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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-14016
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MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0123732
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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510 COTTONWOOD DRIVE, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
5.75% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 1, 2012
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's common stock, $.01 par value
per share, held by nonaffiliates of the registrant was $549,109,880 on February
24, 1999 (based on the closing sales price of the registrant's common stock on
that date). Shares of the registrant's common stock held by each officer and
director and each person who owns more than 5% or more of the outstanding common
stock of the registrant have been excluded in that such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of February 24, 1999, 102,831,982 shares of the registrant's Common
Stock, $.01 par value, were issued and outstanding.
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PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future, are forward-looking statements including
those discussed in Item 1, Business, "Products", "Marketing and Customers",
"Manufacturing and Suppliers", "Research and Development", and "Competition";
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Results of Operations", "Liquidity and Capital Resources" and
"Certain Factors Affecting Future Performance"; and elsewhere in this report. In
this report, the words "anticipate," "believe," "expect," "intend," "future" and
similar expressions also identify forward-looking statements. We make these
forward-looking statements based upon information available on the date hereof,
and we have no obligation to update any such forward-looking statements. Our
actual results could differ materially from those anticipated in this report as
a result of certain factors including, but not limited to, those set forth in
the following risk factors and elsewhere in this report.
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 20.4 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 March 8, 1999, we
announced our newest hard disk drive product which is intended to support the
high end desktop computer market, the DiamondMax Plus 5120. The DiamondMax Plus
5120 is our first hard disk drive using giant magneto-resistive head technology,
our second hard drive featuring 7200 RPM spin speed, our ninth hard disk drive
utilizing our digital signal processor-based electronic architecture and our
eleventh 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
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* 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 report are the property of
their respective holders.
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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;
- 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 desktop computer manufacturers,
we took a number of steps to improve product quality and created dedicated
account
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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, and in the first
quarter of 1999 with our DiamondMax Plus 5120, our second generation 7200 RPM
drive. 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.
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;
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- 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.
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
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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 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.
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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;
- 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 March 8, 1999, we introduced the DiamondMax Plus 5120, our second 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.
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;
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- 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 20.4 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 and giant magneto-resistive head technology and a digital
signal processor-based electronic architecture that, when combined, provides
industry-leading performance. On March 8, 1999, we announced our newest hard
disk drive product, the DiamondMax Plus 5120. The DiamondMax Plus 5120 is our
first giant magneto-resistive head hard disk drive, our ninth disk drive
utilizing our digital signal processor-based electronic architecture and our
eleventh hard disk drive based on our Formula 4 mechanical structure.
The table below sets forth key performance metrics for our eight
generations of magneto-resistive and giant 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................ December 1996 June 1997 September 1997 March 1998 June 1998 June 1998 October 1998
<CAPTION>
DIAMONDMAX
PLUS 5120
----------
<S> <C>
Maximum Capacity
(GB)................ 20.4
Capacity per Disk
(GB)................ 5.1
Rotational Speed
(RPM)............... 7200
First Shipment
Date................ March 1999
</TABLE>
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* No longer in volume production.
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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 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. Pursuant to a sublease accompanying the
option, we have taken possession of this facility and have begun to prepare the
facility for volume manufacturing.
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<PAGE> 10
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.
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
10
<PAGE> 11
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 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. Representative 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> 12
COMPETITION
We compete 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 us. 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 us 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. See "Certain Factors
Affecting Future Performance -- The Hard Disk Drive Market is Highly
Competitive."
