly compensation expense for financial
statement purposes. The "Pseudo-IPO Repurchase Right" provided that if we did
not complete an initial public offering (an "IPO") within six months after an
"IPO Trigger Date," the optionee could tender his shares to us and require us to
repurchase such shares at fair market value. An "IPO Trigger Date" is a date, on
or before February 1, 2001, on which all of the following have occurred: (a) we
have positive net income for four consecutive quarters, (b) our value, as
determined by an independent appraisal, equals or exceeds $700 million, and (c)
we receive the written opinion of a nationally-recognized investment banking
firm indicating that we may undertake an underwritten IPO of our common stock.
The agreement evidencing each option which was amended pursuant to the
Option Amendment Program was modified to: (i) remove our right of first refusal
and vested share repurchase option; (ii) remove the Pseudo-IPO Repurchase Right;
and (iii) provide that in the event of a transfer of control of Maxtor, the
shares subject to the option will become fully vested and exercisable in the
event that the option is not assumed or substituted for by the acquiring
corporation. In addition, each holder of an amended option was granted a new
option to purchase a number of shares of our common stock equal to 10% of the
shares subject to the old option (the "New Option"). The shares subject to the
New Option will vest at the same rate as the shares subject to the old option
and the New Option will be evidenced by an agreement with the same terms and
conditions of the old option, as amended. The Pseudo-IPO Repurchase Right was
implemented shortly after Hyundai Electronics America had acquired us in order
to award and retain employees. Most of the options having this feature were
granted in 1996. As a result of the amendment, our options are no longer subject
to variable accounting treatment.
1998 Employee Stock Purchase Plan. A total of 1.7 million shares of our
common stock have been reserved for issuance under our 1998 Employee Stock
Purchase Plan (the "Purchase Plan"), none of which were issued as of December
26, 1998. The Purchase Plan permits eligible employees to purchase our common
stock at a discount, but only through accumulated payroll deductions, during
sequential 6-month offering periods. Participants will purchase shares on the
last day of each offering period. In general, the price at which shares are
purchased under the Purchase Plan is equal to 85% of the lower of the fair
market value of a share of our common stock on (a) the first day of the offering
period, or (b) the purchase date. Offering periods with the Purchase Plan
generally begin on February 16 and August 16 of each year, although the initial
offering period under the Purchase Plan commenced on July 30, 1998.
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1998 Restricted Stock Plan. Our 1998 Restricted Stock Plan (the "Restricted
Stock Plan") provides for awards of shares of our common stock to employees. Our
board of directors has the authority to amend or terminate the Restricted Stock
Plan. The Restricted Stock Plan's maximum share reserve is 390,000 shares of our
common stock. In June 1998, the Compensation Committee of our board of directors
awarded the restricted stock grants as follows:
<TABLE>
<CAPTION>
NAME NO. OF SHARES
---- -------------
<S> <C>
Mr. Cannon........................................ 100,000
Dr. Jipson........................................ 35,000
Mr. Roach......................................... 35,000
Mr. Tufano........................................ 35,000
Mr. Teh........................................... 35,000
---------
Total................................... 240,000
=========
</TABLE>
We awarded the remaining 150,000 shares under the Restricted Stock Plan in
June 1998 to certain other officers of Maxtor. As of the date of grant, the fair
market value of such shares was determined by the Compensation Committee to be
$9.50. All shares reserved under the Restricted Stock Plan have been awarded.
All unvested shares of restricted stock are forfeited in the event of
termination of employment with us. In general, the restricted stock shares vest
and are released from the forfeiture provision three years from the date of the
restricted stock award. If a participant's employment terminates due to death or
disability, he will be entitled to his pro rata share of vesting based on the
number of months of service from the grant date. Under the terms of a change of
control agreement, vesting of these shares is subject to acceleration upon
certain terminations of employment which occur within 12 months after the
occurrence of a change of control.
Change of Control Agreements. Effective May 29, 1998, the Compensation
Committee of our board of directors approved Change of Control Agreements
pursuant to which some of our executives may receive severance benefits in the
event of a termination of employment under certain circumstances involving a
Change of Control of Maxtor. For this purpose, a "Change of Control" is defined
generally as acquisition by any person of a beneficial ownership of 50% or more
of our voting stock , certain mergers or other business combinations involving
Maxtor, the sale of more than 50% of our assets, liquidation of Maxtor or change
in the majority of the incumbent members of our board of directors (except for
changes in our board of directors composition approved by a majority of the
directors), or the sale by Hyundai Electronics America of more than 50% of its
stock in Maxtor to an hard disk drive manufacturer, provided the number of
shares sold represents at least 10% of the outstanding stock in a single
transaction at the time of such sale. Initial public offerings are excluded from
the definition of Change of Control. Subject to the terms and conditions set
forth in the Change of Control Agreements, severance benefits become payable in
the event that, within 12 months following a Change of Control, the executive is
terminated by us without cause, or resigns following a reduction in such
employee's compensation, responsibility level, or relocation of more than 100
miles.
In such event, the eligible employee is entitled to receive a lump sum cash
payment equal to his or her annual salary plus target incentive for the
severance period. The severance period is 24 months for the Chief Executive
Officer and 12 months for other executives. In addition, the Change of Control
Agreements provide for accelerated vesting of the executive's unvested stock
options and/or restricted stock. For the Chief Executive Officer, all unvested
stock options and restricted stock shall become 100% vested and other
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executives will have their option vesting accelerated by an additional two
years, and their restricted stock shall be vested 50% or pro rata based upon the
number of months from the restricted award date, whichever is greater. The
executive also will be entitled to continued coverage under our medical plan for
the severance period. If any part of the benefits under the Change of Control
Agreement is determined by our accountants to be an excess parachute payment
under Section 280G of the Code, at the executive's option, the payment will be
reduced to the minimum extent necessary to have no excess parachute payment.
401(k) Plan. We maintain a retirement and deferred savings plan for our
employees (the "401(k) Plan") that is intended to qualify as a tax-qualified
plan under U.S. tax law. The 401(k) Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (up to a statutory
limit, which is $10,000 in calendar year 1999). Under the 401(k) Plan, we may
make discretionary matching contributions. Our contributions to the 401(k) Plan
for the fiscal periods ended December 28, 1996, December 27, 1997 and December
26, 1998 were $1.2 million, $1.6 million and $2.0 million, respectively. All
amounts contributed by participants and earnings on such contributions are fully
vested at all times.
Hyundai Electronics America Executive Deferred Compensation Plan. Under the
Hyundai Electronics America Executive Deferred Compensation Plan (the "Deferred
Compensation Plan"), eligible executives of Maxtor who are at the "director"
level or above may irrevocably elect each year to defer on a pre-tax basis up to
100% of their compensation for such year. Each participant's account will be
credited with an amount based on the "deemed investment experience" of the
investment models chosen by the executive under the terms of the Deferred
Compensation Plan. The executives' deferrals, adjusted for the deemed investment
experience, are referred to as the "deferral amounts." The deferral amounts are
distributed to the executive upon the executive's termination of employment or
as of a date certain elected by the executive. Generally, the deferral amounts
will be distributed in a single lump sum, but if the executive has at least 10
years of service with Maxtor, the deferral amount may be distributed in up to 10
annual installments. Deferral amounts may be withdrawn in the event of a
financial hardship (without any forfeiture) and also may be withdrawn by the
executive for any reason, subject to the forfeiture of 25% of the executive's
deferral amounts. All payments under the Deferred Compensation Plan will be paid
in cash from the general funds of Maxtor.
The Deferred Compensation Plan is administered by the Deferred Compensation
Committee of the Hyundai Electronics America board of directors. The Deferred
Compensation Committee designates which of our corporate officers are eligible
to participate in the Deferred Compensation Plan.
Eligible executives will be able to continue to participate in the Deferred
Compensation Plan unless such eligibility is terminated by Hyundai Electronics
America. The Deferred Compensation Plan may be amended, including to terminate
the participation of our executives, or terminated at any time by Hyundai
Electronics America. Upon termination of the Deferred Compensation Plan, all
deferral amounts will be distributed in a cash lump sum payment.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, we have
adopted provisions in our Amended and Restated Certificate of Incorporation
which provide that members of our board of directors shall not be personally
liable for monetary
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damages to us or our stockholders for a breach of fiduciary duty as a director,
except for liability as a result of: (i) a breach of the director's duty of
loyalty to us or our stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) an act
related to the unlawful stock repurchase or payment of a dividend under Section
174 of the Delaware General Corporation Law; and (iv) transactions from which
the director derived an improper personal benefit. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive relief
or rescission.
Our Amended and Restated Certificate of Incorporation also authorizes us to
indemnify our officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. We have and intend
to continue to enter into separate indemnification agreements with each of our
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require us, among other things, to indemnify
such officers and directors against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities
arising from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified and to obtain directors' and officers' insurance if available on
reasonable terms.
At present, except for the StorMedia litigation, there is no pending
litigation or proceeding involving a director, officer, employee or agent of
Maxtor where indemnification will be required or permitted. We are not aware of
any threatened litigation or proceeding which may result in a claim for such
indemnification.
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CERTAIN TRANSACTIONS
TRANSACTIONS WITH HYUNDAI ELECTRONICS AMERICA
In December 1995, Hyundai Electronics America loaned us $100 million, which
was due on April 10, 1996 and accrued interest at LIBOR plus 0.65%, with
interest payable at maturity. This $100 million loan was replaced in April 1996
with a one year $100 million revolving line of credit bearing interest at
Hyundai Electronics America's cost of funds plus 0.10%, with interest payable
quarterly. In July 1996, we borrowed an additional $35 million from Hyundai
Electronics America due in August 1996, bearing interest at LIBOR plus 0.70%
with interest payable at maturity; this loan was repaid at maturity. In April
1997, Hyundai Electronics America renewed the $100 million revolving line of
credit and increased the borrowing limit to $150 million. Hyundai Electronics
America increased the borrowing limit on this line of credit to $185 million in
June 1997, and to $270 million in August 1997. In December 1997, $200 million of
this outstanding indebtedness was cancelled in exchange for 29,850,746 shares of
our preferred stock, the borrowing limit was reduced to $150 million, and we
repaid an additional $5 million in principal. In January 1998, we repaid an
additional $10 million in principal. In April 1998, this revolving line of
credit was renewed with a borrowing limit of $100 million. On July 31, 1998, we
replaced this revolving line, which had an outstanding principal balance of
$55.0 million, with a three-year subordinated term note in the same principal
amount. This note matures on July 31, 2001 and bears interest, payable
semi-annually, LIBOR plus 2.0% (currently 7.65%). We propose to prepay this note
in full with the proceeds of the stock offering.
Hyundai Electronics America currently is an unconditional guarantor of our
facilities lease in Milpitas, California. The aggregate rent under the lease is
currently $6.7 million per annum.
TRANSACTIONS WITH HYUNDAI ELECTRONICS INDUSTRIES
In August 1995, Hyundai Electronics Industries guaranteed a $100 million
364-day revolving credit facility of ours that expired in August 1996. In
January 1996, Hyundai Electronics Industries guaranteed a $13.8 million one year
loan to Maxtor Singapore, which was renewed in January 1997 for an additional
year and repaid at maturity in January 1998. In August 1996, Hyundai Electronics
Industries guaranteed an $86 million 364-day revolving credit facility and a
$129 million three year revolving credit facility. In October 1996, the $86
million 364-day revolving credit facility was increased by $10 million and
Hyundai Electronics Industries guaranteed the additional amount. In addition, in
October 1996, Hyundai Electronics Industries guaranteed a separate $10 million
one year revolving credit facility which was repaid by us in January 1998. In
December 1996, Hyundai Electronics Industries guaranteed two additional credit
facilities, one of which was a three month $20 million uncommitted line that we
repaid at maturity in March 1997 and the other of which was a $10 million one
year facility which was repaid at maturity in December 1997. In August 1997, we
repaid $65 million of the $96 million 364-day revolving credit facility and
extended the balance of $31 million for an additional 364 days, continuing
Hyundai Electronics Industries' guarantee. In October 1997, Hyundai Electronics
Industries guaranteed an additional $10 million one year revolving credit
facility.
Hyundai Electronics Industries served as guarantor for our borrowings under
various revolving bank credit facilities from August 1995 through June 1998. At
March 28, 1998, our aggregate indebtedness guaranteed by Hyundai Electronics
Industries under such
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facilities was $170.0 million. Due to the economic conditions in Korea and
significant recent devaluations of the Korean won versus the U.S. dollar,
Hyundai Electronics Industries' reported financial condition as of year-end 1997
was not in compliance with certain financial covenants applicable to Hyundai
Electronics Industries as guarantor under such revolving credit facilities, and
such non-compliance constituted a default by us under such revolving credit
facilities and also a default (through a cross-default clause) under an
uncommitted credit facility. The default under the revolving credit facilities
was waived by the lending banks in June 1998 in exchange for another Hyundai
affiliate, Hyundai Heavy Industries, becoming the guarantor under such
facilities in place of Hyundai Electronics Industries and an increase in pricing
to reflect borrowing rates based on Hyundai Heavy Industries' current credit
rating. Indebtedness of $200 million under the revolving credit facilities,
guaranteed by Hyundai Heavy Industries was paid with the proceeds of our July
1998 public offering.
On March 30, 1996, we entered into an accounts receivable securitization
program with Citicorp Securities, Inc. Under this program, we could sell our
qualified trade accounts receivable up to $100 million on a non-recourse basis.
As of December 27, 1997, $79.8 million of advances related to sales of accounts
receivable were included in accrued and other liabilities. In connection with
this program, Hyundai Electronics Industries entered into a performance
undertaking under which Hyundai Electronics Industries agreed to cause us to
collect receivables and to perform our obligations in the event of our failure
to perform under the program. Hyundai Electronics Industries also indemnified
the purchasers from any expenses incurred in enforcing their rights under the
program. This asset securitization program was subject to certain conditions,
among which was a condition that all of Hyundai Electronics Industries'
long-term public senior debt securities achieve a specified rating. This
condition was not met in February 1998, and we obtained waivers of this
condition through April 8, 1998.
On April 8, 1998, we entered into a new asset securitization program (the
"Second Program") arranged by Citicorp Securities to replace our then existing
program. Under the Second Program, we could sell our 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. On April 8, 1998, the receivables then securitized under the
existing program, in the amount of approximately $100 million, were transferred
to Citicorp's Corporate Receivables Corporation under the Second Program.
Hyundai Heavy Industries entered into a new performance undertaking similar to
that under the former program. On July 31, 1998, we replaced the Second Program
with an asset securitization program with Fleet National Bank under which we
sell our eligible trade accounts receivable on a non-recourse basis through a
special purpose entity. This asset securitization program does not require any
support from Hyundai Electronics Industries or any of its affiliates.
We also have purchased DRAM chips from Hyundai Electronics Industries. Our
total DRAM chip purchases from Hyundai Electronics Industries in fiscal 1998
totaled approximately $8.6 million. We currently are negotiating a long-term
SDRAM supply agreement with Hyundai Electronics Industries.
Hyundai Electronics Industries and its affiliates purchased $39.5 million
and $6.2 million of disk drive products from us during fiscal years 1997 and
1998, respectively.
70
<PAGE> 76
TRANSACTIONS WITH INTERNATIONAL MANUFACTURING SERVICES
In 1996, we sold a majority interest in International Manufacturing
Services to certain members of International Manufacturing Services management
and other investors for $25 million in cash and $20 million in notes and
retained a 23.5% ownership interest in International Manufacturing Services. In
October 1997, International Manufacturing Services completed an initial public
offering and repaid in full the note and its related interest, which aggregated
$21.8 million. We have agreed to indemnify the investors and International
Manufacturing Services up to $17.5 million for certain breaches of
representations, provided that tax and environmental representations are not
subject to the liability limit.
On December 30, 1998, International Manufacturing Services and Celestica
Inc. completed a strategic combination. As a result of this strategic
combination, Maxtor received 0.4 Celestica Subordinated Voting Shares for each
of its shares of International Manufacturing Services common stock, or a total
of approximately 1,194,000 Celestica Subordinated Voting Shares (representing
less than 2% of the total number of outstanding shares of Celestica capital
stock). The last reported sale price of the Celestica Subordinated Voting Shares
on February 8, 1999, was $28.19 per share.
We outsource most of our printed circuit board assembly to International
Manufacturing Services; International Manufacturing Services supplies us with
printed circuit boards, sub-assemblies and fully integrated products under a
manufacturing services agreement. We made purchases from International
Manufacturing Services in the years ended December 27, 1997 and December 26,
1998 of $115.3 million and $118.6 million, respectively. During this period, two
former officers of Maxtor, Robert Behlman (formerly our Vice President of
Manufacturing) and Nathan Kawaye (formerly our Vice President and Chief
Financial Officer), held positions as President and Chief Executive Officer and
Vice President and Chief Financial Officer, respectively, at International
Manufacturing Services. Mr. Tufano served as a director of International
Manufacturing Services through December 30, 1998.
TRANSACTIONS WITH HYUNDAI INFORMATION TECHNOLOGY
We have implemented the SAP System. Our rights to this new information
system are governed by a license agreement between Hyundai Information
Technology and SAP. We currently are discussing with SAP the terms on which we
could obtain a direct license with SAP.
TRANSACTIONS WITH MMC TECHNOLOGY
Hyundai Electronics America formed a division in May 1996 to supply us with
hard disk media. This division of Hyundai Electronics America was incorporated
as MMC Technology in December 1997 and is currently a wholly-owned subsidiary of
Hyundai Electronics America. Michael Cannon, our President and Chief Executive
Officer, is a director of MMC Technology. During the quarter ended December 27,
1997, the quarter in which we first began to purchase media from MMC Technology,
and the year ended December 26, 1998, MMC Technology supplied media to Maxtor
with an aggregate purchase price of $13.2 million and $146.8 million,
respectively. In August 1998, we entered into an agreement with MMC Technology
with respect to pricing of future purchases that provided for pricing discounts
in return for a purchase volume commitment based on a percentage of Maxtor's
total media purchases through September 30, 2001. The pricing discounts range
from 2% to 4% off of competitive prices.
71
<PAGE> 77
On May 18, 1998, we entered into an agreement with MMC Technology relating
to options to purchase shares of our common stock granted by us to MMC
Technology employees. Under the agreement MMC Technology agreed to reimburse us
for financial statement expenses relating to such options.
OTHER RELATED PARTY TRANSACTIONS
We have entered into employment agreements and change of control agreements
with certain of our officers and have made a loan to one officer. We have
entered into indemnification agreements with each of our directors and executive
officers. Such indemnification agreements require us to indemnify such
individuals to the fullest extent permitted by law.
All material transactions between us and our executive officers, directors,
principal stockholders and other affiliates are subject to review and approval
by the affiliated transaction committee or by a majority of our independent and
disinterested directors.
72
<PAGE> 78
SELLING STOCKHOLDER
The following table sets forth information about Hyundai Electronics
America's beneficial ownership of our common stock before and after the stock
offering and the DECS offering. Beneficial ownership is determined in accordance
with SEC rules. Hyundai Electronics America will remain the beneficial owner of
the Maxtor shares sold in the DECS offering unless and until it delivers the
shares upon termination of DECS Trust IV, on or about February 15, 2002. The
information in the table assumes that the underwriters will not exercise their
right to purchase additional shares in the stock offering or additional DECS in
the DECS offering.
<TABLE>
<CAPTION>
SHARES
UNDERLYING SHARES
SHARES SHARES SECURITIES BENEFICIALLY
BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF EXPECTED OWNED
OWNED PRIOR EXPECTED TO OWNED SHARES TO BE SOLD AFTER
TO STOCK BE SOLD AFTER OWNED IN THE DECS
AND DECS IN STOCK STOCK AFTER STOCK DECS TRUST IV
OFFERINGS OFFERING OFFERING OFFERING OFFERING(1) TERMINATION(1)
------------ ----------- ------------ ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Hyundai Electronics America
3101 North First Street
San Jose, CA 95134 44,029,850 1,200,000 42,829,850 42.0% 15,500,000 23,329,850
<CAPTION>
PERCENTAGE OF
SHARES
OWNED
AFTER
DECS
TRUST IV
TERMINATION(2)
--------------
<S> <C>
Hyundai Electronics America
3101 North First Street
San Jose, CA 95134 26.8%
</TABLE>
- -------------------------
(1) Assumes that Hyundai Electronics America will deliver 15,500,000 shares upon
termination of DECS Trust IV on or about February 15, 2002. Hyundai
Electronics America may deliver fewer shares or may choose to settle its
obligations under the DECS in cash. See the DECS prospectus for a
description of the obligations of Hyundai Electronics America in the DECS
offering.
(2) Based on the number of shares outstanding as of December 26, 1998 after
giving effect to the sale of 7,800,000 newly-issued shares of common stock
by Maxtor in the stock offering.
73
<PAGE> 79
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and Maxtor and Hyundai Electronics America have agreed to sell to such
underwriter, the number of shares set forth opposite the name of such
underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ----------
<S> <C>
Salomon Smith Barney Inc....................................
Hambrecht & Quist LLC.......................................
Lehman Brothers Inc.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
NationsBanc Montgomery Securities LLC.......................
----------
9,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Hambrecht & Quist
LLC, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated
and NationsBanc Montgomery Securities LLC are acting as representatives, propose
to offer some of the shares directly to the public at the public offering price
set forth on the cover page of this prospectus and some of the shares to certain
dealers at the public offering price less a concession not in excess of $
per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share on sales to certain other dealers.
