<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JULY 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-14016
MAXTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0123732
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 COTTONWOOD DRIVE, MILPITAS, CA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
5.75% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 1, 2012
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's common stock, $.01 par value
per share, held by nonaffiliates of the registrant was $233,528,205 on August
11, 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
conclusive determination for other purposes.
As of August 11, 1999, 104,556,419 shares of the registrant's Common Stock,
$.01 par value, were issued and outstanding.
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<PAGE> 2
MAXTOR CORPORATION
FORM 10-Q
JULY 3, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
-------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.................
Condensed Consolidated Balance Sheets -- July 3, 1999 and
December 26, 1998......................................... 3
Condensed Consolidated Statements of Operations -- Three
months and six months ended July 3, 1999, and June 27,
1998...................................................... 4
Condensed Consolidated Statements of Cash Flows -- Six
months ended July 3, 1999, and June 27, 1998.............. 5
Notes to Condensed Consolidated Financial Statements........ 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................. 10 - 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 5. Other Information........................................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signature Page........................................................ 26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAXTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JULY 3, DECEMBER 26,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 198,285 $214,126
Marketable securities..................................... 100,265 13,503
Accounts receivable, net of allowance of doubtful accounts
of $11,754 at July 3, 1999 and $8,409 at December 26,
1998................................................... 211,281 317,758
Inventories............................................... 177,863 153,192
Prepaid expenses and other................................ 38,546 45,198
--------- --------
Total current assets.............................. 726,240 743,777
Net property, plant and equipment........................... 150,359 108,290
Other assets................................................ 8,062 11,346
--------- --------
Total assets...................................... $ 884,661 $863,413
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings, including current portion of
long-term debt......................................... $ 5,004 $ 5,261
Accounts payable.......................................... 445,028 427,737
Accrued and other liabilities............................. 98,757 115,937
--------- --------
Total current liabilities......................... 548,789 548,935
Long-term debt due affiliate................................ -- 55,000
Long-term debt.............................................. 85,023 90,046
--------- --------
Total Liabilities................................. 633,812 693,981
Common Stock, $0.01 par value, 250,000,000 shares
authorized; 104,566,419 shares issued and outstanding at
July 3, 1999 and 94,293,499 shares issued and outstanding
at December 26, 1998...................................... 1,046 943
Additional paid-in capital.................................. 980,837 880,175
Accumulated deficit......................................... (755,647) (741,780)
Cumulative other comprehensive income -- unrealized gain on
investments in equity securities.......................... 24,613 30,094
--------- --------
Total stockholders' equity........................ 250,849 169,432
--------- --------
Total liabilities and stockholders' equity........ $ 884,661 $863,413
========= ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------
JULY 3, JUNE 27, JULY 3, JUNE 27.
1999 1998 1999 1998
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Total revenue........................... $ 524,588 $ 531,265 $ 1,206,178 $1,080,882
Total cost of revenue................... 508,251 468,789 1,103,428 956,151
------------ ----------- ------------ ----------
Gross profit....................... 16,337 62,476 102,750 124,731
Operating expenses:
Research and development.............. 48,585 36,724 95,425 70,096
Selling, general and administrative... 22,199 18,392 42,119 34,315
Stock compensation expenses........... 632 (4,788) 1,497 9,908
------------ ----------- ------------ ----------
Total operating expenses...... 71,416 50,328 139,041 114,319
------------ ----------- ------------ ----------
Income (loss) from operations........... (55,079) 12,148 (36,291) 10,412
Interest expense........................ (2,941) (8,768) (6,621) (17,536)
Interest and other income............... 3,523 2,125 8,420 2,399
Gain on sale of investments............. 22,125 -- 22,125 --
------------ ----------- ------------ ----------
Income (loss) before provision for
income taxes.......................... (32,372) 5,505 (12,367) (4,725)
Provision for (benefit from) income
taxes................................. (1,500) 89 1,500 178
------------ ----------- ------------ ----------
Net income (loss)....................... (30,872) 5,416 (13,867) (4,903)
Other comprehensive income:
Unrealized gain (loss) on investments
in equity securities:
Unrealized gain (loss) on
investments arising during
period........................... 8,028 (464) 16,644 8,660
Less: reclassification adjustment
for gain included in net loss.... (22,125) -- (22,125) --
------------ ----------- ------------ ----------
Comprehensive income (loss)............. $ (44,969) $ 4,952 $ (19,348) $ 3,757
============ =========== ============ ==========
Net income (loss) per share -- basic.... $ (0.30) $ 164.02 $ (0.14) $ (202.72)
Net income (loss) per
share -- diluted...................... $ (0.30) $ 0.12 $ (0.14) $ (202.72)
Shares used in per share calculation
-- basic............................. 103,046,181 33,020 100,979,476 24,186
-- diluted........................... 103,046,181 44,801,870 100,979,476 24,186
</TABLE>
See accompanying notes.
4
<PAGE> 5
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JULY 3, JUNE 27,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (13,867) $ (4,903)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 37,665 31,188
Stock compensation expenses............................... 1,697 9,908
Loss (gain) on sale of property, plant and equipment and
other assets........................................... (1,565) 1,049
Gain on sale of investment................................ (22,125) --
Change in assets and liabilities:
Accounts receivable.................................... 104,802 47,950
Inventories............................................ (24,671) (7,642)
Other current assets................................... 1,466 (5,492)
Accounts payable....................................... 17,291 69,446
Accrued and other liabilities.......................... (17,180) 1,476
--------- ---------
Net cash provided by operating activities............ 83,513 142,980
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment................ -- 3,041
Purchase of property, plant and equipment................... (79,693) (36,597)
Purchase of marketable securities........................... (87,022) --
Proceeds from sale of investments, net...................... 22,090 --
Other....................................................... (192) 8,528
--------- ---------
Net cash used in investing activities................ (144,817) (25,028)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, including short-term
borrowings................................................ -- 69,775
Principal payments of debt, including short-term
borrowings................................................ (55,280) (108,677)
Net payments under accounts receivable securitization....... -- (81,204)
Proceeds from issuance of common stock from public offering,
employee stock purchase plan and stock options
exercised................................................. 100,743 239
--------- ---------
Net cash provided by (used in) financing
activities.......................................... 45,463 (119,867)
--------- ---------
Net change in cash and cash equivalents..................... (15,841) (1,915)
Cash and cash equivalents at beginning of period............ 214,126 16,925
--------- ---------
Cash and cash equivalents at end of period.................. $ 198,285 $ 15,010
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 5,817 $ 10,031
Income taxes........................................... $ 84 $ 785
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property, plant and equipment financed by
accounts payable....................................... $ -- $ 11,792
Purchase of property, plant and equipment financed by
capital lease.......................................... $ -- $ 28
Increase (decrease) in receivable from an affiliates...... $ (1,675) $ 2,325
Retirement of debt in exchange for bond redemption........ $ 5,000 $ --
Increase (decrease) in unrealized gain on investments in
equity securities...................................... $ (5,481) $ 8,660
</TABLE>
See accompanying notes.