INTELLECTUAL PROPERTY
We have been granted approximately 215 U.S. and foreign patents related to
disk drive products and technologies, and have additional patent applications
pending in the United States and certain foreign countries. We have patent
protection on certain aspects of our technology and also rely on trade secret,
copyright and trademark laws, as well as contractual provisions to protect our
proprietary rights. There can be no assurance that our protective measures will
be adequate to protect our proprietary rights; that others, including
competitors with substantially greater resources, have not developed or will not
independently develop or otherwise acquire equivalent or superior technology; or
that we will not be required to obtain licenses requiring us to pay royalties to
the extent that our products may use the intellectual property of others,
including, without limitation, our products that may also be subject to patents
owned or licensed by others. There can be no assurance that any patents will be
issued pursuant to our current or future patent applications, or that patents
issued pursuant to such applications or any patents we own or have license to
use will not be invalidated, circumvented or challenged. Moreover, there can be
no assurance that the rights granted under any such patents will provide
competitive advantages to us or be adequate to safeguard and maintain our
proprietary rights. Litigation may be necessary 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 or those of
others. We could incur substantial costs in seeking enforcement of its issued or
licensed patents against infringement or the unauthorized use of our trade
secrets and proprietary know-how by others or in defending ourself against
claims of infringement by others, which could have a material adverse effect on
our business, financial condition and results of operations. In addition, the
laws of certain countries in which our products are manufactured and sold,
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, and there can be no assurance that such laws will be enforced in an
effective manner. Any failure by us to enforce and protect our intellectual
property rights could have a material adverse effect on our business, financial
condition and results of operations. See "Certain Factors Affecting Future
Performance -- Protection of Our Intellectual Property is Limited; We Face Risk
of Third Party Claims of Infringement," "-- We are Dependent on Our
International Operations; We Face Risks From Our International Sales."
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, our Singapore subsidiary recognized a labor
union, the United Workers of Electronic and Electrical Industries. On November
27, 1998, our Singapore subsidiary signed a three year collective bargaining
agreement with the United Workers of Electronic and Electrical Industries. We
believe that our employee relations are positive. See "Certain Factors
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<PAGE> 13
Affecting Future Performance -- We Depend on Michael R. Cannon and Our Other Key
Personnel; We Could Be Sued Over Our Hiring Practices."
ITEM 2. PROPERTIES
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 350,000 square
feet 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. Pursuant to a sublease
accompanying the option, we have taken possession of this facility and have
begun to prepare the facility for volume manufacturing.
ITEM 3. LEGAL PROCEEDINGS
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 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.
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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.
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 March 22, 1999).......... $19.56 $7.78
Fiscal 1998 Fourth Quarter.................................. 15.63 7.63
Fiscal 1998 Third Quarter (from July 31, 1998).............. 11.63 6.81
</TABLE>
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As of March 22, 1999, there were approximately 95 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 and do not anticipate paying
cash dividends in the near future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
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 Form 10-K. 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 not included elsewhere herein. 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 included elsewhere in this
Form 10-K.
<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>
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- -------------------------
(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.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ITEM 1:
BUSINESS, ITEM 6: SELECTED FINANCIAL INFORMATION AND ITEM 8: CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
OVERVIEW
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 20.4 gigabytes and provides
industry-leading performance.
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. On February 9, 1999, we completed a
secondary public offering of 7.8 million shares of our common stock and at the
same time, Hyundai Electronics America sold 3.2 million shares as a selling
stockholder. Our net proceeds from the secondary offering were approximately
$95.8 million, after deducting the underwriting discounts and estimated expenses
payable by Maxtor. We did not receive any proceeds from the sale of shares by
Hyundai.
A portion of the proceeds from the secondary offering were used 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
plus accrued interest of approximately $0.2 million. The subordinated note bore
interest at LIBOR plus 2%, due semiannually. The remaining approximately $40.6
million of the net proceeds from the secondary offering will be used for general
corporate purposes.
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 assurance
that we will be able to obtain similar rights in the future on terms as
favorable as those currently available to us.
REVENUE RECOGNITION
We generally recognize revenue upon shipment to our customers. Sales to
certain distributors and retailers are governed by agreements providing limited
rights of return, as well as price protection on unsold merchandise.
Accordingly, we record reserves upon shipment for estimated returns, exchanges
and credits for
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<PAGE> 17
price protection. We also record reserves for the estimated cost to repair or
replace products under warranty at the time of sale. We warrant our products
against defects in parts and labor for a period of three years from the date of
shipment with an additional three months allowed for distributors to account for
"shelf life."
TAX MATTERS
Due to 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.
Therefore, 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 Electronics
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
17
<PAGE> 18
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.