After the initial offering of the shares to the public, the public offering
price and such concessions may be changed by the representatives.
Hyundai Electronics America and DECS Trust IV have entered into a separate
underwriting agreement for the offer and sale by DECS Trust IV to Salomon Smith
Barney Inc., Hambrecht & Quist LLC, Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and NationsBanc Montgomery Securities LLC of
15,500,000 DECS, plus up to an additional 2,325,000 DECS solely to cover over-
allotments. On or about February 15, 2002, or upon earlier liquidation of DECS
Trust IV in certain circumstances, DECS Trust IV will distribute Maxtor's common
stock (or, at Hyundai Electronics America's option, the cash equivalent value
and/or such other consideration as is delivered by Hyundai Electronics America
to DECS Trust IV pursuant to a forward purchase contract between Hyundai
Electronics America and DECS Trust IV) to the holders of the DECS at the rate
specified in the DECS prospectus. The closings of the stock offering and the
DECS offering are not conditioned upon each other.
Maxtor and Hyundai Electronics America have granted to the underwriters an
option, exercisable for 30 days from the date of this prospectus, to purchase up
to 1,250,000 additional newly-issued shares of common stock and 180,000
additional shares of common stock owned by Hyundai Electronics America,
respectively, at the public offering price less the underwriting discount. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent such
option is exercised, each underwriter will be obligated, subject to certain
conditions,
74
<PAGE> 80
to purchase a number of additional shares approximately proportionate to such
underwriter's initial purchase commitment.
Maxtor, its executive officers and directors (comprised of seventeen
individuals), and Hyundai Electronics America have agreed that, for a period of
90 days from the date of this prospectus, they will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to sell, or
otherwise dispose of, any shares of common stock of Maxtor or any securities
convertible into, or exercisable or exchangeable for, common stock, except that
each such officer and director of Maxtor may sell, during the 90 day period, up
to 10,000 shares of common stock of Maxtor, subject to an aggregate maximum of
100,000 shares for all such officers and directors during this period. Salomon
Smith Barney Inc. in its sole discretion may release any of the securities
subject to these lock-up agreements at any time without notice.
The common stock is quoted on the Nasdaq National Market under the symbol
"MXTR".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Maxtor in connection with the stock offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY MAXTOR
------------------------------------
NO EXERCISE FULL EXERCISE
-------------- --------------
<S> <C> <C>
Per Share.................. $ $
Total...................... $ $
</TABLE>
In connection with the stock offering and the DECS offering, Salomon Smith
Barney Inc., on behalf of the underwriters, may over-allot, or engage in
syndicate covering transactions, stabilizing transactions and penalty bids.
Over-allotment involves syndicate sales of common stock or DECS in excess of the
number of shares of common stock or DECS to be purchased by the underwriters in
the offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the common stock or the DECS in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids or purchases
of the common stock or the DECS made for the purpose of preventing or retarding
a decline in the market price of the common stock or the DECS while the offering
is in progress. Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when Salomon Smith Barney Inc., in covering
syndicate short positions or making stabilizing purchases, repurchases shares
originally sold by that syndicate member. These activities may cause the price
of common stock or DECS to be higher then the price that otherwise would exist
in the open market in the absence of such transactions. These transactions may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise and, if commenced, may be discontinued at any time.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the common stock on the Nasdaq National Market, prior to the pricing and
completion of the offering. Passive market making consists of displaying bids on
the Nasdaq National Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than those independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the common stock during a
75
<PAGE> 81
specified period and must be discontinued when such limit is reached. Passive
market making may cause the price of the common stock to be higher than the
price that otherwise would exist in the open market in the absence of such
transactions. If passive market making is commenced, it may be discontinued at
any time.
Maxtor and Hyundai Electronics America estimate that the total expenses of
this offering will be $1.3 million. Pursuant to an agreement with Hyundai
Electronics America, Maxtor has the right to reimbursement from Hyundai
Electronics America for up to 50% of its actual expenses incurred in connection
with the stock offering.
The representatives have performed certain investment banking and advisory
services for Maxtor from time to time for which they have received customary
fees and expenses. The representatives may, from time to time, engage in
transactions with and perform services for Maxtor in the ordinary course of
their business.
Maxtor and Hyundai Electronics America have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill") currently is
acting as financial advisor to Hyundai Electronics Industries and its
subsidiaries and affiliates in connection with their strategic assessment of
their assets, financial liabilities and overall capital structure, and in
connection therewith receives certain fees from Hyundai Electronics Industries.
Merrill will receive no separate or additional fee from HEI in connection with
the stock offering and DECS offering.
LEGAL MATTERS
Certain legal matters with respect to the validity of our common stock
offered hereby will be passed upon for Maxtor by Gray Cary Ware & Freidenrich
LLP, Palo Alto, California and for the underwriters by Cleary, Gottlieb, Steen &
Hamilton, New York, New York.
EXPERTS
The consolidated balance sheets as of December 28, 1996, December 27, 1997
and December 26, 1998 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the nine months ended December
28, 1996, the year ended December 27, 1997 and the year ended December 26, 1998
included in this prospectus and registration statement and incorporated in this
prospectus and registration statement by reference to the Annual Report on Form
10-K for the year ended December 27, 1997, have been so included and
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended March 30, 1996, incorporated in this
prospectus and registration statement by reference to the Annual Report on Form
10-K for the year ended December 31, 1997, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing on
page 47 of that Form 10-K, and are incorporated by reference in reliance upon
such report, given upon the authority of such firm as experts in accounting and
auditing.
76
<PAGE> 82
GLOSSARY
Application Specific Integrated Circuit (ASIC) -- a custom designed
integrated circuit that performs a specific application rather than
general-purpose chips such as conventional logic chips with discrete gates. The
use of an ASIC in place of a conventional logic chip reduces product size and
cost.
Actuator -- the mechanism that moves the head assembly across a disk to the
proper track. This mechanical assembly positions the read/write heads over the
circumferential line which describes the target cylinder.
Areal density -- the maximum number of bits per linear inch of storage
surface times the number of tracks per radial inch yields the areal density of
bits per square inch.
Build-to-Order (BTO) -- supply chain management methodology where personal
computers are built to the unique requirements of a specific end-user customer
order.
Controller -- a portion of the integrated circuit circuit that manages the
flow of data to and from the disk media including the error correction coding,
media defect management, actuator positioning and system host interface
interaction.
Digital Signal Processor (DSP) -- a compact integrated circuit that
provides an ultra-fast simplified instruction set processor commonly used in
actuator control applications.
Firmware -- the permanent instructions and data programmed directly into
the circuitry of read only memory, written either in high-level language or in
assembly or machine language, which, when combined with the mechanical
mechanisms and ASICs within the drive, controls the functions of the hard drive.
Gigabyte (GB) -- one billion bytes.
Hard Disk Drive (hard disk drive) -- An electro-mechanical device composed
of an HSA, PCB and magnetic disks that records data onto spinning rigid media in
discrete data blocks each of which can be randomly accessed. The primary mass
storage device of a computer.
Head Disk Assembly (HDA) -- the mechanical components of a disk drive
(minus the electronics), which includes the actuators, read/write heads and
platters.
Interface -- the all-inclusive definition of the connection and interaction
between the hard drive and the host system.
Just-in-Time (JIT) -- inventory management system where components are
stored near a manufacturing facility so they can be released as they are needed
to support the flow of material on the assembly line.
Magnetic Disk -- are disks made of a smooth substrate to which a thin
coating of magnetic materials is applied. Each disk has a slider suspended
directly above it, holding the head, which can read from or write data to the
spinning disk.
Magneto-resistive (MR) -- a technology used for the read element of a
read/write head used with a high-density magnetic disk. hard disk drives use a
magneto-resistive read head for reading and an inductive element for writing. As
storage capacity increases and the bit gets smaller, the magnetic field of the
bit becomes weaker. The magneto-resistive head is more sensitive to magnetic
fields than inductive read heads.
77
<PAGE> 83
Media -- materials that hold data in any form or that allow data to pass
through them, including paper, transparencies, multipart forms, hard, floppy and
optical disks, magnetic tape, wire, cable and fiber.
Megabyte (MB) -- one million bytes.
Printed Circuit Board (PCB) -- a flat board that holds chips and other
electronic components. The board is made of reinforced fiberglass or plastic and
interconnects components via copper pathways. The main printed circuit board in
a system is called a system board or motherboard, while smaller PCBs that plug
into the slots in the motherboard are called boards or cards.
Read Channel -- a circuit in a disk drive that translates the signal read
from or recorded to the read/write head into a single serial stream of data.
Read/Write Head -- a device that reads (senses) and writes (records) data
on a magnetic disk or tape. For writing, the surface of the disk or tape is
moved past the read/write head. By discharging electrical impulses at the
appropriate times, bits are recorded as tiny, magnetized spots of positive or
negative polarity. For reading, the surface is moved past the read/write head,
and the bits that are present induce an electrical current within the head.
Sector -- the smallest unit of storage read or written on a disk.
Sliders -- aerodynamically designed objects that keep the read/write head
at a proper distance from the disk platter. The read/write head is embedded
within the slider.
Spindle -- a rotating shaft in a disk drive.
Thin-film -- a microscopically thin layer of semiconductor or magnetic
material that is deposited onto a metal or ceramic disk.
Thin-film Head -- a read/write head for high-density disks that is made
from thin layers of a conducting film deposited onto a nickel-iron core.
78
<PAGE> 84
MAXTOR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF MAXTOR CORPORATION
Consolidated Balance Sheets December 27, 1997 and December
26, 1998.................................................. F-2
Consolidated Statements of Operations, nine months ended
December 28, 1996, fiscal year ended December 27, 1997,
and fiscal year ended December 26, 1998................... F-3
Consolidated Statements of Stockholders' Equity (Deficit),
nine months ended December 28, 1996, fiscal year ended
December 27, 1997 and fiscal year ended December 26,
1998...................................................... F-4
Consolidated Statements of Cash Flows, nine months ended
December 28, 1996, fiscal year ended December 27, 1997 and
fiscal year ended December 26, 1998....................... F-5
Notes to Consolidated Financial Statements.................. F-6
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-27
</TABLE>
F-1
<PAGE> 85
MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,925 $ 214,126
Marketable securities..................................... -- 13,503
Accounts receivable, net of allowance for doubtful
accounts of $3,573 at December 27, 1997 and $8,409 at
December 26, 1998....................................... 241,777 313,748
Accounts receivable from affiliates....................... 5,870 4,010
Inventories............................................... 155,312 153,192
Prepaid expenses and other................................ 20,814 45,198
--------- ---------
Total current assets............................... 440,698 743,777
Net property, plant and equipment........................... 99,336 108,290
Other assets................................................ 15,438 11,346
--------- ---------
$ 555,472 $ 863,413
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings, including current portion of
long-term debt.......................................... $ 100,057 $ 5,261
Short-term borrowings due to affiliate.................... 65,000 --
Accounts payable.......................................... 206,563 401,296
Accounts payable to affiliates............................ 25,022 26,441
Accrued and other liabilities............................. 155,563 115,937
--------- ---------
Total current liabilities.......................... 552,205 548,935
Long-term debt due affiliate................................ -- 55,000
Long-term debt.............................................. 224,313 90,046
--------- ---------
Total liabilities........................................... 776,518 693,981
Commitments and contingencies (Note 7)
Stockholders' equity (deficit):
Series A Preferred Stock, $0.01 par value, 95,000,000 shares
authorized; 88,059,701 issued and outstanding at December
27, 1997; all outstanding shares converted into 44,029,850
shares of common stock at August 5, 1998.................. 880 --
Common Stock, $0.01 par value, 250,000,000 shares
authorized; 7,563 shares issued and outstanding at
December 27, 1997 and 94,293,499 shares issued and
outstanding at December 26, 1998.......................... -- 943
Additional paid-in capital.................................. 534,765 880,175
Cumulative other comprehensive income -- unrealized gain on
investments in equity securities.......................... 16,262 30,094
Accumulated deficit......................................... (772,953) (741,780)
--------- ---------
Total stockholders' equity (deficit)............... (221,046) 169,432
--------- ---------
$ 555,472 $ 863,413
========= =========
</TABLE>
See accompanying notes.
F-2
<PAGE> 86
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenue................................................. $ 771,655 $ 1,384,799 $ 2,402,286
Revenue from affiliates................................. 27,229 39,521 6,242
--------- ----------- -----------
Total revenue................................. 798,884 1,424,320 2,408,528
Cost of revenue......................................... 861,551 1,316,774 2,102,624
Cost of revenue from affiliates......................... 27,307 36,162 5,491
--------- ----------- -----------
Total cost of revenue......................... 888,858 1,352,936 2,108,115
--------- ----------- -----------
Gross profit (loss)..................................... (89,974) 71,384 300,413
--------- ----------- -----------
Operating expenses:
Research and development................................ 87,752 106,249 152,401
Selling, general and administrative..................... 60,701 62,520 75,819
Stock compensation expense.............................. -- -- 12,088
--------- ----------- -----------
Total operating expenses...................... 148,453 168,769 240,308
--------- ----------- -----------
Income (loss) from operations........................... (238,427) (97,385) 60,105
Interest expense........................................ (18,075) (36,502) (28,784)
Interest and other income............................... 1,000 25,031 7,415
--------- ----------- -----------
Income (loss) before income taxes....................... (255,502) (108,856) 38,736
Provision for income taxes.............................. 824 1,035 7,563
--------- ----------- -----------
Net income (loss)....................................... (256,326) (109,891) 31,173
--------- ----------- -----------
Other comprehensive income (loss):
Unrealized gain on investments in equity securities..... -- 16,262 13,832
--------- ----------- -----------
Comprehensive income (loss)............................. $(256,326) $ (93,629) $ 45,005
========= =========== ===========
Net income (loss) per share --
basic................................................. $ -- $(58,112.64) $ 0.81
diluted............................................... $ -- $(58,112.64) $ 0.47
Shares used in per share calculation --
basic................................................. -- 1,891 38,295,095
diluted............................................... -- 1,891 65,814,126
</TABLE>
See accompanying notes.
F-3
<PAGE> 87
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL INVESTMENTS STOCKHOLDERS'
-------------------- --------------------- PAID-IN IN EQUITY ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES DEFICIT (DEFICIT)
----------- ------ ------------ ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 30, 1996... -- -- 300 $ -- $335,599 -- $(406,736) $ (71,137)
Exchange of common shares
for Series A
Preferred............... 58,208,955 $ 582 (300) -- (582) -- -- --
Net loss.................. -- -- -- -- -- -- (256,326) (256,326)
----------- ----- ------------ ----- -------- ------- --------- ---------
Balance, December 28,
1996.................... 58,208,955 582 -- -- 335,017 -- (663,062) (327,463)
Issuance of additional
Series A Preferred to
parent in exchange for
debt.................... 29,850,746 298 -- -- 199,702 -- -- 200,000
Issuance of stock under
stock option plan and
related
benefits................ -- -- 7,563 -- 46 -- -- 46
Change in unrealized gain
on investments in equity
securities.............. -- -- -- -- -- $16,262 -- 16,262
Net loss.................. -- -- -- -- -- -- (109,891) (109,891)
----------- ----- ------------ ----- -------- ------- --------- ---------
Balance, December 27,
1997.................... 88,059,701 880 7,563 -- 534,765 16,262 (772,953) (221,046)
Issuance of stock under
stock option and
restricted
stock plan.............. -- -- 524,861 5 1,259 -- -- 1,264
Issuance of common stock
in Initial public
offering................ -- -- 49,731,225 498 328,348 -- -- 328,846
Conversion of preferred
stock to common stock... (88,059,701) (880) 44,029,850 440 440 -- -- --
Stock compensation........ -- -- -- -- 12,088 -- -- 12,088
Stock compensation
reimbursement due from
an affiliate............ -- -- -- -- 3,275 -- -- 3,275
Change in unrealized gain
on investments in equity
securities.............. -- -- -- -- -- 13,832 -- 13,832
Net income................ -- -- -- -- -- -- 31,173 31,173
----------- ----- ------------ ----- -------- ------- --------- ---------
Balance, December 26,
1998.................... -- $ -- 94,293,499 $ 943 $880,175 $30,094 $(741,780) $ 169,432
=========== ===== ============ ===== ======== ======= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 88
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
MONTHS YEAR YEAR
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $(256,326) $(109,891) $ 31,173
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 47,064 65,642 74,203
Stock compensation expense................................ -- -- 12,543
Loss on disposal of property, plant and equipment......... 700 4,366 3,562
Gain on sale of subsidiary................................ (2,385) -- --
Gain on fully reserved note receivable from affiliate..... -- (20,000) --
Other..................................................... (589) (157) --
Changes in assets and liabilities:
Accounts receivable..................................... 62,786 (142,860) (71,971)
Accounts receivable from affiliates..................... (1,822) 378 5,135
Inventories............................................. 61,149 (74,434) 2,120
Prepaid expenses and other assets....................... 3,839 687 (10,552)
Accounts payable........................................ (37,297) 102,108 200,394
Accounts payable to affiliates.......................... 4,803 11,563 1,419
Accrued and other liabilities........................... 13,015 15,885 40,112
--------- --------- ---------
Total adjustments....................................... 151,263 (36,822) 256,965
--------- --------- ---------
Net cash provided by (used in) operating activities......... (105,063) (146,713) 288,138
--------- --------- ---------
Cash flows from investing activities:
Purchase of marketable securities......................... -- -- (13,503)
Proceeds from sale of subsidiary.......................... 25,000 -- --
Cash received on a note receivable from affiliate......... -- 20,000 --
Purchase of property, plant and equipment................. (53,780) (82,489) (95,230)
Proceeds from disposals of property, plant and
equipment............................................... 363 609 3,323
Other assets.............................................. (7,599) 621 3,635
--------- --------- ---------
Net cash used in investing activities..................... (36,016) (61,259) (101,775)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt, including short-term
borrowings.............................................. 410,715 319,363 69,775
Principal payments on debt, including short-term
borrowings.............................................. (307,444) (309,784) (308,838)
Proceeds from issuance of common stock.................... -- 46 329,655
Proceeds from intercompany notes issued to parent......... -- 200,000 --
Net payments under accounts receivable securitization..... 16,327 (16,041) (79,754)
--------- --------- ---------
Net cash provided by financing activities................. 119,598 193,584 10,838
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (21,481) (14,388) 197,201
Cash and cash equivalents at beginning of period.......... 52,794 31,313 16,925
--------- --------- ---------
Cash and cash equivalents at end of period................ $ 31,313 $ 16,925 $ 214,126
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 13,444 $ 26,540 $ 24,047
Income taxes.............................................. 2,009 1,025 1,022
Supplemental information on noncash investing and financing
activities:
Purchase of property, plant and equipment financed by
accounts payable.......................................... 8,171 2,670 2,991
Purchase of property, plant and equipment financed by
capital leases............................................ -- 881 --
Exchange of Common Stock for Series A Preferred Stock....... 582 -- --
Exchange of notes payable for Series A Preferred Stock...... -- 200,000 --
Unrealized gain on investments in equity securities......... -- 16,262 13,832
Stock compensation reimbursement due from an affiliate...... -- -- 3,275
</TABLE>
See accompanying notes.
F-5
<PAGE> 89
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. From
January 1996 through July 30, 1998, Maxtor Corporation operated as a
majority-owned subsidiary of Hyundai Electronics America ("HEA"). HEA is a
subsidiary of Hyundai Electronics Industries Co. Ltd. ("HEI"), a Korean
corporation. In August of 1998, the Company completed an initial public offering
of its Common Stock which reduced the ownership interest of HEA to below 50%.
NATURE OF BUSINESS
The Company develops, manufactures and markets hard disk drive products to
customers who sell their products in the personal computer industry. Products
are designed for desktop applications to meet both value and high-performance
needs of customers. Customers include original equipment manufacturers ("OEMs"),
distributors, and retailers. The Company relies on suppliers for components
including heads, disks and custom integrated circuits. Although printed circuit
board assemblies and head stack assemblies are outsourced, head disk assemblies
are completed by the Company. Substantially all of the Company's products are
manufactured at its manufacturing facility in Singapore and sold worldwide.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The actual results with regard to warranty expenditures could have a
material unfavorable impact on the Company if the actual rate of unit failure or
the cost to repair a unit is greater than what the Company has used in
estimating its warranty expense accrual.
Given the volatility of the market for disk drives and for the Company's
products, the Company makes adjustments to the value of inventories based on
estimates of potentially excess and obsolete inventories and negative margin
products after considering forecasted demand and forecasted average selling
prices. However, forecasts are always subject to revisions, cancellations, and
rescheduling. Actual demand will inevitably differ from such anticipated demand
and such differences may have a material impact on the financial statements.
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
F-6
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
components. Any customer order cancellations 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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable and cash
equivalents. The Company has cash equivalent and short-term investment policies
that limit the amount of credit exposure to any one financial institution and
restrict placement of these funds to financial institutions evaluated as highly
credit-worthy. The Company's products are sold worldwide to OEMs, distributors,
and retailers. Concentration of credit risk with respect to the Company's trade
receivables is limited by the Company's ongoing credit evaluation process and
the geographical dispersion of sales transactions. Therefore, the Company
generally requires no collateral from its customers. The allowance for doubtful
accounts is based upon the expected collectibility of all accounts receivable.
