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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
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)
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<S> <C>
DELAWARE 77-0123732
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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510 COTTONWOOD DRIVE, MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
5.75% CONVERTIBLE SUBORDINATED DEBENTURES, DUE MARCH 1, 2012
Indicate by 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. [ ]
The aggregate market value of the registrant's common stock, $.01 par value
per share, held by nonaffiliates of the registrant's common stock was
$566,218,397 on March 6, 2000 (based on the closing sales price of the
registrant's common stock on that date). Shares of the registrant's common stock
held by each officer and director and each person who owns more than 5% or more
of the outstanding common stock of the registrant have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes. As of
March 6, 2000, 114,393,301 shares of the registrant's Common Stock, $.01 par
value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
(the "Proxy Statement"), to be filed within 120 days of the end of the fiscal
year ended January 1, 2000, are incorporated by reference in Part III hereof.
Except with respect to information specifically incorporated by reference in
this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
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PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future, are forward-looking statements including
those discussed in Item 1, Business, "Products," "Marketing and Customers,"
"Manufacturing and Suppliers," "Research and Development," and "Competition;"
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Results of Operations," "Liquidity and Capital Resources" and
"Certain Factors Affecting Future Performance;" and elsewhere in this report. In
this report, the words "anticipate," "believe," "expect," "intend," "future" and
similar expressions also identify forward-looking statements. We make these
forward-looking statements based upon information available on the date hereof,
and we have no obligation to update any such forward-looking statements. Our
actual results could differ materially from those anticipated in this report as
a result of certain factors including, but not limited to, those set forth in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Affecting Future
Performance" and elsewhere in this report. Maxtor(R), DiamondMax(R), Formula
4(R) and MaxFax(R) are registered trademarks -- and No Quibble(R) is a
registered servicemark of Maxtor. The Maxtor logo, MaxAttach(TM) and
Reflect-It(TM) are trademarks of Maxtor. All other brand and company names and
trademarks appearing in this report are the property of their respective
holders.
We are a leading supplier of hard disk drive storage products for desktop
computer systems. Our DiamondMax product family consists of 3.5-inch hard disk
drives with storage capacities which range from 4.3 gigabytes to 60 gigabytes.
These products have high speed interfaces for greater data throughput, a robust
mechanical design for improved reliability, magneto-resistive head technology to
enable high recording density, and a digital signal processor electronic
architecture that, when combined, provide industry leading benchmark performance
and storage capacity to the personal computer marketplace. Our latest products,
announced March 13, 2000, are the DiamondMax VL 30 and Diamond Max 60, both 5400
rpm products. The DiamondMax VL 30 provides capacity of 7.5 gigabytes up to 30
gigabytes and provides cost-optimized storage for the Entry and Mainstream
segments of the market. The DiamondMax 60 provides up to 60 gigabytes of storage
for High end applications. These products add to our DiamondMax Plus 40,
announced in November, 1999, which is an award-winning 7200 rpm product
providing capacities ranging from 10 to 40 gigabytes for the Performance
segment. Our customers are desktop computer manufacturers, including Compaq,
Dell, IBM, Hewlett Packard and Apple; distributors, including Bell Micro and
Ingram; and retailers, including Best Buy, Comp USA, and Staples.
We formed Maxtor Network Systems Group ("MNSG") subsequent to our
acquisition of Creative Design Solutions, Inc. ("CDS") on September 10, 1999.
MNSG concentrates on products and offerings in or related to the Network
Attached Storage ("NAS") market segment. In October 1999, we announced
MaxAttach(TM), MNSG's first NAS product. In January 2000, we announced
MaxAttach(TM) 3000 desktop line of server appliances with enhanced features that
provide data protection (disk mirroring) and data management (disk spanning) at
storage capacities of 20, 40 and 80 GB. The MaxAttach products are designed to
enable the quick, easy, safe and cost-effective addition of storage to networks
in workgroups and small businesses.
COMPANY BACKGROUND
We were founded in 1982 and completed an initial public offering of common
stock in 1985. In the mid-1980's, we were a leading technology innovator in the
hard disk drive industry. As is true today, the hard disk drive industry during
the 1980's was intensely competitive and characterized by rapid technological
change, rapid rates of product and technology obsolescence, changing customer
requirements, dramatic shifts in market share and significant erosion of average
selling prices. In an effort to mitigate the risks associated with these
factors, we pursued all major product segments in the hard disk drive market,
utilizing multiple product families and technology platforms. This costly
strategy added significant complexity to the business, which
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caused us to delay or miss a number of key product introductions and ultimately
led to the deterioration of our overall financial condition. As a result of this
deterioration, we sold 40% of our outstanding common stock to Hyundai
Electronics Industries and its affiliates in 1994.
In early 1996, Hyundai Electronics America ("HEA") acquired all of the
remaining publicly held shares of our common stock as well as all of our common
stock then held by Hyundai Electronics Industries and its affiliates. Shortly
thereafter, HEA invested in renewed efforts to revitalize Maxtor. In July 1996,
we hired Michael R. Cannon, our current Chief Executive Officer and President
and a 20 year veteran of the hard drive industry, who had previously served in
senior management positions in IBM's systems storage division and at SyQuest
Technology and Control Data Corporation. With a view toward capturing business
at leading desktop computer manufacturers, Mr. Cannon identified four key areas
requiring improvement:
Corporate Leadership. To provide strong leadership and the required focus
on execution, we recruited seasoned, industry veterans for key senior management
positions. In addition to Mr. Cannon, key management positions added includes:
- Paul J. Tufano, our Senior Vice President, Finance, and Chief Financial
Officer, whose previous experience includes more than 17 years in a
variety of management positions at IBM; and
- K.H. Teh, our Vice President, Worldwide Manufacturing, whose previous
experience includes 20 years in a variety of manufacturing management
positions at Iomega, Quantum and SyQuest.
These senior managers joined Dr. Victor B. Jipson, our President, Network
Systems Group, who has been at Maxtor since December 1995 and was then our
Senior Vice President, Engineering, whose previous experience includes 16 years
with IBM in a variety of research, technical strategy, product strategy,
research and development, and general management positions. In addition, we
added personnel with significant industry experience to our engineering,
manufacturing, procurement, human resources, and sales and marketing
organizations.
Cost Competitiveness. Since 1996, we aggressively moved to reduce our cost
structure. We stopped using a hard disk drive manufacturing facility owned and
operated by Hyundai Electronics Industries in Korea and consolidated our volume
hard disk drive manufacturing facilities in Singapore. We also closed our sub-
assembly manufacturing facility in Thailand and sold our majority interest in
International Manufacturing Services, our former printed circuit board division,
to certain members of International Manufacturing Services management and
institutional investors. These actions helped reduce our workforce by
approximately 54% by October of 1996. We also removed layers of management and
implemented strict discretionary expense controls. In addition, we improved the
productivity of our research and development expenditures by simplifying our
technology and product roadmap to focus on desktop computer hard disk drives
using a single core technology platform.
Timely Introduction of New Products. Our new management team took a number
of steps designed to improve time-to-market introduction, time-to-volume
production, quality, performance and manufacturability of our products, and the
effectiveness and efficiency of our research and development expenditures. In
particular, we:
- simplified our product and technology roadmap by canceling our 5.25-inch
and 2.5-inch programs;
- focused our research and development efforts on a single core technology
platform that included magneto-resistive head technology and a digital
signal processor-based electronic architecture, which we believe are
capable of supporting rapid extension of our product and technology
roadmap; and
- restructured our product development process by creating an advanced
technology group, which is responsible for assessing new technology
viability, developing early prototypes and exploiting common design
architectures, and by strengthening our existing product design teams,
which are responsible for taking the building blocks provided by the
advanced technology group and designing high performance, highly
manufacturable, cost-effective products which meet our customer
specifications.
Customer/Channel Mix. Recognizing that the vast majority of the growth in
the desktop computer market was being captured by a limited number of leading
personal computer manufacturers, our new
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management simplified our sales channels and focused our sales and marketing
resources on establishing Maxtor as a preferred supplier to leading desktop
computer manufacturers and a limited number of leading distributors and
retailers. To improve overall customer satisfaction and capture accounts with
leading desktop computer manufacturers, we initiated a number of actions to
improve product quality and created dedicated account support teams for our
major desktop computer manufacturer clients, emphasizing senior management
involvement in developing and maintaining customer relationships.
TURNAROUND RESULTS
As a result of the changes described above, our performance improved
significantly during a period of severe fluctuations in the overall hard disk
drive market.
Timely Introduction of New Products. Our restructured manufacturing and
product development processes, as well as a simplified product and technology
roadmap, enabled us to complete one of the fastest transitions in the industry
from hard disk drives utilizing thin-film head technology to 100% use of
magneto-resistive head technology by the end of 1997. With our DiamondMax 2160,
2880 and 3400 products, we demonstrated significantly improved time-to-volume
manufacturing in the fourth quarter of 1997, second quarter of 1998 and the
third quarter of 1998 by producing 1.4, 1.3 and 2.8 million units of these
products, respectively, during their first full quarters of production. In the
first quarter of 1998, we established ourselves as a time-to-market entry leader
with our 2.8 gigabytes per disk hard drive, the DiamondMax 2880. In the second
quarter of 1998, we continued our trend of being a time-to-market leader with a
3.4 gigabyte hard disk drive, the DiamondMax 3400, and the DiamondMax Plus 2500,
our first 7200 RPM product. Our time-to-market leadership continued in the
fourth quarter of 1998 with the introduction of our 4.3 gigabyte per disk hard
disk drive, the DiamondMax 4320, and in the first quarter of 1999 with our
DiamondMax Plus 5120, our second generation 7200 RPM drive. These improvements,
in turn, enabled us to increase our units shipped per quarter from 1.3 million
units during the first quarter of 1997 to 6.8 million units in the fourth
quarter of 1999.
Customer/Channel Mix. Our new focus on leading desktop computer
manufacturers led to significant improvements in our customer/channel mix. For
example, our revenue from shipments to Compaq, Dell and IBM has increased from
approximately 3.8% of total revenue in the second quarter of 1996 to 26.3% of
our total revenue in the fourth quarter of 1999. We also became a leading
supplier of desktop hard disk drives to Dell in less than six months and were a
leading provider of desktop hard disk drives shipped to the domestic retail
channel during 1997. These cumulative changes have resulted in improved
financial results. We increased revenues by 69.1% and 3.2%, from $1,424.3
million in 1997 to $2,408.5 million and $2,486.1 million in 1998 and 1999,
respectively, with improvements in gross margin from 5.0% to 12.5% and 11.9% for
the same periods.
Cost Competitiveness. Our cost competitiveness initiatives led to
significant reduction of operating expenses. Our selling, general and
administrative expense as a percentage of revenue was among the lowest in the
industry for our 1998 and 1999 fiscal years.
INDUSTRY BACKGROUND
The Desktop Hard Disk Drive Market. According to International Data
Corporation ("IDC"), the desktop computer segment is the largest segment of the
worldwide personal computer market, accounting for approximately 82% of global
personal computer shipments in 1999. As a result, desktop computers were the
leading source of demand for hard disk drives, accounting for more than 75% of
all hard disk drive units shipped worldwide in 1999, according to IDC. The
demand for desktop computers and, therefore, computer hard disk drives,
continues to grow in part due to:
- continued improvements in desktop computing price to performance ratios,
including the emergence of the sub-$1,000 desktop computer;
- the rapid accumulation of data resulting from the digitization of
information previously stored in paper form;
- larger file sizes created by multimedia-intensive applications;
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- the exchange of increasing volumes of data among users across the
Internet and intranets with the proliferation of collaborative computing;
and
- increased demand for desktop computer upgrades as a result of Year 2000
compliance efforts.
Future demand growth for hard disk drives also may be driven by new and
emerging hard disk drive markets. In October 1999, IDC forecast that the
worldwide desktop computer segment of the hard disk drive market would grow from
approximately 129 million units in 1999 to 207 million units in 2003, reflecting
a compound annual growth rate of approximately 13.9%.
Hard Disk Drive Technology. The basic operation of a hard disk drive has
not changed materially since its introduction in the 1950's. To improve the
performance of hard disk drives, hard disk drive manufacturers have concentrated
their efforts on optimizing the performance of the various components of the
hard disk drive.
The main components of the hard disk drive are the hard disk assembly and
the printed circuit board. The head disk assembly includes the head, media
(disks), head positioning mechanism (actuator) and spin motor. These components
are contained in a hard base plate protective package in a contamination-free
environment. The printed circuit board includes custom integrated circuits, an
interface connector to the host computer and a power connector.
The head disk assembly is comprised of one or more disks positioned around
a spindle hub that rotates the disks by a spin motor. Disks are made of a smooth
substrate to which a thin coating of magnetic materials is applied. Each disk
has a head suspended directly above it, which can read data from or write data
to the spinning disk. The sensor element of the head, also known as the slider,
is getting progressively smaller, resulting in reduced material costs.
The integrated circuits on the printed circuit board typically include a
drive interface and a controller. The drive interface receives instructions from
the computer, while the controller directs the flow of data to or from the
disks, and controls the heads. The location of data on each disk is logically
maintained in tracks, divided into sectors. The computer sends instructions to
read or write data to the disks based on track and sector locations. Industry
standard interfaces are utilized to allow the disk drive to communicate with the
computer.
A key performance metric in the hard disk drive industry is "areal
density," which is the measure of stored bits per square inch on the recording
surface of a disk. An increase in areal density allows a hard disk drive
provider to decrease the price per megabyte stored by increasing overall storage
capacity per disk, thus reducing product costs through reduced component
requirements. During 1996 and 1997, certain hard disk drive providers began
transitioning to magneto-resistive heads. Prior to this transition, most hard
disk drives utilized thin-film inductive recording heads. Magneto-resistive
heads have discrete read and write structures which provide more signal than the
older thin-film inductive heads. This results in significantly higher areal
densities, which increases storage capacity per disk and improves manufacturing
margin and product reliability. Hard disk drive providers are evaluating or
implementing a number of technological innovations designed to further increase
hard disk drive performance and reduce product costs, including attempting to
simplify the electronic architecture by combining the traditional servo-control
functions of the digital signal processor-based electronic architecture and the
error recovery and interface management functions of traditional hard drive
microprocessors on a single integrated circuit. Moreover, to consistently
achieve timely introduction and rapid volume production of new products, some
hard disk drive providers are striving to simplify their product design
processes by focusing on creating extendible core technology platforms which
utilize common firmware and mechanical designs and re-use of manufacturing
tooling and application specific integrated circuits across various product
generations and product lines.
Hard Disk Drive Market Challenges. Personal computer manufacturers compete
in a consolidating market. The top ten personal computer manufacturers accounted
for greater than 50% of all personal computer units shipped during 1998 and
1999. These personal computer manufacturers use the quality, storage capacity
and performance characteristics of hard drives to select their hard disk drive
providers. Personal computer manufacturers typically seek to qualify three or
four providers for a given hard disk drive
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product generation. To qualify consistently with personal computer manufacturers
and thus succeed in the desktop hard drive industry, a hard disk drive provider
must consistently execute on its product development and manufacturing process
in order to be among the first-to-market introduction and first-to-volume
production at leading storage capacity per disk with competitive prices. Failure
to reach the market on time or to deliver timely volume production usually
results in significantly decreased gross margins due to rapidly declining
average selling prices and dramatic losses in market share. Successful
achievement of the performance parameters, however, is only part of the
competitive equation. As personal computer manufacturers seek to develop
successful business models, they are also requiring their hard disk drive
vendors to maintain high levels of quality to enable low cost of ownership and
adapt their inventory management models to be compatible with the emerging
build-to-order business model in the personal computer industry.
OUR SOLUTION
We have established ourselves as a leading provider of high quality, high
performance hard disk drives to major desktop computer manufacturers,
distributors and retailers. Our management team has extensive hard disk drive
industry experience across all functional areas. As a result, we have been able
to define and implement the key business processes necessary to fulfill the
needs of our customers. These processes focus on the efficient, timely and
cost-effective integration of leading-edge technology to create highly
manufacturable hard disk drives. Moreover, our senior management team vigorously
monitors these processes in an effort to ensure consistent execution and prompt
response to customer demands. We intend to strengthen our leadership position in
the desktop hard disk drive industry by consistently executing these fundamental
business processes.
OUR STRATEGY
We seek to be the dominant provider of hard disk drives to leading desktop
computer manufacturers, distributors and retailers. Since the fourth quarter of
1999, we have been broadening our business to the NAS market. Our strategy to
achieve this goal includes the following elements:
Effectively Integrate New Technology. In 1996, we overhauled our research
and development process by augmenting our traditional product development teams
with a new advanced technology group. The advanced technology group's purpose is
to monitor and evaluate advancements in hard disk drive technology for possible
integration into our future products. This group also works closely with our
product development teams and strategic component vendors to:
- obtain early access to the latest hard disk drive component technology;
- allow for flexibility in choosing state-of-the-art components; and
- ensure viability of new product technologies and components prior to
product design.
Through this process, we intend to continue to integrate new technologies
into our existing core technology platform and to strengthen our ability to
introduce high quality, highly manufacturable, high performance hard disk drive
products with industry leading time-to-volume production on a consistent basis.
Leverage Design Excellence. Our product development methodology reduces
risks associated with design changes by focusing on common firmware and
mechanical designs, and re-use of manufacturing tooling and application specific
integrated circuits. Through this process, we have created a technology
platform, which is used as the common core of each of our current hard disk
drive products and which we believe is extendible into products for new and
emerging hard disk drive market opportunities. To reduce the overall cost of
ownership of our hard disk drive products, we use a robust mechanical
architecture designed to reduce defects that result from customer mishandling
during installation. We also work closely with leading component suppliers in an
effort to ensure that adequate tolerances are designed into our products to
achieve high manufacturing yields and product quality. By utilizing this product
development methodology, we have successfully introduced and achieved timely
volume production of seven generations of magneto-resistive head hard disk
drives in less than two years.