Change in Fiscal Year
During 1996, the Company changed its 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 preceding filings of our
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 years ended on
December 27, 1997 and December 26, 1998, which were audited, comprised twelve
months or 52 weeks. For discussion and analysis purposes, the fiscal year ended
on December 27, 1997 is compared to the unaudited twelve months ended December
28, 1996, also comprising 52 weeks. In the following discussion, references to
1996 are to the twelve months ended December 28, 1996 and references to 1997 and
1998 are to the fiscal years ended December 27, 1997 and December 26, 1998.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue............................................ $1,113.8 $1,424.3 $2,408.5
Cost of revenue.................................... 1,191.7 1,352.9 2,108.1
-------- -------- --------
Gross profit (loss)......................... (77.9) 71.4 300.4
-------- -------- --------
Operating expenses:
Research and development......................... 113.1 106.2 152.4
Selling, general and administrative.............. 82.9 62.6 75.8
Stock compensation expense....................... -- -- 12.1(2)
-------- -------- --------
Total operating expenses.................... 196.0 168.8 240.3(2)
-------- -------- --------
Income (loss) from operations...................... (273.9) (97.4) 60.1(2)
Interest expense................................... (22.1) (36.5) (28.8)
Interest and other income.......................... 1.3 25.0(1) 7.4
-------- -------- --------
Income (loss) before income taxes.................. (294.7) (108.9) 38.7(2)
Provision for income taxes......................... 1.5 1.0 7.5
-------- -------- --------
Net income (loss).................................. $ (296.2) $ (109.9)(1) $ 31.2(2)
======== ======== ========
</TABLE>
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<PAGE> 19
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue............................................ 100.0% 100.0% 100.0%
Cost of revenue.................................... 107.0 95.0 87.5
----- ----- --------
Gross profit (loss)......................... (7.0) 5.0 12.5
----- ----- --------
Operating expenses:
Research and development......................... 10.2 7.5 6.3
Selling, general and administrative.............. 7.4 4.4 3.2
Stock compensation expense....................... -- -- 0.5(2)
----- ----- --------
Total operating expenses.................... 17.6 11.9 10.0(2)
----- ----- --------
Income (loss) from operations...................... (24.6) (6.9) 2.5(2)
Interest expense................................... (2.0) (2.6) (1.2)
Interest and other income.......................... 0.1 1.8(1) 0.3
----- ----- --------
Income (loss) before income taxes.................. (26.5) (7.7) 1.6(2)
Provision for income taxes......................... 0.1 0.1 0.3
----- ----- --------
Net income (loss).................................. (26.6)% (7.8)%(1) 1.3%(2)
===== ===== ========
</TABLE>
- ---------------
(1) Includes recovery of a $20.0 million fully-reserved note from IMS. See
"Certain Transactions."
(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
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.
COMPARISON OF 1996, 1997 AND 1998
Revenue. In 1996, we generated revenue of $1,113.8 million compared with
revenue of $1,424.3 million in 1997 and $2,408.5 million in 1998. Revenue
increased 27.9% from 1996 to 1997 compared to an increase of 69.1% in revenue
from 1997 to 1998. The increase in revenue in both years was due 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. Throughout 1997 and 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
or 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.
Revenue from sales to desktop computer manufacturers was 52.7%, 64.4% and
76.5% of our revenue in 1996, 1997 and 1998, respectively. During 1996, 1997 and
1998, sales to three of the largest desktop computer manufacturers, Compaq, Dell
and IBM, increased from 10.8% to 37.8% and 53.4%, respectively.
Cost of Revenue; Gross Profit (Loss). Gross profit (loss) improved
significantly from a loss of $77.9 million in 1996 to profits of $71.4 million
in 1997 and $300.4 million in 1998. Gross margin increased from (0.7%) in 1996
to 5.0% in 1997 and 12.5% in 1998. The improvement in gross margin in both 1997
and 1998 is due primarily to the timely introduction of new, higher margin
products which achieved market acceptance and higher manufacturing yields. Gross
margin was also favorably affected by improved product
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<PAGE> 20
designs which led to improved manufacturing yields and lower component costs.
However, during 1997 and the first three quarters of 1998, growth of our gross
margin was partially constrained 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 margin.