As of December 27, 1997, the Company had one customer who accounted for more
than 10% of the outstanding trade receivables. As of December 26, 1998, two
customers collectively represent approximately 38% of outstanding trade
receivables. If the customers fail to perform their obligations to the Company,
such failures would have adverse effects upon the Company's financial position,
results of operations, cash flows, and liquidity.
FISCAL YEAR
During 1996, the Company changed its fiscal year end to be consistent with
the fiscal year end of HEA. The fiscal year end changed from the last Saturday
of March, the date used in the Company's preceding filing of its Form 10-K with
the Securities and Exchange Commission, to the last Saturday of December
conforming to a 52/53-week year methodology. The fiscal period ended December
28, 1996 comprised 39 weeks. The years ended December 27, 1997 and December 26,
1998 comprised 52 and 53 weeks, respectively.
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.
MARKETABLE SECURITIES
Marketable securities are reflected at cost which approximates market value
and consist of investments in interest bearing bonds and money market
instruments purchased with an original maturity in excess of three months.
EQUITY SECURITIES
Included in other current assets are equity securities which are classified
as available-for-sale. Available-for-sale securities are carried at market
value. Unrealized gains and losses on securities classified as
available-for-sale are reported as a separate component of stockholders' equity
(deficit) net of applicable tax effects. Deferred taxes allocable to such gains
were fully offset by the utilization of available net operating losses. Realized
gains and losses on sales of all such investments are included in the results of
operations computed using the specific identification cost method.
F-7
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (computed on a first-in,
first-out basis) or market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated on the
straight-line basis over the estimated useful lives of the assets, which
generally range from three to five years, except for buildings which are
depreciated over thirty years. Assets under capital leases and leasehold
improvements are amortized over the shorter of the asset life or the remaining
lease term. Capital lease amortization is included with depreciation expense.
Upon disposal, the Company removes the asset and accumulated depreciation from
its records and recognizes the related gain or loss in results of operations.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenue is recognized upon product shipment. Revenue from sales to certain
distributors and retailers is subject to agreements providing limited rights of
return, as well as price protection on unsold merchandise. Accordingly, the
Company records reserves upon shipment for estimated returns, exchanges and
credits for price protection. The Company also provides for the estimated cost
to repair or replace products under warranty at the time of sale. The Company
currently warrants its products against defects in parts and labor from the date
of shipment with an additional three months allowed for distributors to account
for "shelf life." All products currently in production are warranted for a
period of three years after shipment.
ADVERTISING EXPENSE
Cooperative advertising costs are charged as the related revenue is earned
and other advertising costs are expensed as incurred. Advertising costs for the
nine months ended December 28, 1996 and the fiscal years ended December 27, 1997
and December 26, 1998 were not significant.
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 income (loss). Net foreign exchange losses included in net
income (loss) for the nine months ended December 28, 1996 and the fiscal years
ended December 27, 1997 and December 26, 1998 were immaterial.
F-8
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS
The Company reviews property, plant and equipment and other long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability is
measured by comparison of its carrying amount to future net cash flows the
assets are expected to generate. If such assets are considered to be impaired,
the impairment to be recognized is measured as the amount by which the carrying
amount of the asset exceeds the present value of the future net cash flows.
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
The Company accounts for its accounts receivable securitization program in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities."
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 SFAS No. 123. "Accounting for
Stock-Based Compensation."
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed in accordance with SFAS 128.
Basic net income (loss) per share is computed using the weighted average common
shares outstanding during the period. Diluted net income (loss) per share is
computed using the weighted average common shares and potentially dilutive
securities outstanding during the period. Potentially dilutive securities are
excluded from the computation of diluted net loss per share for those presented
periods in which their effect would be anti-dilutive due to the Company's net
losses. Net loss per share information presented for the year ended December 27,
1997 is not meaningful due to the very limited number of common shares
outstanding during the year. No common shares were outstanding for the nine
month period ended December 28, 1996.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform to current classifications. These reclassifications had no impact on
the Company's prior year net assets or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives which are not hedges must be adjusted to fair value through
net income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
F-9
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. SFAS 133 is effective for
years beginning after June 15, 1999, but companies can early adopt as of the
beginning of any fiscal quarter that begins after June 1998. The Company is
evaluating the requirements of SFAS 133, but does not expect this pronouncement
to materially impact the Company's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
when costs related to software developed or obtained for internal use should be
capitalized or expensed. The SOP is effective for transactions entered into for
fiscal years beginning after December 15, 1998. The Company has reviewed the
provisions of the SOP and does not believe adoption of this standard will have a
material effect upon its financial position or results of operations.
2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 27, 1997 DECEMBER 26, 1998
----------------- -----------------
<S> <C> <C>
Inventories:
Raw materials............................. $ 48,834 $ 51,680
Work-in-process........................... 15,177 8,537
Finished goods............................ 91,301 92,975
--------- ---------
$ 155,312 $ 153,192
========= =========
Prepaid expenses and other:
Investments in equity securities, at fair
value.................................. $ 16,262 $ 30,094
Prepaid expenses and other................ 4,552 15,104
--------- ---------
$ 20,814 $ 45,198
========= =========
Property, plant and equipment, at cost:
Buildings................................. $ 32,453 $ 35,199
Machinery and equipment................... 220,213 244,726
Furniture and fixtures.................... 11,374 31,213
Leasehold improvements.................... 9,012 11,352
--------- ---------
273,052 322,490
Less accumulated depreciation and
amortization.............................. (173,716) (214,200)
--------- ---------
Net property, plant and equipment........... $ 99,336 $ 108,290
========= =========
Accrued and other liabilities:
Income taxes payable...................... $ 2,416 $ 9,123
Accrued payroll and payroll-related
expenses............................... 29,116 46,225
Accrued warranty.......................... 22,716 41,803
Accrued expenses.......................... 21,561 18,786
Advances under securitization............. 79,754 --
--------- ---------
$ 155,563 $ 115,937
========= =========
</TABLE>
F-10
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL INSTRUMENTS
FAIR VALUE DISCLOSURES
The fair values of cash, cash equivalents and marketable securities
approximate carrying values due to the short period of time to maturity. The
carrying values of equity securities and notes receivable, which are classified
in other assets, approximate or are reflected at fair value. The fair value of
the Company's fixed rate debt is estimated based on the current rates offered to
the Company for similar debt instruments having the same remaining maturities.
The fair value of the Company's variable rate debt approximates carrying values
as these instruments are adjusted periodically during the course of the year at
market prices. The fair value of the Company's subordinated debentures is based
on the bid price of the last trade at the end of each fiscal year.
The carrying and fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, 1997 DECEMBER 26, 1998
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 16,925 $ 16,925 $214,126 $214,126
Marketable securities............. -- -- 13,503 13,503
Notes receivable.................. 3,850 3,850 51 51
Equity securities................. 16,262 16,262 30,094 30,094
Short and long-term debt:
fixed rates..................... 13,800 13,800 -- --
variable rates.................. 210,570 210,570 -- --
debt to affiliate............... 65,000 65,000 55,000 55,000
Subordinated debentures........... 100,000 70,000 95,000 60,800
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company attempts to minimize the impact of foreign currency exchange
rate changes on certain underlying assets, liabilities and anticipated cash
flows for operating expenses denominated in foreign currencies by entering into
short-term foreign exchange (primarily forward purchase and sale) contracts. The
Company's policy is to hedge all material transaction exposures on a quarterly
basis. Contracts are generally entered into at the end of each fiscal quarter to
reduce foreign currency exposures for the following fiscal quarter. Contracts
generally have maturities of three months or less. Any gains or losses on these
instruments are accounted for in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation," and are generally
included in cost of revenue. Unrealized gains or losses on foreign currency
forward contracts that are designated and effective as hedges of firm
commitments, are deferred and recorded in the same period as the underlying
transaction. Notional amounts of outstanding currency forward contracts were $0
and $0.3 million, as of December 27, 1997 and December 26, 1998, respectively.
F-11
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SALE OF ACCOUNTS RECEIVABLES
On July 31, 1998, the Company entered into a three year agreement with
Fleet Bank for a $200.0 million asset securitization program. Under the Fleet
program, the Company sells all of its eligible trade accounts receivable on a
non-recourse basis through a special purpose entity. At December 26, 1998,
$100.0 million of accounts receivable had been sold under this arrangement and
have been excluded from the Company's balance sheet.
4. INTERNATIONAL MANUFACTURING SERVICES
In May 1996, the Company entered into an agreement to sell a majority
interest in International Manufacturing Services, Inc. ("IMS"), previously a
wholly-owned subsidiary, to certain members of IMS management and other
investors. At completion of the transaction in June 1996, the Company received
$25.0 million in cash and $20.0 million in notes from IMS, and retained a 24%
ownership interest in IMS. The note receivable, which was fully reserved at the
time of sale, was recovered in the fourth quarter of 1997 resulting in a gain of
$20.0 million. As of December 26, 1998, the Company's ownership interest was
16%.
The Company outsources most of its printed circuit board assembly to IMS;
IMS supplies the Company with printed circuit boards, sub-assemblies and fully
integrated products under a manufacturing services agreement. The Company made
purchases from IMS in the fiscal periods ended December 28, 1996, December 27,
1997 and December 26, 1998 amounted to $191.9 million, $115.3 million and $118.6
million, respectively.
5. SEGMENT AND MAJOR CUSTOMERS INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 31, 1997. SFAS No. 131 supercedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 changes current practice under
SFAS No. 14 by establishing a new framework on which to base segment reporting
and introduces requirements for interim reporting of segment information.
The Company has determined that it has a single reportable segment
consisting of the design, manufacture and sale of data storage products for
desktop computer systems used in heterogeneous computing environments.
Management uses one measurement of profitability and does not disaggregate its
business for internal reporting. The Company has a world-wide sales, service and
distribution network. Products are marketed and sold through a direct sales
force to OEMs, distributors and retailers in the United States, Europe and Asia
Pacific.
F-12
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Revenue from external customers and long-lived
asset information by geographic area for each of the three fiscal periods is
presented in the following table:
<TABLE>
<CAPTION>
U.S. INTERNATIONAL CONSOLIDATED
---------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Nine Months Ended December 28, 1996
Revenue from unaffiliated customers......... $ 751,597 $ 20,058 $ 771,655
Revenue from affiliated customers........... 25,712 1,517 27,229
---------- ---------- ----------
Total revenue............................... $ 777,309 $ 21,575 $ 798,884
========== ========== ==========
Long-lived assets........................... $ 34,020 $ 58,053 $ 92,073
========== ========== ==========
Year Ended December 27, 1997
Revenue from unaffiliated customers......... $1,384,703 $ 96 $1,384,799
Revenue from affiliated customers........... 39,521 -- 39,521
---------- ---------- ----------
Total revenue............................... $1,424,224 $ 96 $1,424,320
========== ========== ==========
Long-lived assets........................... $ 35,972 $ 63,364 $ 99,336
========== ========== ==========
Year Ended December 26, 1998
Revenue from unaffiliated customers......... $2,402,072 $ 214 $2,402,286
Revenue from affiliated customers........... $ 6,242 -- $ 6,242
---------- ---------- ----------
Total revenue............................... $2,408,314 $ 214 $2,408,528
========== ========== ==========
Long-lived assets........................... $ 41,912 $ 66,378 $ 108,290
========== ========== ==========
</TABLE>
Revenue from unaffiliated and affiliated customers is based on the origin
of the sale. Long-lived assets located outside the United States consist
principally of the Company's manufacturing operations located in Singapore which
amounted to $56.3 million, $62.1 million, and $65.5 million as of December 28,
1996, December 27, 1997, and December 26, 1998, respectively.
The Company's export sales represented 48%, 40% and 38% of total revenue
for the nine months ended December 28, 1996, the year ended December 27, 1997
and the year ended December 26, 1998, respectively. Approximately 38%, 57% and
59% of export sales were to Europe, while 55%, 36% and 35% of export sales were
to Asia Pacific for the nine months ended December 28, 1996, the year ended
December 27, 1997 and the year ended December 26, 1998, respectively.
During the nine months ended December 28, 1996, one customer, SED
International, accounted for 11% of the Company's revenue. During the year ended
December 27, 1997, two customers, Compaq and Dell, accounted for approximately
21% and 10%, respectively, of the Company's revenue. During the year ended
December 26, 1998, two customers, Dell and IBM, accounted for approximately 27%
and 15%, respectively, of the Company's revenue.
Sales to OEMs represented 52%, 64% and 77% of total revenue for the nine
months ended December 28, 1996, the year ended December 27, 1997 and the year
ended December 26, 1998, respectively.
F-13
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINES OF CREDIT AND LONG-TERM DEBT
Lines of credit and long-term debt consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
5.75% Subordinated Debentures due March 1, 2012..... $100,000 $ 95,000
Short-term borrowings; interest payable at variable
rates ranging from 6.24% to 7.88% per annum....... 80,967 --
Short-term borrowings due to affiliate; 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 --
Long-term debt due affiliate; interest payable at
rate of 7.65%..................................... -- 55,000
Long-term debt, interest payable at variable rates
ranging from 6.18% to 6.24% per annum............. 129,000 --
Other obligations, including capital leases......... 603 307
-------- --------
389,370 150,307
Less amounts due within one year.................... 165,057 5,261
-------- --------
Due after one year.................................. $224,313 $145,046
======== ========
</TABLE>
Future aggregate maturities as of December 26, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ ---------------
<S> <C>
1999..................................... $ 5,261
2000..................................... 5,046
2001..................................... 60,000
2002..................................... 5,000
2003..................................... 5,000
Later years.............................. 70,000
--------
Total............................... $150,307
========
</TABLE>
Interest on the Subordinated Debentures ("Debentures") is payable on March
1 and September 1 of each year. The Debentures are convertible at the option of
the holder into a cash payment of $167.50 for each $1,000 principal amount at
any time. The Debentures, at the option of the Company, are redeemable at
100.575% of principal amount as of March 30, 1996 and thereafter at prices
adjusting to the principal amount on or after March 1, 1997, plus accrued
interest. The Debentures are entitled to a sinking fund of $5.0 million
principal amount of Debentures, payable annually beginning March 1, 1998, which
is calculated to retire at least 70% of the Debentures prior to maturity. The
Debentures are subordinated in right to payment to all senior indebtedness.
On July 31, 1998, the Company replaced its short-term borrowings from HEA
of $55.0 million with a three year subordinated note due July 31, 2001. This
note bears interest of LIBOR plus 2.0% (currently 7.65%) which is payable
semi-annually. As of December 26, 1998, $55.0 million was outstanding on this
note.
F-14
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 27, 1997, the Company had outstanding obligations under various
credit facilities which were guaranteed by HEI. During 1998, borrowings under
all of these facilities were paid off and the related agreements terminated.
7. 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 26, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
<S> <C>
1999..................................... $11,976
2000..................................... 7,869
2001..................................... 5,927
2002..................................... 4,716
2003..................................... 813
Later years.............................. 9,055
-------
Total............................... $40,356
=======
</TABLE>
The above commitments extend through fiscal year 2016. Rental expense was
approximately $8.9 million for the nine months ended December 28, 1996, $10.7
million for the year ended December 27, 1997, and $11.6 million for the year
ended December 26, 1998.
Pursuant to a sublicense agreement with HEI, the Company is obligated to
pay a portion of an IBM license royalty fee otherwise due from HEI. Such
payments are due in annual installments through 2007. As of December 26, 1998,
aggregate future payments under this commitment are estimated at $14.3 million.
LEGAL PROCEEDINGS
The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
HEI which became effective on November 17, 1995. In that agreement, StorMedia
agreed to supply disk media to the Company. StorMedia's disk media did not meet
the Company's specifications and functional requirements as required by the
agreement and the Company ultimately terminated the agreement.
After a class action securities lawsuit was filed against StorMedia by
certain of its shareholders in September 1996 which alleged, in part, that
StorMedia failed to perform under the agreement, StorMedia sued HEI, Mong Hun
Chung (HEI's chairman), Dr. Chong Sup Park (HEA's President and the individual
who signed the StorMedia Agreement on behalf of the Company) and K.S. Yoo (the
individual who signed the StorMedia Agreement on behalf of HEI) (collectively
the "Original Defendants") in federal court (the "Federal Suit"). In the Federal
Suit, StorMedia alleged that at the time HEI entered into the StorMedia
Agreement, it knew that it would not and could not purchase the volume of
products it committed to purchase, and that failure to do so caused damages to
StorMedia in excess of $206 million.
F-15
<PAGE> 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1996, the Company filed a complaint against StorMedia and
William Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado
state court seeking approximately $100 million in damages and alleging, among
other claims, breach of contract, breach of implied warranty of fitness and
fraud under the StorMedia Agreement (the "Colorado Suit"). This proceeding was
stayed pending resolution of the Federal Suit. The Federal Suit was permanently
dismissed early in February 1998. On February 24, 1998, StorMedia filed a new
complaint in a California state court for $206 million, alleging fraud and
deceit against the Original Defendants and negligent misrepresentation against
HEI and the Company (the "California Suit"). On May 18, 1998, the stay on the
Colorado Suit was lifted by the Colorado state court. The Company's motion to
dismiss, or in the alternative, stay the California Suit, is pending. On
September 9, 1998, the California Suit was stayed pending resolution of the
Colorado Suit. On October 11, 1998, StorMedia filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Act. This bankruptcy filing caused an
automatic stay of proceedings against StorMedia, including the Colorado Suit.
StorMedia has not prosecuted its claims against the Company since it filed for
bankruptcy protection.
The Company believes that it has valid defenses against the claims alleged
by StorMedia and intends to defend itself vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, the Company cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. The litigation could result in significant diversion of
time by the Company's technical personnel, as well as substantial expenditures
for future legal fees. After considering the nature of the claims and facts
relating to the litigation, including the results of preliminary discovery, the
Company's management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition or
results of operations. However, the results of these proceedings, including any
potential settlement, are uncertain and there can be no assurance that they will
not have a material adverse effect on the Company's business, financial position
and results of operations.
The Company has been notified of other claims, including claims of patent
infringement. While the final outcome of these claims cannot be determined at
this time, the Company believes that resolution of these claims will not have a
material adverse effect on its business, financial condition or results of
operations.
No amounts have been reserved in the accompanying consolidated financial
statements for any legal claims or actions.
8. RELATED PARTY TRANSACTIONS
Relationship with HEA and HEI:
In 1994, HEI and certain of its affiliates purchased 40% of the Company's
outstanding common stock for $150.0 million in cash. In early 1996, HEA acquired
all of the remaining shares of publicly-held common stock in a tender offer and
merger for $215.0 million in cash and also acquired all of the Company's common
stock held by HEI and its affiliates. The Company operated as a wholly owned
subsidiary of HEA until completion of its July 31, 1998 initial public offering
which reduced the ownership interest of HEA to below 50%.
F-16
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
From August 1995 through July 1998, HEI and its affiliates guaranteed
various credit facilities of the Company, all of which were repaid and related
guarantee arrangements terminated in connection with the Company's initial
public offering.
The Company's board of directors has established an affiliated transactions
committee which consists entirely of directors who are not employed by HEA, any
affiliate thereof or the Company. The board of directors has adopted resolutions
requiring this Affiliated Transactions Committee to review any material
transactions between Maxtor on the one hand, and HEA or its affiliates on the
other. Also, the Company's Amended and Restated Certificate of Incorporation
have certain provisions concerning the conduct of certain affairs of the Company
as they may involve HEA and its affiliates on the one hand and the Company on
the other.
Transactions with Affiliates:
In December 1995, HEA loaned the Company $100 million, which was due on
April 10, 1996 and accrued interest at LIBOR plus 0.65%, with interest payable
at maturity. This $100 million loan was replaced in April 1996 with a one year
$100 million revolving line of credit bearing interest at HEA's cost of funds
plus 0.10%, with interest payable quarterly. In July 1996, the Company borrowed
an additional $35 million from HEA due in August 1996, bearing interest at LIBOR
plus 0.70% with interest payable at maturity; this loan was repaid at maturity.
In April 1997, HEA renewed the revolving line of credit with a borrowing limit
of $150 million which was increased to $185 million in June 1997, and to $270
million in August 1997. In December 1997, $200 million of this outstanding
indebtedness was cancelled in exchange for 29,850,746 shares of the Company's
preferred stock, the borrowing limit was reduced to $150 million, and $5 million
in principal was repaid. In January 1998, the Company repaid an additional $10
million in principal. In April 1998, the revolving line of credit was renewed
with a borrowing limit of $100 million. On July 31, 1998, the revolving line,
which had an outstanding principal balance of $55.0 million, was replaced with a
three-year subordinated term note in the same principal amount. This note
matures on July 31, 2001 and bears interest, payable semi-annually, at a rate
equal to six-month LIBOR plus 2.0%, currently 7.65%.
Revenue and related cost of revenue from affiliates consists principally of
product sales to HEI for all periods presented.
The cost of revenue includes certain component parts purchased from MMC
Technology, Inc., a wholly owned subsidiary of HEA, amounting to $13.2 million
during the year ended December 31, 1997 and $146.8 million during the year ended
December 26, 1998. The cost of revenue also includes certain component parts
purchased from HEI which to date have not been significant.