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Capitalize on Flexible Manufacturing. Our Singapore manufacturing facility
utilizes a flexible cell-based process that enables us to:
- dedicate manufacturing cells to particular customers, thereby allowing us
to identify, isolate and remedy manufacturing defects quickly, resulting
in improved product quality, faster time-to-volume production and
improved overall customer satisfaction;
- simultaneously manufacture multiple product configurations;
- quickly reconfigure the facility to respond to customer change requests
and changes in product and customer mix;
- effectively adapt our inventory management model to the emerging
build-to-order business model employed by certain of our desktop computer
manufacturer customers; and
- add incremental capacity as needed at a relatively low cost.
This flexible cell-based process, when coupled with our product design
methodology, has enabled us to significantly improve time-to-volume production.
For example, we manufactured 2.8 million units of our DiamondMax 3400 in the
third quarter of 1998, the first full quarter of production.
Increase Market Share With Leading Desktop Computer Manufacturers. We
intend to continue to achieve leading time-to-volume production of high quality,
high performance hard disk drives to capture additional market share with
leading personal computer manufacturers. Our quarterly market share of the
desktop hard disk drive market in terms of units shipped increased from 5.6% in
the first quarter of 1997 to 18.7% in the fourth quarter of 1999, according to
IDC.
Maintain Customer Satisfaction. We believe we distinguish ourselves from
our competitors by focusing on ease of doing business and overall customer
satisfaction. For example, our "No Quibble" service program has been well
received by our customers. We also are devoting significant attention to total
supply chain management to align our business model with the evolving
build-to-order manufacturing business model of certain desktop computer
manufacturers. We use our flexible, cell-based manufacturing process coupled
with a just-in-time inventory model to rapidly respond to the changing needs of
our key desktop computer manufacturer customers. To further automate and improve
the efficiency of our total supply chain management, we have recently installed
a new enterprise resource planning system.
Broaden Product Portfolio. To capture higher margin opportunities, we
intend to leverage our existing technology platform and product development
methodology to develop hard disk drive products to meet the needs of desktop
computers, storage subsystems, consumer electronics, and other emerging storage
applications. To this end, we currently offer products with two rotational
speeds (5400 and 7200 rpm) with configurations from 1 through 4 disks. This
results in a product portfolio with the broadest range of performance and
capacity in the industry and allows us to target entry, mid-range, and high-end
applications in all of the above markets. The 3 and 4-platter designs have been
particularly beneficial to our profit margins and our strategic position as
competitors have suspended their development and introduction of these high
capacity products.
Additionally, on January 18, 2000 Maxtor announced the MaxAttach Desktop
2.0 line of server appliances with enhanced software features that include disk
mirroring and disk spanning at storage capacities of 20, 40 and 80 GB. These
products are designed to enable quick, easy, safe and cost-effective addition of
storage to networks in workgroups and small businesses. The new MaxAttach NAS
4000 line of rack mount server appliances broadens client support to include
UNIX and Linux in addition to Microsoft, and is slated for volume availability
in the second quarter of 2000. To address the expanding storage needs of larger
work groups, Internet service providers and departmental market segments, Maxtor
has announced its intention to introduce additional solutions in its extended
family of MaxAttach storage solutions during the first half of 2000. These will
include application-specific appliances as well as capacity increases to 240 GB.
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PRODUCT DEVELOPMENT/TECHNOLOGY
One of the most important changes undertaken as part of our turnaround was
the restructuring of our product development process to separate the enabling
technology development phase from the product design phase. In early 1996, we
suffered from poor product quality and performance, and products that were late
to market. This contrasts sharply with today as we now enjoy strong customer
relationships based on excellent product quality, time-to-volume production
leadership and industry-leading performance.
Enabling Technology Development Phase. The advanced technology group is
responsible for the enabling technology development phase, including:
- working closely with our product design teams and strategic component
suppliers to create a variety of state-of-the-art technologies to be used
in our future products;
- developing early prototypes to ascertain the stability and
manufacturability of our planned products; and
- analyzing the latest head, disk, channel, motor and application specific
integrated circuit technologies and designs to broaden and strengthen our
technology platform.
This group also focuses on leveraging our current proven technology
platform by re-using as much electronic and mechanical technology as possible in
each successive product generation. In an effort to deliver the highest product
quality possible, the advanced technology group begins its review of emerging
technologies as early as possible, normally 18 months before such technologies
might be included in our products.
Product Design Phase. The creation of the advanced technology group as part
of our turnaround freed our existing product design group from the
responsibility of assessing the viability of new and emerging technologies and
allowed it to concentrate on improving product performance, robustness,
manufacturability, quality and materials costs. The product design group also is
responsible, in part, for executing our new product introduction process. This
process is a highly disciplined review procedure designed to ensure that new
product designs meet clearly specified criteria in terms of yield, scrap,
quality, productivity and production ramp rates prior to release into volume
production.
PRODUCTS
We currently provide hard disk drives primarily for the desktop computer
market, with applications beginning to emerge in consumer electronics, network
attached storage (supporting MNSG), and storage subsystems. Our DiamondMax
product family consists of 3.5-inch hard disk drives with storage capacities
ranging from 4.3 to 60 gigabytes. Our latest products, announced March 13, 2000,
are the DiamondMax VL 30 and DiamondMax 60, both 5400 rpm products. The
DiamondMax VL 30 provides capacity of 7.5 gigabytes up to 30 gigabytes and
provides cost-optimized storage for the Entry and Mainstream segments of the
market. The DiamondMax 60 provides up to 60 gigabytes of storage for High End
applications. These products add to our DiamondMax Plus 40, announced in
November, 1999, which is an award-winning 7200 rpm product providing capacities
ranging from 10 to 40 gigabytes for the Performance segment.
The table below sets forth key parameters for our fourteen generations of
DiamondMax products dating from 1998:
<TABLE>
<CAPTION>
DIAMONDMAX MODELS
--------------------------------------------------------------------------------------------------
2880* 3400* PLUS 2500* 4320* PLUS 5120* 6800* PLUS 6800* VL17 36
------- ------- ---------- ------- ---------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Max. Capacity (GB)........... 11.52 13.6 10.0 17.2 20.4 27.3 27.3 17.4 36.5
Capacity per Disk (GB)....... 2.88 3.40 2.50 4.32 5.1 6.8 6.8 9.1 9.1
Rotational Speed (rpm)....... 5400 5400 7200 5400 7200 5400 7200 5400 5400
First Shipment Date.......... Mar. 98 Jun. 98 Jun. 98 Oct. 98 Mar. 99 Jun. 99 July 99 Sept. 99 Sept. 99
</TABLE>
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* No longer in volume production.
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<TABLE>
<CAPTION>
DIAMONDMAX MODELS
---------------------------------------------------
VL20 40 PLUS 40 VL30 60
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Max. Capacity (GB).......................................... 20.4 40.9 40.9 30.7 61.4
Capacity per disk (GB)...................................... 10.2 10.2 10.2 15.3 15.3
Rotational Speed (rpm)...................................... 5400 5400 7200 5400 5400
First Shipment Date......................................... Nov. 99 Nov. 99 Jan. 00 Apr. 00 Apr. 00
</TABLE>
The table below sets forth key parameters for our current MNSG Products:
<TABLE>
<CAPTION>
MNSG PRODUCTS
--------------------------------------------------
MAXATTACH NAS 3000 NAS 4000
-------------- -------------- --------------
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Maximum Capacity(GB)........................ 72 80 160
Client Support.............................. Microsoft Microsoft Microsoft
UNIX/Linux
Form Factor................................. Desktop Desktop Rack Mount
First Shipment Date......................... 3rd Quarter 99 1st Quarter 00 2nd Quarter 00
</TABLE>
Our DiamondMax product family has won a number of recent editorial and
industry awards including:
<TABLE>
<S> <C>
PC World -- Italy Best Hard Drive -- DiamondMax 2160 -- January 1999
PC Intern -- Germany PC Intern Test Winner and Recommendation -- DiamondMax Plus
2500 -- February 1999
Windows Magazine -- Recommended List DiamondMax 4320 -- March 1999
USA
Computer Reseller CRN Test Center Recommended for DiamondMax 6800 -- April
News -- USA 1999
CHIP -- Germany Top Ten Hard Drives -- DiamondMax Plus 2500 -- April 1999
PC ACHAT -- France Editor's Choice -- DiamondMax Plus 5120 -- May 1999
PC Professionell -- Editor's Choice -- DiamondMax Plus 5120 -- May 1999
Germany
PC Format -- UK PC Format Gold Award -- DiamondMax Plus 5120 -- May 1999
Computer Video -- UK Recommended Award -- DiamondMax Plus 5120 -- May 1999
Windows Magazine -- WIN 100 for DiamondMax 4320 -- JUNE 1999
USA
Windows Magazine -- Win 100 for DiamondMax Plus 2500 -- June 1999
USA
PC Format -- Spain PC Format Award -- DiamondMax Plus 5120 -- June 1999
Computing -- Spain PC Actual Recommended -- DiamondMax Plus 5120 -- June 1999
Personal Computer Editor's Choice -- DiamondMax Plus 5120 -- June 1999
World -- UK
Computer Dealer 1999 Reseller's Choice Award -- July 1999
News -- USA
PC Plus -- Spain Best Performance Award -- DiamondMax Plus 5120 -- July 1999
PC World -- Spain Recommended List DiamondMax Plus 5120 -- July 1999
PC Plus -- Spain PC Plus Performance Award -- DiamondMax Plus 5120 -- July
1999
Windows Magazine -- Recommended List DiamondMax Plus 5120 -- August 1999
USA
Computer Shopper -- Best Buy: DiamondMax 6800 -- September 1999
USA
PC World -- USA Hard Drive Best Buy: DiamondMax Plus 5120 -- October 1999
Winmag.com -- USA Winlist for DiamondMax Plus 6800 -- October 1999
</TABLE>
MANUFACTURING/QUALITY
To be competitive, we must manufacture high quality, highly manufacturable,
high performance hard disk drives with industry leading time-to-volume
production at competitive costs. Our hard disk drive
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<PAGE> 10
manufacturing operations consist primarily of the final assembly of high-level
subassemblies built to our specifications and testing of completed products.
Manufacturing. Pilot production of our products, as well as cost reduction,
quality and product improvement engineering on current products, are conducted
at our Longmont, Colorado facility. We manufacture our hard disk drives in
volume at multiple facilities in Singapore, which uses a flexible, cell-based
process. The Singapore facility consists of modular production units ("MPUs"),
each of which contains a number of modular work cells ("MWCs"). Each MWC
essentially is a mini-serial production line consisting of all of the tooling
and test equipment necessary to build and test a hard disk drive. Each MPU is
responsible for managing the supply of the components and other parts required
by its MWCs. We coupled our cell-based manufacturing approach with a
sophisticated factory information system that collects data from each MWC on
various productivity and quality metrics.
In March 1999, we purchased two buildings in Singapore totaling
approximately 39,455 square meters and entered into a long-term lease of the
underlying land from Singapore's Housing Development Board. The property is
located near our current volume manufacturing facilities. Pursuant to a sublease
accompanying the option, we have taken possession of this facility and have
begun volume manufacturing and warehousing operations there. We believe that we
will be able to add capacity at our current facility or another facility to
provide sufficient capacity through at least the end of 2000.
Quality. Consistent with our goal to establish Maxtor as a leader in
product quality and overall customer satisfaction, we have implemented a
corporate-wide quality program, which focuses on:
- robustness of design and improved design tolerances;
- quality of incoming parts and factory process control; and
- customer feedback, failure analysis and timely response.
In addition, our quality, materials, enabling technology and product
development groups work closely with leading component vendors in an effort to
ensure sufficient tolerances are designed into our hard disk drives to achieve
high manufacturing yields and product quality. Our Singapore facility also is
ISO 9002 certified. Finally, our executives meet regularly with customers to
exchange product quality information to facilitate rapid analysis of customer
failures and timely implementation of corrective actions.
MATERIALS AND SUPPLIES
We have developed and continue to develop strategic relationships with
leading suppliers of many of the key components for our hard disk drive
products. These relationships enable us to actively manage our supply chain to
improve flexibility in choosing state-of-the-art components and to reduce
component, inventory and overall product costs. In addition, our strategic
suppliers work closely with our advanced technology group, enabling us to gain
early access to leading-edge hard disk drive technology and to improve the
overall efficiency of our product design process.
We rely on a limited number of leading suppliers for the parts used in the
manufacturing of our products, including magneto-resistive heads and head stack
assemblies, media, custom integrated circuits, read channel integrated circuits,
printed circuit boards and motor/baseplate assemblies. In general, we seek to
have at least two or three suppliers for each of our component requirements.
Custom application specific integrated circuits, including our digital signal
processor controller chips, and channels, however, currently are sole-sourced
from Texas Instruments and Lucent, respectively. Because of their custom nature,
these products require significant design-in periods and long lead times. We
outsource a majority of our printed circuit board assembly to Celestica, Inc., a
successor to our former affiliate, International Manufacturing Services, Inc.
CUSTOMERS AND SALES CHANNELS
From 1986 to 1997, chronic performance and quality issues, as well as
late-to-market product introduction, had impacted adversely our ability to win
business with leading desktop computer manufacturers. As a result, we were
heavily dependent on sales to a large number of regional distributors which
limited
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<PAGE> 11
our ability to forecast periodic shipments and shifted our product mix toward
lower performance, lower margin products. Recognizing that the majority of the
growth in shipments in the desktop computer market was being captured by a
limited number of desktop computer manufacturers, we simplified our sales
channels and focused our sales and marketing efforts on becoming a significant
provider of hard disk drives to leading desktop computer manufacturers,
including Compaq, Dell, Gateway 2000, Inc., Hewlett-Packard and IBM, and a
limited number of leading distributors and retailers. By emphasizing overall
customer satisfaction, product quality and performance and time-to-volume
production, we believe that we have established a strong customer base.
Manufacturers. Shipments to our three primary desktop computer manufacturer
customers accounted for 3.8% of our total revenue in the quarter ended June 29,
1996 and increased to 26.3% in the quarter ended January 1, 2000. Including the
above, we shipped to nine of the top ten desktop computer manufacturers in 1999.
We believe that our success depends on our ability to maintain and further
develop strong desktop computer manufacturer customer relationships and to
provide products that fit the needs of the desktop computer manufacturer
channel.
Distributors. We use a select group of distributors to sell our products
cost-effectively to the large number of geographically dispersed customers which
tend to hold very small market shares of the overall desktop computer market,
including value-added resellers, dealers, system integrators and small desktop
computer manufacturers. Distributors accounted for 26.4% of revenue for the year
ended December 27, 1997; 15.4% of revenue for the year ended December 26, 1998;
and 18.5% of revenue for the year ended January 1, 2000. Distributors generally
enter into non-exclusive agreements with us for purchase and redistribution of
product on a quick turnover basis. Purchase orders are placed and revised on a
weekly basis. We grant certain of our distributors price protection and limited
rights to return product on a rotation basis. Our major distributors include
Bell Micro and Ingram.
Retailers. To increase awareness of the Maxtor brand name and benefit from
the typically higher gross margins of the retail sales channel, we sell our
retail-packaged products directly to major retailers such as computer
superstores, warehouse clubs and computer electronics stores, and authorized
sales through distributors to smaller retailers. Retailers accounted for 9.2% of
revenue for the year ended December 27, 1997; 8.1% of revenue for the year ended
December 26, 1998; and 6.3% of revenue for the year ended January 1, 2000. Our
current retail customer base is in the United States and Canada; however, we
have begun efforts to establish a retail channel presence in the emerging retail
markets in Europe and Asia. We believe the retail channel complements other
sales channels. Retailers supply the after-market "upgrade" sector in which
end-users purchase and install products to upgrade their computers. We grant
certain of our retailers price protection and limited rights to return product
on a rotation basis.
SALES AND MARKETING
We market and sell our products to leading desktop computer manufacturers,
distributors and retailers. Representative offices are located throughout the
United States and in Australia, France, Germany, Great Britain, Hong Kong,
Japan, Korea, Singapore and Taiwan. We have formed multi-disciplined, dedicated
account and channel teams focused on each of its current and target strategic
desktop computer manufacturer, distributor and retail accounts. These teams
generally are comprised of representatives from our sales, marketing,
engineering and quality organizations. Our senior management also takes an
active role in our sales efforts. Dedicated field sales and technical support
personnel are located in close proximity to the manufacturing facilities of each
of our desktop computer manufacturer customers.
Our marketing and public relations functions are performed both internally
and through outside firms. Public relations, direct marketing, worldwide
packaging and marketing materials are targeted to various end-user segments. We
utilize both consumer media and trade publications. We have programs under which
qualifying resellers are reimbursed for certain advertising expenditures. We
also have invested in direct marketing and customer satisfaction programs. We
maintain ongoing contact with end-users through primary and secondary market
research, focus groups, product registrations and technical support databases.
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<PAGE> 12
BACKLOG
We generally sell standard products according to standard agreements or
purchase order terms. Delivery dates are specified by purchase orders. Such
orders may be subject to change, cancellation or rescheduling by the customer
without significant penalties. The quantity actually purchased and shipment
schedules are frequently revised to reflect changes in the customer's needs. In
addition, orders for our products are filled for several large customers from
just-in-time inventory warehouses, whereby orders are not placed ahead of time
on our order entry backlog system. Instead, we receive a periodic forecast of
requirements from the customer. Upon shipment from the just-in-time warehouse,
the customer is invoiced. In light of these factors, backlog reporting as of any
particular date may not be indicative of our actual revenue for any succeeding
period and, therefore, is not necessarily an accurate predictor of our future
revenue.