OPERATING EXPENSES
Research and Development Expense. Research and development expense as a
percentage of revenue was 10.2%, 7.5% and 6.3% in 1996, 1997 and 1998,
respectively. While R&D expense as a percentage of revenue decreased by 2.7%
from 1996 to 1997, the absolute dollar level of R&D spending declined only
slightly. During 1997, R&D expenditures were focused on desktop hard disk drives
as a result of the rationalization of our product and technology roadmap to
focus on desktop hard disk drives utilizing a single core technology platform
and MR head technology. From 1997 to 1998, R&D expense as a percentage of
revenue decreased by 1.2% while the absolute dollar level of R&D spending
increased from $106.2 million in 1997 to $152.4 million in 1998. During 1998,
the absolute dollar increase in R&D expenditures was due to our efforts to
develop new products for the desktop computer market and future products in
other hard disk drive segments.
Selling, General and Administrative Expense. SG&A expenses as a percentage
of revenues were 7.4%, 4.4% and 3.2% in 1996, 1997 and 1998, respectively. The
absolute dollar level of SG&A expense declined from $82.9 million in 1996 to
$62.6 million in 1997, but increased to $75.8 million in 1998. Beginning in the
second half of 1996, SG&A expense was reduced as a result of our cost reduction
efforts, as well as the sale of our majority ownership interest in IMS in June
1996. During 1997 and 1998, SG&A expense decreased as a percentage of revenue
due to an increase in 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
had not been 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 was $22.1 million, $36.5 million and
$28.8 million in 1996, 1997 and 1998, respectively, representing a 65.2%
increase from 1996 to 1997 and a 21.1% decrease from 1997 to 1998. As a
percentage of revenue, interest expense was 2.0%, 2.6% and 1.2% in 1996, 1997
and 1998, respectively. The increase from 1996 to 1997 was due to substantial
growth in short-term and long-term borrowings required to fund our operations.
During the fourth quarter of 1997, our interest expense was offset by the
conversion of $200.0 million of subordinated debt held by Hyundai Electronics
America into equity in Maxtor with the associated reduction in interest
payments. The benefit derived from such debt reduction was, however, partially
offset by an increase in our interest expense due to higher interest rates
applied to our intercompany loan from Hyundai Electronics America and bank
credit facilities, in each case as a result of the higher cost of borrowing
resulting from changes in the economic environment in Korea. The decrease from
1997 to 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.
At December 28, 1996, December 27, 1997 and December 26, 1998, we had
$149.8 million, $165.1 million and $5.3 million of short-term and $229.1
million, $224.3 million and $145.0 million of long-term indebtedness
outstanding, respectively.
Interest and Other Income. Interest and other income was $1.3 million,
$25.0 million and $7.4 million in 1996, 1997 and 1998, respectively. As a
percentage of revenue, interest and other income was 0.1%, 1.8% and 0.3% in
1996, 1997 and 1998, respectively. The increase in 1997 was due principally to a
one-time event in the fourth quarter of 1997 which related to the recovery of a
$1.3 million fully-reserved note issued to us by
20
<PAGE> 21
Storage Dimensions, Inc., and a $20.0 million fully-reserved note issued to us
by International Manufacturing Services.
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 June of 1999. Additionally, we have
formed a Year 2000 Project Office to coordinate the foregoing corporate program
and also have engaged external Year 2000 consultants to assist with methodology
and process of the inventory, assessment and resolution phases. 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 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
21
<PAGE> 22
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
have sought written assurances and have begun to perform physical audits 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 and/or in person assurances that our
ability to supply product to them in volume will not be affected by the Year
2000 Issue.
THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES
We made capital expenditures of approximately $33.0 million and incurred
related expenses of approximately $7.5 million in fiscal 1998 in connection with
our implementation of the SAP system. We expect to make capital expenditures of
approximately $10.0 million and incur expenses of approximately $4.0 million in
fiscal 1999 in connection with the resolution of our Year 2000 issues. No
significant system projects have been deferred due to Year 2000 issues. As we
progress in our Year 2000 readiness program, these costs may change. In
addition, our cost estimates do not include potential costs related to any
customer or other claims resulting from our failure to adequately correct our
Year 2000 issues.