5
<PAGE> 6
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The consolidated
financial statements include the accounts of Maxtor Corporation (Maxtor or the
Company) and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. All adjustments of a normal
recurring nature which, in the opinion of management, are necessary for a fair
statement of the results for the interim periods have been made. It is
recommended that the interim financial statements be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for
the fiscal year ended December 26, 1998 incorporated in the Company's annual
report on Form 10-K. Interim results are not necessarily indicative of the
operating results expected for later quarters or the full fiscal year.
2. INVENTORIES
<TABLE>
<CAPTION>
JULY 3, DECEMBER 26,
1999 1998
-------- ------------
<S> <C> <C>
Inventories comprised (in thousands):
Raw materials............................................. $ 44,668 $ 51,680
Work-in-process........................................... 4,174 6,308
Finished goods............................................ 129,021 95,204
-------- --------
$177,863 $153,192
======== ========
</TABLE>
3. STOCKHOLDERS' EQUITY
In February 1999, the Company completed a secondary public offering of 7.8
million shares of the Company's common stock. The Company received net proceeds
of approximately $95.8 million from the offering, after deducting the
underwriting discounts and estimated expenses payable by the Company. A portion
of the proceeds from the secondary offering were used to prepay without penalty
outstanding aggregate principal indebtedness of $55.0 million owed to Hyundai
Electronics America under a subordinated note due July 31, 2001 (see Note 8).
In June 1999, the Board of Directors amended the Company's Amended and
Restated 1996 Stock Option Plan (the "Amended Option Plan"), subject to
stockholder approval, to (1) increase the maximum number of shares issuable
under the Amended Option Plan by 3,676,367 shares, to a total of 17,475,685
shares, and (2) permit the award of restricted stock grants. In connection
therewith, the Board of Directors granted a total of 1,680,000 shares of
restricted stock to certain executive officers and key employees under the
Amended Option Plan. Restricted stock awarded under this plan vests over three
years from the date of grant and is subject to forfeiture in the event of
termination of employment with the Company. 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.
In June 1999, the Board of Directors amended the Company's 1998 Stock
Purchase Plan (the "Purchase Plan"), subject to stockholder approval, to
increase the number of shares reserved under the Purchase Plan by 700,000 shares
to an aggregate total of 2,400,000 shares.
4. GAIN ON SALE OF INVESTMENTS
In April 1999, the Company sold a portion of its equity investment in
Celestica Inc. resulting in approximately $22.1 million gain, which was included
in gain on sale of investment for the quarter ended July 3, 1999.
6
<PAGE> 7
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. NET INCOME (LOSS) PER SHARE
In accordance with the disclosure requirements of Statements of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share", 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>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -----------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 1999 1998
------------ ----------- ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss)......................... $ (30,872) $ 5,416 $ (13,867) $ (4,903)
============ =========== ============ ========
Net income (loss) available to common
stockholders............................ $ (30,872) $ 5,416 $ (13,867) $ (4,903)
============ =========== ============ ========
DENOMINATOR
Basic weighted average common shares
outstanding............................. 103,046,181 33,020 100,979,476 24,186
Effect of dilutive securities:
Convertible preferred stock............. -- 44,029,850 -- --
Common stock options.................... -- 739,000 -- --
------------ ----------- ------------ --------
Diluted weighted average common shares.... 103,046,181 44,801,870 100,979,476 24,186
============ =========== ============ ========
Basic net income (loss) per share......... $ (0.30) $ 164.02 $ (0.14) $(202.72)
============ =========== ============ ========
Diluted net income (loss) per share....... $ (0.30) $ 0.12 $ (0.14) $(202.72)
============ =========== ============ ========
</TABLE>
The following securities and contingently issuable shares are excluded in
the calculation of diluted shares outstanding as their effects would be
antidilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 1999 1998
-------- -------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Convertible preferred stock..................... -- -- -- 44,029,850
Common stock options............................ 106,497 -- 1,731,804 475,795
</TABLE>
6. CONTINGENCIES
The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
Hyundai Electronics Industries Co. Ltd. ("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 (Hyundai Electronics America
("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.
7
<PAGE> 8
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In December 1996, the Company filed a complaint against StorMedia and
William Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado
state court seeking approximately $100 million in damages and alleging, among
other claims, breach of contract, breach of implied warranty of fitness and
fraud under the StorMedia Agreement (the "Colorado Suit"). This proceeding was
stayed pending resolution of the Federal Suit. The Federal Suit was permanently
dismissed early in February 1998. On February 24, 1998, StorMedia filed a new
complaint in a California state court for $206 million, alleging fraud and
deceit against the Original Defendants and negligent misrepresentation against
HEI and the Company (the "California Suit"). On May 18, 1998, the stay on the
Colorado Suit was lifted by the Colorado state court. The Company's motion to
dismiss, or in the alternative, stay the California Suit, is pending. On
September 9, 1998, the California Suit was stayed pending resolution of the
Colorado Suit. On October 11, 1998, StorMedia filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Act. This bankruptcy filing caused an
automatic stay of proceedings against StorMedia, including the Colorado Suit.
StorMedia has not prosecuted its claims against the Company since it filed for
bankruptcy protection.
The Company believes that it has valid defenses against the claims alleged
by StorMedia and intends to defend itself vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, the Company cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. The litigation could result in significant diversion of
time by the Company's technical personnel, as well as substantial expenditures
for future legal fees. After considering the nature of the claims and facts
relating to the litigation, including the results of preliminary discovery, the
Company's management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition or
results of operations. However, the results of these proceedings, including any
potential settlement, are uncertain and there can be no assurance that they will
not have a material adverse effect on the Company's business, financial position
and results of operations.