COMPETITION
We compete primarily with manufacturers of 3.5-inch hard disk drives,
including Fujitsu, Quantum, Samsung, Seagate, IBM, and Western Digital, some of
which have a larger share of the desktop hard disk drive market than ours.
We believe that important competitive factors in the hard disk drive market
are quality, storage capacity, performance, price, time-to-market introduction,
time-to-volume production, desktop computer manufacturer product qualifications,
breadth of product lines, reliability and technical service and support. We
believe we compete favorably with respect to these factors. See section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting Future Performance -- The Hard Disk
Drive Market is Highly Competitive."
INTELLECTUAL PROPERTY
We have been granted 177 United States and foreign patents related to disk
drive products and technologies, and have additional patent applications pending
in the United States and certain foreign countries. We have patent protection on
certain aspects of our technology and also rely on trade secret, copyright and
trademark laws, as well as contractual provisions to protect our proprietary
rights. There can be no assurance that our protective measures will be adequate
to protect our proprietary rights; that others, including competitors with
substantially greater resources, have not developed or will not independently
develop or otherwise acquire equivalent or superior technology; or that we will
not be required to obtain licenses requiring us to pay royalties to the extent
that our products may use the intellectual property of others, including,
without limitation, our products that may also be subject to patents owned or
licensed by others. There can be no assurance that any patents will be issued
pursuant to our current or future patent applications, or that patents issued
pursuant to such applications or any patents we own or have license to use will
not be invalidated, circumvented or challenged. Moreover, there can be no
assurance that the rights granted under any such patents will provide
competitive advantages to us or be adequate to safeguard and maintain our
proprietary rights. Litigation may be necessary to enforce patents issued or
licensed to us, to protect trade secrets or know-how owned by us or to determine
the enforceability, scope and validity of our proprietary rights or those of
others. We could incur substantial costs in seeking enforcement of its issued or
licensed patents against infringement or the unauthorized use of our trade
secrets and proprietary know-how by others or in defending ourselves against
claims of infringement by others, which could have a material adverse effect on
our business, financial condition and results of operations. In addition, the
laws of certain countries in which our products are manufactured and sold,
including various countries in Asia, may not protect our products and
intellectual property rights to the same extent as the laws of the United
States, and there can be no assurance that such laws will be enforced in an
effective manner. Any failure by us to enforce and protect our intellectual
property rights could have a material adverse effect on our business, financial
condition and results of operations. See "Certain Factors Affecting Future
Performance -- Protection of Our Intellectual Property is Limited; We Face Risk
of Third Party Claims of Infringement," "-- We are Dependent on Our
International Operations; We Face Risks From Our International Sales."
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<PAGE> 13
EMPLOYEES
As part of our turnaround, we reduced our personnel from 9,330 in March
1996 to 4,330 in October 1996. Since October 1996, we have added significant
personnel to our research and development, sales and marketing and production
staff. As of January 1, 2000, we had 6,669 employees worldwide, including 936 in
engineering, research and development; 188 in marketing, sales and customer
support; 5,367 in manufacturing; and 164 in general management and
administration. As of January 1, 2000, we had 5,035 employees at our
manufacturing facilities in Singapore and 98 employees at our foreign sales
offices. None of our U.S. employees currently are represented by a labor
organization. In May 1997, our Singapore subsidiary recognized a labor union,
the United Workers of Electronic and Electrical Industries, and in November
1998, signed a three-year collective bargaining agreement with that union. We
believe that our employee relations are positive.
EXECUTIVE OFFICERS
The following table lists the executive officers of the Company and their
ages as of March 6, 2000. There are no family relationships between any director
or executive officer of the Company. Executive officers serve at the discretion
of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Dr. Chong Sup Park......................... 52 Chairman of the Board
Michael R. Cannon.......................... 47 President, and Chief Executive Officer
Paul J. Tufano............................. 46 Senior Vice President, Finance, and Chief
Financial Officer
Dr. Victor B. Jipson....................... 47 President, Network Systems Group
Dr. Pantelis S. Alexopoulus................ 51 Vice President, Advanced Technology and
Chief
Technology Officer
David L. Beaver............................ 45 Vice President, Worldwide Materials
Michael D. Cordano......................... 35 Vice President, Worldwide Sales
Phillip C. Duncan.......................... 49 Vice President, Human Resources and
Facilities
Catherine Hartsog.......................... 41 Vice President, Investor Relations
Misha Rozenberg............................ 37 Vice President, Quality
Glenn H. Stevens........................... 49 Vice President, General Counsel and
Secretary
K.H. Teh................................... 45 Vice President, Worldwide Manufacturing
& Managing Director, Singapore
Michael J. Wingert......................... 39 Vice President, Desktop Development
</TABLE>
Dr. Chong Sup Park has been Chairman of our board of directors since May
1998. On March 1, 2000 he was appointed to the position of President and CEO of
Hyundai Electronics Industries Co., Ltd., and he continues to serve as Chairman
of Hyundai Electronics America, positions he has held since September 1996. Dr.
Park has also been Chairman of MMC Technology's board of directors since January
1998. From September 1996 to May 1998, Dr. Park served as Vice Chairman of our
board of directors. Dr. Park previously served as our President and Chief
Executive Officer from February 1995 until his appointment as Vice Chairman.
From 1993 until joining us in 1995, he was Chairman, President and Chief
Executive officer and a director of Axil Computer, Inc., a workstation computer
manufacturer and a Hyundai Business Group company, in Santa Clara, California.
Dr. Park also formerly held various other management positions with Hyundai
Electronics Industries, including the position of Senior Vice President,
Semiconductor Sales and Marketing, which he held from 1990 to 1992. From 1985 to
1989, Dr. Park was President and Chief Executive Officer of Hyundai Electronics
America.
Michael R. Cannon has been our President and Chief Executive Officer since
July 1996. From 1993 until he joined us in 1996, Mr. Cannon held several senior
management positions with IBM's Storage Systems division, including Vice
President, Mobile and Desktop Business Unit; Vice President, Product Design; and
Vice President, Worldwide Operations. From May 1991 to January 1993, he served
as Senior Vice President of SyQuest, a removable disk drive company, and prior
to joining SyQuest he held the position of Vice
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<PAGE> 14
President, Southeast Asia Operations, with Imprimis Technology. He is also a
Director of MMC Technology, a wholly owned subsidiary of Hyundai Electronics
America.
Paul J. Tufano has been our Senior Vice President, Finance since November
1998 and Chief Financial Officer since July 1996. From July 1996 to his
appointment as Senior Vice President, Finance Mr. Tufano served as our Vice
President, Finance. From 1979 to 1996, Mr. Tufano held a variety of management
positions at IBM. Mr. Tufano was Manager of Worldwide Logistics for IBM's
storage systems division. Other management positions included Manager of Plans
and Controls for IBM's Desktop and Mobile Storage products business unit, and
Controller for IBM's San Jose, California facility. Until December 30, 1998, Mr.
Tufano was a director of International Manufacturing Services, Inc., a major
electronic manufacturing service company.
Dr. Victor B. Jipson has been President of our Network Systems Group since
October, 1999. From December 1995 until his appointment as President, Network
Systems Group, he served as our Senior Vice President, Engineering. From 1991 to
1995, he was General Manager of IBM's Optical Storage Solutions business unit.
From 1975 to 1991, Dr. Jipson held key management positions in research,
technical strategy, product strategy and research and development with IBM.
Dr. Pantelis S. Alexopoulos has been our Vice President, Advanced
Technology and Chief Technology Officer since April 1997. Before joining Maxtor
in 1996, Mr. Alexopoulus spent 14 years at IBM, the most recent position being
Manager, Head-Disk Interface and Advance Files, Storage Systems and Technology
at the Almaden Research Laboratory.
David L. Beaver has been our Vice President, Materials since May 1998. From
1994 to 1997, he was Director of Operations -- Materials at EMASS, a data
storage company, and from 1991 to 1994, he was Director of Corporate Materials
Procurement at SyQuest.
Mike Cordano has been our Vice President, Worldwide Sales since August
1999. Prior to his promotion, he held the position of Vice President, Global
Sales. Prior to joining Maxtor in 1994, Mr. Cordano held various sales positions
at Connor Peripherals, Inc.
Phillip C. Duncan has been our Vice President, Human Resources since August
1996. From 1994 to 1996, he was Vice President, International Sales and
Marketing and Human Resources of Berkeley Systems, a software company. From 1992
to 1994, he held senior human resources management positions at SyQuest, and
from 1990 to 1992, he held similar positions at Cirrus Logic, a semiconductor
company.
Catherine Hartsog has been Vice President, Investor Relations and Corporate
Communications since November 1999. Before joining Maxtor in 1998, Ms. Hartsog
spent 10 years in a variety of communications functions at Quantum Corporation.
Her most recent position there was Vice President of Corporate Communications, a
position she held from 1995 to 1998.
Misha Rozenberg has been Vice President, Quality since March 1998. From
1996 to 1998, he was Vice President, Supplier Engineering. From 1994 to 1996,
Mr. Rozenberg was a Senior Director of Supplier Engineering with Conner
Peripherals, Inc., a disk drive company. From 1990 to 1994, he was a Manager
with Apple Computer.
Glenn H. Stevens has been our Vice President, General Counsel and Secretary
since June 1994. From 1992 to 1994, Mr. Stevens had a private law practice. From
1979 to 1992, he held various positions within the legal department at US West,
Inc., a telecommunications products and services provider, including Chief
Counsel and Secretary for its research and development organization and Chief
Intellectual Property Counsel for the family of US West companies.
K.H. Teh has been our Vice President, Worldwide Manufacturing since May
1997. From 1996 to 1997, he was with Iomega, a removable disk drive company,
where he had been Managing Director of its Malaysia manufacturing facility. From
1994 to 1996, he was a Managing Director, Malaysia Manufacturing, with Quantum,
and was a Senior Director with SyQuest from 1993 to 1994.
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<PAGE> 15
Michael J. Wingert has been our Vice President, Desktop Engineering since
November 1999. Previously, he was the Vice President, Engineering for five
years. Prior to joining Maxtor in 1994, Mr. Wingert held various senior
management positions in product testing and development at IBM.
ITEM 2. PROPERTIES
Our sales and administrative offices and advanced technology operations are
located at a 180,087 square foot facility in Milpitas, California. HEA is
currently an unconditional guarantor of our facilities lease in Milpitas,
California.
We also maintain 373,457 square feet of engineering and pilot production
facilities as well as administrative, marketing and materials facilities in
Longmont, Colorado. In addition, our MNSG division is located in Santa Clara,
California. All of our domestic facilities are leased. Our leases for our
Longmont, Colorado facility begin to expire on December 2001. We have entered
into a lease for a new facility in Longmont, Colorado of 450,090 square feet, to
be completed in April 2001. The new lease has a 15-year term and is renewable
for five years. There can be no assurance that we will be able to obtain
additional space that can accommodate our needs.
Our volume manufacturing facilities are located in buildings in Singapore
totaling approximately 734,000 square feet, which are located on two parcels of
leased land with leases terminating in 2016 (with an option to renew for 30
years) and 2018 (with an option to renew for 30 years).
We also lease various sales and support facilities in Australia, France,
Germany, Hong Kong, Ireland, Japan, Korea, Singapore, Taiwan, United Kingdom,
and the United States. The aggregate rent under all of our leases is currently
$8.4 million per annum.
ITEM 3. LEGAL PROCEEDINGS
We are currently involved in a dispute with StorMedia Incorporated
("StorMedia"), which arose out of an agreement among Maxtor, 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 Maxtor. StorMedia's disk media did not meet our specifications and
functional requirements as required by the agreement and we 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 Maxtor) 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, we filed a complaint against StorMedia and William Almon
(StorMedia's Chairman and Chief Executive Officer) in a Colorado state court
seeking approximately $100 million in damages and alleging, among other claims,
breach of contract, breach of implied warranty of fitness and fraud under the
StorMedia Agreement (the "Colorado Suit"). This proceeding was stayed pending
resolution of the Federal Suit. The Federal Suit was permanently dismissed early
in February 1998. On February 24, 1998, StorMedia filed a new complaint in a
California state court for $206 million, alleging fraud and deceit against the
Original Defendants and negligent misrepresentation against HEI and Maxtor (the
"California Suit"). On May 18, 1998, the stay on the Colorado Suit was lifted by
the Colorado state court. Our motion to dismiss, or in the alternative, stay the
California Suit, is pending. On September 9, 1998, the California Suit was
stayed pending resolution of the Colorado Suit. On October 11, 1998, StorMedia
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act.
This bankruptcy filing caused an automatic stay of proceedings against
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<PAGE> 16
StorMedia, including the Colorado Suit. StorMedia has not prosecuted its claims
against Maxtor since it filed for bankruptcy protection.
On or about February 17, 1999, we filed proofs of claim in the bankruptcy
cases against StorMedia, Inc. and StorMedia International, Ltd., in which we
asserted claims based upon the claims and allegations set forth in the Colorado
Action. On or about November 2, 1999, StorMedia filed an "Objection To Proof Of
Claim And Counterclaims And Crossclaims For Breach Of Contract, Breach Of The
Implied Covenant Of Good Faith, And Fair Dealing, Promissory Fraud, And Fraud
And Deceit," titled StorMedia, Inc and StorMedia Int'l Ltd. v. Maxtor Corp. and
Hyundai Electronics Indus., Inc. (In re StorMedia, Inc.), commencing Adversary
Proceeding Number 99-5409 (the "Bankruptcy Action"). In the Bankruptcy Action,
StorMedia seeks to disallow our proof of claim on the grounds that under
Bankruptcy Code section 502(b) and applicable state law, our claims against
StorMedia are unenforceable and not allowable because we rejected StorMedia's
products for reasons other than quality. StorMedia further seeks a determination
pursuant to Bankruptcy Code section 502(b) and applicable state law that our
claims are unenforceable and not allowable because StorMedia is entitled to a
setoff in an amount exceeding our claims. StorMedia further seeks a
determination that under Bankruptcy Code section 510(c) and applicable state law
that any allowable claim by us is equitably subordinated to all allowed claims
of StorMedia's other creditors. In addition, StorMedia also asserts in the
Bankruptcy Action counterclaims against us and cross-claims against HEI
asserting: Breach of Volume Purchase Agreement, Breach of the Implied Covenant
of Good Faith and Fair Dealing, Promissory Fraud and Fraud and Deceit.
On December 23, 1999, HEI and Maxtor filed motions seeking an order of the
Bankruptcy Court providing that the Bankruptcy Court will abstain from hearing
the Bankruptcy Action pursuant to 28 U.S.C. sec. 1334(c). In December of 1999,
the Bankruptcy Court entered an order extending the deadline for Maxtor and HEI
to file an answer or other responsive pleading in the Bankruptcy Action through
the earlier of: (i) entry of an order on the abstention motions, or (ii)
February 14, 2000.
On or about February 16, 2000, the Bankruptcy Court approved a stipulation
entered into among Maxtor, HEI and StorMedia, which provided in part, that the
Bankruptcy Court will abstain from the Bankruptcy Action pursuant to 28 U.S.C.
sec. 1334(c). The stipulation also provided that the automatic stay imposed by
the Bankruptcy Court will be modified to allow all parties to the Colorado
Action to proceed to final, non-appealable judgment or settlement.
In addition, the parties have agreed that any award of damages pursuant to
final, non-appealable judgment entered by the Colorado Court in our favor or any
final, non-appealable stipulated judgment or other form of settlement entered
into in the Colorado Action in our favor, will be deemed to be a valid claim
under applicable non-bankruptcy law for the purposes of allowance in StorMedia's
bankruptcy cases, subject, however, in all respects to the determination of the
Bankruptcy Court of all issues within the Bankruptcy Court's exclusive
jurisdiction (the "Bankruptcy Court Matters"), including, but not limited to:
(i) the extent to which StorMedia holds defenses that arise exclusively under
the Bankruptcy Code to the allowance of such claim in StorMedia's bankruptcy
cases; (ii) the classification of such claim under the Plan; (iii) the extent to
which such claim may be equitably subordinated pursuant to 11 U.S.C. sec. 510;
and (iv) the extent to which such claim may reduce our liability to StorMedia,
if any (as determined by a final non-appealable judgment of the Colorado Court),
pursuant to 11 U.S.C. 553. The Bankruptcy Court Matters will remain subject to
Bankruptcy Court jurisdiction and will be stayed and held in abeyance until such
time as the Colorado Court has fully resolved the Colorado Action by entry of a
final, non-appealable judgment or settlement.
We believe that we have valid defenses against the claims alleged by
StorMedia and intend to defend ourselves vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, we cannot determine the possible loss, if any, that 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 our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this matter will not have a material adverse effect on our
business, financial condition or results of operations. However, the results of
these proceedings, including any potential
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<PAGE> 17
settlement, are uncertain and there can be no assurance that they will not have
a material adverse effect on our business, financial position and results of
operations.