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;
- 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
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<PAGE> 23
- 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. In February 1999, we completed an underwritten
secondary public offering of 7,800,000 newly-issued shares of our common stock.
We received $95.8 million, net of offering costs and expenses.
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 $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. We prepaid this note in full
(including accrued interest) with a portion of the net proceeds we received in
the February 1999 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
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<PAGE> 24
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 the proceeds we received from the July 1998 and February 1999
stock offerings, 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.
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.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
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.
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<PAGE> 25
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
qualification 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
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<PAGE> 26
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 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;
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<PAGE> 27
- 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.
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.
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<PAGE> 28
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
- 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 have incorporated
giant magneto-resistive head technology into our newest product. 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.
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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. Consequently, 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
practices. We may receive such claims in the future as we
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<PAGE> 30
seek to hire qualified employees. We could incur substantial costs in defending
ourselves against any such claims.
WE HAVE HISTORICALLY HAD 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.
We are 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;
- 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
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<PAGE> 31
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 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.
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Our dependence on revenue from international sales and our need to manage
international operations each 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 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;
- the presence or absence of short-selling of our common stock; and
- events affecting other companies that the market deems comparable to us.
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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 its February 1999
public 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.
In February 1999, DECS Trust IV, a newly-formed trust, sold 12,500,000
DECS. The terms of the DECS provide that DECS Trust IV may distribute shares of
our common stock owned by Hyundai Electronics America on or about February 15,
2002, or upon earlier liquidation of DECS Trust IV under certain circumstances.
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.
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
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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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF MAXTOR CORPORATION
Consolidated Balance Sheets December 27, 1997 and December
26, 1998.................................................. 36
Consolidated Statements of Operations, nine months ended
December 28, 1996, fiscal year ended December 27, 1997,
and fiscal year ended December 26, 1998................... 37
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...................................................... 38
Consolidated Statements of Cash Flows, nine months ended
December 28, 1996, fiscal year ended December 27, 1997 and
fiscal year ended December 26, 1998....................... 39
Notes to Consolidated Financial Statements.................. 40
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... 59
</TABLE>
Financial Statement Schedules:
The following consolidated financial statement schedule of Maxtor Corporation
is filed as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Maxtor Corporation.
Schedule II Valuation and qualifying accounts............................84
Schedules not listed above have been omitted since they are not applicable or
are not required or the information required to be set therein is included in
the Consolidated Financial Statements or notes thereto.
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MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
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.
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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.
37
<PAGE> 38
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.
38
<PAGE> 39
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.
39
<PAGE> 40
MAXTOR CORPORATION
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 which 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 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
40
<PAGE> 41
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
41
<PAGE> 42
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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."
42
<PAGE> 43
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
43
<PAGE> 44
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.................. 213,157 203,947
Software................................. 7,056 40,779
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>
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.
44
<PAGE> 45
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 SFAS 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.
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.
45
<PAGE> 46
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
46
<PAGE> 47
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term Borrowings 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.
47
<PAGE> 48
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
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
48
<PAGE> 49
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Federal Suit. The Federal Suit was permanently dismissed early in February 1998.
On February 24, 1998, StorMedia filed a new complaint in 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%.
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.
49
<PAGE> 50
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
50
<PAGE> 51
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
51
<PAGE> 52
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
52
<PAGE> 53
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 Emerging Issues Task Force
No. 96-18. 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.
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
53
<PAGE> 54
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
54
<PAGE> 55
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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
securities....................................... 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.
55
<PAGE> 56
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. However, with additional tax planning, the net operating loss
carryforwards limitation of $16.0 million per year can be increased.
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 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>
56
<PAGE> 57
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following securities and contingently issuable shares are excluded in
the calculation of diluted shares outstanding as their effects would be
antidilutive:
<TABLE>
<CAPTION>
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>
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.