The Company has been sued in Federal Court in the Northern District of
California by Papst-Motoren GmbH and Papst Licensing (collectively "Papst").
Papst alleges that the Company is infringing on 15 patents purportedly owned by
Papst. The Company filed its Answer and Counterclaim on May 19, 1999, alleging
defenses of implied license, patent exhaustion, misuse, invalidity,
unenforceability and noninfringement, among others. The Company also filed a
motion to bifurcate for early discovery the license, exhaustion and misuse
defenses. At hearing on July 21, 1999, the Court stayed further action in the
case pending the outcome of a motion filed by Papst on July 13, 1999, seeking
coordination and transfer of this case with several other actions involving
Papst patents. This motion was filed with the Judicial Panel on Multidistrict
Litigation in Washington, D.C. On August 5, 1999, the Company filed its
opposition to the motion. No hearing date has been set in that proceeding. A
further status conference in the District Court is scheduled for October 27,
1999. 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.
This statement should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 26, 1998.
No amounts have been reserved in the accompanying consolidated financial
statements for any legal claims or actions.
7. RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
to current classifications.
8
<PAGE> 9
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. RELATED PARTY TRANSACTION
During the quarter ended April 3, 1999, the Company paid off $55.0 million
note payable to HEA and incurred $2.3 million of interest payment related to the
note (see Note 3). As of July 3, 1999, Maxtor has no outstanding indebtedness to
HEA.
The cost of revenue includes certain component parts purchased from MMC
Technology, Inc. ("MMC"), a wholly owned subsidiary of HEA, amounting to $41.1
million for the quarter ended July 3, 1999 and $79.3 million for the six months
ended July 3, 1999. The cost of component parts purchased from MMC was $33.6
million for the quarter ended June 27, 1998 and $61.2 million for the six months
ended June 27, 1998. The cost of revenue also includes certain component parts
purchased from HEI which to date have not been significant.
9. SUBSEQUENT EVENT
As of the date hereof, the Company has sold a portion of its investment in
Celestica Inc. resulting in approximately $9.0 million gain, which will be
included in gain on sale of investments for the quarter ending October 2, 1999.
9
<PAGE> 10
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 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations: "Results of Operations"; "Liquidity and
Capital Resources"; "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.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes included in Part I.
Financial Information, Item 1. Condensed Consolidated Financial Statements of
this report.
REVENUE AND GROSS PROFIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- --------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 CHANGE 1999 1998 CHANGE
------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(In millions) (Unaudited)
Total revenue.................... $524.6 $531.3 $ (6.7) $1,206.2 $1,080.9 $125.3
Gross profit..................... $ 16.3 $ 62.5 $(46.2) $ 102.8 $ 124.7 $(21.9)
Net Income (loss)................ $(30.9) $ 5.4 $(36.3) $ (13.9) $ (4.9) $ (9.0)
As a percentage of revenue:
Total revenue.................... 100.0% 100.0% 100.0% 100.0%
Gross profit..................... 3.1% 11.8% 8.5% 11.5%
Net Income (loss)................ -5.9% 1.0% -1.1% -0.5%
</TABLE>
Revenue
Total revenue for the second quarter of fiscal year 1999 decreased by 1.3%
compared to the same quarter in fiscal year 1998 primarily due to a significant
decrease in average unit prices, partially offset by an increase in total units
shipped during the second fiscal quarter 1999. Total shipments for the second
fiscal quarter 1999 was 5.0 million units, which was 1.2 million units or 32.5%
higher compared to the second fiscal quarter a year ago. Maxtor remains focused
on OEM customers. Revenue from the OEM channel for the quarter ended July 3,
1999 represented 83.9% of total revenue compared to 72.2% for the corresponding
quarter in 1998. Revenue from the distribution and retail channels represented
16.1% of total revenue for the second quarter in 1999 compared to 27.8% for the
same quarter in fiscal year 1998.
For the six months ended July 3, 1999, total revenue increased by 11.6%
compared to the six months ended June 27, 1998 primarily due to an increase in
unit shipments, and partially offset by the declining average unit prices.
Revenue and unit volume growth in the first six months of fiscal year 1999 is
attributable to better time to market performance, strengthening of the OEM
customer base and a continued trend to shipping higher capacity drives.
Gross profit
Gross profit as a percentage of revenue decreased to 3.1% in second quarter
of 1999 from 11.8% in the second quarter of 1998, and gross profit for the first
six months of 1999 declined to 8.5% compared to 11.5% for the same period a year
ago. The notable decrease in gross profit is due mainly to deterioration in
average unit selling prices throughout the first and second quarters of fiscal
year 1999. The rapid price erosion is
10
<PAGE> 11
partially offset by the increase in unit volumes and 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 designs, which led to improved manufacturing yields and lower component
costs. We expect to continue volume growth for the remainder of the fiscal year
based on the strength of the OEM portion of our business and the market
acceptance of our new products. However, we believe that the decline in average
selling prices that the entire hard disk drive industry is experiencing is
likely to continue and thus, worsen profitability in the near future.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 CHANGE 1999 1998 CHANGE
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(In millions) (Unaudited)
Research and development............... $48.6 $36.7 $11.9 $95.4 $70.1 $25.3
Selling, general and administrative.... $22.2 $18.4 $ 3.8 $42.1 $34.3 $ 7.8
Stock compensation expenses............ $ 0.6 $(4.8) $ 5.4 $ 1.5 $ 9.9 $(8.4)
As a percentage of revenue:
Research and development............... 9.3% 6.9% 7.9% 6.5%
Selling, general and administrative.... 4.2% 3.5% 3.5% 3.2%
Stock compensation expenses............ 0.1% -0.9% 0.1% 0.9%
</TABLE>
Research and Development (R&D)
R&D expense as a percentage of revenue increased to 9.3% for the second
quarter of 1999 compared to 6.9% for the same quarter in 1998. Similarly, R&D
expense for the six months ended July 3, 1999 as a percentage of revenue
increased to 7.9% compared to 6.5% for the same period a year ago. The absolute
dollar level of R&D expenditures during fiscal year 1999 increased significantly
due primarily to our efforts to develop new products for the desktop computer
market, including our efforts to transition from the magneto-resistive head
technology to the giant magneto-resistive head technology, as well as new market
segments. In March 1999, we announced our newest hard disk drive product, the
DiamondMax Plus 5120, which is our first product utilizing the giant
magneto-resistive (GMR) head technology. Most recently, in May 1999, we
introduced a second generation of our GMR head technology, the DiamondMax Plus
6800 series.