We were sued in the United States District Court for the Northern District
of California by Papst-Motoren GmbH and Papst Licensing (collectively "Papst")
claiming infringement of a number of hard disk drive motor patents. The lawsuit
alleges infringement of 15 of the hard disk drive motor patents, which 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 have 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. The motion was granted October 12, 1999, and the case has been
transferred to the Eastern District of Louisiana for coordinated or consolidated
pre-trial proceedings with three other actions involving Papst patents. The
consolidated proceedings are still in their initial stages, and there has been
no formal discovery taken by Maxtor. We deny any wrongdoing and intend to
vigorously defend ourselves. While the final outcome of these claims cannot be
determined at this time, we believe that resolution of these claims will not
have a material adverse effect on our business, financial condition or results
of operations. This statement should be read in conjunction with our periodic
reports filed with the SEC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended January 1, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been trading publicly on the Nasdaq National Market
under symbol "MXTR" since July 31, 1998. The table below sets forth the range of
quarterly high and low closing sales prices for our common stock on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- ----
<S> <C> <C>
Fiscal 2000 First Quarter (through March 6, 2000)........... 8.88 6.25
Fiscal 1999 Fourth Quarter.................................. 7.25 4.94
Fiscal 1999 Third Quarter................................... 7.31 4.69
Fiscal 1999 Second Quarter.................................. 8.25 4.53
Fiscal 1999 First Quarter................................... 19.56 7.78
Fiscal 1998 Fourth Quarter.................................. 15.63 7.63
Fiscal 1998 Third Quarter (from July 31, 1998).............. 11.63 6.81
</TABLE>
As of March 1, 2000, there were approximately 210 stockholders of record of
our common stock including The Depository Trust Company which holds shares of
Maxtor common stock on behalf of an indeterminate number of beneficial owners.
DIVIDEND POLICY
We have never paid cash dividends on our stock and do not anticipate paying
cash dividends in the near future.
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<PAGE> 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
MARCH 30, DECEMBER 28, DECEMBER 27, DECEMBER 26, JANUARY 1,
1996 1996(1) 1997 1998 2000
----------- ------------ ------------ ------------ -----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue................................ $1,269.0 $ 798.9 $1,424.3 $2,408.5 $2,486.1
Cost of revenue........................ 1,196.3 888.9 1,352.9 2,108.1 2,287.3
-------- ------- -------- -------- --------
Gross profit (loss).................. 72.7 (90.0) 71.4 300.4 198.8
-------- ------- -------- -------- --------
Operating expenses:
Research and development............. 94.7 87.8 106.2 152.4 191.5
Selling, general and
administrative..................... 82.8 60.7 62.6 75.8 89.3
Stock compensation expense........... -- -- -- 12.1(3) 2.5(4)
Acquired in-process technology....... -- -- -- -- 7.0
Amortization of goodwill and other
intangible assets.................. -- -- -- -- 3.1
Other................................ 4.5 -- -- -- --
-------- ------- -------- -------- --------
Total operating expenses...... 182.0 148.5 168.8 240.3(3) 293.4
-------- ------- -------- -------- --------
Income (loss) from operations.......... (109.3) (238.5) (97.4) 60.1(3) (94.6)
Interest expense....................... (11.8) (18.0) (36.5) (28.8) (13.7)
Interest and other income.............. 1.1 1.0 25.0(2) 7.4 15.6
Gain on sale of investment............. -- -- -- -- 44.1
-------- ------- -------- -------- --------
Income (loss) before income taxes...... (120.0) (255.5) (108.9) 38.7(3) (48.6)
Provision for income taxes............. 2.8 0.8 1.0 7.5 1.5
-------- ------- -------- -------- --------
Net income (loss)...................... $ (122.8) $(256.3) $ (109.9)(2) $ 31.2(3) $ (50.1)
======== ======= ======== ======== ========
Net income (loss) per
share -- diluted(5).................. $ (5.94) $ -- $ -- $ 0.47 $ (0.48)
======== ======= ======== ======== ========
Shares used in per share calculation
(in thousands)....................... 20,677 -- -- 65,814 105,503
======== ======= ======== ======== ========
Pro forma net loss per
share -- diluted..................... $ -- $(17.62) $ (3.62) $ 0.47 $ (0.48)
======== ======= ======== ======== ========
Shares used in pro forma calculation
(in thousands)....................... -- 14,552 30,350 65,814 105,503
======== ======= ======== ======== ========
BALANCE SHEET DATA:
Total assets........................... $ 442.5 $ 314.5 $ 555.5 $ 863.4 $ 906.3
Total current liabilities.............. 413.1 412.9 552.2 548.9 537.2
Long-term debt......................... 100.2 229.1 224.3 145.0 113.8
Total stockholders' equity (deficit)... (71.1) (327.5) (221.0) 169.4 255.3
</TABLE>
- ---------------
(1) We changed our fiscal year during the period ended December 28, 1996 to
conform our fiscal year to that of Hyundai Electronics America.
(2) Includes recovery of a $20.0 million fully-reserved note.
(3) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. Without such charge, we would have had total operating expenses
of $228.2 million, income from operations of $72.2 million, income before
income taxes of $50.8 million and net income of $43.3 million. Our 1996
Stock Option Plan was amended and restated to remove the variable features
and provide for fixed award options. See Note 10 to the consolidated
financial statements.
(4) As in prior year, the $2.5 million compensation charge is related to the
removal of our 1996 Stock Option Plan's variable features. We will continue
to incur such expense until the year 2001.
(5) Net loss per share information for the fiscal periods ended December 28,
1996 and December 27, 1997 has not been presented since such information is
not meaningful due to the limited number of shares of common stock
outstanding at that time.
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Item 1:
Business, Item 6: Selected Financial Information and Item 8: Consolidated
Financial Statements and Supplementary Data.
OVERVIEW
In February 1999, we completed a public offering of 7.8 million shares of
our common stock. We received net proceeds of approximately $95.8 million from
the offering, net of issuance costs. A portion of the proceeds from the offering
was used to prepay without penalty outstanding aggregate principal indebtedness
of $55 million owing to HEA under a subordinated note due July 31, 2001.
In September 1999, we acquired privately held Creative Design Solutions,
Inc. ("CDS"), a leading participant in the emerging network attached storage
market. We are transitioning from only being a supplier of hard disk drives for
the desktop personal computer market to a company well positioned to provide
storage solutions that will deliver outstanding price and performance values in
networked environments.
We have formed Maxtor Network Systems Group ("MNSG") subsequent to our
acquisition of CDS. MNSG concentrates on products and offerings in or related to
the Network Attached Storage ("NAS") market segment. In October 1999, we
announced MaxAttach(TM), MNSG's first NAS product. The MaxAttach(TM) network
storage appliance is a network file sharing solution for a broad range of office
and workgroup environments.
INTELLECTUAL PROPERTY
When we were a majority-owned subsidiary of HEA, 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 have not been a
majority-owned subsidiary of HEA. On June 25, 1998, we entered into an agreement
with HEA whereby we agreed to pay an allocated share of the license fees
associated with certain third party rights in annual installments ranging from
$1.0 million to $2.3 million through 2007. For the year ended January 1, 2000,
we recorded expense of $1.85 million in connection with this commitment. There
can be no assurance that we will be able to obtain similar rights in the future
on terms as favorable as those currently available to us.
REVENUE RECOGNITION
We generally recognize revenue upon shipment to our customers. Sales to
certain distributors and retailers are governed by agreements providing limited
rights of return, as well as price protection on unsold merchandise.
Accordingly, we record reserves upon shipment for estimated returns, exchanges
and credits for price protection. We also record reserves for the estimated cost
to repair or replace products under warranty at the time of sale. We warrant our
products against defects in parts and labor for a period of three years from the
date of shipment, with an additional three months allowed for distributors to
account for "shelf life."
TAX MATTERS
The provision for income taxes consists primarily of state and foreign
taxes. Due to our net operating losses ("NOLs"), NOL carryforwards and favorable
tax status in Singapore, we have not incurred any significant foreign, U.S.
federal, state or local income taxes for any recent fiscal periods. Future tax
benefits from current operating losses have not been recognized in the current
fiscal year because of the uncertainty concerning their realization.
As a result of the July 1998 public offering of our common stock, which
caused an "ownership change" for federal and state income tax purposes, a
significant portion of our NOL carryforwards is restricted as to utilization.
Details are provided in Note 11 to the consolidated financial statements.
We were part of the HEA consolidated group for federal income tax purposes
during the period from early 1996 to August 1998. Pursuant to a "Tax Allocation
Agreement" we were liable for our allocable share of the total consolidated tax
return liability during this period. The HEA consolidated group has used
19
<PAGE> 20
substantial amounts of our NOLs and other tax attributes. Under the Tax
Allocation Agreement, neither HEA nor Maxtor was required to reimburse the other
for any utilization of the other members' NOLs or other tax attributes.
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
(IN MILLIONS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue................................................. $1,424.3 $2,408.5 $2,486.1
Cost of revenue......................................... 1,352.9 2,108.1 2,287.3
-------- -------- --------
Gross profit.......................................... 71.4 300.4 198.8
-------- -------- --------
Operating expenses:
Research and development.............................. 106.2 152.4 191.5
Selling, general and administrative................... 62.6 75.8 89.3
Stock compensation expense............................ -- 12.1(2) 2.5(3)
Acquired in-process technology........................ -- -- 7.0
Amortization of goodwill and other intangible
assets............................................. -- -- 3.1
-------- -------- --------
Total operating expenses...................... 168.8 240.3(2) 293.4
-------- -------- --------
Income (loss) from operations........................... (97.4) 60.1(2) (94.6)
Interest expense........................................ (36.5) (28.8) (13.7)
Interest and other income............................... 25.0(1) 7.4 15.6
Gain on sale of investment.............................. -- -- 44.1
-------- -------- --------
Income (loss) before income taxes....................... (108.9) 38.7(2) (48.6)
Provision for income taxes.............................. 1.0 7.5 1.5
-------- -------- --------
Net income (loss)....................................... $ (109.9)(1) $ 31.2(2) $ (50.1)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
<S> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue................................................. 100.0% 100.0% 100.0%
Cost of revenue......................................... 95.0 87.5 92.0
----- ----- -----
Gross profit.......................................... 5.0 12.5 8.0
----- ----- -----
Operating expenses:
Research and development.............................. 7.5 6.3 7.7
Selling, general and administrative................... 4.4 3.2 3.6
Stock compensation expense............................ -- 0.5(2) 0.1(3)
Acquired in-process technology........................ -- -- 0.3
Amortization of goodwill and other intangible
assets............................................. -- -- 0.1
----- ----- -----
Total operating expenses...................... 11.9 10.0(2) 11.8
----- ----- -----
Income (loss) from operations........................... (6.9) 2.5(2) (3.8)
Interest expense........................................ (2.6) (1.2)(2) (0.6)
Interest and other income............................... 1.8(1) 0.3 0.6
Gain on sale of investment.............................. -- -- 1.8
----- ----- -----
Income (loss) before income taxes....................... (7.7) 1.6(2) (2.0)
Provision for income taxes.............................. 0.1 0.3 0.1
----- ----- -----
Net income (loss)....................................... (7.8)%(1) 1.3%(2) (2.0)%
===== ===== =====
</TABLE>
20
<PAGE> 21
- ---------------
(1) Includes recovery of a $20.0 million fully-reserved note.
(2) Total operating expenses, income from operations, income before income taxes
and net income for the year ended December 26, 1998 reflect a $12.1 million
compensation charge related to certain variable accounting features of our
option plan. Without such charge, we would have had total operating expenses
of $228.2 million, income from operations of $72.2 million, income before
income taxes of $50.8 million and net income of $43.3 million. Our 1996
Stock Option Plan was amended and restated to remove the variable features
and provide for fixed award options. See Note 10 to the consolidated
financial statements.
(3) As in prior year, the $2.5 million compensation charge is related to the
removal of our 1996 Stock Option Plan's variable features. We will continue
to incur such expense until the year 2001.
COMPARISON OF 1997, 1998 AND 1999
Revenue. In 1997, we generated revenue of $1,424.3 million compared with
revenue of $2,408.5 million in 1998 and $2,486.1 million in 1999. Revenue
increased 69.1% from 1997 to 1998 compared to an increase of 3.2% from 1998 to
1999. The increase in revenue in both years was due primarily to an increase in
unit shipments arising from improved time-to-market introduction and
time-to-volume production and a shift in our customer base to desktop computer
manufacturers. Throughout 1998 and 1999, revenue growth from increased unit
shipments was partially offset by rapid price erosion in the hard disk drive
market as a whole, which resulted in declining average selling prices. We
believe that the effect of hard disk drive market average selling price declines
on our average selling prices was contained partially by our improved
time-to-market introduction and time-to-volume production, and by Maxtor's trend
toward shipping higher capacity hard disk drives, which tend to have higher
initial average selling prices.
Revenue from sales to desktop computer manufacturers was 64.4%, 76.5% and
75.9% of our revenue in 1997, 1998 and 1999, respectively. During 1997, 1998 and
1999, sales to three of the largest desktop computer manufacturers, Compaq, Dell
and IBM, were in the aggregate 37.8%, 53.4% and 35.9%, respectively.
Cost of Revenue; Gross Profit. Gross profit improved from $71.4 million in
1997 to $300.4 million in 1998 and decreased to $198.8 million in 1999. Gross
margin increased from 5.0% in 1997 to 12.5% in 1998 and decreased to 8.0% in
1999. The improvement in gross margin from 1997 to 1998 was due primarily to the
timely introduction of new, higher margin products which achieved market
acceptance and higher manufacturing yields. The decrease in gross margin from
1998 to 1999 is due primarily to continued rapid price erosion in the hard disk
drive industry, which resulted in declining average selling prices for our
products.
OPERATING EXPENSES
Research and Development Expense. Research and development ("R&D") expense
as a percentage of revenue was 7.5%, 6.3% and 7.7% in 1997, 1998 and 1999,
respectively. From 1997 to 1998, R&D expense as a percentage of revenue
decreased by 1.2% while the absolute dollar level of R&D spending increased
which was due to our efforts to develop new products for the desktop computer
market and future products in other hard disk drive segments. From 1998 to 1999,
R&D expense as a percentage of revenue increased by 1.4% while the absolute
dollar level of R&D spending increased from $152.4 million in 1998 to $191.5
million in 1999. During 1999, the absolute dollar increase in R&D expenditures
was due to our continued efforts to develop new products for the desktop
computer market and future products in other hard disk drive segments and the
NAS market.
Selling, General and Administrative Expense. Selling, general &
administrative ("SG&A") expenses as a percentage of revenue were 4.4%, 3.2% and
3.6% in 1997, 1998 and 1999, respectively. The absolute dollar level of SG&A
expense increased from $62.6 million in 1997 to $75.8 million in 1998 and to
$89.3 million in 1999. During 1998 and 1999, increase in SG&A expense was
consistent with revenue growth.
Stock Compensation Expense. Stock compensation expense decreased from $12.1
million in 1998 to $2.5 million in 1999. This expense was incurred due to an
amendment of our 1996 Stock Option Plan to
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<PAGE> 22
remove the variable options features resulting in additional non-cash
compensation expense of $12.1 million in 1998 and $2.5 million in 1999 related
to the difference between the estimated fair market value of our stock and the
exercise price of the options granted under our 1996 Stock Option Plan between
May 1996 and October 1997.
Acquired In-Process Technology. The acquired in-process technology charge
of $7 million resulted from the acquisition of CDS. The value of the acquired
in-process technology was determined using a combination of risk-adjusted income
approaches and an independent valuation. The total amount of $7 million was
charged to operations as the technology had not reached the stage of
technological feasibility at the date of acquisition and had no future
alternative uses.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets represents the amortization of goodwill and
other intangible assets relating to the acquisition of CDS. Such amortization
amounted to $3.1 million in 1999.
Interest Expense. Interest expense was $36.5 million, $28.8 million and
$13.7 million in 1997, 1998 and 1999, respectively, representing a 21.1%
decrease from 1997 to 1998 and a 52.1% decrease from 1998 to 1999. As a
percentage of revenue, interest expense was 2.6%, 1.2% and 0.6% in 1997, 1998
and 1999, respectively. The decrease from 1997 to 1998 was due primarily to a
reduction in debt of $239.1 million, approximately $200.0 million of which was
paid using proceeds from our July 1998 public offering. The decrease from 1998
to 1999 was due to the reduction in long-term and short-term borrowings.
As of December 27, 1997, December 26, 1998 and January 1, 2000, we had
$165.1 million, $5.3 million and $5.0 million of short-term and $224.3 million,
$145.0 million and $113.8 million of long-term indebtedness outstanding,
respectively.
Interest and Other Income. Interest and other income was $25.0 million,
$7.4 million and $15.6 million in 1997, 1998 and 1999, respectively. As a
percentage of revenue, interest and other income was 1.8%, 0.3% and 0.6% in
1997, 1998 and 1999, respectively. The increase was due primarily to the overall
increase in cash and cash equivalents and marketable securities as a result of
our public offerings in 1998 and 1999.
During 1999, we sold our equity investment in Celestica, Inc. resulting in
a gain on sale of investment of $44.1 million.
CURRENT PRODUCTS AND TECHNOLOGY ACQUIRED FROM CDS
When we acquired CDS in September 1999, the fair value of current products
and technology under development was determined by using the income approach,
which discounts expected future cash flows to present value. We consider the
pricing model for products related to the CDS acquisition to be standard within
the high-technology network attached storage industry. We expect that products
incorporating the current products and technology under development from the CDS
acquisition, will be completed and begin to generate cash flows over the six to
nine months after integration. However, development of these current products
and technology remains a significant risk to us due to the remaining effort to
achieve technical viability, rapidly changing customer markets, uncertain
standards for new products, and significant competitive threats from numerous
companies. The nature of the efforts to develop the current products and
technology into commercially viable products consists principally of planning,
designing, and testing activities necessary to determine that the product can
meet market expectations, including functionality and technical requirements.
Failure to bring these products to market in a timely manner could result in a
loss of market share, or a lost opportunity to capitalize on emerging markets,
and could have a material adverse impact on our business and operating results.
The approximate development costs incurred since the acquisition date to
January 1, 2000 on current products and technology under development is $2.3
million. Estimated cost to complete current products and technology under
development at the time of acquisition was $1.3 million.