57
<PAGE> 58
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. UNAUDITED QUARTERLY RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
MARCH 29, JUNE 28, SEPTEMBER 27, DECEMBER 27, MARCH 28, JUNE 27,
1997 1997 1997 1997 1998 1998
--------- -------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............. $247,008 $283,094 $392,226 $ 501,992 $ 549,617 $ 531,265
Gross profit
(loss)............. $ (7,108) $ 2,767 $ 21,547 $ 54,178 $ 62,255 $ 62,476
Net income (loss).... $(54,986) $(46,608) $(31,363) $ 23,066 $ (10,319) $ 5,416
Net income (loss) per
share --
basic.............. -- -- -- $ 3,050.25* $ (672.16)* $ 164.02*
diluted............ -- -- -- $ 0.52 $ (0.23) $ 0.12
Shares used in per
share
calculation --
basic.............. -- -- -- 7,563 15,352 33,020
diluted............ -- -- -- 44,037,413 44,037,413 44,801,870
<CAPTION>
THREE MONTHS ENDED
----------------------------
SEPTEMBER 26, DECEMBER 26,
1998 1998
------------- ------------
<S> <C> <C>
Revenue.............. $ 599,797 $ 727,849
Gross profit
(loss)............. $ 73,197 $ 102,485
Net income (loss).... $ 6,078 $ 29,998
Net income (loss) per
share --
basic.............. $ 0.10 $ 0.32
diluted............ $ 0.08 $ 0.31
Shares used in per
share
calculation --
basic.............. 59,515,691 94,276,066
diluted............ 76,860,814 97,299,072
</TABLE>
- ---------------
* Net income (loss) per share for the three months ended December 27, 1997,
March 28, 1998, and June 27, 1998 is not considered meaningful due to the very
limited number of common shares outstanding. For the nine months ended
September 27, 1997, the Company operated as a wholly owned subsidiary with no
common stock outstanding.
14. SUBSEQUENT EVENTS
On February 9, 1999, the Company completed a Registration Statement on Form
S-3 offering 7,800,000 shares of newly issued common stock. Net proceeds of
$95.8 million, after deducting underwriters' commissions and offering costs,
were used to prepay $55.0 million of long-term debt due to HEA plus accrued
interest of approximately $0.2 million and to provide working capital.
58
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Maxtor Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index of this Form 10-K 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. In addition, in our opinion, the financial
statement schedule listed in the accompanying index present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits 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
59
<PAGE> 60
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 L. 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.
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
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<PAGE> 61
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.
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,
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<PAGE> 62
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 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
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<PAGE> 63
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.
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
From 1996 to May 13, 1998, each member of our board of directors who was
not our employee or an employee of 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.
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 November 30, 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.
Effective December 1, 1998, each Outside Director received:
- 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;
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<PAGE> 64
- 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.
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 $100,000 for services rendered to us in the
fiscal year ended December 26, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- -----------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND FISCAL YEAR SALARY BONUS COMPENSATION STOCK UNDERLYING COMPENSATION
PRINCIPAL POSITION ENDED(1) ($) ($) ($)(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.
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<PAGE> 65
(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.
(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 0.6 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
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 vesting
period. This table does not
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<PAGE> 66
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
- if Mr. Tufano is terminated without cause, payment of nine months' base
salary plus any portion of the sign-on bonus remaining unpaid.
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<PAGE> 67
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.
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
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<PAGE> 68
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.
Option Amendment Program. In the second quarter of 1998, we implemented a
stock option amendment program (the "Option Amendment Program") pursuant to
which we 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 us, 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" was defined
as a date, on or before February 1, 2001, on which all of the following had
occurred: (a) we had positive net income for four consecutive quarters, (b) our
value, as determined by an independent appraisal, equaled or exceeded $700
million, and (c) we had received the written opinion of a nationally-recognized
investment banking firm indicating that we could 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
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<PAGE> 69
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.