Selling, General and Administrative (SG&A)
Overall SG&A expense increased, in terms of absolute dollars and as a
percentage of revenue, both for the second quarter of 1999 and the first six
months of fiscal year 1999 when compared to the same periods of fiscal year
1998. The increase in absolute dollars is primarily attributable to the costs
associated with supporting Maxtor's higher sales volume as well as additional
expenses incurred for the Year 2000 implementation. As a result of controlled
marketing, general and administrative expenses, SG&A expense as a percentage of
revenue increased marginally over the same periods of fiscal year 1998.
Stock Compensation
In 1996 we adopted the 1996 Stock Option Plan (the 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.
These options, which were granted between May 1996 and October 1997, required
remeasurement of any intrinsic compensation element at each reporting date
determined by the difference between the estimated current fair value of our
stock and the exercise price of the options. In the first quarter of 1998, we
amended and restated the Plan to remove the variable features and all grants
subsequent to October 1997 have been subject to fixed terms. In the second
quarter of 1998, we offered and re-issued new fixed-award options in exchange
for options previously issued under variable terms, thereby eliminating the
requirement to remeasure these options in subsequent periods. In connection
therewith, we recorded compensation expense related to the difference between
the estimated fair market value of our stock as of March 28, 1998 and the stated
value of our options. Compensation cost was reflected in accordance with
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and
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Other Variable Stock Option or Award Plans." Accordingly, we recorded non-cash
compensation expense of $9.9 million in the first six months of 1998 and $1.5
million in the first six months of 1999. The remaining unrecognized compensation
element will be reflected in quarterly charges, decreasing sequentially through
the second quarter of 2001.
INTEREST EXPENSE, INTEREST INCOME AND GAIN ON SALE OF INVESTMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 CHANGE 1999 1998 CHANGE
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(In millions) (Unaudited)
Interest expense........................... $ (2.9) $(8.8) $ 5.9 $(6.6) $(17.5) $10.9
Interest and other income.................. $ 3.5 $ 2.1 $ 1.5 $ 8.4 $ 2.4 $ 6.0
Gain on sale of investment................. $ 22.1 $ -- $22.1 $22.1 $ -- $22.1
As a percentage of revenue:
Interest expense........................... -0.6% -1.7% -0.5% -1.6%
Interest and other income.................. 0.7% 0.4% 0.7% 0.2%
Gain on sale of investment................. 4.2% 0.0% 1.8% 0.0%
</TABLE>
Interest Expense
Interest expense as a percentage of revenue declined from 1.7% in the
second quarter of 1998 to 0.6% in the second quarter of 1999, and from 1.6% in
the first six months of 1998 to 0.5% in the first six months of 1999. In
absolute dollar terms, interest expense decreased by $5.9 million in the second
quarter of 1999 and decreased by $10.9 million for the first six months of 1999.
The decrease in interest expense in 1999 was due primarily to the retirement of
debt as a result of proceeds generated from our public offerings in July 1998
and February 1999. Our total short-term and long-term outstanding borrowings
were $350.5 million at June 27, 1998 compared to $90.0 million at July 3, 1999.
Interest and Other Income
Interest and other income in the second quarter of 1999 increased
significantly in both absolute dollar amount and as a percentage of revenue when
compared to the second quarter of 1998. Additionally, interest and other income
for the first six months of 1999 also improved over the same period a year ago.
The increase was primarily due to the increase in total cash and cash
equivalents and marketable securities, which were generated from our public
offerings in July 1998 and February 1999. Our total cash and cash equivalents
and marketable securities were $15.0 million at July 3, 1998 compared to $298.6
million at July 3, 1999.
Gain on Sale of Investment
In April 1999, we sold a portion of our equity investment in Celestica Inc.
resulting in approximately $22.1 million gain. There was no such transaction
during the first six months of fiscal year 1998.
Provision for income taxes
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1999 1998 CHANGE 1999 1998 CHANGE
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(In millions) (Unaudited)
Income (loss) before provision for income
taxes................................... $(32.4) $5.5 $(37.9) $(12.4) $(4.7) $(7.7)
Provision for income taxes................ $ (1.5) $0.1 $ (1.6) $ 1.5 $ 0.2 $ 1.3
</TABLE>
The provision for income taxes consists primarily of federal alternative
minimum tax and foreign taxes. Due to our net operating losses (NOL), NOL
carryforwards and favorable tax status in Singapore, we have not incurred any
significant foreign, U.S. federal, state or local income taxes for prior fiscal
periods.
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<PAGE> 13
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. Additionally, we have formed a Year 2000 Program 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. As of June 30, 1999, Maxtor believes it is
Year 2000 ready for all of our "Mission Critical" functional operations.
Although there can be no assurance that the process will address all the Year
2000 issues, our confidence is high that at this time we have adequately
addressed all areas within Maxtor that could cause a potential business
interruption.
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 and necessary modifications of
our human resources and payroll processing systems. As of July 1, 1999 our human
resources and payroll processing systems are Year 2000 compliant. We have also
completed the assessment, resolution and test of our factory information systems
and supplier just in time delivery systems and we are confident that these
systems will function correctly in the next century.
Networking Systems. In a recent corporate level business decision, we have
concluded that instead of upgrading our current Banyan Vines based networking
system, it would be much more beneficial to us if we implemented NT-servers and
Microsoft Exchange Mailman System. The decision has been made to go
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<PAGE> 14
forward with the NT-server implementation now, in order to avoid impacting
critical development programs at a later time. The current outlook of the
NT-server implementation schedule is for completion by September 30, 1999. The
NT-server network is Y2K compliant.
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 have completed the assessment of our non-information technology
systems to determine the level of risk of business interruption associated with
a failure of each system and prioritized our resolution activities. Our
Contingency Plans reflect the priorities and provide precise instructions for
correcting problems in the event they need to be activated.