22
<PAGE> 23
YEAR 2000 COMPLIANCE
YEAR 2000 ISSUE DESCRIBED
Many computer systems and software products were coded to accept, store or
report only two digit entries in date code fields. Beginning in the Year 2000,
these date code fields needed 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, needed to be upgraded to comply with such
Year 2000 requirements. We could have been 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 have included 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 had 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 this 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.
MAXATTACH PRODUCTS
Our new NAS products are also Y2K compliant. Our NAS operating system
software uses ANSIC time specifications, which store time as number of seconds
since January 1, 1970 using a signed 32-bit number, which is unaffected in or by
the Year 2000, but which will roll over in the Year 2038.
RESULTS OF OUR YEAR 2000 PREPARATIONS
We have not experienced any known material adverse impacts on our current
products, internal information systems, and non information technology systems
(equipment and systems) as a result of 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. For our Year 2000 program we initially
estimated capital expenditures of approximately $10.0 million and expenses of
approximately $4.0 million in fiscal 1999 in connection with the resolution of
our Year 2000 issues. During 1999, we incurred approximately $1.5 million in
capital expenditures and approximately $3.0 million in expenses related to our
Year 2000 issues, well below estimates. No significant system projects were
deferred due to the Year 2000 Issue.
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 2000, we had $353.9 million in cash and cash equivalents
and marketable securities as compared to $227.6 million as of 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 $115.2 million for the year ended
January 1, 2000. The cash provided from operating activities was principally
generated from collection of accounts receivable and decreases in inventory
purchases, which was partially offset by the decrease in accounts payable and
accrued
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<PAGE> 24
expenses. We used $162.4 million for investing activities during 1999,
principally for the purchase of marketable securities and property, plant and
equipment. For the twelve months ended January 1, 2000, 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.
In September 1999, our Singapore subsidiary, Maxtor Peripherals (S) Pte
Ltd, entered into a four-year loan agreement with the Economic Development Board
of Singapore (the "Board") for SGD48 million, which will amortize in seven equal
semi-annual installments beginning March 2001. Interest is charged by the Board
at 1% above the prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year, which has been the rate of payment since inception.
This loan is supported by a two-year guaranty from the Bank of Nova Scotia at an
interest rate of 0.15% per year. This guaranty is currently secured by cash but
the Company may, at its option, substitute other assets as security.
As of January 1, 2000, our outstanding debt primarily comprised $90.0
million in publicly traded 5.75% Subordinated Debentures, due March 1, 2012. The
Debentures require annual sinking fund payments of $5.0 million, which commenced
March 1, 1998. These debentures are no longer convertible into our common stock
or any other security of the Company.
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. As of January 1, 2000,
$100.0 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. In 2000, capital
expenditures are expected to be between approximately $90.0 million and $120.0
million, to be used principally for adding manufacturing capacity. 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 obtained, or, if obtained, that it will be
available on satisfactory terms. See discussion below under the heading "Certain
Factors Affecting Future Performance."
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement will require us to recognize all derivatives on the balance sheet at
fair value. SFAS No. 133 requires that derivative instruments used to hedge be
identified specifically as to assets, liabilities, firm commitments or
anticipated transactions and measured as to effectiveness and ineffectiveness
when hedging changes in fair value or cash flows. Derivative instruments that do
not qualify as either a fair value or cash flow hedge will be valued at fair
value with the resultant gain or loss recognized in current earnings. Changes in
the effective portion of fair value hedges will be recognized in current
earnings along with the change in fair value of the hedged item. Changes in the
effective portion of the fair value of cash flow hedges will be recognized in
other comprehensive income until realization of the cash flows of the hedged
item through current earnings. Any ineffective portion of hedges will be
recognized in current earnings.
In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date
of FASB Statement No. 133," to defer for one year the effective date of
implementation of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000, with earlier
application encouraged. We are in the process of evaluating the requirements of
SFAS Nos. 133, but do not expect this pronouncement to materially impact our
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally
24
<PAGE> 25
accepted accounting principles to revenue recognition in financial statements.
In March 2000, the SEC issued SAB No. 101A, to defer for one quarter the
effective date of implementation of SAB No. 101 with earlier application
encouraged. We are required to adopt SAB 101 in the second quarter of fiscal
2000. We do not expect the adoption of SAB 101 to have a material effect on our
financial position or results of operations.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $791.9 MILLION
We have a history of significant losses. With the exception of the fiscal
year ended December 26, 1998, we incurred losses in each of the recent years.
These losses were primarily a result of:
- delayed product introductions;
- product performance and quality problems;
- low manufacturing yields and under-utilization of manufacturing capacity;
- high operating and interest expenses; and
- overall market conditions in the hard disk drive industry, including
fluctuations in demand and declining average selling prices.
As of January 1, 2000, we had an accumulated deficit of approximately
$791.9 million. If we do not address successfully the factors that led to our
history of losses, we will not be profitable in the future. Even if we
successfully addressed these factors, we still may not be profitable in the
future.
OUR AVERAGE SELLING PRICES ARE DECLINING
It is very difficult to achieve and maintain profitability and revenue
growth in the hard disk drive industry because the average selling price of a
hard disk drive rapidly declines over its commercial life due to technological
enhancement, productivity improvement, and also increase in industry supply.
This is true even for those products which 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. We anticipate that
average selling prices of our products will continue to decline in the
foreseeable future.
UNLESS WE CONSISTENTLY EXECUTE, WE WILL HAVE SIGNIFICANT LOSSES
Most of our products are sold to desktop computer manufacturers. Such
manufacturers use the quality, storage capacity, performance and price
characteristics of hard disk drives to select, or qualify, their hard disk drive
suppliers. Such manufacturers typically seek to qualify three or four suppliers
for each hard disk drive product generation. To qualify consistently with these
manufacturers, and thus succeed in the desktop hard disk drive industry, we must
execute consistently on our product development and manufacturing processes to
be among the first-to-market introduction and first-to-volume production at
leading storage capacity per disk with competitive prices and high quality. Once
a manufacturer has chosen its hard disk drive suppliers for a given desktop
computer product, it generally will purchase hard disk drives from those
suppliers for the commercial life of that product line. If we miss a
qualification opportunity, we may not have another opportunity to do business
with that manufacturer until we introduce our next generation of products. The
effect of missing a product qualification opportunity is magnified by the
limited number of high volume manufacturers of personal computers. If we do not
reach the market or deliver volume production in a timely manner, we may lose
opportunities to qualify our products, our gross margins probably will decline
due to rapidly declining average selling prices, and we probably will lose
market share.
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<PAGE> 26
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 IDC, the growth rate in the desktop
computer market has slowed in recent quarters. Because of our reliance on the
desktop segment of the personal computer market, we will be affected more by
changes in market conditions for desktop computers than would a company with a
broader range of products. Any decrease in the demand for desktop computers
could cause a decrease in the demand for our products.
Although our current products are designed for the largest segment of the
hard disk drive market, the desktop computer market, demand may shift to other
market segments over time. We also believe that to remain a significant supplier
of hard disk drives to major manufacturers of personal computers, we will need
to offer a broader range of hard disk drive products to our customers.
Therefore, we will need to develop and manufacture new products that address
additional hard disk drive market segments and emerging technologies to remain
competitive in the hard disk drive industry. Examples of potentially important
market segments that our current products are not designed to address include:
- the client-server market;
- lower cost, lower performance personal computer systems (typically below
$699); and
- laptop personal computers.
To specifically address these or additional market segments, we would have
to reengineer some of our existing technology and develop new technology.
Certain of our competitors have significant advantages over us in one or more of
these and other potentially significant new or growing market segments. Any
failure by us to successfully develop and introduce new products to address
specifically these additional market segments could have a material adverse
effect on our business, financial condition and results of operations.
A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS
We sell most of our products to a limited number of customers. During the
year ended January 1, 2000, one customer, Dell, accounted for approximately
22.8% of our revenue, and our top ten customers accounted for approximately
58.0% of our revenue. During the year ended December 26, 1998, three customers,
Dell, Compaq and IBM, accounted for approximately 26.6%, 12.2% and 14.6%,
respectively of our revenue, and our top ten customers accounted for
approximately 72.7% of our revenue.
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:
- our ability to be consistently among the first to volume-production with
competitive products;
- the average unit selling price 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;
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<PAGE> 27
- changes in product or customer mix;
- our existing competitors introducing better products at competitive
prices before we do;
- new competitors entering our market;
- our ability to manage successfully the complex and difficult process of
qualifying our products with our customers;
- our customers canceling, rescheduling or deferring significant orders for
our products, particularly in anticipation of new products or
enhancements from us or our competitors;
- the ability of certain of our distribution and retail customers to return
unsold products for credit;
- the ability of certain of our distribution and retail customers to
receive lower prices retroactively on their inventory of our products
when we lower prices on our products;
- our ability to purchase enough components and raw materials at
competitive prices which allows us to make a profit;
- the availability of adequate capital resources;
- increases in research and development expenditures, particularly as a
percentage of revenue, required to maintain our competitive position;
- changes in our strategy;
- personnel changes; and
- other general economic and competitive factors.
Many of our operating expenses are relatively fixed and difficult to reduce
or modify. As a result, the fixed nature of our operating expenses will magnify
any adverse effect of a decrease in revenue on our results of operations.
As a result of these and other factors, we believe that period to period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
WE MUST MANAGE OUR GROWTH
In July 1996, we began to modify our management and operational structures.
Our revenues generally have been growing since the first quarter of 1997. Our
restructuring activities and revenue growth have placed, and we expect will
continue to place, a significant strain on our personnel and resources. Our
ability to maintain the advantages of the restructuring and to manage future
growth will depend on our ability to:
- continue to improve our information and control systems;
- hire, train, retain, manage and motivate an expanding employee base; and
- maintain effective cost controls.
OUR CUSTOMERS ARE PLACING NEW AND COSTLY DEMANDS ON US
Our customers are adopting more sophisticated business models that place
additional strains on our business. For example, many personal computer
manufacturers, including some of our largest personal computer manufacturing
customers, are starting to adopt build-to-order manufacturing models that reduce
their component inventories and related costs and enable them to tailor their
products more specifically to the needs of their customers.
Some of our personal computer manufacturing customers also are considering
or have implemented a "channel assembly" model in which the manufacturer ships a
minimal computer system to the dealer or other assembler, and component
suppliers (including hard disk drive manufacturers such as us) ship parts
directly to the dealer or other assembler for installation at its location.
Finally, certain of our manufacturing customers have adopted just-in-time
inventory management processes that require component suppliers to maintain
inventory at or near the customer's production facility. These new business
models require us to hold our
27
<PAGE> 28
products in inventory longer, which increases our risk of inventory obsolescence
and average selling price decline. These changing models also increase our
capital requirements and costs, complicate our inventory management strategies,
and make it difficult for us to match our manufacturing plans with projected
customer demand.
THE HARD DISK DRIVE MARKET IS HIGHLY COMPETITIVE
Although our share of the desktop hard disk drive market has increased
steadily since the first quarter of 1997, this market segment and the hard disk
drive market in general are intensely competitive even during periods when
demand is stable. We compete primarily with manufacturers of 3.5-inch hard disk
drives for the personal computer industry, including:
- IBM Corporation;
- Fujitsu Limited;
- Quantum Corporation;
- Samsung Electronic Company Limited;
- Seagate Technology, Inc.; and
- Western Digital Corporation.
We also could face significant competition from other companies in our
current markets or in other markets into which we may expand our product
portfolio. Some 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 products that are designed for desktop computers and
network storage systems. As a result, the demand for our products depends on the
overall demand for desktop computers and the NAS market. The desktop computer
and NAS markets tend to go through periods of rapid growth followed by periods
of oversupply and rapid price and gross margin erosion. This environment makes
it difficult for us and our customers to reliably forecast demand for our
products. We do not have long-term supply contracts with our customers, and our
customers often can defer or cancel orders with limited notice and without
significant penalty.
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<PAGE> 29
TO DEVELOP NEW PRODUCTS, WE MUST EFFECTIVELY INTEGRATE PARTS FROM THIRD PARTIES
Unlike some of our competitors, we do not manufacture any of the parts used
in our products. Instead, our products incorporate parts designed by and
purchased from third parties. Consequently, the success of our products depends
on our ability to gain access to and integrate parts that use leading-edge
technology. To successfully manage these integration projects we must:
- obtain high quality parts;
- hire skilled personnel;
- effectively integrate different products from a variety of vendors; and
- manage difficult scheduling and delivery problems.
Our success will depend on our ability to develop and maintain
relationships with key suppliers.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS
A number of the parts used in our products are available from only one or a
limited number of outside suppliers. Currently, we purchase digital signal
processor/controller and spin/servo integrated circuits only from Texas
Instruments, Inc. and purchase channel integrated circuits only from Lucent
Technologies Inc. As we have experienced in the past, some of the parts we
require may periodically be in short supply. As a result, we must allow for
significant ordering lead times for certain parts. In addition, we may have to
pay significant cancellation charges to suppliers if we cancel orders for parts
because we reduce production due to production cut-backs caused by market
oversupply, reduced demand, transition to new products or technologies or for
other reasons. We order the majority of our parts on a purchase order basis and
only have limited long-term volume purchase agreements with certain existing
suppliers. If we cannot obtain sufficient quantities of high quality parts when
we need them, our business, financial condition and results of operations could
be materially and adversely affected.
WE DEPEND ON MICHAEL R. CANNON AND OUR KEY PERSONNEL; WE COULD BE SUED OVER OUR
HIRING PRACTICES
Our success depends upon the continued contributions of our key employees,
many of whom, and in particular Michael R. Cannon, our President and Chief
Executive Officer, would be extremely difficult to replace. Additionally, we
have employment contracts with the following key personnel:
- Mr. Cannon;
- Paul J. Tufano, our Senior Vice President, Finance and Chief Financial
Officer;
- Dr. Victor B. Jipson, our President, Network Systems Group;
- Dr. Pantelis S. Alexopoulos, our Vice President, Advanced Technology and
Chief Technology Officer;
- David L. Beaver, our Vice President, Worldwide Materials;
- Michael D. Cordano, our Vice President, Worldwide Sales;
- Phillip C. Duncan, our Senior Vice President, Human Resources;
- Misha Rozenberg, our Vice President, Quality;
- Glenn H. Stevens, our Vice President, General Counsel and Secretary;
- K.H. Teh, our Vice President, Worldwide Manufacturing; and
- Michael J. Wingert, our Vice President, Desktop Engineering.
We 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. If we are unable to retain our existing employees or to
hire and integrate new
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<PAGE> 30
employees, our business, financial condition and results of operations could be
materially and adversely affected.
Companies in the hard disk drive industry whose employees accept positions
with competitors often claim that such competitors have engaged in unfair hiring
practices. We may receive such claims in the future as we seek to hire qualified
employees. We could incur substantial costs in defending ourselves against any
such claims.
WE HAVE HISTORICALLY HAD SIGNIFICANT DEBT
We historically have operated with a significant amount of debt as compared
to our equity. As of January 1, 2000, we had outstanding approximately $118.8
million in principal amount of indebtedness. We incurred $28.8 million and $13.7
million in interest expense for the years ended December 26, 1998 and January 1,
2000, respectively. We also have an asset securitization program under which we
sell our accounts receivable on a non-recourse basis. As of January 1, 2000,
$100.0 million of accounts receivable was securitized under the program. We must
meet certain conditions in order to continue this program.
We are subject to the risks associated with carrying debt, including:
- Principal and interest repayment obligations that require the expenditure
of substantial amounts of cash;
- Our potential inability to repay principal or interest when due;
- Our potential violation of loan covenants that could result in a default
on the debt, such debt becoming immediately payable and legal actions
against us; and
- Adverse effects of interest expense on our business, financial condition
and results of operations.
WE MAY NEED MORE CAPITAL IN THE FUTURE BECAUSE THE HARD DISK DRIVE BUSINESS IS
CAPITAL INTENSIVE
Our business is capital intensive, and we may need more capital in the
future. Our future capital requirements will depend on many factors, including:
- the rate of our sales growth;
- the level of our profits or losses;
- the timing and extent of our spending to support facilities upgrades and
product development efforts;
- the timing and size of business or technology acquisitions; and
- the timing of introductions of new products and enhancements to our
existing products.
We may issue additional equity to raise capital. Any future equity
financing will decrease existing stockholders' percentage equity ownership and
may, depending on the price at which the equity is sold, result in significant
economic dilution to such stockholders. Furthermore, our board of directors is
authorized under our charter documents to issue preferred stock with rights,
preferences or privileges senior to those of our common stock without
stockholder approval.
While we currently do not have a revolving credit facility, it is our goal
to obtain one in the near future. However, we believe that current market
conditions for such facilities are not as favorable as they have been at certain
times in the past, that for various reasons the number of potential lenders
actively providing credit facilities to companies in the data storage industry
has decreased recently, and that the terms on which the remaining potential
lenders are willing to offer such facilities, in many cases, are restrictive
and/or costly. Consequently, the terms and conditions under which we might
obtain such a facility are uncertain. Any failure to obtain adequate credit
facilities on acceptable terms could have a material and adverse effect on our
business, financial condition and results of operations.
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<PAGE> 31
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 HEA, 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 HEA. We may not be able to obtain similar rights in
the future on terms as favorable.
We were sued in the United States District Court for the Northern District
of California by Papst-Motoren GmbH and Papst Licensing (collectively "Papst")
claiming infringement of a number of hard disk drive motor patents. The lawsuit
alleges infringement of 15 of the hard disk drive motor patents, which 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 have 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. The motion was granted October 12, 1999, and the case has been
transferred to the Eastern District of Louisiana for coordinated or consolidated
pre-trial proceedings with three other actions involving Papst patents. The
consolidated proceedings are still in their initial stages, and there has been
no formal discovery taken by Maxtor. We deny any wrongdoing and intend to
vigorously defend ourselves. While the final outcome of these claims cannot be
determined at this time, we believe that resolution of these claims will not
have a material adverse effect on our business, financial condition or results
of operations.