Pursuant to a sublicense agreement with HEI, the Company is obligated to
pay a portion of an IBM license royalty fee otherwise due from HEI. Such
payments are due in annual installments through 2007. For the year ended
December 26, 1998, the Company recorded expense of $1.1 million in connection
with this commitment.
HEA currently is an unconditional guarantor of the Company's facilities
lease in Milpitas, California. The aggregate rent under the lease is currently
$6.7 million per annum.
F-17
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's rights to its newly implemented SAP information system are
governed by a license agreement between Hyundai Information Technology and SAP.
Stockholder Agreement with HEA and HEI:
The Company, HEA and HEI ("Hyundai Affiliates") are parties to a
stockholder agreement which includes provisions for HEA to nominate directors
based on the ownership interest of the Hyundai Affiliates, prohibition of
certain proxy solicitations by Hyundai Affiliates, and rights of the Hyundai
Affiliates to maintain stock ownership.
When the Hyundai Affiliates beneficially own less than a majority, but at
least 30% of the outstanding voting stock, HEA has the right to designate for
nomination one director in each of the three classes of the Company's board of
directors.
Standstill and Right to Maintain Ownership; Substantial Stock
Ownership. Hyundai Affiliates are not permitted to acquire additional shares of
voting stock except for two reasons. First, Hyundai Affiliates may purchase
voting stock if a third party makes a tender offer or exchange offer for at
least 40% or accumulates more than 20% of voting stock, unless these actions by
the third party have been approved by a majority of directors who are not
employees of any Hyundai entity or Maxtor. Second, Hyundai Affiliates may
purchase voting stock through December 31, 2000, if as a result of an issuance
of common stock or other equity securities, Hyundai Affiliates will own in the
aggregate less than 30% of outstanding voting stock, plus one share (the
"Minimum Ownership") following such issuance. The prohibition on Hyundai
Affiliates' acquisition of voting stock terminates on the earlier of December
31, 2001 or such time as the Hyundai Affiliates beneficially own less than 20%
of outstanding voting stock.
Agreement Not to Compete. HEA and HEI also have agreed not to compete with
the Company in the design, development, manufacture, marketing or sale of hard
disk drives through July 2003. Despite this agreement, Hyundai Affiliates are
permitted to make investments of up to 3% of the outstanding stock of a publicly
traded corporation.
9. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In the third quarter of 1998, the Company completed the issuance of
49,731,225 shares of its common stock in an initial public offering. The Company
received approximately $328.8 million, net of issuance costs and underwriters'
commissions. Approximately $200.0 million of the proceeds have been used for
repayment of certain outstanding indebtedness under credit facilities due to
various banks (see Note 6). Upon closing of the July 1998 public offering, all
outstanding shares of the Series A Preferred Stock converted into 44,029,850
shares of common stock. As a result of the July 1998 public offering, the
Company ceased to be a majority-owned subsidiary of HEI and therefore no longer
is subject to HEI's previous commitment of financial support.
On May 29, 1998, the Board of Directors approved a one-for-two reverse
split of the Company's outstanding common stock, which became effective upon the
Company's filing of an amended and restated certificate of incorporation in
Delaware on July 24, 1998. All references in the financial statements to the
number of the Company's common shares and price per share amounts, as well as
the conversion ratio of preferred shares, have been
F-18
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
retroactively restated to reflect the reverse split. The Board of Directors also
approved the increase of the Company's authorized common stock to 250,000,000
shares.
RESTRICTED STOCK PLAN
On May 29, 1998, the Company adopted the 1998 Restricted Stock Plan which
provides for awards of shares of common stock to certain executive employees.
Restricted stock awarded under this plan vests three years from the date of
grant and is subject to forfeiture in the event of termination of employment
with the Company. The Company has granted 390,000 shares of common stock under
this plan. Compensation cost based on the fair market value of the Company's
stock at the date of grant is reported as compensation expense on a ratable
basis over the vesting periods. For the year ended December 26, 1998,
compensation expense recorded in connection with the Restricted Stock Plan
amounted to $455,000.
1998 EMPLOYEE STOCK PURCHASE PLAN
A total of 1.7 million shares of the Company's common stock have been
reserved for issuance under the Company's 1998 Employee Stock Purchase Plan (the
"Purchase Plan"), none of which were issued as of December 26, 1998. The
Purchase Plan permits eligible employees to purchase the Company's common stock
at a discount, but only through accumulated payroll deductions, during
sequential 6-month offering periods. Participants will purchase shares on the
last day of each offering period. In general, the price at which shares are
purchased under the Purchase Plan is equal to 85% of the lower of the fair
market value of a share of common stock on (a) the first day of the offering
period, or (b) the purchase date. Offering periods of the Purchase Plan
generally begin on February 16 and August 16 of each year, although the initial
offering period under the Purchase Plan commenced on July 30, 1998.
STOCK OPTIONS
The Company grants options pursuant to its 1996 Stock Option Plan (the
"Plan") which was approved by the Board of Directors in May 1996. Options under
the Plan expire ten years from the date of grant.
The Plan generally provides for non-qualified stock options and incentive
stock options to be granted to eligible employees, consultants, and directors of
the Company (or any parent or subsidiary of the Company) at a price not less
than 85% of the fair market value at the date of grant, as determined by the
Board of Directors. The Board or an executive committee appointed by the Board
also approves other terms such as number of shares granted and exercisability
thereof. Any person who is not an employee may be granted only a non-qualified
stock option. Options granted under the Plan generally vest over a four-year
period with 25% vesting of the first anniversary date of the vest date and 6.25%
each quarter thereafter.
The Company amended and restated the Plan in February 1998 to remove
certain provisions which had given rise to variable accounting, and offered and
modified employee option agreements in the second quarter of 1998 for the
majority of employees which had previously held variable options to achieve
fixed-award accounting. To comply with the variable plan accounting required
prior to these amendments, the Company recorded compensation expense related to
the difference between the estimated fair market value of its
F-19
<PAGE> 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock and the stated exercise price of the Company's options. Compensation cost
was reflected in accordance with Financial Accounting Standards Board
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans."
The following table summarizes option activity through December 26, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE EXERCISE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE VALUE
---------- ---------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at March 30, 1996......... -- -- -- --
Shares reserved................... 5,136,084 -- -- --
Options granted................... (4,661,099) 4,661,099 $ 6.00 $ 27,966
Option canceled................... 1,108,349 (1,108,349) 6.00 (6,650)
---------- ---------- --------
Balance at December 28, 1996...... 1,583,334 3,552,750 6.00 21,316
Options granted................... (1,622,375) 1,622,375 6.00 9,735
Options exercised................. -- (7,563) 6.00 (46)
Option canceled................... 759,645 (759,645) 6.00 (4,558)
---------- ---------- --------
Balance at December 27, 1997...... 720,604 4,407,917 6.00 26,447
Shares reserved................... 8,663,234 -- -- --
Options granted................... (5,848,761) 5,848,761 10.16 59,431
Options exercised................. -- (134,862) 6.00 (809)
Options cancelled................. 815,857 (815,857) 7.77 (6,339)
---------- ---------- --------
Balance at December 26, 1998...... 4,350,934 9,305,959 8.46 $ 78,730
========== ========== ========
</TABLE>
There were no shares vested as of December 28, 1996 and 1,221,518 shares
vested, but unexercised as of December 27, 1997 at a weighted average exercise
price of $6.00. There were 2,543,703 shares vested but unexercised at December
26, 1998 at a weighted average exercise price of $6.01. There were 7,563 shares
exercised subject to repurchase as of December 27, 1997 and no shares exercised
subject to repurchase as of December 28, 1996 and December 26, 1998.
On July 30, 1998 the Company reduced the exercise price of options to
purchase 437,763 shares. The exercise price of such options originally ranged
from $8.00 to $9.50 per share and was reduced to $7.00 per share, the fair
market value of the Company's common stock as of that date.
F-20
<PAGE> 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information for stock options outstanding at
December 26, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 6.00-$ 6.00 4,909,265 8.07 $ 6.00 2,540,806 $ 6.00
$ 7.00-$12.97 1,497,802 9.55 $ 7.28 1,170 $ 7.00
$13.19-$15.63 2,898,892 9.88 $13.24 1,727 $14.26
--------- ---------
$ 6.00-$15.63 9,305,959 8.87 $ 8.46 2,543,703 $ 6.01
========= =========
</TABLE>
The Company accounts for its stock option and employee stock purchase plans
in accordance with APB 25 and related interpretations. The following information
concerning such plans is provided in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation."
During 1997, the Company also granted options to the employees of MMC
Technology, a wholly owned subsidiary of HEA. As of December 26, 1998, there
were 523,960 options outstanding pursuant to these grants which are included in
the table above. The Company measures compensation cost for options granted to
non-employees at their fair value in accordance with SFAS No. 123 and its
interpretations. MMC Technology has agreed to reimburse the Company for any
compensation expense arising from these grants. Accordingly, compensation costs
related to the MMC grants are reported as a receivable from affiliates.
The fair value of option grants has been estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate............. 6.18% 5.86% 5.07%
Weighted average expected life...... 5 years 4.5 years 4 years
Volatility.......................... -- -- 62%
Dividend yield...................... -- -- --
</TABLE>
No price volatility is assumed for 1996 and 1997 because the Company's
equity securities were not traded publicly. No dividend yield is assumed as the
Company has not paid dividends and has no plans to do so.
The weighted average expected life was calculated based on the vesting
period and the expected life at the date of grant. The risk-free interest rate
was calculated based on rates prevailing during grant periods and the expected
life of the options at the date of grants. The weighted average fair values of
options granted to employees during the nine months ended December 28, 1996 and
the fiscal years ended December 28, 1997 and December 26, 1998 were $1.34, $0.84
and $4.54, respectively.
F-21
<PAGE> 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to SFAS 123, the Company also estimates the fair value of
employee's purchase rights under the Employee Stock Purchase Plan and unvested
shares issued under the Restricted Stock Plan using the Black-Scholes valuation
model. The fair value of purchase rights under the Employee Stock Purchase Plan
for the year ended December 26, 1998 was $2.58 which was estimated using the
following assumptions: a weighted-average expected life of 0.5 years; expected
volatility of 0.62; and weighted-average risk-free interest rates of 5.03
percent. The fair value of unvested shares issued under the Restricted Stock
Purchase Plan for the year ended December 26, 1998 was $3.73 which was estimated
using the following assumptions: a weighted-average expected life of 3.0 years;
expected volatility of 0.62; and weighted-average risk-free interest rates of
5.52 percent.
The following pro forma net income (loss) information for the Company's
stock options, restricted stock and employee stock purchase plan has been
prepared following the provisions of SFAS 123 in thousands, except per share
data:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 28, 1996
----------------------------
AS REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net loss.......................................... $ 256,326 $ 257,488
Net income per share -- diluted................... -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 27, 1997
----------------------------
AS REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net loss.......................................... $ 109,891 $ 111,613
Net loss per share -- diluted..................... $ (58,112.64) $ (59,023.27)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 26, 1998
----------------------------
AS REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net income........................................ $ 31,173 $ 21,481
Net income per share -- diluted................... $ 0.47 $ 0.33
</TABLE>
The pro forma net income (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 net loss per share
information presented for the year ended December 27, 1997 is not meaningful due
to the very limited number of common shares outstanding during such period. No
common shares were outstanding for the nine month period ended December 28,
1996.
F-22
<PAGE> 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE
MONTHS YEAR ENDED
ENDED ----------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S..................................... -- -- $5,563
Foreign................................. $1,124 $1,035 2,000
Deferred:
Foreign................................. (300) -- --
------ ------ ------
Total................................... $ 824 $1,035 $7,563
====== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the U.S. statutory rate of 35% to the income (loss) before income taxes for the
nine months ended December 28, 1996 and the fiscal years ended December 27, 1997
and December 26, 1998. The principal reasons for this difference are as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED ----------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) at U.S.
statutory rate........................ $(89,442) $(38,100) $ 13,558
Tax savings from foreign operations..... (27,104) (63,487) (55,556)
Repatriated foreign earnings............ -- -- 106,853
U.S. loss not providing current tax
benefit............................... 52,722 100,748 --
Benefit of prior years U.S. losses...... -- -- (63,875)
Valuation of temporary differences...... 64,492 2,361 (382)
Stock compensation expense.............. -- -- 4,132
Alternative minimum tax................. -- -- 2,500
Other................................... 156 (487) 333
-------- -------- --------
Total......................... $ 824 $ 1,035 $ 7,563
======== ======== ========
</TABLE>
F-23
<PAGE> 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and accruals..................... $ 8,975 $ 11,802
Depreciation........................................ 6,149 6,254
Sales related reserves.............................. 11,006 23,521
Net operating loss carryforwards.................... 218,718 113,977
Tax credit carryforwards............................ 19,335 22,231
Capitalized research and development................ 102,049 92,263
Notes receivable reserve............................ 1,220 1,712
Other............................................... 10,965 8,283
--------- ---------
Total deferred tax assets................. 378,417 280,043
Valuation allowance for deferred tax assets......... (284,140) (267,549)
--------- ---------
Net deferred tax assets............................. $ 94,277 $ 12,494
========= =========
Deferred tax liabilities:
Unremitted earnings of certain foreign entities..... $ 88,585 $ 1,961
Unrealized gain on investments in equity security... 5,692 10,533
--------- ---------
Total deferred tax liabilities............ $ 94,277 $ 12,494
========= =========
</TABLE>
Pre-tax income from foreign operations was approximately $79.0 million for
the nine months ended December 28, 1996, and $86.0 million and $172.3 million
for the years ended December 27, 1997 and December 26, 1998, respectively.
Subject to its continued compliance with certain legal requirements, the Company
currently enjoys a tax holiday for its operations in Singapore that has been
extended until June 30, 2003.
During the fiscal years ended December 27, 1997 and December 26, 1998, the
valuation allowance for deferred tax assets increased by $32.7 million and
decreased by $16.6 million, respectively.
At December 26, 1998, for federal income tax purposes, the Company had net
operating loss carryforwards of $317.0 million and tax credit carryforwards of
approximately $19.6 million which will expire beginning in fiscal years 2008 and
1999, respectively. 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 $269.0 million of
net operating loss carryforwards and the deduction equivalent of approximately
$19.6 million of tax credit carryforwards will be limited to approximately $16.0
million per year.
The Company was part of the HEA consolidated group for federal income tax
returns for periods from early 1996 to August 1998 (the "Affiliation Period").
As a member of the HEA consolidated group, the Company was subject to a tax
allocation agreement. For
F-24
<PAGE> 108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial reporting purposes, however, Company's tax loss is computed on a
separate tax return basis, and, as such, Company did not record any tax benefit
in its financial statements for the amount of the net operating loss included in
the HEA consolidated income tax return.
The Company ceased to be a member of the HEA consolidated group as of
August 1998. The Company remains liable for its share of the total consolidated
or combined tax return liability of the HEA consolidated group prior to August
1998. The Company has agreed to indemnify or reimburse HEA if there is any
increase in its share of the consolidated or combined tax return liability
resulting from revisions to the Company's taxable income or revisions to another
HEA member's taxable income, except to the extent such revisions to another HEA
member's taxable income are made after September 15, 1999.
11. NET INCOME (LOSS) PER SHARE:
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted net income
(loss) per share calculations is provided as follows (in thousands, except share
and per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss).................... $(256,326) $ (109,891) $ 31,173
========= =========== ===========
Net income (loss) available to common
stockholders....................... $(256,326) $ (109,891) $ 31,173
========= =========== ===========
DENOMINATOR
Basic weighted average common shares
outstanding........................ -- 1,891 38,295,095
EFFECT OF DILUTIVE SECURITIES
-- Common stock options............ -- -- 1,391,428
-- Convertible preferred stock..... -- -- 26,127,603
--------- ----------- -----------
Diluted weighted average common
shares............................. -- 1,891 65,814,126
========= =========== ===========
Basic net income (loss) per share
(see Note 1)....................... $ -- $(58,112.64) $ 0.81
========= =========== ===========
Diluted net income (loss) per
share.............................. $ -- $(58,112.64) $ 0.47
========= =========== ===========
</TABLE>
The following securities and contingently issuable shares are excluded in
the calculation of diluted shares outstanding as their effects would be
antidilutive:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Stock options............................. 3,552,000 4,408,000 --
Convertible preferred stock............... 29,104,000 44,030,000 --
</TABLE>
F-25
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma net income (loss) per share information reflecting the 44,029,850
shares of convertible preferred stock as if converted on issuance is presented
as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss).......................... $ (256,326) $ (109,891) $ 31,173
=========== =========== ===========
Net income (loss) available to common
stockholders............................. $ (256,326) $ (109,891) $ 31,173
=========== =========== ===========
DENOMINATOR -- PRO FORMA
Pro forma basic weighted average common
shares outstanding....................... 14,552,000 30,350,000 64,422,698
Effect of dilutive common stock options.... -- -- 1,391,428
----------- ----------- -----------
Pro forma diluted weighted average common
shares................................... 14,552,000 30,350,000 65,814,126
=========== =========== ===========
Pro forma basic net income (loss) per
share.................................... $ (17.62) $ (3.62) $ 0.81
=========== =========== ===========
Pro forma diluted net income (loss) per
share.................................... $ (17.62) $ (3.62) $ 0.47
=========== =========== ===========
</TABLE>
12. EMPLOYEE BENEFIT PLAN:
401(k) PLAN
The Company maintains a retirement and deferred savings plan for its
employees (the "401(k) Plan") that is intended to qualify as a tax-qualified
plan under the Code. The 401(k) Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (up to a statutory
limit). Under the 401(k) Plan, the Company may make discretionary contributions.
The Company's contributions to the 401(k) Plan for the fiscal periods ended
December 28, 1996, December 27, 1997 and December 26, 1998 were $1.2 million,
$1.6 million and $2.0 million, respectively. All amounts contributed by
participants and earnings on such contributions are fully vested at all times.
13. SUBSEQUENT EVENTS
The Company has filed a Registration Statement on Form S-3 and issued a
preliminary prospectus for an offering of 7,800,000 shares of newly issued
common stock (excluding any additional shares issuable upon exercise of
underwriters' over-allotment option). Net proceeds, after deducting
underwriters' commissions and offering costs, will be used to prepay up to $55.0
million of long-term debt due to HEA and to provide working capital. The
completion of the Registration is subject to certain conditions.
F-26
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Maxtor Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing on page F-1 of this Form S-3 present fairly, in all material respects,
the financial position of Maxtor Corporation and its subsidiaries at December
27, 1997 and December 26, 1998, and the results of their operations and their
cash flows for the nine months ended December 28, 1996, the year ended December
27, 1997 and the year ended December 26, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 21, 1999
F-27
<PAGE> 111
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9,000,000 SHARES
MAXTOR CORPORATION
COMMON STOCK
LOGO
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 112
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 9, 1999
PROSPECTUS
15,500,000 SHARES
LOGO
COMMON STOCK
------------------------
This prospectus accompanies a separate prospectus of DECS Trust IV covering
the sale of DECS. This prospectus covers the distribution by DECS Trust IV of up
to 15,500,000 shares of Maxtor common stock owned by Hyundai Electronics
America. DECS Trust IV may distribute up to an additional 2,325,000 shares of
Maxtor common stock owned by Hyundai Electronics America to cover rights to
purchase additional DECS granted to the underwriters of the DECS offering. The
terms of the DECS provide that DECS Trust IV may distribute the Maxtor common
stock to DECS holders on or about February 15, 2002, or upon earlier liquidation
of DECS Trust IV under certain circumstances.
Maxtor will not receive any of the proceeds from the sale of DECS or the
delivery of the Maxtor common stock under this prospectus.
Maxtor is not responsible for any information included in or omitted from
the prospectus used by DECS Trust IV to sell the DECS. The prospectus used to
sell the DECS is not part of this prospectus and is not incorporated by
reference into this prospectus.
In a separate but concurrent public offering of common stock by Maxtor,
Maxtor is selling 7,800,000 shares of newly-issued common stock and Hyundai
Electronics America is selling 1,200,000 shares of common stock of Maxtor.
Maxtor will not receive any proceeds from the shares of common stock sold by
Hyundai Electronics America.
Maxtor's common stock is traded on the Nasdaq National Market under the
symbol "MXTR." On February 8, 1999, the last reported sale price for our common
stock on the Nasdaq National Market was $14.44 per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
, 1999
A-1
<PAGE> 113
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THIS PROSPECTUS IS NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Relationship Between Maxtor and Hyundai..................... 20
Where You Can Find More Information......................... 25
Price Range of Our Common Stock............................. 26
Dividend Policy............................................. 26
Capitalization.............................................. 27
Dilution.................................................... 28
Selected Consolidated Financial Data........................ 29
Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 30
Business.................................................... 42
Management.................................................. 55
Certain Transactions........................................ 69
Selling Stockholder......................................... 73
Plan of Distribution........................................ 74
Legal Matters............................................... 76
Experts..................................................... 76
Glossary.................................................... 77
Index to Consolidated Financial Statements.................. F-1
</TABLE>
A-2
<PAGE> 114
THE DECS OFFERING
DECS Trust IV is offering for sale 15,500,000 DECS under the DECS
prospectus, plus up to an additional 2,325,000 DECS solely to cover
over-allotments. On or about February 15, 2002, or upon earlier liquidation of
DECS Trust IV in certain circumstances, DECS Trust IV will distribute Maxtor
common stock (or, at Hyundai Electronics America's option, the cash equivalent)
and/or such other consideration as is delivered by Hyundai Electronics America
to the Trust. This prospectus covers the delivery by DECS Trust IV under the
DECS of up to 15,500,000 shares of Maxtor common stock that may be delivered by
Hyundai Electronics America, plus up to an additional 2,325,000 shares of Maxtor
common stock that may be delivered by Hyundai Electronics America to cover (1)
the underwriters' right to purchase additional DECS and (2) DECS purchased by
Salmon Smith Barney Inc. in connection with the organization of the DECS Trust
IV.