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
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<PAGE> 70
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 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 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
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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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of February 24, 1999: (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of the individuals listed in the Summary Compensation Table and by each of our
directors; and (iii) by all of our officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO OFFERINGS
-------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
------------------- ------------ ---------
<S> <C> <C>
5% STOCKHOLDER:
Hyundai Electronics America(2).............................. 40,829,850 39.7%
3101 North First Street
San Jose, CA 95134
VGH Partners LLC(3)......................................... 9,402,300 9.1
260 Franklin Street
Boston, MA 02110
EXECUTIVE OFFICERS AND DIRECTORS:
Dr. Chong Sup Park(4)(5).................................... 16,500 *
Michael R. Cannon(4)(6)..................................... 372,402 *
Charles F. Christ(4)........................................ 16,500 *
Thomas L. Chun.............................................. -- --
Chang See Chung(5).......................................... -- --
Charles Hill(4)............................................. 16,500 *
Y.H. Kim(4)(5).............................................. 16,500 *
Philip S. Paul(4)........................................... 5,000 *
Dr. Victor B. Jipson(4)(7).................................. 54,468 *
William F. Roach(4)(8)...................................... 77,343 *
Paul J. Tufano(4)(9)........................................ 46,093 *
K.H. Teh(4)(10)............................................. 27,124 *
All executives officers and directors as a group (17
persons)(4)(5)(11)........................................ 763,363 *
</TABLE>
- ---------------
* Less than one percent (1%)
(1) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on 102,831,982 shares outstanding as of
February 24, 1999. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. All shares of our
common stock subject to options currently exercisable or exercisable within
60 days after February 24, 1999 are
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deemed to be outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the number of shares beneficially
owned and the percentage of ownership of such person, but are not deemed to
be outstanding and to be beneficially owned for the purpose of computing
the percentage of ownership of any other person. Except as indicated in the
footnotes to the table and subject to applicable community property laws,
based on information provided by the persons named in the table, such
persons have sole voting and investment power with respect to all shares of
our common stock shown as beneficially owned by them.
(2) Hyundai Electronics America has certain nomination rights and rights to
maintain at least a 30% ownership interest in us through the year 2000, and
has agreed to certain limitations on the acquisition of our common stock
and proxy solicitations. Includes 12,500,000 shares of our common stock
owned by Hyundai Electronics America that may be delivered to DECS Trust IV
on or about February 15, 2002. Hyundai Electronics America may deliver
fewer shares or may choose to settle its obligations with DECS Trust IV in
cash.
(3) Based solely upon publicly available documents filed with the Securities
and Exchange Commission.
(4) All shares subject to an option granted under the Amended Plan which are
exercisable within 60 days after February 24, 1999.
(5) Excludes 40,829,850 shares of our common stock beneficially owned by
Hyundai Electronics America. Each such individual disclaims beneficial
ownership of such shares.
(6) Excludes 100,000 shares of our common stock granted to Mr. Cannon on May
29, 1998 pursuant to the Restricted Stock Plan. See "Benefit Plans -- 1998
Restricted Stock Plan."
(7) Excludes 35,000 shares of our common stock granted to Dr. Jipson on May 29,
1998 pursuant to the Restricted Stock Plan. See "Benefit Plans -- 1998
Restricted Stock Plan."
(8) Excludes 35,000 shares of Common Stock granted to Mr. Roach on May 29, 1998
pursuant to the Restricted Stock Plan. See "Benefit Plans -- 1998
Restricted Stock Plan."
(9) Excludes 35,000 shares of Common Stock granted to Mr. Tufano on May 29,
1998 pursuant to the Restricted Stock Plan. See "Benefit Plans -- 1998
Restricted Stock Plan."
(10) Excludes 15,000 shares of Common Stock granted to Mr. Teh on May 29, 1998
pursuant to the Restricted Stock Plan. See "Benefit Plans -- 1998
Restricted Stock Plan."
(11) Excludes 305,000 shares of Common Stock granted to certain officers on May
29, 1998, pursuant to the Restricted Stock Plan. See "Benefit Plans -- 1998
Restricted Stock Plan."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 our February 1999 offering,
Hyundai Electronics America owned approximately 40.0% of our outstanding common
stock.
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
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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 subject
to certain agreements between Hyundai Electronics America and the underwriters
of our February 1999 public offering. Holders of our common stock other than
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 Securities and Exchange
Commission 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.
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
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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 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. Our
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 currently owns approximately 40% of our common stock. 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
of 1933 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
of 1933 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 our February 1999 public offering and the DECS offering, to allocate
expenses for such offerings, to provide for indemnification to us 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 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
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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 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.
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
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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 with a three-year subordinated term note in the same principal
amount which bore interest, payable semi-annually, at LIBOR plus 2.0%. As of
December 26, 1998, this note had an outstanding balance of $55.0 million. We
prepaid this note in full (including accrued interest) with the proceeds of the
February 1999 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 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
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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.