WE 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;
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<PAGE> 32
- 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 and $51.2 million as of December 26, 1998 and January 1, 2000,
respectively. While we believe that our warranty reserves will be sufficient,
the failure to maintain sufficient warranty reserves or the unenforceability of
our liability limitations could have a material adverse effect on our business,
financial condition and results of operations.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE
Our stock price and the number of shares traded each day has varied
greatly. We expect these fluctuations to continue due to factors including:
- quarterly fluctuations in operating results;
- announcements of new products by us or our competitors;
- gains or losses of significant customers;
- changes in stock market analysts' estimates;
- the presence or absence of short-selling of our common stock; and
- events affecting other companies that the market deems comparable to us.
Our stock price also may be affected by events relating to HEA and Hyundai
Electronics Industries, including sales of our common stock by HEA or the
perception that such sales may occur. Our stock price may be subject to
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 HEA on or about February 15, 2002, or upon earlier
liquidation of DECS Trust IV under certain circumstances. We do not
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<PAGE> 33
know how or whether investors in the DECS offering will resell the DECS. Any
market that develops for the DECS could reduce the demand for our common stock
or otherwise negatively affect the market for our common stock.
WE COULD BE SUBJECT TO ENVIRONMENTAL LIABILITIES
We use only a limited variety of chemicals in our manufacturing and
research operations. However, we are subject to a wide range of environmental
protection regulations in the U.S. and Singapore. While we have not experienced
any material adverse effect on our operations as a result of such laws, future
regulations may have a material adverse effect on our business, financial
condition and results of operations. We believe that we are in compliance in all
material respects with all present environmental regulations. In the U.S.,
environmental regulations often require parties to fund remedial action
regardless of fault. As a consequence, it is often difficult to estimate the
future impact of environmental matters, including potential liabilities. If we
have to make significant capital expenditures or pay significant expenses in
connection with future remedial actions or to continue to comply with applicable
environmental laws, our business, financial condition and results of operations
could be materially and adversely affected.
ANTITAKEOVER PROVISIONS COULD AFFECT STOCKHOLDERS
We have a number of protective provisions in place designed to provide our
board of directors with time to consider whether a hostile takeover is in our
best interests and the best interests of our stockholders. These provisions,
however, could discourage potential acquisition proposals and could delay or
prevent a change in control of Maxtor. Such provisions also could diminish the
opportunities for a holder of our common stock to participate in tender offers,
including offers at a price above the then-current market price for our common
stock. Such provisions also may inhibit fluctuations in our stock price that
could result from takeover attempts.
The first of these provisions is Section 203 of the Delaware General
Corporation Law. Section 203 places significant restrictions on a public
Delaware corporation's ability to engage in any merger, asset or stock sale, or
other transaction resulting in a financial benefit to a stockholder holding 15%
or more of the corporation's voting stock.
In addition, our charter documents allow our board of directors to issue up
to 95 million shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the stockholders. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock, thereby
delaying, deferring or preventing a change in control of Maxtor. Furthermore,
such preferred stock may have other rights, including economic rights, senior to
our common stock, and as a result, the issuance of such preferred stock could
have a material adverse effect on our stock price. We currently do not plan to
issue shares of preferred stock.
Our charter documents also contain a number of protective measures
including provisions:
- dividing our board of directors into three classes serving staggered
three-year terms with only one of the three classes being elected each
year;
- requiring cause to remove directors;
- granting our board of directors the exclusive right to set the authorized
number of directors and to fill vacancies on our board of directors;
- requiring that any action required or permitted to be taken by our
stockholders be effected at a duly called annual or special meeting of
the stockholders instead of by a consent in writing;
- providing that only our board of directors, the Chairman of our board of
directors, or the Chief Executive Officer can call special meetings of
the stockholders;
- requiring advance notice for stockholder proposals or director
nominations by stockholders; and
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- requiring the affirmative vote of at least two-thirds of our outstanding
voting stock, voting as a single class to amend the above provisions.
In addition, we have entered into a Stockholder Agreement with HEA which:
- grants HEA certain rights for nomination;
- requires HEA to vote in favor of other board of director nominees so long
as HEA's rights to designate nominees are honored; and
- restricts HEA's rights to solicit proxies or acquire additional shares of
our common stock.
UNCERTAINTY AND RISKS RELATING TO INTEGRATION OF CREATIVE DESIGN SOLUTIONS, INC.
AND RISKS RELATING TO ACQUISITIONS GENERALLY
Part of Maxtor's strategy is to grow through the acquisition of related
business, such as the acquisition of CDS in September 1999.
This strategy is accompanied by a number of risks, including:
- the difficulty of assimilating the operations and personnel of CDS;
- the potential disruption of its ongoing business and distraction of
management;
- the difficulty of incorporating acquired technology or content and rights
into its products;
- the correct assessment of the relative percentages of in-process research
and development expense which can be immediately written off as compared
to the amount which must be amortized over the appropriate life of the
asset;
- the failure to successfully develop an acquired in-process technology
could result in the impairment of amounts currently capitalized as
intangible assets;
- unanticipated expenses related to technology integration;
- the maintenance of uniform standards, controls, procedures and policies;
- impairment of relationships with employees and customers as a result of
any integration of new management personnel; and
- the potential unknown liabilities associated with CDS.
Maxtor may not be successful in addressing these risks or any other
problems encountered in connection with the CDS acquisition or any of the future
acquisitions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated in pages 25 through
34 of this Report.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF MAXTOR CORPORATION
Consolidated Balance Sheets --
December 26, 1998 and January 1, 2000..................... 36
Consolidated Statements of Operations --
Fiscal years ended December 27, 1997, December 26, 1998
and January 1, 2000.................................... 37
Consolidated Statements of Stockholders' Equity (Deficit) --
Fiscal years ended December 27, 1997, December 26, 1998
and January 1, 2000.................................... 38
Consolidated Statements of Cash Flows --
Fiscal years ended December 27, 1997, December 26, 1998
and January 1, 2000.................................... 39
Notes to Consolidated Financial Statements.................. 41
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... 61
Financial Statement Schedules:
The following consolidated financial statement schedule of
Maxtor Corporation is filed as part of this Report and
should be read in conjunction with the consolidated
financial statements of Maxtor Corporation.
Schedule II Valuation and Qualifying Accounts............... S-1
</TABLE>
Schedules not listed above have been omitted since they are not applicable
or are not required or the information required to be set therein is included in
the consolidated financial statements or notes thereto.
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MAXTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 26, JANUARY 1,
1998 2000
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 214,126 $ 240,357
Marketable securities..................................... 13,503 113,565
Accounts receivable, net of allowance for doubtful
accounts of $8,409 at December 26, 1998 and $15,459 at
January 1, 2000........................................ 317,758 231,616
Inventories, net.......................................... 153,192 103,854
Prepaid expenses and other................................ 45,198 12,338
--------- ----------
Total current assets.............................. 743,777 701,730
Property, plant and equipment, net.......................... 108,290 132,089
Goodwill and other intangible assets, net................... -- 55,107
Other assets................................................ 11,346 17,409
--------- ----------
Total assets...................................... $ 863,413 $ 906,335
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings, including current portion of
long-term debt......................................... $ 5,261 $ 5,000
Accounts payable.......................................... 427,737 404,874
Accrued and other liabilities............................. 115,937 127,321
--------- ----------
Total current liabilities......................... 548,935 537,195
Long-term debt due to affiliate............................. 55,000 --
Long-term debt.............................................. 90,046 113,770
--------- ----------
Total liabilities................................. 693,981 650,965
Commitments and contingencies (Note 8)
Common stock, $0.01 par value, 250,000,000 shares
authorized; 94,293,499 shares issued and outstanding at
December 26, 1998 and 113,428,924 shares issued and
outstanding at January 1, 2000............................ 943 1,119
Additional paid-in capital.................................. 880,175 1,043,964
Accumulated deficit......................................... (741,780) (791,928)
Cumulative other comprehensive income....................... 30,094 2,215
--------- ----------
Total stockholders' equity........................ 169,432 255,370
--------- ----------
Total liabilities and stockholders' equity........ $ 863,413 $ 906,335
========= ==========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 37
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenue............................................ $ 1,384,799 $ 2,402,286 $ 2,486,123
Revenue from affiliates............................ 39,521 6,242 --
----------- ----------- ------------
Total revenue............................ 1,424,320 2,408,528 2,486,123
Cost of revenue.................................... 1,316,774 2,102,624 2,287,316
Cost of revenue from affiliates.................... 36,162 5,491 --
----------- ----------- ------------
Total cost of revenue.................... 1,352,936 2,108,115 2,287,316
----------- ----------- ------------
Gross profit............................. 71,384 300,413 198,807
----------- ----------- ------------
Operating expenses:
Research and development......................... 106,249 152,401 191,511
Selling, general and administrative.............. 62,520 75,819 89,274
Stock compensation expense....................... -- 12,088 2,437
Acquired in-process technology................... -- -- 7,028
Amortization of goodwill and other intangible
assets........................................ -- -- 3,118
----------- ----------- ------------
Total operating expenses................. 168,769 240,308 293,368
----------- ----------- ------------
Income (loss) from operations...................... (97,385) 60,105 (94,561)
Interest expense................................... (36,502) (28,784) (13,723)
Interest and other income.......................... 25,031 7,415 15,592
Gain on sale of investment......................... -- -- 44,085
----------- ----------- ------------
Income (loss) before income taxes.................. (108,856) 38,736 (48,607)
Provision for income taxes......................... 1,035 7,563 1,541
----------- ----------- ------------
Net income (loss).................................. (109,891) 31,173 (50,148)
Unrealized gain (loss) on investments in equity
securities....................................... 16,262 13,832 16,206
Less: reclassification adjustment for gain included
in net loss...................................... -- -- (44,085)
----------- ----------- ------------
Comprehensive income (loss)........................ $ (93,629) $ 45,005 $ (78,027)
=========== =========== ============
Net income (loss) per share -- basic............... $(58,112.64) $ 0.81 $ (0.48)
Net income (loss) per share -- diluted............. $(58,112.64) $ 0.47 $ (0.48)
Shares used in per share calculation
-- basic......................................... 1,891 38,295,095 105,503,281
-- diluted....................................... 1,891 65,814,126 105,503,281
</TABLE>
See notes to consolidated financial statements.
37
<PAGE> 38
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER STOCKHOLDERS'
-------------------- -------------------- PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (DEFICIT)
----------- ------ ----------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 28,
1996..................... 58,208,955 $ 582 -- $ -- $ 335,017 $(663,062) $ -- $(327,463)
Issuance of additional
Series A Preferred to
parent in exchange for
debt..................... 29,850,746 298 -- -- 199,702 -- -- 200,000
Issuance of stock under
stock option and related
plans.................... -- -- 7,563 -- 46 -- -- 46
Change in unrealized gain
on investments in equity
securities............... -- -- -- -- -- -- 16,262 16,262
Net loss................... -- -- -- -- -- (109,891) -- (109,891)
----------- ----- ----------- ------ ---------- --------- -------- ---------
Balance, December 27,
1997..................... 88,059,701 880 7,563 -- 534,765 (772,953) 16,262 (221,046)
Issuance of stock under
stock option and related
plans.................... -- -- 524,861 5 1,259 -- -- 1,264
Issuance of common stock in
initial public
offering................. -- -- 49,731,225 498 328,348 -- -- 328,846
Conversion of preferred
stock to common stock.... (88,059,701) (880) 44,029,850 440 440 -- -- --
Stock compensation......... -- -- -- -- 12,088 -- -- 12,088
Stock compensation
reimbursement due from an
affiliate................ -- -- -- -- 3,275 -- -- 3,275
Change in unrealized gain
on investments in equity
securities............... -- -- -- -- -- -- 13,832 13,832
Net income................. -- -- -- -- -- 31,173 -- 31,173
----------- ----- ----------- ------ ---------- --------- -------- ---------
Balance, December 26,
1998..................... -- -- 94,293,499 943 880,175 (741,780) 30,094 169,432
Issuance of stock under
stock option and related
plans.................... -- -- 3,205,743 17 8,915 -- -- 8,932
Issuance of common stock in
secondary public
offering................. -- -- 7,800,000 78 95,722 -- -- 95,800
Issuance of stock for
acquisition of
business................. -- -- 8,129,682 81 56,715 -- -- 56,796
Stock compensation......... -- -- -- -- 2,437 -- -- 2,437
Other comprehensive
income................... -- -- -- -- -- -- (27,879) (27,879)
Net loss................... -- -- -- -- -- (50,148) -- (50,148)
----------- ----- ----------- ------ ---------- --------- -------- ---------
Balance, January 1, 2000... -- $ -- 113,428,924 $1,119 $1,043,964 $(791,928) $ 2,215 $ 255,370
=========== ===== =========== ====== ========== ========= ======== =========
</TABLE>
See notes to consolidated financial statements.
38
<PAGE> 39
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $(109,891) $ 31,173 $ (50,148)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 65,642 74,203 83,219
Amortization of goodwill and other intangible assets..... -- -- 3,118
Acquired in-process technology........................... -- -- 7,028
Stock compensation expense............................... -- 12,543 4,947
Loss (gain) on sale of property, plant and equipment and
other assets.......................................... 4,366 3,562 (603)
Gain on sale of investment............................... -- -- (44,085)
Gain on fully reserved note receivable from affiliate.... (20,000) -- --
Changes in assets and liabilities:
Accounts receivable................................... (142,482) (66,836) 87,254
Inventories........................................... (74,434) 2,120 49,586
Other current assets.................................. 687 (10,552) (7,206)
Accounts payable...................................... 113,671 201,813 (24,343)
Accrued and other liabilities......................... 15,728 40,112 6,400
--------- --------- ---------
Net cash (used in) provided by operating
activities....................................... (146,713) 288,138 115,167
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment........ 609 3,323 339
Purchase of property, plant and equipment.................. (82,489) (95,230) (105,124)
Cash received on a note receivable from affiliate.......... 20,000 -- --
Cash acquired from acquisition............................. -- -- 710
Purchase of marketable securities.......................... -- (13,503) (110,062)
Proceeds from sale of investment........................... -- -- 44,085
Proceeds from matured securities........................... -- -- 10,000
Other...................................................... 621 3,635 (2,309)
--------- --------- ---------
Net cash used in investing activities............... (61,259) (101,775) (162,361)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, including short-term
borrowings............................................... 319,363 69,775 28,743
Principal payments of debt, including short-term
borrowings............................................... (309,784) (308,838) (60,050)
Net payments under accounts receivable securitization...... (16,041) (79,754) --
Proceeds from intercompany notes issued to parent.......... 200,000 -- --
Proceeds from issuance of common stock from public
offering, employee stock purchase plan and stock options
exercised................................................ 46 329,655 104,732
--------- --------- ---------
Net cash provided by financing activities........... 193,584 10,838 73,425
--------- --------- ---------
Net change in cash and cash equivalents.................... (14,388) 197,201 26,231
Cash and cash equivalents at beginning of year............. 31,313 16,925 214,126
--------- --------- ---------
Cash and cash equivalents at end of year................... $ 16,925 $ 214,126 $ 240,357
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
39
<PAGE> 40
MAXTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.............................................. $ 26,540 $ 24,047 $ 13,833
Income taxes.......................................... $ 1,025 $ 1,022 $ 304
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property, plant and equipment financed by
accounts payable...................................... $ 2,670 $ 2,991 $ 374
Purchase of property, plant and equipment financed by
capital leases........................................ $ 881 $ -- $ --
Exchange of notes payable for Series A Preferred Stock... $ 200,000 $ -- $ --
Increase (decrease) in unrealized gain on investments in
equity securities..................................... $ 16,262 $ 13,832 $ (27,879)
Stock compensation reimbursement due from an affiliate... $ -- $ 3,275 $ --
Common stock issued for acquisition...................... $ -- $ -- $ 56,796
</TABLE>
See notes to consolidated financial statements.
40
<PAGE> 41
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of Maxtor
Corporation and its wholly-owned subsidiaries ("Maxtor" or the "Company"). All
significant inter-company accounts and transactions have been eliminated.
NATURE OF BUSINESS
We develop, manufacture and market hard disk drive products for desktop
applications to customers which sell their products in the personal computer
industry. Customers include original equipment manufacturers ("OEMs"),
distributors, and national retailers. Additionally, several smaller retailers
and value-added resellers ("VARs") carry Maxtor products purchased through our
distribution network. We rely on suppliers for components including heads, disks
and custom integrated circuits. Although printed circuit board assemblies and
head stack assemblies are outsourced, head disk assemblies are completed by us.
All of our products are manufactured by Maxtor at our manufacturing facilities
in Singapore and sold in North America, Europe and Asia.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The actual results with regard to warranty expenditures could have a
material unfavorable impact on us if the actual rate of unit failure or the cost
to repair a unit is greater than what we have used in estimating our warranty
expense accrual.
Given the volatility of the market for disk drives and for our products, we
make adjustments to the value of inventories based on estimates of potentially
excess and obsolete inventories and negative margin products after considering
forecasted demand and forecasted average selling prices. However, forecasts are
always subject to revisions, cancellations, and rescheduling. Actual demand will
inevitably differ from such anticipated demand and such differences may have a
material impact on the financial statements.