THE STOCK OFFERING
Maxtor and Hyundai Electronics America, a major holder of Maxtor common
stock, are offering for sale in a separate offering 9,000,000 shares of Maxtor
common stock and up to an additional 1,250,000 shares solely to cover
over-allotments.
A-3
<PAGE> 115
PLAN OF DISTRIBUTION
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and DECS Trust IV has agreed to sell to such underwriter, the number
of DECS set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF DECS
---- ----------
<S> <C>
Salomon Smith Barney Inc...........................
Hambrecht & Quist LLC..............................
Lehman Brothers Inc................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................
NationsBanc Montgomery Securities LLC..............
----------
Total.............................................. 15,500,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the DECS included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the DECS (other than those
covered by the over-allotment option described below) if they purchase any of
the DECS.
The underwriters, for whom Salomon Smith Barney Inc. is acting as
representative, propose to offer some of the DECS directly to the public at the
public offering price set forth on the cover page of the DECS prospectus and
some of the DECS to certain dealers at the public offering price less a
concession not in excess of $ per DECS. The underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per DECS on sales to
certain other dealers. After the initial offering of the DECS to the public, the
public offering price and such concessions may be changed by the representative.
DECS Trust IV has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to 2,325,000 additional
DECS at the same price per DECS as the initial DECS purchased by the
underwriters. The underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, in connection with the DECS offering. To
the extent such option is exercised, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional DECS approximately
proportionate to such underwriter's initial purchase commitment. In addition,
Salomon Smith Barney Inc. purchased DECS in connection with the
organization of DECS Trust IV.
Maxtor, its executive officers and directors (comprised of seventeen
individuals) and Hyundai Electronics America have agreed that, for a period of
90 days from the date of this prospectus, they will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to sell, or
otherwise dispose of, any shares of common stock of Maxtor or any securities
convertible into, or exercisable or exchangeable for, common stock of Maxtor,
except that each such officer and director of Maxtor may sell, during the 90 day
period, up to 10,000 shares of common stock of Maxtor, subject to an aggregate
maximum of 100,000 shares for all such officers and directors during this
period. Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.
However, this agreement will not restrict the ability of Maxtor and Hyundai
Electronics America to take any of the actions listed above in connection with
the offering by DECS Trust IV of the DECS or any delivery of shares of Maxtor
common stock pursuant to the terms of the DECS.
A-4
<PAGE> 116
The DECS will be a new issue of securities with no established trading
market. DECS Trust IV has applied to list the DECS on the Nasdaq National Market
under the symbol "HYTDL". The underwriters intend to make a market in the DECS,
subject to applicable laws and regulations. However, the underwriters are not
obligated to do so and any such market-making may be discontinued at any time at
the sole discretion of the underwriters without notice. Accordingly, no
assurance can be given as to the liquidity of such market.
Pursuant to the Contract, DECS Trust IV has agreed, subject to the terms
and conditions set forth therein, to purchase from Hyundai Electronics America
an aggregate number of shares of Maxtor common stock equal to the aggregate
number of DECS to be purchased by the underwriters from DECS Trust IV pursuant
to the underwriting agreement (including any DECS to be purchased by the
underwriters upon exercise of the over-allotment option plus the number of DECS
purchased by the underwriters in connection with the organization of the Trust).
Pursuant to the terms of the Contract, Hyundai Electronics America will be
obligated to deliver to DECS Trust IV at the Exchange Date of the DECS a number
of shares of common stock (or, at Hyundai Electronics America's option, the cash
equivalent) and/or such other consideration as permitted or required by the
terms of the Contract, that are expected to have the same value as the shares of
Maxtor common stock delivered pursuant to the DECS. The closing of the offering
of the DECS is conditioned upon execution of the Contract by Hyundai Electronics
America and DECS Trust IV. For further information, see the DECS prospectus.
In connection with the DECS offering and the stock offering, Salomon Smith
Barney Inc., on behalf of the underwriters, may over-allot, or engage in
syndicate covering transactions, stabilizing transactions and penalty bids.
Over-allotment involves syndicate sales of DECS or Maxtor common stock in excess
of the number of DECS to be purchased by the underwriters in the offering, which
creates a syndicate short position. Syndicate covering transactions involve
purchases of the DECS or the Maxtor common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of certain bids or purchases of DECS or common
stock made for the purpose of preventing or retarding a decline in the market
price of the DECS or common stock while the offering is in progress. Penalty
bids permit the underwriters to reclaim a selling concession from a syndicate
member when Salomon Smith Barney Inc., in covering syndicate short positions or
making stabilizing purchases, repurchases DECS or common stock originally sold
by that syndicate member. These activities may cause the price of DECS or common
stock to be higher than the price that otherwise would exist in the open market
in the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the DECS or common stock on the Nasdaq National Market, prior to the pricing and
completion of the DECS offering. Passive market making consists of displaying
bids on the Nasdaq National Market no higher than the bid prices of independent
market makers and making purchases at prices no higher than those independent
bids and effected in response to order flow. Net purchases by a passive market
maker on each day are limited to a specified percentage of the passive market
maker's average daily trading volume in the common stock during a specified
period and must be discontinued when such limit is reached. Passive market
making may cause the price of the common stock to be higher than the price that
otherwise would exist in the open market in the absence of such transactions. If
passive market making is commenced, it may be discontinued at any time.
A-5
<PAGE> 117
Maxtor and Hyundai Electronics America, a majority holder of Maxtor's
common stock, have entered into a separate underwriting agreement for the offer
and sale (1) by Maxtor of 7,800,000 newly-issued shares of common stock, plus up
to an additional 1,170,000 newly-issued shares of common stock solely to cover
over-allotments, and (2) by Hyundai Electronics America of 1,200,000 shares of
Maxtor common stock, plus up to an additional 180,000 shares of Maxtor common
stock to cover over-allotments. The closings of the DECS offering and the stock
offering are not conditioned upon each other.
In the ordinary course of their respective businesses, the underwriters and
their affiliates have engaged in and may in the future engage in commercial and
investment banking transactions with Maxtor and its affiliates.
The representatives have performed certain investment banking and advisory
services for Maxtor from time to time for which they have received customary
fees and expenses. The representatives may, from time to time, engage in
transactions with and perform services for Maxtor in the ordinary course of
their business.
Maxtor and Hyundai Electronics America have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill") currently is
acting as financial advisor to Hyundai Electronics Industries and its
subsidiaries and affiliates in connection with their strategic assessment of
their assets, financial liabilities and overall capital structure, and in
connection therewith receives certain fees from Hyundai Electronics Industries.
Merrill will receive no separate or additional fee from Hyundai Electronics
Industries in connection with the stock offering and DECS offering.
LEGAL MATTERS
Certain legal matters with respect to the validity of our common stock
offered hereby will be passed upon for Maxtor and Hyundai Electronics America by
Gray Cary Ware & Freidenrich LLP, Palo Alto, California and for the underwriters
by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The consolidated balance sheets as of December 28, 1996, December 27, 1997
and December 26, 1998 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the nine months ended December
28, 1996, the year ended December 27, 1997 and the year ended December 26, 1998
included in this prospectus and registration statement and incorporated in this
prospectus and registration statement by reference to the Annual Report on Form
10-K for the year ended December 27, 1997, have been so included and
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended March 30, 1996, incorporated in this
prospectus and registration statement by reference to the Annual Report on Form
10-K for the year ended December 31, 1997, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing on
page 47 of that Form 10-K, and are incorporated by reference in reliance upon
such report, given upon the authority of such firm as experts in accounting and
auditing.
A-6
<PAGE> 118
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15,500,000 SHARES
MAXTOR CORPORATION
COMMON STOCK
LOGO
------------
PROSPECTUS
, 1999
------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions payable by the Registrant in connection with the sale
of the Common Stock being registered. All amounts shown are estimates except for
the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
Registration fee........................................... $ 125,100
NASD filing fee............................................ 45,500
Nasdaq National Market application fee..................... 17,500
Blue sky qualification fees and expenses................... 5,000
Printing and engraving expenses............................ 400,000
Legal fees and expenses.................................... 350,000
Accounting fees and expenses............................... 250,000
Transfer agent and registrar fees.......................... 8,000
Miscellaneous expenses..................................... 98,900
----------
Total............................................ $1,300,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to the provisions of the Delaware General Corporation Law, the
Registrant has adopted provisions in its Amended and Restated Certificate of
Incorporation which provide that members of its board of directors shall not be
personally liable for monetary damages to the Registrant or its stockholders for
a breach of fiduciary duty as a director, except for liability as a result of:
(i) a breach of the director's duty of loyalty to the Registrant or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) an act related to
the unlawful stock repurchase or payment of a dividend under Section 174 of the
Delaware General Corporation Law; and (iv) transactions from which the director
derived an improper personal benefit. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Amended and Restated Certificate of Incorporation also authorizes the
Registrant to indemnify its officers, directors and other agents, by bylaws,
agreements or otherwise, to the full extent permitted under Delaware law. The
Registrant has and intends to continue to enter into separate indemnification
agreements with each of its directors and officers which may, in some cases, be
broader than the specific indemnification provisions contained in the Delaware
General Corporation Law. The indemnification agreements may require the
Registrant, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified and to obtain
directors' and officers' insurance if available on reasonable terms.
II-1
<PAGE> 120
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The underwriting agreements filed as Exhibits 1.1 and 1.2 to this
Registration Statement provide for indemnification by the underwriters of the
Registrant and its officers and directors for certain liabilities arising under
the Securities Act, or otherwise.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.5 Certificate of Retirement of Series of Preferred Stock.+
4.1(14) Stockholder Agreement dated June 25, 1998.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.+
10.1 Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.**+
10.2(14) Indenture dated as of March 1, 1987 between Registrant and
Security Pacific National Bank, as Trustee.
10.3(2) Lease Agreement for Premises Located at 1821 Lefthand
Circle, Suite D, between Registrant and Pratt Land Limited
Liability Company, dated October 19, 1994.
10.4(2) Lease Agreement for Premises Located at 1841 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.5(2) Lease Agreement for Premises Located at 1851 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.6(2) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.7(2) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.8(3) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995.
10.9(3) Lease Agreement for Premises Located at 1900 Pike Road,
Suite A Longmont, CO, between Registrant as Tenant and Pratt
Land Limited Liability Company as Landlord, dated February
24, 1995.
10.10(3) Lease Agreement for Premises Located at 2040 Miller Drive
Suite A, B, & C between Registrant as Tenant and Pratt Land
Limited Liability Company as Landlord, dated February 24,
1995.
10.11(3) Manufacturing and Purchase Agreement by and Between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995.
</TABLE>
II-2
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.12(3) Lease Agreement for Premises Located at 2040 Miller Drive,
Suites D, E, & F, Longmont, CO, between Registrant as Tenant
and Pratt Management Company, LLC as Landlord.
10.13(5) Credit Agreement among Registrant and The Initial Lenders
and the Issuing Bank and Citibank, N.A., dated August 31,
1995.
10.14(5) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995.
10.15(5) Amendment to the Financing Agreement among Registrant and
the CIT Group/Business Credit, Inc., dated October 17, 1995.
10.16(6) First Supplemental Indenture, dated as of January 11, 1996,
between Registrant and State Street Bank and Trust Company.
10.17(6) Credit Agreement, dated as of December 29, 1995 between
Registrant and Hyundai Electronics America.
10.18(12) Maxtor Corporation 1996 Stock Option Plan.**
10.19(12) Intercompany Loan Agreement, dated as of April 10, 1996,
between Registrant and Hyundai Electronics America.
10.20(12) Receivables Purchase and Sale Agreement, dated as of March
30, 1996, among Registrant and Corporate Receivables
Corporation and Citicorp North America, Incorporated.
10.21(7) Recapitalization Agreement among the Registrant,
International Manufacturing Services, Incorporated and
certain investors, dated as of May 21, 1996.
10.22(7) Redemption Agreement between Registrant and International
Manufacturing Services, Incorporated, dated as of May 21,
1996.
10.23(7) Manufacturing Services Agreement between Registrant and
International Manufacturing Services, Incorporated, dated
June 13, 1996.*
10.24(8) Credit Facility, dated as of July 31, 1996, between
Registrant and Hyundai Electronics America.
10.25(9) Exchange Agreement effective June 18, 1996, between Maxtor
Corporation and Hyundai Electronics America.
10.26(10) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
10.27(10) Credit Agreement, dated August 29, 1996, among Registrant,
Citibank, N.A., and Syndicate Banks.
10.28(11) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996.**
10.29(11) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996.**
10.30(11) Employment Agreement between William Roach and Registrant,
dated December 13, 1996.**
10.31(12) Intercompany Loan Agreement, dated as of April 10, 1997,
between Registrant and Hyundai Electronics America.
10.32(14) 364-Day Credit Agreement dated as of October 31, 1997
between Registrant and Nomura Bank International.
10.33(13) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Registrant and Hyundai
Electronics America.
</TABLE>
II-3
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.34(13) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.35(14) Employment Agreement between Philip Duncan and Registrant
dated July 15, 1996.**
10.36(14) Receivables Purchase and Sale Agreement dated as of April 8,
1998, among Maxtor Receivables Corporation, Registrant,
Corporate Receivables Corporation, Citicorp North America
and Bankers Trust Company.
10.37(14) Intercompany Loan Agreement dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.
10.38(14) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.
10.39(14) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**
10.40(14) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.
10.41(14) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*
10.42(14) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*
10.43(14) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.
10.44(14) R/3 Software End-User Value License Agreement between SAP
Korea Ltd. and Hyundai Information Technology Co. Ltd. dated
as of June 30, 1996.
10.45(14) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.
10.46(14) Tax Allocation Agreement dated as of July 21, 1995 among
Hyundai Electronics America, registrant and certain other
subsidiaries.
10.47(4) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
10.48(14) Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.
10.49(14) Indemnity Agreement between Hyundai Electronics Industries
Co., Ltd. and Registrant dated June 25, 1998.
10.50(14) License Agreement between Registrant and Hyundai Electronics
Industries Co., Ltd. dated June 25, 1998.
10.51(1) Stock Purchase Agreement between Registrant and Hyundai
Electronics Industries Co., Ltd., Hyundai Heavy Industries
Co., Ltd., Hyundai Corporation, and Hyundai Merchant Marine
Co., Ltd., dated September 10, 1993.
10.52(15) Supply Agreement between Registrant and MMC Technology dated
August 18, 1998.*
10.53(14) 1998 Restricted Stock Plan.**
10.54(14) Form of Restricted Stock Grant Agreement.**
10.55(16) Amended and Restated 1996 Stock Option Plan.**
10.56(14) Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael Cannon.**
</TABLE>
II-4
<PAGE> 123
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.57(14) Retention Agreement dated as of May 29, 1998 between
Registrant and Paul Tufano.**
10.58(14) Form of Retention Agreement between Registrant and Executive
Officers.**
10.59(14) Letter Agreement between Victor B. Jipson and Registrant
dated as of June 12, 1998.**
10.60(14) Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.
10.61(14) Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.
10.62(14) Letter Agreement setting forth terms and conditions of Loan
Agreement between Registrant and the Bank of New York dated
as of December 27, 1997.
10.63(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.64(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of October 31, 1997 between
Registrant and Nomura Bank International plc.
10.65(14) Waiver and Amendment dated as of May 22, 1998 to Three-Year
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.66(15) Purchase and Sale Agreement between Registrant and Maxtor
Receivables Corporation dated as of July 31, 1998.
10.67(15) Receivables Purchase Agreement Among Maxtor Receivables
Corporation, The Registrant, BlueKeel Funding LLC and Fleet
National Bank.
10.68 Letter Agreement between Registrant and MMC Technology dated
May 18, 1998.+
10.69 Mutual Release and Termination Agreement by and among
Hyundai Electronics America, Axil Computers, Inc., Image
Quest Technologies, Inc., Registrant, Odeum Microsystems,
TV/COM International, Inc. dated November 1998.+
10.70 Letter Agreement between Hyundai Electronics America and
Registrant dated January 19, 1999.+
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).+
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- -------------------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
+ Previously filed with this registration statement.
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993.
II-5
<PAGE> 124
(2) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
(3) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995.
(4) Incorporated by reference to exhibit III of Schedule 14D-9 filed November
9, 1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed November 14, 1996.
(6) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(7) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
(8) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(9) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(10) Incorporated by reference to exhibits of Form 8-K filed September 13, 1996.
(11) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997.
(12) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997.
(13) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(14) Incorporated by reference to exhibits of Form S-1 filed July 30, 1998.
(15) Incorporated by reference to exhibits of Form 10-Q filed November 10, 1998.
(16) Incorporated by reference to exhibits of Form 8-K filed January 20, 1999.
(b) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of Maxtor is filed
as part of this Registration Statement and should be read in conjunction with
the consolidated financial statements of Maxtor.
SCHEDULE II
<TABLE>
<S> <C>
Valuation and Qualifying Accounts -- Allowance for Doubtful
Accounts.................................................. S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
II-6
<PAGE> 125
director, officer, or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
- For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
- For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Milpitas, County of Santa Clara, State of California, on the 8th day of
February 1999.
MAXTOR CORPORATION
By: /s/ MICHAEL R. CANNON
-----------------------------------
Michael R. Cannon
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DR. CHONG SUP PARK* Chairman of the Board February 8, 1999
- ---------------------------------------------
Dr. Chong Sup Park
/s/ MICHAEL R. CANNON President, Chief February 8, 1999
- --------------------------------------------- Executive Officer and
Michael R. Cannon Director
/s/ PAUL J. TUFANO* Senior Vice President, February 8, 1999
- --------------------------------------------- Finance, Chief Financial
Paul J. Tufano Officer and Principal
Accounting Officer
/s/ CHANG SEE CHUNG* Director February 8, 1999
- ---------------------------------------------
Chang See Chung
/s/ CHARLES HILL* Director February 8, 1999
- ---------------------------------------------
Charles Hill
/s/ CHARLES F. CHRIST* Director February 8, 1999
- ---------------------------------------------
Charles F. Christ
/s/ Y.H. KIM* Director February 8, 1999
- ---------------------------------------------
Y.H. Kim
/s/ PHILIP S. PAUL* Director February 8, 1999
- ---------------------------------------------
Philip S. Paul
/s/ THOMAS CHUN* Director February 8, 1999
- ---------------------------------------------
Thomas Chun
</TABLE>
*By: /s/ MICHAEL R. CANNON
-----------------------------
Michael R. Cannon
Attorney-in-fact
II-8
<PAGE> 127
MAXTOR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS CHARGED
BALANCE AT TO COST DEDUCTIONS/ BALANCE AT
PERIOD ENDED BEGINNING OF PERIOD AND EXPENSES (RECOVERIES(1)) END OF PERIOD
------------ ------------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C>
December 28, 1996.... $5,196 $1,355 $1,296 $5,255
December 27, 1997.... $5,255 $1,000 $2,682 $3,573
December 26, 1998.... $3,573 $5,659 $ 823 $8,409
</TABLE>
- -------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 128
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.5 Certificate of Retirement of Series of Preferred Stock.+
4.1(14) Stockholder Agreement dated June 25, 1998.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.+
10.1 Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.**+
10.2(14) Indenture dated as of March 1, 1987 between Registrant and
Security Pacific National Bank, as Trustee.
10.3(2) Lease Agreement for Premises Located at 1821 Lefthand
Circle, Suite D, between Registrant and Pratt Land Limited
Liability Company, dated October 19, 1994.
10.4(2) Lease Agreement for Premises Located at 1841 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.5(2) Lease Agreement for Premises Located at 1851 Lefthand Circle
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.6(2) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.7(2) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.8(3) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995.
10.9(3) Lease Agreement for Premises Located at 1900 Pike Road,
Suite A Longmont, CO, between Registrant as Tenant and Pratt
Land Limited Liability Company as Landlord, dated February
24, 1995.
10.10(3) Lease Agreement for Premises Located at 2040 Miller Drive
Suite A, B, & C between Registrant as Tenant and Pratt Land
Limited Liability Company as Landlord, dated February 24,
1995.
10.11(3) Manufacturing and Purchase Agreement by and Between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995.
10.12(3) Lease Agreement for Premises Located at 2040 Miller Drive,
Suites D, E, & F, Longmont, CO, between Registrant as Tenant
and Pratt Management Company, LLC as Landlord.
10.13(5) Credit Agreement among Registrant and The Initial Lenders
and the Issuing Bank and Citibank, N.A., dated August 31,
1995.
10.14(5) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995.
10.15(5) Amendment to the Financing Agreement among Registrant and
the CIT Group/ Business Credit, Inc., dated October 17,
1995.
10.16(6) First Supplemental Indenture, dated as of January 11, 1996,
between Registrant and State Street Bank and Trust Company.
10.17(6) Credit Agreement, dated as of December 29, 1995 between
Registrant and Hyundai Electronics America.