Vendors and Suppliers. Our vendors and suppliers include the sources of
materials used in our hard disk drives, the JIT (Just In Time) and forward
carrier logistics operations, 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. On site assessments of our high risk
material and logistics suplliers have been completed. The Maxtor Year 2000
Program Office has created an extensive repository of detailed data and
information collected from our inventory and remediation activities as well as
our supplier assessments. Assessments 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.
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 $2.5 million and incur expenses of approximately $4.0 million in
fiscal 1999 in connection with the resolution of our Year 2000 issues. During
the first six months ended July 3, 1999, we incurred approximately $1.0 million
in capital expenditures and $2.1 million in expenses related to 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
- any failure to develop and implement adequate fall-back, work around or
other contingency plans in the event that difficulties or delays arise.
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<PAGE> 15
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
are being developed in connection with the assessment and resolution of the
risks identified. As a result of changes to our business environment, we expect
that these plans will be updated from time to time to reflect the current state
of the business. These plans cover risks associated with Maxtor internal
operations, as well as any material and service shortages or logistics related
delays, which we identified as potential occurrences as a result of our on site
supplier assessments. 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 July 3, 1999, we had $ 298.6 million in cash, cash equivalents and
marketable securities as compared to $227.6 million at December 26, 1998. In
February 1999, we completed an underwritten secondary public offering of
7,800,000 newly-issued shares of our common stock and received $95.8 million,
net of offering costs and expenses.
Operating activities provided net cash of $83.5 million for six months
ended July 3, 1999. The cash provided from operating activities was principally
generated from collection of accounts receivable, increase in accounts payable,
and adjustment of other non-cash charges, which was partially offset by the
increase in inventory and a decrease in accrued expenses. We used $144.8 million
in investing activities during the first six months of 1999, principally for the
purchase of marketable securities and property, plant and equipment, partially
offset by proceeds from sale of investment. During the six months ended July 3,
1999, we reduced short and long-term debt by $60.0 million using approximately
$55.0 million of the proceeds from our February 1999 public offering and cash
from operations.
As of July 3, 1999, our outstanding debt comprised primarily $90.0 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.
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 July 3, 1999, $82.0
million of accounts receivable was securitized under the program and excluded
from our accounts receivable balance.
We believe our existing capital resources, 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. During 1999, capital
expenditures are expected to be between approximately $125.0 million and $130.0
million, to be used principally for adding manufacturing capacity and
implementing new and updating existing information technology systems. We intend
to seek financing arrangements, including a line of credit, to fund our future
capacity expansion plans, as necessary. However, our ability to generate cash
will depend on, among other things, demand in the desktop hard disk drive market
and pricing conditions. If we need additional capital, there can be no assurance
that such additional financing can be
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<PAGE> 16
obtained, or, if obtained, that it will be available on satisfactory terms. See
discussion below under the heading "Certain Factors Affecting Future
Performance".
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $755.6 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.
We also had a net loss of $30.9 million for the quarter ended July 3, 1999 due
primarily to a significant decrease in average unit selling prices. However, we
believe that the decline in average selling prices that the entire hard disk
drive industry is experiencing is likely to continue and thus, worsen
profitability in the near future.
OUR AVERAGE SELLING PRICES ARE DECLINING
We anticipate that average selling prices in the hard disk drive industry
will continue to decline for the foreseeable future. The average selling price
of a hard disk drive rapidly declines over its commercial life due to
technological enhancement, productivity improvement, and also increase in
industry supply. 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 competitors lower prices to absorb excess capacity, liquidate
excess inventories, restructure or attempt to gain market share. These factors
make it very challenging to achieve and maintain profitability and revenue
growth in the hard disk drive industry.
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.
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Although our current products are designed for the largest segment of the
hard disk drive market, the desktop computer market, demand may shift to other
market segments over time. We also believe that to remain a significant supplier
of hard disk drives to major manufacturers of personal computers, we will need
to offer a broader range of hard disk drive products to our customers.
Therefore, we will need to develop and manufacture new products that address
additional hard disk drive market segments and emerging technologies to remain
competitive in the hard disk drive industry. Examples of potentially important
market segments that our current products are not designed to address include:
- the client-server market;
- lower cost, lower performance personal computer systems (typically below
$699); and
- laptop personal computers.
To specifically address these or additional market segments, we would have to
reengineer some of our existing technology and develop new technology. Certain
of our competitors have significant advantages over us in one or more of these
and other potentially significant new or growing market segments. Any failure by
us to successfully develop and introduce new products to address specifically
these additional market segments could have a material adverse effect on our
business, financial condition and results of operations.
A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS
We sell most of our products to a limited number of customers. During the
six months ended July 3, 1999, two customers, Dell and IBM, accounted for
approximately 26% and 10%, respectively, of our revenue, and our top ten
customers accounted for approximately 69% of our revenue. During the six months
ended June 27, 1998, two customers, Dell and IBM, accounted for approximately
27% and 17%, respectively, of our revenue, and our top ten customers accounted
for approximately 74% 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 quarterly results may not be indicative of our 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;
- the average unit selling prices of our 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;
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<PAGE> 18
- our customers canceling, rescheduling or deferring significant orders for
our products, particularly in anticipation of new products or
enhancements from us or our competitors;
- the ability of certain of our distribution and retail customers to return
unsold products for credit;
- the ability of certain of our distribution and retail customers to
receive lower prices retroactively on their inventory of our products
when we lower prices on our products;
- our ability to purchase enough components and raw materials at
competitive prices which allow us to make a profit;
- the availability of adequate capital resources;
- increases in research and development expenditures, particularly as a
percentage of revenue, required to maintain our competitive position;
- changes in our strategy;
- personnel changes; and
- other general economic and competitive factors.
Many of our operating expenses are relatively fixed and difficult to reduce
or modify. As a result, the fixed nature of our operating expenses will magnify
any adverse effect of a decrease in revenue on our results of operations.
As a result of these and other factors, we believe that period to period
comparisons of our historical results of operations are not a good
predictoroperations are not good predictors of our future performance. If our
future operating results are below the expectations of stock market analysts,
our stock price may decline.
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
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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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
our customers and us 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 products. We have
decided not to pursue optically-assisted recording technologies at this time.