RISKS AND UNCERTAINTIES
Our business entails a number of risks. As is typical in the disk drive
industry, we must utilize leading edge components for our new generation of
products, which may only be available from a limited number of suppliers. While
we are qualified and continue to qualify multiple sources for many components,
we are reliant on, and will continue to be reliant on, the availability of
supply from our vendors for many semi-custom and custom integrated circuits,
heads, media and other key components. Any de-commitments from customers for
product or delays of components from vendors could have an adverse impact on our
ability to ship products as scheduled to our customers.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject us to concentrations of
credit risk consist primarily of accounts receivable and cash equivalents. We
have cash equivalents and short-term investment policies that limit the amount
of credit exposure to any one financial institution and restrict placement of
these funds to financial institutions evaluated as highly credit-worthy. Our
products are sold worldwide to OEMs, distributors, and retailers. Concentration
of credit risk with respect to our trade receivables is limited by an ongoing
credit evaluation process and the geographical dispersion of sales transactions.
Therefore, collateral is
41
<PAGE> 42
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
generally not required from our customers. The allowance for doubtful accounts
is based upon the expected collectibility of all accounts receivable. As of
January 1, 2000, we had one customer who accounted for more than 10% of the
outstanding trade receivables. As of December 26, 1998, two customers
collectively represented approximately 38% of outstanding trade receivables. If
the customers fail to perform their obligations to us, such failures would have
adverse effects upon our financial position, results of operations, cash flows
and liquidity.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments, which are purchased with an
original maturity of three months or less, to be cash equivalents.
EQUITY SECURITIES
All equity securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value. Unrealized gains and
losses on securities classified as available-for-sale, when material, are
reported net of taxes as a separate component of stockholder's equity. Realized
gains and losses on sales of all such investments are included in the results of
operations computed using the specific identification cost method.
INVENTORIES
Inventories are stated at the lower of cost (computed on a first-in,
first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated on the
straight-line basis over the estimated useful lives of the assets, which
generally range from three to five years, except for buildings which are
depreciated over thirty years. Assets under capital leases and leasehold
improvements are amortized over the shorter of the asset life or the remaining
lease term. Capital lease amortization is included with depreciation expense.
Upon disposal, we remove the asset and accumulated depreciation from our records
and recognize the related gain or loss in results of operations.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, representing the excess of purchase price and acquisition costs
over the fair value of net assets of business acquired, and other intangible
assets, representing workforce, customer list and other current products and
technology, are being amortized over the estimated useful lives ranging from one
to seven years. Accumulated amortization as of January 1, 2000 was $3.1 million.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenue is recognized upon product shipment. Revenue from sales to certain
distributors is subject to agreements providing limited rights of return, as
well as price protection on unsold merchandise. Accordingly, we record reserves
upon shipment for estimated returns, exchanges and credits for price protection.
We also provide for the estimated cost to repair or replace products under
warranty at the time of sale. We currently warrant our products against defects
in parts and labor from the date of shipment with an additional three months
allowed for distributors to account for "shelf life." All products currently in
production are warranted for a period of 36 months after shipment.
ACCOUNTING FOR INCOME TAXES
We account for income taxes under the liability method. Under the liability
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
42
<PAGE> 43
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. We are required to
adjust our deferred tax liabilities in the period when tax rates or the
provisions of the income tax laws change. Valuation allowances are established
to reduce deferred tax assets to the amounts expected to be realized.
FOREIGN CURRENCY TRANSLATION
The functional currency for all foreign operations is the U.S. dollar. As
such, all material foreign exchange gains or losses are included in the
determination of net income (loss). Net foreign exchange losses included in net
loss for the fiscal years ended December 27, 1997, December 26, 1998 and January
1, 2000 were not material.
LONG-LIVED ASSETS
We review property, plant and equipment and other long lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is measured
by comparison of its carrying amount to future net cash flows the assets are
expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying
amount of the asset exceeds the present value of the future net cash flows.
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
We account for our accounts receivable securitization program in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities."
STOCK-BASED COMPENSATION
We have elected to continue to follow the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations thereof for financial reporting purposes
and have adopted the disclosure only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed in accordance with SFAS No.
128, "Earnings per Share." Basic net income (loss) per share is computed using
the weighted average common shares outstanding during the year. Diluted net
income (loss) per share is computed using the weighted average common shares and
potentially dilutive securities outstanding during the year. Potentially
dilutive securities are excluded from the computation of diluted net loss per
share for those presented years in which their effect would be anti-dilutive due
to our net losses. Net loss per share information presented for the year ended
December 27, 1997 is not meaningful due to the very limited number of common
shares outstanding during the year.
COMPREHENSIVE INCOME
In 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income," which
requires that an enterprise report and display, by major components and as a
single total, the change in its net assets during the period from non-owner
sources. The adoption of this Statement resulted in a change in the financial
statement presentation, but did not have an impact on our consolidated financial
position, results of operations or cash flows. As required by the provisions of
SFAS No. 130, all prior period data presented has been restated.
43
<PAGE> 44
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT REPORTING
In 1998, we adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of this Statement only affected the form and content of our segment
disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to conform
to current year classifications. These reclassifications had no impact on our
prior year stockholders' equity or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement will require us to recognize all derivatives on the balance sheet at
fair value. SFAS No. 133 requires that derivative instruments used to hedge be
identified specifically as to assets, liabilities, firm commitments or
anticipated transactions and measured as to effectiveness and ineffectiveness
when hedging changes in fair value or cash flows. Derivative instruments that do
not qualify as either a fair value or cash flow hedge will be valued at fair
value with the resultant gain or loss recognized in current earnings. Changes in
the effective portion of fair value hedges will be recognized in current
earnings along with the change in fair value of the hedged item. Changes in the
effective portion of the fair value of cash flow hedges will be recognized in
other comprehensive income until realization of the cash flows of the hedged
item through current earnings. Any ineffective portion of hedges will be
recognized in current earnings.
In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date
of FASB Statement No. 133," to defer for one year the effective date of
implementation of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000, with earlier
application encouraged. We are in the process of evaluating the requirements of
SFAS Nos. 133, but do not expect this pronouncement to materially impact our
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. In March 2000, the SEC issued SAB
No. 101A to defer for one quarter the effective date of implementation of SAB
No. 101 with earlier application encouraged. We are required to adopt SAB 101 in
the second quarter of fiscal 2000. We do not expect the adoption of SAB 101 to
have a material effect on our financial position or results of operations.
44
<PAGE> 45
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUPPLEMENTAL FINANCIAL STATEMENT DATA (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 26, JANUARY 1,
1998 2000
------------ ----------
<S> <C> <C>
Inventories:
Raw materials............................................. $ 51,680 $ 29,027
Work-in-process........................................... 8,537 2,302
Finished goods............................................ 92,975 72,525
--------- ---------
$ 153,192 $ 103,854
========= =========
Prepaid expenses and other:
Investments in equity securities, at fair value........... $ 30,094 $ 2,215
Prepaid expenses and other................................ 15,104 10,123
--------- ---------
$ 45,198 $ 12,338
========= =========
Property, plant and equipment, at cost:
Buildings................................................. $ 35,199 $ 55,174
Machinery and equipment................................... 203,947 248,880
Software.................................................. 40,779 48,129
Furniture and fixtures.................................... 31,213 10,149
Leasehold improvements.................................... 11,352 14,601
--------- ---------
322,490 376,933
Less: Accumulated depreciation and amortization............. (214,200) (244,844)
--------- ---------
Net property, plant and equipment........................... $ 108,290 $ 132,089
========= =========
Accrued and other liabilities:
Income taxes payable...................................... $ 9,123 $ 7,291
Accrued payroll and payroll-related expenses.............. 46,225 39,228
Accrued warranty.......................................... 41,803 51,236
Accrued expenses.......................................... 18,786 29,566
--------- ---------
$ 115,937 $ 127,321
========= =========
</TABLE>
3. FINANCIAL INSTRUMENTS
FAIR VALUE DISCLOSURES
The fair values of cash and cash equivalents approximate carrying values
because of their short maturities. The carrying values of notes receivable,
which are classified in other assets, approximate fair values. The fair values
of our fixed rate debt are estimated based on the current rates offered to us
for similar debt instruments with the same remaining maturities. The fair values
of our variable rate debt approximate carrying values as these instruments are
adjusted periodically during the course of the year at market prices. The fair
values of our convertible subordinated debentures are based on the bid price of
the last trade for the fiscal years ended December 26, 1998 and January 1, 2000.
45
<PAGE> 46
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying values and fair values of our financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 26, 1998 JANUARY 1, 2000
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $214,126 $214,126 $240,357 $240,357
Marketable securities........................... 13,503 13,503 113,565 113,565
Notes receivable................................ 51 51 331 331
Equity securities............................... 30,094 30,094 2,215 2,215
Short and long-term debt:
fixed rates................................... -- -- -- --
variable rates................................ -- -- 28,763 28,763
debt to affiliate............................. 55,000 55,000 -- --
Subordinated debentures......................... 95,000 60,800 90,000 63,000
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
We enter into currency forward contracts to manage foreign currency
exchange risk associated with our manufacturing operations in Singapore. Our
policy is to hedge all material transaction exposures on a quarterly basis.
Contracts are generally entered into at the end of each fiscal quarter to reduce
foreign currency exposures for the following fiscal quarter. Contracts generally
have maturities of three months or less. Any gains or losses on these
instruments are accounted for in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation," and are generally
included in cost of revenue. Unrealized gains or losses on foreign currency
forward contracts that are designated and effective as hedges of firm
commitments, are deferred and recorded in the same period as the underlying
transaction. Notional amounts of outstanding currency forward contracts were
$0.3 million as of December 26, 1998. No such forward contracts were outstanding
as of January 1, 2000.
SALES OF ACCOUNTS RECEIVABLES
On July 31, 1998, we entered into a three-year agreement with Fleet Bank
for a $200.0 million asset securitization program. Under the Fleet Bank program,
we sold all of our eligible trade accounts receivable on a non-recourse basis
through a special purpose entity. As of January 1, 2000, $100.0 million of
accounts receivable had been sold under this arrangement and has been excluded
from our balance sheet.
As part of this arrangement, we are subject to financial covenants
including the maintenance of certain financial ratios and a tangible net worth
test.
4. GAIN ON SALE OF INVESTMENT
In April 1999, we sold a portion of our equity investment in Celestica Inc.
resulting in approximately a $22.1 million gain. In September 1999, we sold the
remaining portion resulting in an additional $22 million gain; both were
included in gain on sale of investment for the year ended January 1, 2000.
5. ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC.
In September 1999, we acquired all the outstanding stock of Creative Design
Solutions, Inc. ("CDS"), in exchange for a total of 8,129,682 shares of our
common stock and assumption of outstanding CDS stock options for an aggregate
purchase price of approximately $57.6 million, including acquisition expenses.
The acquisition was accounted for using the purchase method of accounting,
and accordingly, the purchase price has been allocated to the tangible and
identifiable intangible assets acquired and liabilities
46
<PAGE> 47
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assumed on the basis of their fair values on the acquisition date of September
10, 1999. Approximately $2.7 million of the aggregate purchase price was
allocated to net tangible assets consisting primarily of cash, accounts
receivable, inventory, prepaids, and property, plant and equipment, and $10.4
million to short-term borrowings, accounts payable and accrued liabilities. The
historical carrying amounts of such net assets approximated their fair values.
Approximately $7 million was allocated to acquired in-process technology and was
immediately charged to operations at the acquisition date because it had no
alternative future uses. Approximately $10.3 million was allocated to current
products and technology, workforce and customer list, which are being amortized
over their estimated useful lives ranging from 1 to 7 years. The purchase price
in excess of the fair value of identified tangible and intangible assets and
liabilities assumed in the amount of $48.1 million was allocated to goodwill and
is being amortized over its estimated useful life of 7 years. We will evaluate
the periods of amortization continually to determine whether later events and
circumstances warrant revised estimates of useful lives.
The following unaudited proforma consolidated amounts give effect to the
acquisition of CDS as if it had occurred on December 28, 1997 and December 27,
1998 by consolidating the results of operations of CDS with our results for the
fiscal years ended December 26, 1998 and January 1, 2000, respectively (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
DECEMBER 26, JANUARY 1,
1998 2000
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Revenue..................................................... $2,409,094 $ 2,486,646
Net income/(loss)........................................... $ 16,259 $ (63,291)
Net income/(loss) per share:
Basic..................................................... $ 0.35 $ (0.59)
Diluted................................................... $ 0.22 $ (0.59)
Shares used in per share calculation
Basic..................................................... 46,424,777 107,044,347
Diluted................................................... 74,303,301 107,044,347
</TABLE>
The above unaudited pro forma consolidated amounts are not necessarily
indicative of the actual results of operations that would have been reported if
the acquisition had actually occurred as of the beginning of the periods
described above, nor does such information purport to indicate the results of
our future operations. In the opinion of management, all adjustments necessary
to present fairly such pro forma amounts have been made.
6. SEGMENT AND MAJOR CUSTOMER INFORMATION
Based on the criteria set forth in SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," we have determined that we
have a single reportable segment consisting of the design, manufacture and sale
of data storage products for desktop computer and network storage systems used
in heterogeneous computing environments. Management uses one measurement of
profitability and does not disaggregate its business for internal reporting. We
have a world-wide sales, service and distribution network. Products are marketed
and sold through a direct sales force to OEMs, distributors and retailers in the
United States, Europe and Asia Pacific.
Operations outside the United States primarily consist of the manufacturing
plant in Singapore that produces subassemblies and final assemblies for our disk
drive products. For the year ended January 1, 2000, we have retroactively
changed the method of presenting geographic revenue information from point of
47
<PAGE> 48
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
origination to point of destination. Revenue by destination and long-lived asset
information by geographic area for each of the three fiscal years is presented
in the following table:
<TABLE>
<CAPTION>
YEAR ENDED AND AS OF YEAR ENDED AND AS OF YEAR ENDED AND AS OF
DECEMBER 27, 1997 DECEMBER 26, 1998 JANUARY 1, 2000
----------------------- ----------------------- -----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
United States................. $ 895,733 $35,972 $1,493,271 $ 41,912 $1,781,296 $108,807
Asia Pacific.................. 189,995 62,421 317,033 65,797 342,890 77,832
Europe........................ 303,200 943 532,698 581 312,168 557
Latin America and other....... 35,392 -- 65,526 -- 49,769 --
---------- ------- ---------- -------- ---------- --------
Total............... $1,424,320 $99,336 $2,408,528 $108,290 $2,486,123 $187,196
========== ======= ========== ======== ========== ========
</TABLE>
Revenues are substantially originated from the United States. No individual
foreign country's revenue is material to the Company as a whole. Long-lived
assets located outside the United States consist primarily of the manufacturing
operations located in Singapore which amounted to $62.1 million, $65.5 million
and $77.5 million as of December 27, 1997, December 26, 1998 and January 1,
2000, respectively.
During the year ended December 27, 1997, two customers, Compaq and Dell,
accounted for approximately 21% and 10% respectively, of our revenue. During the
year ended December 26, 1998, two customers, Dell and IBM, accounted for
approximately 27% and 15% respectively, of our revenue. During the year ended
January 1, 2000, Dell accounted for approximately 22.8% of our revenue.
Sales to OEMs represented 64%, 77% and 75% of total revenue for the years
ended December 27, 1997, December 26, 1998 and January 1, 2000, respectively.
7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings and long-term debt consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 26, JANUARY 1,
1998 2000
------------ ----------
<S> <C> <C>
5.75% Subordinated Debentures due March 1, 2012............. $ 95,000 $ 90,000
Long-term debt due affiliate; interest payable at rate of 55,000 --
7.65%.....................................................
4-year loan due to the Economic Development Board of -- 28,763
Singapore; interest payable at 1% above prevailing Central
Provident Fund lending rate, subject to minimum of 3.5%
per year..................................................
Other obligations, including capital leases................. 307 7
-------- --------
150,307 118,770
Less amounts due within one year............................ (5,261) (5,000)
-------- --------
Due after one year.......................................... $145,046 $113,770
======== ========
</TABLE>
48
<PAGE> 49
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future aggregate maturities as of January 1, 2000 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
<S> <C>
2000................................................... $ 5,000
2001................................................... 13,224
2002................................................... 13,217
2003................................................... 17,329
2004................................................... 5,000
Later years............................................ 65,000
--------
Total........................................ $118,770
========
</TABLE>
Interest on the Subordinated Debentures (the "Debentures") is payable semi
annually. The Debentures are convertible at the option of the holder into a cash
payment of $167.50 for each $1,000 principal amount at any time. The Debentures,
at our option, are redeemable at 100.575% of the outstanding principal amount,
plus accrued interest. The Debentures require a sinking fund payment of $5.0
million, payable annually, which is calculated to retire at least 70% of the
Debentures prior to maturity. The Debentures are subordinated in right to
payment to all senior indebtedness.
In July 1998, we replaced our short-term borrowings from Hyundai
Electronics America ("HEA") of $55.0 million with a three-year subordinated note
due July 31, 2001. This note bears interest of LIBOR plus 2.0% and was repaid in
February 1999.
In September 1999, our Singapore subsidiary Maxtor Peripherals (S) Pte Ltd
entered into a four-year loan agreement with the Economic Development Board of
Singapore (the "Board") for SGD48 million, which will amortize in seven equal
semi-annual installments beginning March 2001. Interest is charged by the Board
at 1% above the prevailing Central Provident Fund lending rate, subject to a
minimum of 3.5% per year, which has been the rate of payment since inception.
This loan is supported by a two-year guaranty from the Bank of Nova Scotia at an
interest rate of 0.15% per year. This guaranty is currently collateralized by
cash but the Company may, at its option, substitute other assets as security.