</TABLE>
E-1
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.18(12) Maxtor Corporation 1996 Stock Option Plan.**
10.19(12) Intercompany Loan Agreement, dated as of April 10, 1996,
between Registrant and Hyundai Electronics America.
10.20(12) Receivables Purchase and Sale Agreement, dated as of March
30, 1996, among Registrant and Corporate Receivables
Corporation and Citicorp North America, Incorporated.
10.21(7) Recapitalization Agreement among the Registrant,
International Manufacturing Services, Incorporated and
certain investors, dated as of May 21, 1996.
10.22(7) Redemption Agreement between Registrant and International
Manufacturing Services, Incorporated, dated as of May 21,
1996.
10.23(7) Manufacturing Services Agreement between Registrant and
International Manufacturing Services, Incorporated, dated
June 13, 1996.*
10.24(8) Credit Facility, dated as of July 31, 1996, between
Registrant and Hyundai Electronics America.
10.25(9) Exchange Agreement effective June 18, 1996, between Maxtor
Corporation and Hyundai Electronics America.
10.26(10) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
10.27(10) Credit Agreement, dated August 29, 1996, among Registrant,
Citibank, N.A., and Syndicate Banks.
10.28(11) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996.**
10.29(11) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996.**
10.30(11) Employment Agreement between William Roach and Registrant,
dated December 13, 1996.**
10.31(12) Intercompany Loan Agreement, dated as of April 10, 1997,
between Registrant and Hyundai Electronics America.
10.32(14) 364-Day Credit Agreement dated as of October 31, 1997
between Registrant and Nomura Bank International.
10.33(13) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Registrant and Hyundai
Electronics America.
10.34(13) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.35(14) Employment Agreement between Philip Duncan and Registrant
dated July 15, 1996.**
10.36(14) Receivables Purchase and Sale Agreement dated as of April 8,
1998, among Maxtor Receivables Corporation, Registrant,
Corporate Receivables Corporation, Citicorp North America
and Bankers Trust Company.
10.37(14) Intercompany Loan Agreement dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.
10.38(14) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.
10.39(14) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**
10.40(14) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.
</TABLE>
E-2
<PAGE> 130
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.41(14) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*
10.42(14) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*
10.43(14) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.
10.44(14) R/3 Software End-User Value License Agreement between SAP
Korea Ltd. and Hyundai Information Technology Co. Ltd. dated
as of June 30, 1996.
10.45(14) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.
10.46(14) Tax Allocation Agreement dated as of July 21, 1995 among
Hyundai Electronics America, registrant and certain other
subsidiaries.
10.47(4) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
10.48(14) Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.
10.49(14) Indemnity Agreement between Hyundai Electronics Industries
Co., Ltd., and Registrant dated June 25, 1998.
10.50(14) License Agreement between Registrant and Hyundai Electronics
Industries Co., Ltd., dated June 25, 1998.
10.51(1) Stock Purchase Agreement between Registrant and Hyundai
Electronics Industries Co., Ltd., Hyundai Heavy Industries
Co., Ltd., Hyundai Corporation, and Hyundai Merchant Marine
Co., Ltd., dated September 10, 1993.
10.52(15) Supply Agreement between Registrant and MMC Technology dated
August 18, 1998.*
10.53(14) 1998 Restricted Stock Plan.**
10.54(14) Form of Restricted Stock Grant Agreement.**
10.55(16) Amended and Restated 1996 Stock Option Plan.**
10.56(14) Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael Cannon.**
10.57(14) Retention Agreement dated as of May 29, 1998 between
Registrant and Paul Tufano.**
10.58(14) Form of Retention Agreement between Registrant and Executive
Officers.**
10.59(14) Letter Agreement between Victor B. Jipson and Registrant
dated as of June 12, 1998.**
10.60(14) Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.
10.61(14) Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.
10.62(14) Letter Agreement setting forth terms and conditions of Loan
Agreement between Registrant and the Bank of New York dated
as of December 27, 1997.
10.63(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.64(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of October 31, 1997 between
Registrant and Nomura Bank International plc.
</TABLE>
E-3
<PAGE> 131
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.65(14) Waiver and Amendment dated as of May 22, 1998 to Three-Year
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.66(15) Purchase and Sale Agreement between Registrant and Maxtor
Receivables Corporation dated as of July 31, 1998.
10.67(15) Receivables Purchase Agreement Among Maxtor Receivables
Corporation, The Registrant, BlueKeel Funding LLC and Fleet
National Bank.
10.68 Letter Agreement between Registrant and MMC Technology dated
May 18, 1998.+
10.69 Mutual Release and Termination Agreement by and among
Hyundai Electronics America, Axil Computers, Inc., Image
Quest Technologies, Inc., Registrant, Odeum Microsystems,
TV/COM International, Inc. dated November 1998.+
10.70 Letter Agreement between Hyundai Electronics America and
Registrant dated January 19, 1999.+
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).+
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- -------------------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
+ Previously filed with this registration statement.
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993.
(2) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
(3) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995.
(4) Incorporated by reference to exhibit III of Schedule 14D-9 filed November
9, 1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed November 14, 1996.
(6) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(7) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
(8) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(9) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(10) Incorporated by reference to exhibits of Form 8-K filed September 13, 1996.
(11) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997.
(12) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997.
(13) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(14) Incorporated by reference to exhibits of Form S-1 filed July 30, 1998.
(15) Incorporated by reference to exhibits of Form 10-Q filed November 10, 1998.
(16) Incorporated by reference to exhibits of Form 8-K filed January 20, 1999.
E-4
<PAGE> 1
EXHIBIT 1.1
CGSH DRAFT 2/6/99
Maxtor Corporation
Shares(a)/
Common Stock
($0.01 par value)
Underwriting Agreement
New York, New York
February , 1999
Salomon Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
NationsBanc Montgomery Securities LLC
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Maxtor Corporation, a corporation organized under the laws of
Delaware (the "Company"), proposes to sell to the several underwriters named in
Schedule I hereto (the "Underwriters"), for whom you (the "Representatives") are
acting as representatives, shares of Common Stock, $0.01 par value ("Common
Stock") of the Company and Hyundai Electronics America, a Corporation organized
under the laws of California ("HEA"), proposes to sell to the several
Underwriters shares of Common Stock (said shares to be issued and sold by the
Company and shares to be sold by HEA collectively being hereinafter called the
"Underwritten Securities"). The Company and HEA also propose to grant to the
Underwriters an option to purchase up to additional shares of Common
Stock to cover over-allotments (the "Option Securities"; the Option Securities,
together with the Underwritten Securities being
- --------
(a) Plus an option to purchase from the Company and HEA up to
additional Securities to cover over-allotments.
<PAGE> 2
hereinafter called the "Securities"). To the extent there are no additional
Underwriters listed on Schedule I other than you, the term Representatives as
used herein shall mean you, as Underwriters, and the terms Representatives and
Underwriters shall mean either the singular or plural as the context requires.
The use of the neuter in this Agreement shall include the feminine and masculine
wherever appropriate. Any reference herein to the Registration Statement, a
Preliminary Prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Item 12 of Form S-3
which were filed under the Exchange Act on or before the Effective Date of the
Registration Statement or the issue date of such Preliminary Prospectus or the
Prospectus, as the case may be; and any reference herein to the terms "amend",
"amendment" or "supplement" with respect to the Registration Statement, any
Preliminary Prospectus or the Prospectus shall be deemed to refer to and include
the filing of any document under the Exchange Act after the Effective Date of
the Registration Statement, or the issue date of any Preliminary Prospectus or
the Prospectus, as the case may be, deemed to be incorporated therein by
reference. Certain terms used herein are defined in Section 17 hereof.
1. Representations and Warranties.
(i) The Company represents and warrants to, and agrees with,
each Underwriter as set forth below in this Section 1.
(a) The Company meets the requirements for use of Form S-3
under the Act and has prepared and filed with the Commission a
registration statement (file number 333-69307) on Form S-3, including a
related preliminary prospectus, for registration under the Act of the
offering and sale of the Securities. The Company may have filed one or
more amendments thereto, including a related preliminary prospectus,
each of which has previously been furnished to you. The Company will
next file with the Commission one of the following: either (1) prior to
the Effective Date of such registration statement, a further amendment
to such registration statement, (including the form of final
prospectus) or (2) after the Effective Date of such registration
statement, a final prospectus in accordance with Rules 430A and 424(b).
In the case of clause (2), the Company has included in such
registration statement, as amended at the Effective Date, all
information (other than Rule 430A Information) required by the Act and
the rules thereunder to be included in such registration statement and
the Prospectus. As filed, such amendment and form of final prospectus,
or such final prospectus, shall contain all Rule 430A Information,
together with all other such required information, and, except to the
extent the Representatives shall agree in writing to a modification,
shall be in all substantive respects in the form furnished to you prior
to the Execution Time or, to the extent not completed at the Execution
Time, shall contain only such specific additional information and other
changes (beyond that contained in the latest Preliminary Prospectus) as
the Company has advised you, prior to the Execution Time, will be
included or made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which Option Securities are purchased, if such date
is not the Closing Date (a "settlement date"), the Prospectus (and any
2
<PAGE> 3
supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the Exchange Act and the
respective rules thereunder; on the Effective Date and at the Execution
Time, the Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date, the
Prospectus, if not filed pursuant to Rule 424(b), will not, and on the
date of any filing pursuant to Rule 424(b) and on the Closing Date and
any settlement date, the Prospectus (together with any supplement
thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Company makes no
representations or warranties as to the information contained in or
omitted from the Registration Statement or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter
through the Representatives specifically for inclusion in the
Registration Statement or the Prospectus (or any supplement thereto).
(c) Each of the Company and Maxtor Asia Pacific Limited,
Maxtor Disc Drives Pty. Limited, Maxtor Europe GmbH, Maxtor Europe
Limited, Maxtor Europe SARL, Maxtor (Japan) Limited, Maxtor Korea
Limited, Maxtor Ireland Limited, Maxtor Peripherals (S) Pte. Limited,
Maxtor Receivables Corporation, Maxtor Sales Private Limited, Maxtor
(Thailand) Limited and Old SDI Sub (each a "Subsidiary" and
collectively the "Subsidiaries") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction in which it is chartered or organized with full
corporate power and authority to own or lease, as the case may be, and
to operate its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction
which requires such qualification except to the extent that the failure
to be so qualified or be in good standing could not reasonably be
expected to have a Material Adverse Effect (as defined herein).
(d) All the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and all outstanding shares of capital
stock of the Subsidiaries are owned by the Company either directly or
through wholly owned Subsidiaries free and clear of any perfected
security interest or any other security interests, claims, liens or
encumbrances.
(e) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock (including the
Securities being sold hereunder by HEA) have been duly and validly
authorized and issued and are fully paid and nonassessable; the
Securities being sold hereunder by the Company have been duly and
validly authorized, and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be fully paid and
nonassessable; the Securities being sold by HEA are duly listed, and
admitted
3
<PAGE> 4
and authorized for trading, on Nasdaq National market and the
Securities being sold hereunder by the Company are duly listed, and
admitted and authorized for trading, subject to official notice of
issuance, on the Nasdaq National Market; the certificates for the
Securities are in valid and sufficient form; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive
or other rights to subscribe for the Securities except for the
ownership maintenance rights granted to HEA under the stockholder
agreement, dated June 25, 1998, among the Company, HEA and Hyundai
Electronics Industries Co., Ltd. (the "Stockholder Agreement"), which
do not apply to the Securities being sold hereunder by the Company;
and, except as set forth in the Prospectus, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
rights to convert any obligations into or exchange any securities for,
shares of capital stock of or ownership interests in the Company are
outstanding, except options granted to employees in the ordinary course
of business since the end of the Company's fiscal year ended December
26, 1998.
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectus
under the headings "Risk Factors--Protection of Our Intellectual
Property is Limited; We Face Risk of Third Party Claims of
Infringement", "--We are the Subject of Legal Proceedings and Claims",
"Relationship Between Maxtor and Hyundai" and "Certain Transactions"
insofar as such statements summarize legal matters, agreements,
documents, or proceedings discussed therein, are accurate and fair
summaries of such legal matters, agreements, documents or proceedings.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company, enforceable in accordance with its terms, except (i) as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (ii) to the extent that rights to indemnity or
contribution under this Agreement may be limited by Federal and state
securities laws or the public policy underlying such laws.
(h) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required for the
consummation by the Company of the transactions contemplated herein,
except such as have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of Securities by the Underwriters in the
manner contemplated herein and in the Prospectus.
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<PAGE> 5
(j) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, or result in a
breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any Subsidiaries pursuant
to, (i) the charter or by-laws of the Company or any Subsidiaries, (ii)
the terms of any material indenture, contract, lease, mortgage, deed of
trust, note agreement, loan agreement or other material agreement,
obligation, condition, covenant or instrument to which the Company or
any Subsidiary is a party or bound or to which its or their property is
subject, or (iii) any statute, law, rule, regulation, judgment, order
or decree applicable to the Company or any Subsidiary of any court,
regulatory body, administrative agency, governmental body, arbitrator
or other authority having jurisdiction over the Company or any
Subsidiary or any of its or their properties.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement which
have not been waived in writing prior to the Execution Time.
(l) The consolidated historical financial statements and
schedules of the Company and its consolidated subsidiaries included in
the Prospectus and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods
indicated, comply as to form with the applicable accounting
requirements of the Act and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as otherwise noted therein).
The selected financial data set forth under the caption "Selected
Consolidated Financial Data" in the Prospectus and Registration
Statement fairly present, on the basis stated in the Prospectus and the
Registration Statement, the information included therein.
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any Subsidiaries or its or their property is pending or, to
the knowledge of the Company, threatened that (i) could reasonably be
expected to have a material adverse effect on the performance of this
Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and the Subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course
of business (a "Material Adverse Effect"), except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(n) Each of the Company and the Subsidiaries owns, leases or
has sufficient rights to use all such properties as are necessary to
the conduct of its operations as presently conducted.
(o) Neither the Company nor any Subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms
of any material indenture, contract, lease,
5
<PAGE> 6
mortgage, deed of trust, note agreement, loan agreement or other
material agreement, obligation, condition, covenant or instrument to
which it is a party or bound or to which its property is subject, or
(iii) any statute, law, rule, regulation, judgment, order or decree of
any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or
such subsidiary or any of its properties, as applicable, the violation
of which could reasonably be expected to have a Material Adverse
Effect.
(p) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company and its consolidated subsidiaries
and delivered their report with respect to the audited consolidated
financial statements and schedules included in the Prospectus, and
Ernst & Young LLP, who have certified certain financial statements of
the Company and its consolidated subsidiaries and delivered their
report with respect to the audited consolidated financial statements
included in the Prospectus, are each independent public accountants
with respect to the Company within the meaning of the Act and the
applicable published rules and regulations thereunder.
(q) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid by the Company or any
Subsidiary in connection with the execution and delivery of this
Agreement or the issuance and sale by the Company of the Securities.
(r) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a Material Adverse Effect) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty
levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as could not reasonably be
expected to have a Material Adverse Effect.
(s) No labor problem or dispute with the employees of the
Company or any Subsidiary exists or, to the knowledge of the Company,
is threatened or imminent, that could, in any such case, reasonably be
expected to have a Material Adverse Effect.
(t) The Company and each Subsidiary carry, or are entitled to
the benefits of, insurance (including self-insurance) in such amounts
and covering such risks as are prudent and customary in the businesses
in which they are engaged and all such insurance is, and after
consummation of the transactions contemplated herein will be, in full
force and effect; and neither the Company nor any Subsidiary has any
reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that could not reasonably be expected to have a
Material Adverse Effect.
(u) No Subsidiary is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any
other distribution on such Subsidiary's
6
<PAGE> 7
capital stock, from repaying to the Company any loans or advances to
such Subsidiary from the Company or from transferring any of such
Subsidiary's property or assets to the Company or any other Subsidiary,
except for any requirements under the laws of the jurisdictions in
which any Subsidiary is organized that corporations organized in such
jurisdictions maintain specified levels of capital or statutory
reserves.
(v) The Company and the Subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the
appropriate federal, state or foreign regulatory authorities necessary
to conduct their respective businesses as presently conducted except
where the failure to possess such licenses, certificates, permits or
authorizations would not have a Material Adverse Effect, and neither
the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any such license,
certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, could
reasonably be expected to have a Material Adverse Effect.
(w) The Company and each of the Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(x) The Company has not directly or indirectly taken any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(y) The Company and the Subsidiaries (i) are in material
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) have received
and are in compliance with all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses as presently conducted and (iii) have not
received notice of any actual or potential liability for the
investigation or remediation of any disposal or release of hazardous or
toxic substances or wastes, pollutants or contaminants, except where
such non-compliance with Environmental Laws, failure to receive
required permits, licenses or other approvals, or liability would not,
individually or in the aggregate, have a Material Adverse Effect.
Neither the Company nor any Subsidiary has been named as a "potentially
responsible party" under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
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<PAGE> 8
(z) Each of the Company and the Subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302
of the United States Employee Retirement Income Security Act of 1974
("ERISA") and the regulations and published interpretations thereunder
with respect to each "plan" (as defined in Section 3(3) of ERISA and
such regulations and published interpretations) in which employees of
the Company or any of the Subsidiaries are eligible to participate.
Each such plan is in compliance in all material respects with the
presently applicable provisions of ERISA and such regulations and
published interpretations, except where the failure to so comply could
not reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect. Neither the Company nor any of the
Subsidiaries has incurred any unpaid liability to the Pension Benefit
Guaranty Corporation (other than for the payment of premiums in the
ordinary course) or to any such plan under Title IV of ERISA.
(aa) Maxtor Peripherals (S) Pte. Limited ("Maxtor Singapore")
is the only Subsidiary that reasonably could be deemed to be a
"significant subsidiary" of the Company within the meaning of Rule
11-02(w) of Regulation S-X under the Act.
(bb) The Company and the Subsidiaries own, possess, license or
have other rights to use all patents, patent applications, trade and
service marks, trade and service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets, technology, know-how
and other intellectual property (collectively, the "Intellectual
Property") necessary for the conduct of their respective businesses as
now conducted (as described in the Prospectus), except where the
failure to own or possess any such Intellectual Property could not
reasonably be expected, singly or in the aggregate, to have a Material
Adverse Effect and (i) to the knowledge of the Company, there are no
rights of third parties to any such Intellectual Property, other than
licenses granted in the ordinary course of business; (ii) to the
knowledge of the Company, there is no material infringement by third
parties of any such Intellectual Property; (iii) except as specifically
set forth in the Prospectus, there is no pending or, to the knowledge
of the Company, threatened action, suit, proceeding or claim by others
challenging the Company's rights in or to any such Intellectual
Property, and the Company is unaware of any facts which would form a
reasonable basis for any such claim; (iv) except as specifically set
forth in the Prospectus, there is no pending or to the knowledge of the
Company, threatened action, suit, proceeding or claim by others
challenging the validity or scope of any such Intellectual Property,
and the Company is unaware of any facts which would form a reasonable
basis for any such claim; (v) except as specifically set forth in the
Prospectus under the caption "Risk Factor--Protection of Our
Intellectual Property is Limited; We Face Risk of Third Party Claims of
Infringement," there is no pending or, to the knowledge of the Company,
threatened action, suit, proceeding or claim by others that the Company
infringes or otherwise violates any patent, trademark, copyright, trade
secret or other proprietary rights of others, and the Company is
unaware of any other fact which would form a reasonable basis for any
such claim and (vi) to the Company's knowledge, all U.S. patents owned
by the Company are valid and enforceable.
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<PAGE> 9
(cc) Except as disclosed in the Prospectus, the Company (i)
does not have any material lending or other relationship with any bank
or lending affiliate of any of the Underwriters and (ii) does not
intend to use any of the proceeds from the sale of the Securities
hereunder to repay any outstanding debt owed to any affiliate of any of
the Underwriters.
(dd) The Company and the Subsidiaries are implementing a
program, as described in the Prospectus, to analyze and address the
risk that the computer hardware and software used by them and each
supplier, vendor, customer or financial service organizations used or
serviced by them may be unable to recognize and properly execute
date-sensitive functions involving certain dates prior to and any dates
after December 31, 1999 (the "Year 2000 Problem"), and reasonably
believe that such risk will be remedied on a timely basis and will not
have a Material Adverse Effect. The Company is in substantial
compliance with the Commission's staff legal bulletin No. 5 dated
January 12, 1998 related to Year 2000 compliance.
(ee) Neither the Company nor any of the Subsidiaries has
distributed nor will it distribute prior to the latest of (i) the
Closing Date, (ii) any settlement date and (iii) completion of the
distribution of the Securities, any offering material in connection
with the offering and sale of the Securities other than any Preliminary
Prospectus, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act.
(ff) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company or any of the Subsidiaries to
or for the benefit of any of the officers or directors of the Company
or any Subsidiary or any of the members of the families of any of them,
which loans, advances or guarantees are required to be, and are not,
disclosed in the Registration Statement and Prospectus.
(gg) There have not been, and there are not proposed, any
transactions or agreements between the Company or any of the
Subsidiaries on the one hand and the officers, directors or
stockholders of the Company or any of the Subsidiaries on the other,
which transactions or agreements are required to be, and are not,
disclosed in the Registration Statement and Prospectus.