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.
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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.
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.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements -- See Index to Consolidated
Financial Statements under Item 8 on page 35 of this report.
(2) Financial Statement Schedules -- See Index to Consolidated Financial
Statements under Item 8 on page 35 of this report.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of
Registrant, dated June 6, 1996.
3.2(14) Amended and Restated Certificate of Incorporation of
Registrant, dated July, 1998.
3.3(14) Amended and Restated Bylaws of Registrant, dated June 6,
1996.
3.4(1) Amended and Restated Bylaws of Registrant, dated July, 1998.
3.5(16) Certificate of Retirement of Series of Preferred Stock.
4.1(14) Stockholder Agreement dated June 25, 1998.
10.1(16) 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.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
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.
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.*
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
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(17) 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.
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(17) Letter Agreement between Registrant and MMC Technology dated
May 18, 1998.+
</TABLE>
81
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
10.69(16) 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(16) Letter Agreement between Hyundai Electronics America and
Registrant dated January 19, 1999.
21.1(14) List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- ---------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
(1) Incorporated by reference to exhibits to 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 S-3 filed December 21, 1998.
(17) Incorporated by reference to exhibits of Form 8-K filed January 20, 1999.
82
<PAGE> 83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milpitas, State of California, on the 23rd day of March, 1999.
MAXTOR CORPORATION
(Registrant)
By: /s/ MICHAEL R. CANNON
------------------------------------
Michael R. Cannon
President, Chief Executive
Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL R. CANNON President, Chief Executive March 23, 1999
- ----------------------------------------------------- Officer, and Director
Michael R. Cannon
/s/ PAUL J. TUFANO Senior Vice President, Finance, March 23, 1999
- ----------------------------------------------------- Chief Financial Officer and
Paul J. Tufano Principal Accounting Officer
/s/ CHONG SUP PARK Chairman of the Board March 23, 1999
- -----------------------------------------------------
Chong Sup Park
/s/ CHARLES F. CHRIST Director March 23, 1999
- -----------------------------------------------------
Charles F. Christ
/s/ THOMAS L. CHUN Director March 23, 1999
- -----------------------------------------------------
Thomas L. Chun
/s/ CHANG SEE CHUNG Director March 23, 1999
- -----------------------------------------------------
Chang See Chung
/s/ CHARLES HILL Director March 23, 1999
- -----------------------------------------------------
Charles Hill
/s/ Y. H. KIM Director March 23, 1999
- -----------------------------------------------------
Y. H. Kim
/s/ PHILIP S. PAUL Director March 23, 1999
- -----------------------------------------------------
Philip S. Paul
</TABLE>
83
<PAGE> 84
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.
84
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of
Registrant, dated June 6, 1996.
3.2(14) Amended and Restated Certificate of Incorporation of
Registrant, dated July, 1998.
3.3(14) Amended and Restated Bylaws of Registrant, dated June 6,
1996.
3.4(1) Amended and Restated Bylaws of Registrant, dated July, 1998.
3.5(16) Certificate of Retirement of Series of Preferred Stock.
4.1(14) Stockholder Agreement dated June 25, 1998.
10.1(16) 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.
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.
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ------------------------------------------------------------
<C> <S>
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.
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.
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ------------------------------------------------------------
<C> <S>
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(17) 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.
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(17) Letter Agreement between Registrant and MMC Technology dated
May 18, 1998.+
10.69(16) 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(16) Letter Agreement between Hyundai Electronics America and
Registrant dated January 19, 1999.
21.1(14) List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- ------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- ---------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
(1) Incorporated by reference to exhibits to 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 S-3 filed December 21, 1998.
(17) Incorporated by reference to exhibits of Form 8-K filed January 20, 1999.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-08181 and 333-61011) of Maxtor Corporation
of our report dated January 21, 1999 appearing on page 59 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> DEC-26-1998
<CASH> 214,126
<SECURITIES> 13,503
<RECEIVABLES> 326,167
<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, Selling, General
and Administrative costs of $75,819 and stock compensation expense of $12,088.
</FN>
</TABLE>