Our inability to introduce or achieve volume production of new competitive
products, (regardless of whether they include giant magneto-resistive head
technology) on a timely and cost-effective basis has in the past and in the
future could have a material adverse effect on our business, financial condition
and results of operations.
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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 OUR KEY PERSONNEL
Our success depends upon the continued contributions of our key employees,
many of whom would be extremely difficult to replace. We also do not have key
person life insurance on any of our personnel. 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. There
is no guarantee that we will be successful in retaining our key employees. 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.
WE HAVE LIMITED MANUFACTURING FACILITIES, WHICH MAY FAIL TO MEET OUR FUTURE
MANUFACTURING REQUIREMENTS AND WHICH MAY BE DAMAGED BY NATURAL DISASTERS OR
OTHER EVENTS
Our volume manufacturing operations currently are based in two facilities
in Singapore. A fire, flood, earthquake or other disaster or condition affecting
either or both of our facilities could have a material adverse effect on our
business, financial condition and results of operations. Although we have taken
steps to ensure that manufacturing facilities will be available, our inability
to fit-up our facilities to meet our customers' demands in a timely manner could
limit our growth and could have a material adverse effect on our business,
financial condition and results of operations. Additionally, the development of
excess manufacturing capacity 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;
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- the timing and size of business or technology acquisitions; and
- the timing of introductions of new products and enhancements to our
existing products.
We may issue additional equity to raise capital. Any future equity
financing will decrease existing stockholders' percentage equity ownership and
may, depending on the price at which the equity is sold, result in significant
economic dilution to such stockholders. Furthermore, our board of directors is
authorized under our charter documents to issue preferred stock with rights,
preferences or privileges senior to those of our common stock without
stockholder approval.
While we currently do not have a revolving credit facility, it is our goal
to obtain one in the near future. However, we believe that current market
conditions for such facilities are not as favorable as they have been at certain
times in the past, that for various reasons the number of potential lenders
actively providing credit facilities to companies in the data storage industry
has decreased recently, and that the terms on which the remaining potential
lenders are willing to offer such facilities, in many cases, are restrictive
and/or costly. Consequently, the terms and conditions under which we might
obtain such a facility are uncertain. Any failure to obtain adequate credit
facilities on acceptable terms could have a material and adverse effect on our
business, financial condition and results of operations.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; WE FACE RISK OF THIRD PARTY
CLAIMS OF INFRINGEMENT
We have patent protection on some of our technology. We may not receive
patents for our current or future patent applications, and any patents that we
have or that are issued to us may be invalidated, circumvented or challenged.
Moreover, the rights granted under any such 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.
We have been sued by Papst-Motoren GmbH and Papst Licensing (collectively
"Papst") claiming infringement of a number of hard disk drive motor patents. The
lawsuit is 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. The patents in question relate to motors that we
purchase from motor vendors and the use of such motors in hard disk drives. We
filed our Answer and Counterclaim on May 19, 1999, alleging defenses of implied
license, patent exhaustion, misuse, invalidity, unenforceability and
noninfringement, among others. We also filed a motion to bifurcate for early
discovery the license, exhaustion and misuse defenses. At hearing on July 21,
1999, the Court stayed further action in the case pending the outcome of a
motion filed by Papst on July 13, 1999, seeking coordination and transfer of
this case with several other actions involving Papst patents. This motion was
filed with the Judicial Panel on Multidistrict Litigation in Washington, D.C. On
August 5, 1999, we filed our opposition to the motion. No hearing date has been
set in that proceeding. A further status conference in the District Court is
scheduled for October 27, 1999.While
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<PAGE> 22
we believe that our defenses to the Papst claim are valid, 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 we will be able to successfully defend ourselves against any
such lawsuit. A favorable outcome for Papst in the lawsuit could result in the
issuance of an injunction against us or our products and/or the payment of
monetary damages equal to a reasonable royalty or recovered lost profits or, in
the case of a finding of a willful infringement, treble damages and could have a
material adverse effect on our business, financial condition and results of
operations.
WE ARE DEPENDENT ON OUR INTERNATIONAL OPERATIONS; WE FACE RISKS FROM OUR
INTERNATIONAL SALES
We conduct most of our manufacturing and testing operations and purchase a
substantial portion of our key parts outside the U.S. We also sell a significant
portion of products to foreign distributors and retailers.
Our dependence on revenue from international sales and our need to manage
international operations each 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 $41.8
million as of July 3, 1999 and $26.2 million as of June 27, 1998. 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.
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<PAGE> 23
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE
Our stock price and the number of shares traded each day have 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.
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 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.
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PART II. OTHER INFORMATION
ITEM 1. 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
Hyundai Electronics Industries Co. Ltd. (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 (Hyundai Electronics America (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 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 sued in the United States District Court for the
Northern District of California by Papst-Motoren GmbH and Papst Licensing
(collectively "Papst"). Papst alleges that the Company is infringing on 15
patents purportedly owned by Papst. The Company filed its Answer and
Counterclaim on May 19, 1999, alleging defenses of implied license, patent
exhaustion, misuse, invalidity, unenforceability and noninfringement, among
others. The Company also filed a motion to bifurcate for early discovery the
license, exhaustion and misuse defenses. At hearing on July 21, 1999, the Court
stayed further action in the case pending the outcome of a motion filed by Papst
on July 13, 1999, seeking coordination and transfer of this case with several
other actions involving Papst patents. This motion was filed with the Judicial
Panel on Multidistrict Litigation in Washington, D.C. On August 5, 1999, the
Company filed its opposition to the motion. No hearing date has been set in that
proceeding. A further status conference in the District Court is
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scheduled for October 27, 1999. 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. This statement should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 26, 1998. No
amounts have been reserved in the accompanying consolidated financial statements
for any legal claims or actions.
ITEM 5. OTHER INFORMATION.
The net proceeds to Maxtor from the sale of 49,731,225 shares of Maxtor
common stock in our initial public offering (Registration Statement No.
333-56099), effective July 30, 1998, including the underwriter's exercise of
their overallotment on August 14, 1998, were approximately $328.8 million after
deducting underwriting discounts and estimated offering expenses payable by
Maxtor.
From the date of the closing of the initial public offering through April
3, 1999, we applied the net proceeds as follows: approximately $200.0 million
was used to pay certain outstanding indebtedness under certain credit facilities
due to various banks; approximately $128.8 million was used for general
corporate purposes.