(hh) To the Company's knowledge, no officer or director of the
Company is in breach or violation of any employment agreement,
non-competition agreement, confidentiality agreement, or other
agreement restricting the nature or scope of employment to which such
officer or director is a party, other than such breaches or violations
which could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect; the conduct of the
Company's business, as described in the Registration Statement and
Prospectus, will not result in a breach or violation of any such
agreement.
(ii) There are no outstanding options to acquire shares of
capital stock of the Company except as disclosed in the Registration
Statement and the Prospectus and
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<PAGE> 10
options granted to employees in the ordinary course of business since
the end of the Company's fiscal year ended December 26, 1998.
(jj) The Company has not received any notice or communication
(in writing or otherwise), or any other information, indicating that
there is a material possibility that any customer of the Company
identified in the "Business--Customers and Sales Channels" section of
the Registration Statement will cease dealing with the Company or
otherwise materially reduce the volume of business transacted by such
customer with the Company below historical levels.
Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in
connection with the offering of the Securities shall be deemed a
representation and warranty by the Company, as to matters covered
thereby, to each Underwriter.
(ii) HEA represents and warrants to, and agrees with, each
Underwriter that:
(a) HEA has full legal right, capacity, power and authority to
enter into and perform this Agreement and to sell, transfer, asign and
deliver in the manner provided in this Agreement the Securities to be
sold by it hereunder.
(b) HEA is the lawful owner of the Securities to be sold by it
hereunder and upon sale and delivery of, and payment for, such
Securities, as provided herein, will convey to the Underwriters good
and marketable title to such Securities, free and clear of all liens,
encumbrances, equities and claims whatsoever.
(c) HEA has not taken, directly or indirectly any action
designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the securities.
(d) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by HEA
of the transactions contemplated herein, except such as may have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other
approvals as have been obtained.
(e) Neither the sale of the Securities being sold by HEA nor
the consummation of any other of the transactions herein contemplated
by HEA nor the fulfillment of the terms hereof will conflict with, or
result in a breach or violation or imposition of any lien, charge or
encumbrance upon any property or assets of HEA pursuant to, (i) the
charter or by-laws of HEA, (ii) the terms of any material indenture,
contract, lease, mortgage, deed
10
<PAGE> 11
of trust, note agreement, loan agreement or other material agreement,
obligation, condition, covenant or instrument to which HEA is a party
or bound or to which its property is subject, or (iii) any statute,
law, rule, regulation, judgment, order or decree applicable to HEA of
any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over HEA or any of
its properties.
(f) HEA is not and, after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended.
(g) To the best of HEA's knowledge, the representations and
warranties of the Company contained in this Section 1 are true and
correct; HEA is familiar with the Registration Statement and has no
knowledge of any material fact, condition or information not disclosed
in the Prospectus or any supplement thereto which has adversely
affected or may adversely affect the business of the Company or any
Subsidiary; and the sale of Securities by HEA pursuant hereto is not
prompted by any information concerning the Company or any Subsidiary
which is not set forth in the Prospectus or any supplement thereto.
(h) This Agreement has been duly authorized, executed and
delivered by HEA and constitutes a valid and binding obligation of HEA
enforceable in accordance with its terms, except (i) as the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (ii) to the extent that rights to
11
<PAGE> 12
indemnity or contribution under this Agreement may be limited by
Federal and state securities laws or the public policy underlying such
laws.
(i) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the sale by HEA of the
Securities.
(j) Except as disclosed in the Prospectus, HEA (i) does not
have any material lending or other relationship with any bank or
lending affiliate of any of the Underwriters and (ii) does not intend
to use any of the proceeds from the sale of the Securities hereunder to
repay any outstanding debt owed to any affiliate of any of the
Underwriters.
(k) There have not been, and there are not proposed, any
transactions or agreements between HEA or any of its subsidiaries
on the one hand and the officers, directors or stockholders of the
Company or any of the Subsidiaries on the other, which transactions or
agreements are required to be, and are not, disclosed in the
Registration Statement and Prospectus.
Any certificate signed by any officer of HEA and delivered to
the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by HEA,
as to matters covered thereby, to each Underwriter.
2. Purchase and Sale. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties herein set forth, the
Company and HEA agree, severally and not jointly, to sell to each Underwriter,
and each Underwriter agrees, severally and not jointly, to purchase from the
Company and HEA, at a purchase price of $ per share, the amount of the
Underwritten Securities set forth opposite such Underwriter's name in Schedule I
hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company and HEA hereby
grant an option to the several Underwriters to purchase, severally and not
jointly, up to Option Securities at the same purchase price per share as the
Underwriters shall pay for the Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date of
the Prospectus upon written or telegraphic notice by the Representatives to the
Company setting forth the number of shares of the Option Securities as to which
the several Underwriters are exercising the option and the settlement date. The
maximum number of Option Securities to be sold by the Company is and
the maximum aggregate number of Option Securities to be sold by HEA is .
In the event that the Underwriters exercise less than their full over-allotment
option, the number of Option Securities to be sold by the Company and HEA shall
be, as nearly as practicable, in the same proportion as the maximum number of
Option Securities to be sold by the Company and HEA
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<PAGE> 13
and the number of Option Securities to be sold. The number of Option Securities
to be purchased by each Underwriter shall be the same percentage of the total
number of Option Securities to be purchased by the several Underwriters as such
Underwriter is purchasing of the Underwritten Securities, subject to such
adjustments as you in your absolute discretion shall make to eliminate any
fractional shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
February , 1999, or at such time on such later date not more than three Business
Days after the foregoing date as the Representatives shall designate, which date
and time may be postponed by agreement among the Representatives, the Company
and HEA or as provided in Section 9 hereof (such date and time of delivery and
payment for the Securities being herein called the "Closing Date"). Delivery of
the Securities shall be made to the Representatives for the respective accounts
of the several Underwriters against payment by the several Underwriters through
the Representatives of the respective aggregate purchase prices of the
Securities being sold by the Company to or upon the order of the Company by wire
transfer payable in same-day funds to the accounts specified by the Company.
Delivery of the Underwritten Securities and the Option Securities shall be made
through the facilities of The Depository Trust Company unless the
Representatives shall otherwise instruct.
HEA will pay all applicable state transfer taxes, if any,
involved in the transfer to the several Underwriters of the Securities to be
purchased by them from HEA and the respective Underwriters will pay any
additional stock transfer taxes involved in further transfers.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company and HEA will
deliver the Option Securities (at the expense of the Company) to the
Representatives, at 388 Greenwich Street, New York, New York, on the date
specified by the Representatives (which shall be within three Business Days
after exercise of said option) for the respective accounts of the several
Underwriters, against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company and HEA by wire transfer payable in same-day funds to the accounts
specified by the Company and HEA. If settlement for the Option Securities occurs
after the Closing Date, the Company and HEA will deliver to the Representatives
on the settlement date for the Option Securities, and the obligation of the
Underwriters to purchase the Option Securities shall be conditioned upon receipt
of supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
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<PAGE> 14
5. Agreements.
(i) The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of
the Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto to
be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The Company
will promptly advise the Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have become
effective, (2) when the Prospectus, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule
424(b) or when any Rule 462(b) Registration Statement shall have been
filed with the Commission, (3) when, prior to termination of the
offering of the Securities, any amendment to the Registration Statement
shall have been filed or become effective, (4) of any request by the
Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any
supplement to the Prospectus or for any additional information, (5) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (6) of the receipt
by the Company of any notification with respect to the suspension of
the qualification of the Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order or the suspension of any such qualification and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the Exchange Act or the respective
rules thereunder, the Company promptly will (1) notify the
Representatives of such event, (2) prepare and file with the
Commission, subject to the second sentence of paragraph (i)(a) of this
Section 5, an amendment or supplement which will correct such statement
or omission or effect such compliance and (3) supply any supplemented
Prospectus to you in such quantities as you may reasonably request.
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<PAGE> 15
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and the Subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto) and, so
long as delivery of a prospectus by an Underwriter or dealer may be
required by the Act, as many copies of the Preliminary Prospectus and
the Prospectus and any supplement thereto as the Representatives may
reasonably request.
(e) The Company will use its best efforts, to arrange, if
necessary, for the qualification of the Securities for sale under the
laws of such jurisdictions as the Representatives may designate and
will maintain such qualifications in effect so long as required for the
distribution of the Securities; provided that in no event shall the
Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out
of the offering or sale of the Securities, in any jurisdiction where it
is not now so subject.
(f) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, or contract to sell, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of
the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of Common
Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock; or publicly announce an
intention to effect any such transaction, for a period of 90 days after
the date of this Agreement, provided, however, that the Company may
issue and sell Common Stock pursuant to any employee stock option plan,
restricted stock plan, employee stock purchase plan or dividend
reinvestment plan of the Company in effect at the Execution Time and
the Company may issue Common Stock issuable upon the conversion of
securities or the exercise of warrants outstanding at the Execution
Time. The Company also will not, without the prior written consent of
Salomon Smith Barney Inc., during the period of 90 days following the
Execution Time, authorize any executive officer or director of the
Company to engage in transactions described in clause (i) or (ii) above
involving more than 10,000 shares of any class of common stock of the
Company, and will not authorize such transactions involving more than
100,000 shares of any class of common stock of the Company in the
aggregate for all such executive officers and directors during such 90
day period.
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<PAGE> 16
(g) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), the Preliminary Prospectus,
the Prospectus, and each amendment or supplement to any of them; (ii)
the printing (or reproduction) and delivery (including postage, air
freight charges and charges for counting and packaging) of such copies
of the Registration Statement, the Preliminary Prospectus, the
Prospectus, and all amendments or supplements to any of them, as may,
in each case, be reasonably requested for use in connection with the
offering and sale of the Securities; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the original issuance and sale of the Securities; (iv) the printing (or
reproduction) and delivery of this Agreement, any blue sky memorandum
and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Securities; (v) the
registration of the Securities under the Exchange Act and the listing
of the Securities on the Nasdaq National Market; (vi) any registration
or qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification); (vii)
any filings required to be made with the National Association of
Securities Dealers, Inc. (including filing fees and the reasonable fees
and expenses of counsel for the Underwriters relating to such filings);
(viii) the transportation and other expenses incurred by or on behalf
of Company representatives (excluding the Underwriters) in connection
with presentations to prospective purchasers of the Securities; (ix)
the fees and expenses of the Company's accountants and the fees and
expenses of counsel (including local and special counsel) for the
Company and HEA; and (x) all other costs and expenses incident to the
performance by the Company and HEA of their obligations hereunder.
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<PAGE> 17
(i) The Company will use the net proceeds to the Company of
the offering of the Securities as described under the heading "Use of Proceeds"
in the Prospectus.
(ii) HEA agrees with the several Underwriters that:
(a) Except as provided for in the Underwriting Agreement of
even date herewith relating to the sale of DECS by DECS Trust IV and
the documents referenced therein, HEA will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to
sell, pledge or otherwise dispose of, (or enter into any transaction
which is designed to, or might reasonably be expected to, result in the
disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any
affiliate of the Company or any person in privity with the Company or
any affiliate of the Company) directly or indirectly, or file (or
participate in the filing of) a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act with respect to, any shares
of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for such capital stock, or publicly
announce an intention to effect any such transaction, for a period of
90 days after the date of this Agreement, other than shares of Common
Stock disposed of as bona fide gifts approved by Salomon Smith Barney
Inc.
(b) HEA will not take any action designed to or which has
constituted or which might reasonably be expected to cause or result,
under the Exchange Act or otherwise, in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Securities.
(c) HEA will advise you promptly, and if requested by you,
will confirm such advice in writing, so long as delivery of a
prospectus relating to the Securities by an underwriter or dealer may
be required under the Act, of any change in information in the
Registration Statement or the Prospectus relating to HEA.
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and HEA contained
herein as of the Execution Time, the Closing Date and any settlement date
pursuant to Section 3 hereof, to the accuracy of the statements of the Company
and HEA made in any certificates pursuant to the provisions hereof, to the
performance by the Company and HEA of their respective obligations hereunder and
to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the
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<PAGE> 18
Registration Statement will become effective not later than (i) 6:00 PM
New York City time on the date of determination of the public offering
price, if such determination occurred at or prior to 3:00 PM New York
City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date;
if filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b), the Prospectus, and any such supplement, will
be filed in the manner and within the time period required by Rule
424(b); and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for
that purpose shall have been instituted or threatened.
(b) The Company shall have caused Gray Cary Ware & Freidenrich
LLP, counsel for the Company, to have furnished to the Representatives
their opinion, dated the Closing Date and addressed to the
Representatives, to the effect that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing
under the laws of the State of Delaware, with
corporate power and authority to own or lease, as the
case may be, and to operate its properties and
conduct its businesses as described in the
Prospectus, and is duly qualified to do business as
foreign corporation and is in good standing under the
laws of the State of California and, to the knowledge
of such counsel, each other jurisdiction which
requires such qualification, except where the failure
to be so qualified or be in good standing could not
reasonably be expected to have a Material Adverse
Effect;
(ii) except as otherwise set forth in the Prospectus,
all outstanding shares of capital stock of each
Subsidiary are owned of record by the Company or by
another Subsidiary;
(iii) the Company's authorized equity capitalization
is as set forth in the Prospectus; the capital stock
of the Company conforms in all material respects to
the description thereof contained in the Prospectus;
the outstanding shares of Common Stock (including
Securities being sold hereunder by HEA) have been
duly and validly authorized and issued and are fully
paid and nonassessable; the Securities being sold by
HEA are duly listed, and admitted and authorized for
trading, on the Nasdaq National Market and the
Securities being sold hereunder by the Company have
been duly and validly authorized, and, when issued
and delivered to and paid for by the Underwriters
pursuant to this Agreement, will be fully paid and
nonassessable; the Securities being sold hereunder
are duly listed, and admitted and authorized for
trading, subject to official notice of issuance, on
the Nasdaq National Market; the certificates for the
Securities are in valid and sufficient form; the
holders of outstanding shares of
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<PAGE> 19
capital stock of the Company are not entitled to
preemptive rights under the Company's charter
documents, Delaware corporate law or any agreements
of which such counsel is aware, or to such counsel's
knowledge, similar rights to subscribe for the
Securities except for the ownership maintenance
rights granted to HEA under the Stockholder
Agreement, which do not apply to the Securities being
sold by the Company hereunder; and, except as set
forth in the Prospectus, to the knowledge of such
counsel, no options, warrants or other rights to
purchase, agreements or other obligations to issue,
or rights to convert any obligations into or exchange
any securities for, shares of capital stock of or
ownership interests in the Company are outstanding,
except options granted to employees in the ordinary
course of business since the end of the Company's
fiscal year ended December 26, 1998;
(iv) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by
or before any court or governmental agency, authority
or body or any arbitrator involving the Company or
any Subsidiaries or its or their property of a
character required to be disclosed in the
Registration Statement which is not adequately
disclosed in the Prospectus, and, to the knowledge of
such counsel, there is no franchise, contract or
other document of a character required to be
described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto,
which is not described or filed as required under the
Act or the applicable rules and regulations of the
Commission thereunder; and the statements in the
Prospectus under the headings "Risk
Factors--Protection of Our Intellectual Property is
Limited; We Face Risk of Third Party Claims of
Infringement," "--We are the Subject of legal
Proceedings and Claims", "Relationship Between Maxtor
and Hyundai," "Certain Transactions,"
"Management--Executive Compensation," "--Employment
Agreements" and "Benefit Plans" accurately summarize
in all material respects the matters therein
described to the extent they are matters of law and
descriptions of contractual arrangements;
(v) the Registration Statement has become effective
under the Act; any required filing of the Prospectus,
and any supplements thereto, pursuant to Rule 424(b)
has been made in the manner and within the time
period required by Rule 424(b); to the knowledge of
such counsel, no stop order suspending the
effectiveness of the Registration Statement has been
issued, no proceedings for that purpose have been
instituted or threatened and the Registration
Statement and the Prospectus (other than the
financial statements, schedules and other financial
information contained therein, as to which such
counsel need express no opinion) comply as to form in
all material respects with the applicable
requirements of the Act and the rules thereunder;
19
<PAGE> 20
(vi) this Agreement has been duly authorized,
executed and delivered by the Company (assuming due
authorization and execution by each party thereto
other than the Company);
(vii) the Company is not and, after giving effect to
the offering and sale of the Securities and the
application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company"
as defined in the Investment Company Act of 1940, as
amended;
(viii) no consent, approval, authorization, filing
with or order of any court or governmental agency or
body is required in connection with the transactions
contemplated herein, except such as have been
obtained under the Act and such as may be required
under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the
Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus
and such other approvals (specified in such opinion)
as have been obtained;
(ix) neither the issuance and sale of the Securities,
nor the consummation of any other of the transactions
herein contemplated nor the fulfillment of the terms
hereof will conflict with, result in a breach or
violation of or imposition of any lien, charge or
encumbrance upon any property or assets of the
Company pursuant to, (i) the charter or by-laws of
the Company, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to
which the Company is a party or bound or to which its
property is subject and that is filed as an exhibit
to the Registration Statement, or (iii) any statute,
law, rule or regulation which, in the experience of
such counsel, typically is applicable to the types of
transactions contemplated herein or, to the knowledge
of such counsel, any judgment, order or decree
applicable to the Company of any court, regulatory
body, administrative agency, governmental body,
arbitrator or other authority asserting jurisdiction
over the Company or any of its properties; and
(x) to the knowledge of such counsel, no holders of
securities of the Company have rights to the
registration of such securities under the
Registration Statement except for rights granted to
HEA under the Stockholder Agreement.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of California, the General Corporation Law of the State of
Delaware or the Federal laws of the United States, to the extent they
deem proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who are
reasonably
20
<PAGE> 21
satisfactory to counsel for the Underwriters and (B) as to matters of
fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials. References to the
Prospectus in this paragraph (b) include any supplements thereto at the
Closing Date.
In addition, such counsel shall state that such counsel has
participated in conferences and in telephone conversations with
officers and other representatives of the Company, representatives of
HEA, representatives of the Representatives and representatives of the
independent public accountants of the Company, during which conferences
and conversations the contents of the Registration Statement and the
Prospectus were discussed, and such counsel has reviewed certain
corporate records and documents furnished to such counsel by the
Company and that, although such counsel has not undertaken to
independently verify and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (except as specified in the
foregoing opinion), on the basis of the foregoing, and such counsel's
understanding of the U.S. federal securities laws, no information has
come to the attention of such counsel that causes such counsel to
believe that the Registration Statement on the Effective Date or at the
Execution Time contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus as of its date and on the Closing Date included or includes
any untrue statement of a material fact or omitted or omits to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading (other
than financial statements and schedules and other financial information
contained therein, as to which such counsel need express no opinion).
(c) The Company shall have caused counsel for Maxtor Singapore
(such counsel to be reasonably satisfactory to the Representatives) to
have furnished to the Representatives an opinion, dated the Closing
Date and addressed to the Representatives, to the effect that:
(i) Maxtor Singapore has been duly incorporated and
is validly existing as a corporation in good standing under
the laws of the jurisdiction in which it is chartered or
organized, with corporate power and authority to own or lease,
as the case may be, and to operate its properties and conduct
its businesses as described in the Prospectus, and, to the
knowledge of such counsel, is duly qualified to do business as
a foreign corporation and is in good standing under the laws
of each jurisdiction which requires such qualification, except
where the failure to be so qualified or be in good standing
could not reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), prospects,
earnings, business or properties of Maxtor Singapore, whether
or not arising from transactions in the ordinary course of
business;
(ii) all the outstanding shares of capital stock of
Maxtor Singapore have been duly and validly authorized and
issued and are fully paid and nonassessable,
21
<PAGE> 22
and except as otherwise set forth in the Prospectus, are owned
of record by the Company;
(iii) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving Maxtor Singapore or its property which,
if determined adversely to Maxtor Singapore, could reasonably
be expected to have, individually or in the aggregate, a
material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of
Maxtor Singapore, whether or not arising from transactions in
the ordinary course of business; and
(iv) neither the issue and sale of the Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or
imposition of any lien, charge or encumbrance upon any
property or assets of Maxtor Singapore pursuant to, (i) the
charter or by-laws of Maxtor Singapore, (ii) to the knowledge
of such counsel, the terms of any material indenture,
contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other material agreement, obligation, condition,
covenant or instrument to which Maxtor Singapore is a party or
bound or to which its property is subject, or (iii) any
statute, law, rule or regulation which, in the experience of
such counsel, typically is applicable to the types of
transactions contemplated herein or, to the knowledge of such
counsel, any judgment, order or decree applicable to Maxtor
Singapore of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority
asserting jurisdiction over Maxtor Singapore or any of its
property.
In rendering such opinion, such counsel may rely as to matters of fact,
to the extent they deem proper and specified in such opinion, upon
certificates of responsible officers of the Company, Maxtor Singapore
and public officials. References to the Prospectus in this paragraph
(c) include any supplements thereto at the Closing Date.