The net proceeds to Maxtor from the sale of 7,800,000 shares of Maxtor
common stock in our secondary public offering (Registration Statement No.
333-69307), effective February 9, 1999, were approximately $95.8 million after
deducting underwriting discounts and estimated offering expenses payable by
Maxtor.
From the date of the closing of the secondary public offering through April
3, 1999, we applied the net proceeds as follows: $55.2 million was used to pay
outstanding principal indebtedness and accrued interest owing to Hyundai
Electronics America under a subordinated note due July 31, 2001; $40.6 million
was used for general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(See index to exhibits on page E-1 of this report.)
There were no reports filed on Form 8-K during the reporting six months
period ended July 3, 1999.
ITEMS 2, 3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
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.
MAXTOR CORPORATION
By /s/ PAUL J. TUFANO
------------------------------------
Senior Vice President, Finance,
Chief Financial Officer and
Principal Accounting Officer
Date: August 16, 1999
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<C> <S> <C>
10.169 Executive Retention Incentive Agreement between Michael R.
Cannon and Registrant dated June 23, 1999...................
10.170 Promissory Note between Michael R. Cannon and Registrant
dated June 23, 1999.........................................
27 Financial Data Schedule.....................................
</TABLE>
<PAGE> 1
EXHIBIT 10.169
EXECUTIVE RETENTION INCENTIVE AGREEMENT
This Executive Retention Agreement (the "Agreement") is made and entered
into as of June 23, 1999 (the "Effective Date"), by and between Maxtor
Corporation, a Delaware corporation (the "Company") and Michael R. Cannon
("Executive").
R E C I T A L S
A. Executive is the president and chief executive officer of the Company and
possesses valuable knowledge of the Company, its business and operations,
and the markets in which the Company competes.
B. The Company draws upon the knowledge, experience and advice of Executive
in order to manage its business for the benefit of the Company's
stockholders.
C. Executive and the Company have entered into a Retention Agreement dated
May 29, 1998 setting forth certain incentives for Executive to remain
employed with the Company (the "May 1998 Retention Agreement").
D. The Compensation Committee of the Board of Directors desires to supplement
Executive's retention arrangements so as to provide additional
compensation and benefits to the Executive to encourage Executive to
continue to devote his full attention and dedication to the Company and to
create additional incentives to continue his employment with the Company.
1. Loan.
(a) As of the Effective Date of this Agreement, the Company will
loan Executive the sum of Five Million ($5,000,000.00) (the "Loan"). Except as
otherwise provided in this Agreement, the Loan shall be subject to the terms and
conditions of the promissory note, attached hereto as Exhibit 1 (the "Promissory
Note").
(b) Notwithstanding any other provisions in the Promissory Note to
the contrary:
(i) In consideration of Executive's future services, on June
22, 2002, Executive's obligation to pay the then outstanding balance of the Loan
(including unpaid principal and accrued interest thereon) shall be forgiven and
the Promissory Note shall be canceled, provided Executive remains continuously
employed through such date;
(ii) Upon the occurrence of a termination of Executive's
employment by the Company for other than Cause, as that term is defined in the
May 1998 Retention Agreement, Executive's obligation to pay the then outstanding
balance of the Loan (including unpaid principal and accrued interest thereon)
shall be forgiven and the Promissory Note shall be canceled;
(iii) Upon the occurrence of a Termination Upon a Change of
Control, as that term is defined in the May 1998 Retention Agreement,
Executive's obligation to pay the
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<PAGE> 2
then outstanding balance of the Loan (including unpaid principal and accrued
interest thereon) shall be forgiven and the Promissory Note shall be canceled;
(iv) In the event Executive becomes Permanently Disabled, as
that term is defined in the May 1998 Retention Agreement, or dies, Executive's
obligation to pay the then outstanding balance of the loan (including unpaid
principal and accrued interest thereon) shall be forgiven and the Promissory
Note shall be canceled.
2. Payment of Taxes. All payments made to Executive under this Agreement
shall be subject to all applicable federal and state income, employment and
payroll taxes. At the time the Promissory Note is canceled or any payment
thereunder is forgiven, in whole or in part, or at any time thereafter as
requested by the Company, Executive hereby authorizes withholding from payroll
and any other amounts payable to him, and otherwise agrees to make adequate
provision for any sums required to satisfy the federal, state, local and foreign
tax withholding obligations of the Company, which may arise in connection with
such forgiveness or cancellation. Executive acknowledges that, notwithstanding
any other provision of the Agreement, no obligations under the Promissory Note
shall be forgiven or canceled unless the tax withholding obligations of the
Company are satisfied.
3. Parachute Payment. If due to the benefits provided under this
Agreement, Executive is subject to any excise tax due to characterization of any
amounts payable hereunder as excess parachute payments pursuant to Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code"), the Company
agrees to offer the Executive the option of (i) receiving the full parachute
payment subject to the excise tax, or (ii) receiving a reduced parachute payment
that would not be subject to the excise tax (which in some circumstances may
maximize the net benefit to Executive). Unless the Company and Executive
otherwise agree in writing, any calculation required under this Section 3 shall
be made in writing by independent public accountants agreed to by the Company
and Executive (the "Accountants"), whose calculation shall be conclusive and
binding upon Executive and the Company for all purposes. For purposes of
calculating the Executive's options under this Section 3 the Accountants may
rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company and Executive shall furnish to
the Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section 3 The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 3
4. Arbitration. Any claim, dispute or controversy arising out of this
Agreement, the interpretation, validity or enforceability of this Agreement or
the alleged breach thereof shall be submitted by the parties to binding
arbitration by the American Arbitration Association in Santa Clara County,
California or elsewhere by mutual agreement. The selection of the arbitrator and
the arbitration procedure shall be governed by the Commercial Arbitration Rules
of the American Arbitration Association. All costs and expenses of arbitration
or litigation, including but not limited to attorneys fees and other costs
reasonably incurred by the Executive, shall be paid by the Company. Judgment may
be entered on the award of the arbitration in any court having jurisdiction.
5. Interpretation. Executive and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California, without regard to such state's conflict of laws rules.
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<PAGE> 3
6. Conflict in Benefits. This Agreement and the Promissory Note shall
supersede all prior arrangements, whether written or oral, and understandings
regarding the Loan. This Agreement is not intended to and shall not affect,
limit or terminate the May 1998 Retention Agreement which is supplemented hereby
and which shall remain in full force and effect as supplemented hereby.
Notwithstanding any other provision in the May 1998 Retention Agreement to the
contrary, the benefits payable under the May 1998 Retention Agreement upon a
Termination Upon Change of Control shall NOT be reduced by any amount of the
Loan which may be forgiven upon a Termination Upon Change of Control. Moreover,
this Agreement is not intended to and shall not limit (i) any plans, programs,
or arrangements of the Company that are regularly made available to a
significant number of employees of the Company, (ii) the Company's 1998
Restricted Stock Plan, (iii) any agreement or arrangement with the Executive
that has been reduced to writing and which does not relate to the subject matter
hereof, (iv) any agreements or arrangements hereafter entered into by the
parties in writing, all of which shall remain in full force and effect in
accordance with the terms thereof. With respect to the Loan, this Agreement and
the Note are the entire agreement and no other documents, understanding or
discussion has been relied upon in entering this Agreement or the Note or
contain any term or condition of this Agreement or Note.
7. Successors and Assigns.
(a) Successors of the Company. The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession transaction constitutes a material breach
of this Agreement by the Company. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor or assign to its business
and/or assets as aforesaid which executes and delivers the agreement provided
for in this Section 7 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.
(b) Heirs of Executive. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.
8. Notices. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
if to the Company: Maxtor Corporation
2190 Miller Drive
Longmont, Colorado 80501
Attn: General Counsel
and if to the Executive at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
3
<PAGE> 4
9. Validity. If any one or more of the provisions (or any part thereof) of
this Agreement shall be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions (or any
part thereof) shall not in any way be affected or impaired thereby.
10. Modification. This Agreement may only be modified or amended by a
supplemental written agreement signed by Executive and the Company. Executive
has had the opportunity to consult counsel of Executive's own choosing prior to
entering into this Agreement and Note.
11. Ratification. The parties hereto ratify and reaffirm the May 1998
Retention Agreement and the Promissory Note dated June 23, 1999, both of which
are incorporated herein by reference.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year written below.
MAXTOR CORPORATION
Date: By: /s/ Glenn H. Stevens
----------- --------------------------------
Vice President, General Counsel
Title: and Secretary
--------------------------------
EXECUTIVE:
Date: /s/ Michael R. Cannon
----------- ---------------------------------------
Michael R. Cannon
Address for Notice:
- -------------------------------
- -------------------------------
- -------------------------------
4
<PAGE> 1
EXHIBIT 10.170
PROMISSORY NOTE
$5,000,000.00 Milpitas, California
June 23, 1999
The undersigned, Michael R. Cannon ("Borrower"), hereby unconditionally
promises to pay to the order of Maxtor Corporation, a Delaware corporation (the
"Lender"), the sum of Five Million Dollars ($5,000,000.00) plus interest, in
accordance with the terms of the Executive Retention Agreement by and between
Lender and Borrower effective June 23, 1999 (the "June 1999 Retention
Agreement").
The outstanding principal balance of this Note, together with all accrued
and unpaid interest hereon, shall be due and payable on June 22, 2002, or upon
termination for "Cause" or voluntary termination of employment for reasons other
than "Good Reason" as those terms are defined in the June 1999 Retention
Agreement. Interest shall accrue on unpaid principal from the date hereof until
maturity at a rate of 4.98%, compounded annually.
This Note may be prepaid, in whole or in part, at any time or from time to
time, without penalty or premium. Any prepayment of principal must be
accompanied by then accrued but unpaid interest. Interest shall cease to accrue
on amounts of principal so prepaid. Any prepayment of interest shall include all
interest accrued to the date of payment, but need not include any payment of
principal.
All payments of principal or interest shall be made in lawful money of the
United States of America to the Lender at the offices of the Lender, or at such
other address as the Lender shall specify to Borrower in writing. Any payment
shall be deemed made upon receipt by Lender.
Upon payment in full of all principal and interest payable hereunder, this
Note shall be surrendered to Borrower for cancellation.
Borrower waives its rights to impose any defense (other than payment),
set-off, counterclaim or cross-claim in any action brought on this Note.
Borrower waives presentment, demand for performance, notice of performance,
protest, notice of protest, and notice of dishonor.
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<PAGE> 2
If the indebtedness represented by this Note or any part hereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings, or if this Note is placed in the hands of attorneys for collection
after default, Borrower agrees to pay, in addition to the principal and interest
payable hereon, reasonable attorneys' and collection fees and costs.
This Note is being delivered in and shall be construed in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, Borrower has executed this Note as of the day and year
first above written.
/s/ Michael R. Cannon
----------------------------------
Michael R. Cannon
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> DEC-27-1999
<PERIOD-END> APR-03-1999
<CASH> 198,285
<SECURITIES> 100,265
<RECEIVABLES> 223,035
<ALLOWANCES> 11,754
<INVENTORY> 177,863
<CURRENT-ASSETS> 726,240
<PP&E> 386,410
<DEPRECIATION> 236,051
<TOTAL-ASSETS> 884,661
<CURRENT-LIABILITIES> 548,789
<BONDS> 90,000
0
0
<COMMON> 1,046
<OTHER-SE> 249,803<F1>
<TOTAL-LIABILITY-AND-EQUITY> 884,661
<SALES> 1,206,178
<TOTAL-REVENUES> 1,206,178
<CGS> 1,103,428
<TOTAL-COSTS> 1,103,428
<OTHER-EXPENSES> 139,041<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,621
<INCOME-PRETAX> (12,367)
<INCOME-TAX> 1,500
<INCOME-CONTINUING> (13,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,867)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
<FN>
<F1>OTHER SE INCLUDES ADDITIONAL PAID-IN CAPITAL OF $980,837 UNREALIZED GAIN ON
INVESTMENTS IN EQUITY SECURITIES OF $24,613, AND ACCUMULATED DEFICIT OF
$755,647.
<F2>OTHER EXPENSES INCLUDE RESEARCH AND DEVELOPMENT OF $70,096 AND SELLING, GENERAL
AND ADMINISTRATIVE COSTS OF $42,119, AND STOCK COMPENSATION EXPENSE OF $1,497.
</FN>
</TABLE>