(d) HEA shall have caused Hal Hofherr, counsel for HEA, to
have furnished to the Representatives his opinion dated the Closing
Date and addressed to the Representatives, to the effect that:
(i) HEA is duly incorporated and is validly existing
as a corporation in good standing under the laws of the State
of California, with corporate power and authority to own or
lease, as the case may be, and to operate its properties and
conduct its business as described in the Prospectus, to the
knowledge of such counsel, is duly qualified to do business as
a foreign corporation and is in good standing under the laws
of each other jurisdiction which requires such qualification,
except where the failure to be so qualified or be in good
standing could not reasonably be expected to have a material
adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of
22
<PAGE> 23
HEA and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business;
(ii) this Agreement has been duly authorized,
executed and delivered by HEA, and HEA has full legal right
and authority to sell, transfer and deliver in the manner
provided in this Agreement and the Securities being sold by it
hereunder;
(iii) the delivery by HEA to the several Underwriters
of certificates for the Securities being sold hereunder by HEA
against payment therefor as provided herein, will pass good
and marketable title to such Securities to the several
Underwriters, free and clear of all liens, encumbrances,
equities and claims whatsoever;
(iv) HEA is not, and after giving effect to the
offering and sale of the Securities and the application of the
proceeds thereof as described in the Prospectus, will not be,
an "investment company" as defined in the Investment Company
Act of 1940, as amended;
(v) no consent, approval, authorization, filing with
or order of any court or governmental agency or body is
required in connection with the consummation by HEA of the
transactions contemplated herein, except such as may have been
obtained under the Act and such as may be required under the
blue sky laws of any jurisdiction in connection with the
purchase and distribution of the Securities by the
Underwriters in the manner contemplated in this Agreement and
in the Prospectus and such other approvals (specified in such
opinion) as have been obtained; and
(vi) neither the sale of the Securities being sold by
the Company and HEA nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the
terms hereof will conflict with, result in a breach or
violation of or imposition of any lien, charge or encumbrance
upon any property or assets of HEA pursuant to, (i) the
charter or by-laws of the HEA, (ii) to the knowledge of such
counsel, the terms of any material indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or
other material agreement, obligation, condition, covenant or
instrument to which HEA is a party or bound or to which its
property is subject, or (iii) any statute, law, rule or
regulation which, in the experience of such counsel, typically
is applicable to the types of transactions contemplated herein
or, to the knowledge of such counsel, any judgment, order or
decree applicable to HEA of any court, regulatory body,
administrative agency, governmental body, arbitrator or other
authority asserting jurisdiction over HEA or any of its
properties.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of California, the General Corporation Law of the State of
Delaware or the Federal laws of the United States, to the extent it
deems proper and specified in such opinion, upon the opinion of other
counsel of
23
<PAGE> 24
good standing whom it believes to be reliable and who are reasonably
satisfactory to counsel for the Underwriters, and (B) as to matters of
fact, to the extent it deems proper, on certificates of responsible
officers of HEA and public officials.
(e) The Representatives shall have received from Cleary,
Gottlieb, Steen & Hamilton, counsel for the Underwriters, such opinion
or opinions, dated the Closing Date and addressed to the
Representatives, with respect to the issuance and sale of the
Securities, the Registration Statement, the Prospectus (together with
any supplement thereto) and other related matters as the
Representatives may reasonably require, and the Company and HEA shall
have furnished to such counsel such documents as they reasonably
request for the purpose of enabling them to pass upon such matters.
(f) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chief Executive Officer and
the Chief Financial Officer of the Company, dated the Closing Date, to
the effect that the signers of such certificate have carefully examined
the Registration Statement, the Prospectus, any supplements to the
Prospectus and this Agreement and that:
(i) the representations and warranties of the Company
in this Agreement are true and correct on and as of the
Closing Date with the same effect as if made on the Closing
Date and the Company has complied in all material respect with
all the agreements and satisfied in all material respect all
the conditions on its part to be performed or satisfied at or
prior to the Closing Date (such certificate to set forth all
known failures to comply with such agreements or satisfy such
conditions whether such known failures are material or
immaterial);
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and to the
Company's knowledge, after due inquiry with the Commission, no
proceedings for that purpose have been instituted or, to the
Company's knowledge, threatened; and
(iii) since the date of the most recent financial
statements included or incorporated by reference in the
Prospectus (exclusive of any supplement thereto), there has
been no material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the
Company and the Subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(g) HEA shall have furnished to the Representatives a
certificate, signed by the Chief Executive Officer, dated the Closing
Date, to the effect that the signer of such certificate has carefully
examined the Registration Statement, the Prospectus, any supplement to
the Prospectus and this Agreement and that the representations and
warranties of HEA in this Agreement are true and correct in all
material respects on and as of the Closing Date to the same effect as
if made on the Closing Date.
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<PAGE> 25
(h) The Company shall have caused PricewaterhouseCoopers LLP
to have furnished to the Representatives letters, at the Execution Time
and at the Closing Date, dated respectively as of the Execution Time
and as of the Closing Date, in form and substance reasonably
satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the Exchange
Act and the respective applicable published rules and regulations
adopted by the Commission thereunder and stating in effect that:
(i) in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and
the related published rules and regulations adopted by the
Commission;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by the Company
and the Subsidiaries; carrying out certain specified
procedures (but not an examination in accordance with
generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders, directors and the audit,
executive and compensation committees of the Company and its
subsidiaries; and inquiries of certain officials of the
Company who have responsibility for financial and accounting
matters of the Company and its subsidiaries as to transactions
and events subsequent to December 26, 1998, nothing came to
their attention which caused them to believe that:
(a) any unaudited financial statements
included or incorporated by reference in the Company
Registration Statement and the Company Prospectus do
not comply as to form in all material respects with
applicable accounting requirements of the Act and
with the related rules and regulations adopted by the
Commission with respect to financial statements
included or incorporated by reference in quarterly
reports on Form 10-Q under the Exchange Act; and said
unaudited financial statements are not in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that of the
audited financial statements included in the Company
Registration Statement and the Company Prospectus;
(b) with respect to the period subsequent to
December 26, 1998, there were any changes, at a
specified date not more than five business days prior
to the date of the letter, in the long-term debt and
capital lease obligations due after one year of the
Company and the Subsidiaries or capital stock of the
Company or any increase in the shareholders' deficit
of
25
<PAGE> 26
the Company or decreases in net current assets or
total assets of the Company and the Subsidiaries as
compared with the amounts shown on the December 26,
1998, consolidated balance sheet included or
incorporated in the Company Registration Statement
and the Company Prospectus, or for the period from
December 26, 1998 to such specified date there were
any decreases, as compared with the corresponding
period in the preceding quarter, in total revenue or
income from operations or income before income taxes
or in total or per share amounts of net income of the
Company and the Subsidiaries, except in all instances
for changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an
explanation by the Company as to the significance
thereof unless said explanation is not deemed
necessary by the Representatives; or
(c) the information included or incorporated
in the Company Registration Statement and Company
Prospectus in response to Regulation S-K, Item 301
(Selected Financial Data), Item 302 (Supplementary
Financial Information) and Item 402 (Executive
Compensation) is not in conformity with the
applicable disclosure requirements of Regulation S-K;
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and the Subsidiaries) set forth in the Registration
Statement and the Prospectus, including the information set
forth under the captions "Selected Consolidated Financial
Data," "Capitalization," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business"
and "Certain Transactions" in the Company Prospectus and the
information included or incorporated by reference in Items 1,
2, 6, 7, and 11 of the Company's Annual Report on Form 10-K,
incorporated by reference in the Registration Statement and
the Prospectus, agrees with the accounting records of the
Company and the Subsidiaries, excluding any questions of legal
interpretation.
References to the Prospectus in this paragraph (h) include any
supplement thereto at the date of the letter.
(i) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph
(h) of this Section 6 or (ii) any change, or any development involving
a prospective change, in or affecting the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and the Subsidiaries, taken as a whole, whether or not arising
26
<PAGE> 27
from transactions in the ordinary course of business, except as set
forth in or contemplated in the Prospectus (exclusive of any supplement
thereto) the effect of which, in any case referred to in clause (i) or
(ii) above, is, in the sole judgment of the Representatives, so
material and adverse as to make it impractical or inadvisable to
proceed with the offering or delivery of the Securities as contemplated
by the Registration Statement (exclusive of any amendment thereof) and
the Prospectus (exclusive of any supplement thereto).
(j) Subsequent to the Execution Time, there shall not have
been any decrease in the rating of any of the Company's debt securities
by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Act) or any notice given
of any intended or potential decrease in any such rating or of a
possible change in any such rating that does not indicate the direction
of the possible change.
(k) The Securities shall have been listed and admitted and
authorized for trading on the Nasdaq National Market, and satisfactory
evidence of such actions shall have been provided to the
Representatives.
(l) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto from each officer and director of the Company, which persons are
listed on Schedule II hereto, addressed to the Representatives.
(m) Prior to the Closing Date, the Company and HEA shall have
furnished to the Representatives such further information, certificates
and documents as the Representatives may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company and
HEA in writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Gray Cary Ware & Freidenrich LLP, counsel for the
Company, at 400 Hamilton Avenue, Palo Alto, California 94301, on the Closing
Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or HEA to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally
27
<PAGE> 28
through Salomon Smith Barney Inc. on demand for all reasonable out-of-pocket
expenses (including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities.
8. Indemnification and Contribution. (a) The Company and HEA
jointly and severally agree to indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person
who controls any Underwriter within the meaning of either the Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Act, the
Exchange Act or other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Securities as originally filed or in any
amendment thereof, or in any Preliminary Prospectus or the Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein; provided, further, that with respect to any
untrue statement or omission of material fact made in any Preliminary
Prospectus, the indemnity agreement contained in this Section 8(a) shall not
inure to the benefit of any Underwriter from whom the person asserting any such
loss, claim, damage or liability purchased the securities concerned, to the
extent that any such loss, claim, damage or liability of such Underwriter occurs
under the circumstance where it shall have been determined by final
nonappealable judgment that (w) the Company had previously furnished copies of
the Prospectus to the Representatives, (x) delivery of the Prospectus was
required by the Act to be made to such person, (y) the untrue statement or
omission of a material fact contained in the Preliminary Prospectus was
corrected in the Prospectus and (z) there was not sent or given to such person,
at or prior to the written confirmation of the sale of such securities to such
person, a copy of the Prospectus.
This indemnity agreement will be in addition to any liability
which the Company may otherwise have.
(b) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, each person who controls the
Company within the meaning of either the Act or the Exchange Act and HEA, to the
same extent as the foregoing indemnity to each Underwriter, but only with
reference to written information relating to such Underwriter furnished to the
Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement
28
<PAGE> 29
will be in addition to any liability which any Underwriter may otherwise have.
The Company and HEA acknowledge that the statements set forth in the last
paragraph of the cover page regarding delivery of the Securities, and, under the
heading "Underwriting" (i) the list of Underwriters and their respective
participation in the sale of the Securities, (ii) the sentences related to
concessions and reallowances and (iii) the paragraph related to stabilization,
syndicate covering transactions and penalty bids in any Preliminary Prospectus
and the Prospectus constitute the only information furnished in writing by or on
behalf of the several Underwriters for inclusion in any Preliminary Prospectus
or the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and HEA, jointly and severally,
and the Underwriters severally agree to contribute
29
<PAGE> 30
to the aggregate losses, claims, damages and liabilities (including legal or
other expenses reasonably incurred in connection with investigating or defending
same) (collectively "Losses") to which the Company, HEA and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company and HEA on the one hand and by the
Underwriters on the other from the offering of the Securities; provided,
however, that in no case shall any Underwriter (except as may be provided in any
agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the Securities purchased by such Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable for any
reason, the Company and HEA, jointly and severally, and the Underwriters
severally shall contribute in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company and HEA
on the one hand and of the Underwriters on the other in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company and HEA
shall be deemed to be equal to the total net proceeds from the offering (before
deducting expenses) received by them, and benefits received by the Underwriters
shall be deemed to be equal to the total underwriting discounts and commissions,
in each case as set forth on the cover page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether any untrue or
any alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information provided by the Company
or HEA on the one hand or the Underwriters on the other, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The Company, HEA and the
Underwriters agree that it would not be just and equitable if contribution were
determined by pro rata allocation or any other method of allocation which does
not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (d), no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person who
controls an Underwriter within the meaning of either the Act or the Exchange Act
and each director, officer, employee and agent of an Underwriter shall have the
same rights to contribution as such Underwriter, and each person who controls
the Company within the meaning of either the Act or the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (d).
(e) The liability of HEA under the indemnity and contribution
provisions contained in this Section 8 shall be limited to an amount equal to
the lesser of (i) the initial public offering price of the Securities sold by
HEA to the Underwriters under this Agreement and (ii) $25,000,000. The Company
and HEA may agree, as among themselves and without limiting the rights of the
Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
9. Default by an Underwriter. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or
30
<PAGE> 31
Underwriters hereunder and such failure to purchase shall constitute a default
in the performance of its or their obligations under this Agreement, the
remaining Underwriters shall be obligated severally to take up and pay for (in
the respective proportions which the amount of Securities set forth opposite
their names in Schedule I hereto bears to the aggregate amount of Securities set
forth opposite the names of all the remaining Underwriters) the Securities which
the defaulting Underwriter or Underwriters agreed but failed to purchase;
provided, however, that in the event that the aggregate amount of Securities
which the defaulting Underwriter or Underwriters agreed but failed to purchase
shall exceed 10% of the aggregate amount of Securities set forth in Schedule I
hereto, the remaining Underwriters shall have the right to purchase all, but
shall not be under any obligation to purchase any, of the Securities, and if
such nondefaulting Underwriters do not purchase all the Securities, then the
Company shall have 36 hours within which it may, but is not obligated, to find
one or more substitute underwriters satisfactory to the Representatives to
purchase such Securities upon the terms set forth in this Agreement and if the
Company is unable to find one or more such underwriters that are satisfactory to
the Representatives, this Agreement will terminate without liability to any
nondefaulting Underwriter, HEA or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding five Business Days, as the Representatives shall
determine in order that the required changes in the Registration Statement and
the Prospectus or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting Underwriter of
its liability, if any, to the Company, HEA and any nondefaulting Underwriter for
damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if at any
time prior to such time (i) trading in any of the Company's securities shall
have been suspended by the Commission the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on either of such Exchanges, (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets is such as to make it, in the sole
judgment of the Representatives, impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Prospectus
(exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of HEA and of the Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, HEA or the Company or
any of the officers, directors, employees, agents or controlling persons
referred to in Section 8 hereof, and will survive delivery of and payment for
the Securities. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancellation of this Agreement.
31
<PAGE> 32
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to Salomon Smith Barney Inc. General Counsel (fax
no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith Barney
Inc., at 388 Greenwich Street, New York, New York, 10013, Attention: General
Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to
Chief Financial Officer c/o of Maxtor Corporation, 510 Cottonwood Drive,
Milpitas, California 95035 (fax no. (408) 432-4158) and confirmed to the General
Counsel c/o Maxtor Corporation, 2190 Miller Drive, Longmont. Colorado 80501 (fax
no. (303) 678-3111), attention of the Legal Department, with a copy to Diane
Holt Frankle (fax no. (650) 327-3699) at Gray Cary Ware & Freidenrich LLP, 400
Hamilton Avenue, Palo Alto, California 94301; or if sent to HEA, will be mailed,
delivered or telefaxed to Chief Executive Officer, c/o Hyundai Electronics
America, 3101 North First Street, San Jose, California 95134 (fax no. (408)
232-8194) and confirmed to the General Counsel c/o Hyundai Electronics America,
3101 North First Street, San Jose, California 95134 (fax no. (408) 232-8194),
attention of the Legal Department.
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City.
"Commission" shall mean the Securities and Exchange
Commission.
32
<PAGE> 33
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(i)(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(i)(a) above, including exhibits and
financial statements, as amended at the Execution Time (or, if not
effective at the Execution Time, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto or
any Rule 462(b) Registration Statement becomes effective prior to the
Closing Date, shall also mean such registration statement as so amended
or such Rule 462(b) Registration Statement, as the case may be. Such
term shall include any Rule 430A Information deemed to be included
therein at the Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
33
<PAGE> 34
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company, HEA and the several Underwriters.
Very truly yours,
Maxtor Corporation
By:
-------------------------------------
Name:
Title:
Hyundai Electronics America
By:
-------------------------------------
Name:
Title:
34
<PAGE> 35
The foregoing Agreement is hereby confirmed
and accepted as of the date first above
written.
Salomon Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
NationsBanc Montgomery Securities LLC
By: Salomon Smith Barney Inc.
By:
-------------------------------
Name:
Title:
For themselves and the other several
Underwriters named in Schedule I to the
foregoing Agreement.
35
<PAGE> 36
[FORM OF LOCK-UP AGREEMENT] EXHIBIT A
[LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR STOCKHOLDER OF
CORPORATION]
Maxtor Corporation
Public Offering of Common Stock
February , 1999
Salomon Smith Barney Inc.
Hambrecht & Quist LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
NationsBanc Montgomery Securities LLC
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), among Maxtor
Corporation, a Delaware corporation (the "Company"), Hyundai Electronics America
("HEA"), a stockholder of the Company and each of you as representatives of a
group of Underwriters named therein, relating to an underwritten public offering
of Common Stock, $0.01 par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter
into the Underwriting Agreement, the undersigned will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to sell,
pledge or otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect
<PAGE> 37
any such transaction, for a period of 90 days after the date of this Agreement,
other than (i) shares of Common Stock disposed of as bona fide gifts approved by
Salomon Smith Barney Inc., or (ii) a number of shares of Common Stock (not to
exceed 10,000 shares) authorized by the Company to be sold (it being understood
that the Company will not authorize all executive officers and directors to sell
more than 100,000 shares of Common Stock in the aggregate during such 90 day
period). In case of (ii) above, the undersigned agrees to sell such shares of
Common Stock only to or through Salomon Smith Barney Inc.
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting Agreement),
the agreement set forth above shall likewise be terminated.
Yours very truly,
By:
-------------------------------------
Name:
Title:
2
<PAGE> 38
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN
UNDERWRITERS SECURITIES TO BE PURCHASED
<S> <C>
Salomon Smith Barney Inc..........................
Hambrecht & Quist LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
NationsBanc Montgomery Securities LLC
------------
Total ................
============
</TABLE>
<PAGE> 39
SCHEDULE II
List of Officers, Directors and Shareholders
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Dr. C. S. Park Chairman of the Board of Directors
Michael R. Cannon President, Chief Executive Officer, Director
Charles F. Christ Director
Chang See Chung Director
Charles Hill Director
Y.H. Kim Director
Phillip S. Paul Director
Thomas L. Chun Director
Victor B. Jipson Senior Vice President
William F. Roach Senior Vice president
Paul J. Tufano Senior Vice President
Glenn H. Stevens Vice President
Phillip C. Duncan Vice President
K. K. Kim Vice President
Misha Rozenberg Vice President
K. H. Teh Vice President
David L. Beaver Vice President
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus relating to the public
offering of Maxtor common stock and the prospectus relating to the delivery by
DECS Trust IV of shares of Maxtor common stock owned by Hyundai Electronics
America constituting part of this Registration Statement on Form S-3 (the
"Prospectuses") of our report dated January 21, 1999 relating to the financial
statements of Maxtor Corporation, which appear in such Prospectuses. We also
consent to the application of such report to the Financial Statement Schedule
for the nine months ended December 28, 1996 and the years ended December 27,
1997 and December 26, 1998 listed under Item 16(b) of this Registration
Statement on Form S-3 when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included that Financial Statement Schedule. We also consent to the
incorporation by reference of our report dated February 3, 1998, except for
notes 7 and 10 for which the date is April 9, 1998, appearing on page 46 of
Maxtor Corporation's Annual Report on Form 10-K for the year ended December 27,
1997. We also consent to the references to us under the headings "Experts" and
"Selected Financial Data" in such Prospectuses. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data."
PricewaterhouseCoopers LLP
San Jose, California
February 8, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
April 25, 1996, except for the second paragraph of Note 1 as to which the date
is July 24, 1998, with respect to the financial statements and schedule of
Maxtor Corporation included in Amendment No. 1 to the Registration Statement
(Form S-3) and related Prospectus of Maxtor Corporation for the registration of
shares its common stock.
/s/ ERNST & YOUNG LLP
--------------------------------------
San Jose, California
February 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> DEC-26-1998
<CASH> 214,126
<SECURITIES> 13,503
<RECEIVABLES> 322,157
<ALLOWANCES> 8,409
<INVENTORY> 153,192
<CURRENT-ASSETS> 743,777
<PP&E> 322,490
<DEPRECIATION> 214,200
<TOTAL-ASSETS> 863,413
<CURRENT-LIABILITIES> 548,935
<BONDS> 95,000
0
0
<COMMON> 943
<OTHER-SE> 168,489<F1>
<TOTAL-LIABILITY-AND-EQUITY> 863,413
<SALES> 2,408,528
<TOTAL-REVENUES> 2,408,528
<CGS> 2,108,115
<TOTAL-COSTS> 2,108,115
<OTHER-EXPENSES> 240,308<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,784
<INCOME-PRETAX> 38,736
<INCOME-TAX> 7,563
<INCOME-CONTINUING> 31,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,173
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.47
<FN>
<F1>OTHER SE INCLUDES ADDITIONAL PAID-IN CAPITAL OF $880,175 UNREALIZED GAIN ON
INVESTMENTS IN EQUITY SECURITIES OF $30,094, AND ACCUMULATED DEFICIT OF
$741,780.
<F2>OTHER EXPENSES INCLUDE RESEARCH AND DEVELOPMENT OF $152,401 AND SELLING,
GENERAL AND ADMINISTRATIVE COSTS OF $75,819, AND STOCK COMPENSATION EXPENSE OF
$12,088.
</FN>
</TABLE>