8. COMMITMENTS AND CONTINGENCIES
We lease certain of our principal facilities and certain machinery and
equipment under operating lease arrangements. The future minimum annual rental
commitments as of January 1, 2000 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING (IN THOUSANDS)
------------------ --------------
<S> <C>
2000................................................... $13,271
2001................................................... 12,217
2002................................................... 6,429
2003................................................... 4,846
2004................................................... 2,372
Later years............................................ 17,484
-------
Total........................................ $56,619
=======
</TABLE>
The above commitments extend through fiscal year 2016. Rental expense was
approximately $10.7 million, $11.6 million and $15.3 million for the years ended
December 27, 1997, December 26, 1998 and January 1, 2000, respectively.
Pursuant to a sublicense agreement with Hyundai Electronics Industries Co.
Ltd. ("HEI"), we are obligated to pay a portion of an IBM license royalty fee
otherwise due from HEI. Such payments are due in
49
<PAGE> 50
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
annual installments through 2007. As of January 1, 2000, aggregate future
payments under this commitment are estimated at $12.4 million.
LEGAL PROCEEDINGS
We are currently involved in a dispute with StorMedia Incorporated
("StorMedia"), which arose out of an agreement among Maxtor, 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
Maxtor. StorMedia's disk media did not meet our specifications and functional
requirements as required by the agreement and we ultimately terminated the
agreement.
After a class action securities lawsuit was filed against StorMedia by
certain of its shareholders in September 1996 which alleged, in part, that
StorMedia failed to perform under the agreement, StorMedia sued HEI, Mong Hun
Chung (HEI's chairman), Dr. Chong Sup Park (HEA's President and the individual
who signed the StorMedia Agreement on behalf of Maxtor) 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, we filed a complaint against StorMedia and William Almon
(StorMedia's Chairman and Chief Executive Officer) in a Colorado state court
seeking approximately $100 million in damages and alleging, among other claims,
breach of contract, breach of implied warranty of fitness and fraud under the
StorMedia Agreement (the "Colorado Suit"). This proceeding was stayed pending
resolution of the Federal Suit. The Federal Suit was permanently dismissed early
in February 1998. On February 24, 1998, StorMedia filed a new complaint in a
California state court for $206 million, alleging fraud and deceit against the
Original Defendants and negligent misrepresentation against HEI and Maxtor (the
"California Suit"). On May 18, 1998, the stay on the Colorado Suit was lifted by
the Colorado state court. Our motion to dismiss, or in the alternative, stay the
California Suit, is pending. On September 9, 1998, the California Suit was
stayed pending resolution of the Colorado Suit. On October 11, 1998, StorMedia
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act.
This bankruptcy filing caused an automatic stay of proceedings against
StorMedia, including the Colorado Suit. StorMedia has not prosecuted its claims
against Maxtor since it filed for bankruptcy protection.
On or about February 17, 1999, we filed proofs of claim in the bankruptcy
cases against StorMedia, Inc. and StorMedia International, Ltd., in which we
asserted claims based upon the claims and allegations set forth in the Colorado
Action. On or about November 2, 1999, StorMedia filed an "Objection To Proof Of
Claim And Counterclaims And Crossclaims For Breach Of Contract, Breach Of The
Implied Covenant Of Good Faith, And Fair Dealing, Promissory Fraud, And Fraud
And Deceit," titled StorMedia, Inc and StorMedia Int'l Ltd. v. Maxtor Corp. and
Hyundai Electronics Indus., Inc. (In re StorMedia, Inc.), commencing Adversary
Proceeding Number 99-5409 (the "Bankruptcy Action"). In the Bankruptcy Action,
StorMedia seeks to disallow our proof of claim on the grounds that under
Bankruptcy Code section 502(b) and applicable state law, our claims against
StorMedia are unenforceable and not allowable because we rejected StorMedia's
products for reasons other than quality. StorMedia further seeks a determination
pursuant to Bankruptcy Code section 502(b) and applicable state law that our
claims are unenforceable and not allowable because StorMedia is entitled to a
setoff in an amount exceeding our claims. StorMedia further seeks a
determination that under Bankruptcy Code section 510(c) and applicable state law
that any allowable claim by us is equitably subordinated to all allowed claims
of StorMedia's other creditors. In addition, StorMedia also asserts in the
Bankruptcy Action counterclaims against us and cross-claims against HEI
asserting: Breach of Volume Purchase Agreement, Breach of the Implied Covenant
of Good Faith and Fair Dealing, Promissory Fraud and Fraud and Deceit.
50
<PAGE> 51
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On December 23, 1999, HEI and Maxtor filed motions seeking an order of the
Bankruptcy Court providing that the Bankruptcy Court will abstain from hearing
the Bankruptcy Action pursuant to 28 U.S.C. sec. 1334(c). In December of 1999,
the Bankruptcy Court entered an order extending the deadline for Maxtor and HEI
to file an answer or other responsive pleading in the Bankruptcy Action through
the earlier of: (i) entry of an order on the abstention motions, or (ii)
February 14, 2000.
On or about February 16, 2000, the Bankruptcy Court approved a stipulation
entered into among Maxtor, HEI and StorMedia, which provided in part, that the
Bankruptcy Court will abstain from the Bankruptcy Action pursuant to 28 U.S.C.
sec. 1334(c). The stipulation also provided that the automatic stay imposed by
the Bankruptcy Court will be modified to allow all parties to the Colorado
Action to proceed to final, non-appealable judgment or settlement.
In addition, the parties have agreed that any award of damages pursuant to
final, non-appealable judgment entered by the Colorado Court in our favor or any
final, non-appealable stipulated judgement or other form of settlement entered
into in the Colorado Action in our favor, will be deemed to be a valid claim
under applicable non-bankruptcy law for the purposes of allowance in StorMedia's
bankruptcy cases, subject, however, in all respects to the determination of the
Bankruptcy Court of all issues within the Bankruptcy Court's exclusive
jurisdiction (the "Bankruptcy Court Matters"), including, but not limited to:
(1) the extent to which StorMedia holds defenses that arise exclusively under
the Bankruptcy Code to the allowance of such claim in StorMedia's bankruptcy
cases; (ii) the classification of such claim under the Plan; (iii) the extent to
which such claim may be equitably subordinated pursuant to 11 U.S.C. sec. 510;
and (iv) the extent to which such claim may reduce our liability to StorMedia,
if any (as determined by a final non-appealable judgment of the Colorado Court),
pursuant to 11 U.S.C. 553. The Bankruptcy Court Matters will remain subject to
Bankruptcy Court jurisdiction and will be stayed and held in abeyance until such
time as the Colorado Court has fully resolved the Colorado Action by entry of a
final, non-appealable judgment or settlement.
We believe that we have valid defenses against the claims alleged by
StorMedia and intend to defend ourselves vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, we cannot determine the possible loss, if any, that 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 our
technical personnel, as well as substantial expenditures for future legal fees.
After considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, our management believes that the
resolution of this matter will not have a material adverse effect on our
business, financial condition or results of operations. However, the results of
these proceedings, including any potential settlement, are uncertain and there
can be no assurance that they will not have a material adverse effect on our
business, financial position and results of operations.
We were sued in the United States District Court for the Northern District
of California by Papst-Motoren GmbH and Papst Licensing (collectively "Papst")
claiming infringement of a number of hard disk drive motor patents. The lawsuit
alleges infringement of 15 of the hard disk drive motor patents, which 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 have 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. The motion was granted October 12, 1999, and the case has been
transferred to the Eastern District of Louisiana for coordinated or consolidated
pre-trial proceedings with three other actions involving Papst patents. The
consolidated proceedings are still in their initial stages, and there has been
no formal discovery taken by Maxtor. We deny any wrongdoing and intend to
vigorously defend the matter. While the final outcome of these claims cannot be
determined at this
51
<PAGE> 52
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
time, we believe that resolution of these claims will not have a material
adverse effect on our business, financial condition or results of operations.
This statement should be read in conjunction with our periodic reports filed
with the SEC.
9. RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH HEA AND HEI
In 1994, HEI and certain of its affiliates purchased 40% of our outstanding
common stock for $150.0 million in cash. In early 1996, HEA acquired all of the
remaining shares of public-held common stock in a tender offer and merger for
$215.0 million in cash and also acquired all of our common stock held by HEI and
its affiliates. We operated as a wholly owned subsidiary of HEA until completion
of its July 31, 1998 initial public offering which reduced the ownership
interest of HEA to below 50%.
From August 1995 through July 1998, HEI and its affiliates guaranteed our
various credit facilities, all of which were repaid and related guarantee
arrangements terminated in connection with our initial public offering.
Our board of directors has established an affiliated transactions committee
which consists entirely of directors who are not employed by HEA, any affiliate
thereof or the Company. The board of directors has adopted resolutions requiring
this Affiliated Transactions Committee to review any material transactions
between Maxtor and HEA or its affiliates. Also, our Amended and Restated
Certificate of Incorporation have certain provisions concerning the conduct of
certain affairs of the Company as they may involve HEA and its affiliates and
the Company.
Transactions with Affiliates
In April 1997, HEA renewed a revolving line of credit with a borrowing
limit of $150 million, which was increased to $185 million in June 1997, and to
$270 million in August 1997. In December 1997, $200 million of this outstanding
indebtedness was cancelled in exchange for 29,850,746 shares of our preferred
stock, the borrowing limit was reduced to $150 million, and $5 million in
principal was repaid. In January 1998, we repaid an additional $10 million in
principal. In April 1998, the revolving credit line was renewed with a borrowing
limit of $100 million. On July 31, 1998, the revolving line, which had an
outstanding principal balance of $55 million, was replaced with a three-year
subordinated term note in the same principal amount. This note was paid off in
the first quarter of 1999. As of January 1, 2000, there is no outstanding
indebtedness to HEA.
The cost of revenue includes certain component parts purchased from MMC
Technology, Inc., a wholly owned subsidiary of HEA, amounting to $146.8 million
during the year ended December 26, 1998 and $150.2 million during the year ended
January 1, 2000. The cost of revenue also includes certain component parts
purchased from HEI which to date have not been significant.
Pursuant to a sublicense agreement with HEI, we are obligated to pay a
portion of an IBM license royalty fee otherwise due from HEI. Such payments are
due in annual installments through 2007. For the year ended January 1, 2000,
$1.85 million expense was incurred in connection with this obligation.
HEA currently is an unconditional guarantor of our facilities lease in
Milpitas, California. The aggregate rent under the lease is currently $3.2
million per annum.
Stockholder Agreement with HEA and HEI
The Company, HEA and HEI ("Hyundai Affiliates") are parties to a
stockholder agreement which includes provisions for HEA to nominate directors
based on the ownership interest of the Hyundai Affiliates,
52
<PAGE> 53
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
prohibition of certain proxy solicitations by Hyundai Affiliates, and rights of
the Hyundai Affiliates to maintain stock ownership.
When the Hyundai Affiliates beneficially own less than a majority, but at
least 30% of the outstanding voting stock, HEA has the right to designate for
nomination one director in each of the three classes of our board of directors.
Standstill and Right to Maintain Ownership; Substantial Stock
Ownership. Hyundai Affiliates are not permitted to acquire additional shares of
voting stock except for two reasons. First, Hyundai Affiliates may purchase
voting stock if a third party makes a tender offer or exchange offer for at
least 40% or accumulates more than 20% of voting stock, unless these actions by
the third party have been approved by a majority of directors who are not
employees of any Hyundai entity or Maxtor. Second, Hyundai Affiliates may
purchase voting stock through December 31, 2000, if as a result of an issuance
of common stock or other equity securities, Hyundai Affiliates will own in the
aggregate less than 30% of outstanding voting stock, plus one share (the
"Minimum Ownership") following such issuance. The prohibition on Hyundai
Affiliates' acquisition of voting stock terminates on the earlier of December
31, 2001 or such time as the Hyundai Affiliates beneficially own less than 20%
of outstanding voting stock.
Agreement Not to Compete. HEA and HEI also have agreed not to compete with
us in the design, development, manufacture, marketing or sale of hard disk
drives through July 2003. Despite this agreement, Hyundai Affiliates are
permitted to make investments of up to 3% of the outstanding stock of a publicly
traded corporation, which competes with Maxtor in the aforementioned businesses.
10. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In May 1998, the Board of Directors approved a one-for-two reverse split of
our outstanding common stock, which became effective upon our filing of an
amended and restated certificate of incorporation in Delaware on July 24, 1998.
All references in the financial statements to the number of our common shares
and price per share amounts, as well as the conversion ratio of preferred
shares, have been retroactively restated to reflect the reverse split. The Board
of Directors also approved the increase of our authorized common stock to 250
million shares.
In July 1998, we completed the issuance of 49,731,225 shares of our common
stock in an initial public offering. We received approximately $328.8 million,
net of issuance costs. Approximately $200.0 million of the proceeds were used
for repayment of certain outstanding indebtedness under credit facilities due to
various banks. Upon closing of the July 1998 public offering, all outstanding
shares of the Series A Preferred Stock converted into 44,029,850 shares of
common stock. As a result of the July 1998 public offering, we ceased to be a
majority-owned subsidiary of HEI and therefore are no longer subject to HEI's
previous commitment of financial support.
In February 1999, we completed a public offering of 7.8 million shares of
our common stock. Net proceeds of approximately $95.8 million were received from
the offering, net of issuance costs. A portion of the proceeds from the offering
was used to prepay without penalty outstanding aggregate principal indebtedness
of $55 million owing to HEA under a subordinated note due July 31, 2001.
RESTRICTED STOCK PLAN
In May 1998, we adopted the 1998 Restricted Stock Plan (the "98 Plan"),
which provides for awards of shares of common stock to certain executive
employees. Restricted stock awarded under this plan vests three years from the
date of grant and is subject to forfeiture in the event of termination of
employment with us prior to vesting. We granted 390,000 shares of common stock
in June 1998 under this plan. Compensation cost
53
<PAGE> 54
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
based on fair market value of our stock at the date of grant is reported as
compensation expense on a ratable basis over the vesting periods. For the years
ended December 26, 1998 and January 1, 2000, compensation expense recorded in
connection with the 98 Plan amounted to $455,000 and $1.29 million,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
A total of 2.4 million shares of our common stock has been reserved for
issuance under our 1998 Employee Stock Purchase Plan (the "Purchase Plan"),
pursuant to which 1.2 million shares had been issued as of January 1, 2000. The
Purchase Plan permits eligible employees to purchase our common stock at a
discount, but only through accumulated payroll deductions, during sequential
six-month offering periods. Participants purchase shares on the last day of each
offering period. In general, the price at which shares are purchased under the
Purchase Plan is equal to 85% of the lower of the fair market value of a share
of common stock on (a) the first day of the offering period, or (b) the purchase
date. Offering periods of the Purchase Plan generally begin on February 16 and
August 16 of each year, although the initial offering period under the Purchase
Plan commenced on July 30, 1998.
STOCK OPTION PLAN
We grant options and awards of restricted stock pursuant to our Amended and
Restated 1996 Stock Option Plan (the "Amended Plan"), which was approved by the
Board of Directors in May 1996, and amended by our stockholders at our 1999
Annual Meeting of Stockholders. Options under the Amended Plan expire ten years
from the date of grant. Restricted stock vests in one or more installments over
a number of years. In June 1999, we granted 1,680,000 shares of common stock
under this plan. For the year ended January 1, 2000, compensation expense
recorded amounted to $1.22 million.
The Plan generally provides for the grant of non-qualified stock options to
our eligible employees, consultants, affiliates and directors at a price not
less than 85% of the fair market value at the date of grant, as determined by
the Board of Directors, and incentive stock options to our employees at a price
not less than the fair market value at the date of grant. The Plan also provides
for the grant of restricted stock to eligible employees. The Board of Directors
or an executive committee appointed by the Board also approves other terms such
as number of shares granted and exercisability thereof. Options granted under
the Amended Plan vest over a four-year period with 25% vesting at the first
anniversary date of the vest date and 6.25% each quarter thereafter. Restricted
stock grants vest in one or more installments over a period of years, and are
subject to forfeiture if employment is terminated prior to the time the shares
become fully vested and non-forfeitable.
In connection with our acquisition of CDS in September 1999, we established
a separate reserve of 674,477 shares of our common stock for issuance upon
exercise of stock options (the "Assumed Options") granted under the CDS
Incentive Stock Option Plan (the "CDS Plan"). As of January 1, 2000, 670,293
shares of our common stock were issuable under the CDS Plan. The Assumed Options
are incentive stock options which vest over four years subject to the terms and
conditions of the Assumed Options agreement.
The Plan was amended in February 1998 to remove certain provisions which
had given rise to variable accounting, and offered and modified employee option
agreements in the second quarter of 1998 for the majority of employees who had
previously held variable options to achieve fixed-award accounting. To comply
with the variable plan accounting required prior to these amendments, we
recorded compensation expense related to the difference between the estimated
fair market value of our stock and the stated exercise price of our options.
Compensation cost was reflected in accordance with FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans."
54
<PAGE> 55
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes option activity through January 1, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
SHARES WEIGHTED AVERAGE
AVAILABLE EXERCISE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE VALUE
---------- ---------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance as of December 28, 1996......... 1,583,334 3,552,750 $ 6.00 $21,316
Options granted....................... (1,622,375) 1,622,375 6.00 9,735
Options exercised..................... -- (7,563) 6.00 (46)
Options canceled...................... 759,645 (759,645) 6.00 (4,558)
---------- ---------- -------
Balance as of December 27, 1997......... 720,604 4,407,917 6.00 26,447
Shares reserved....................... 8,663,234 -- -- --
Options granted....................... (5,848,761) 5,848,761 10.16 59,431
Options exercised..................... -- (134,862) 6.00 (809)
Options canceled...................... 815,857 (815,857) 7.77 (6,339)
---------- ---------- -------
Balance as of December 26, 1998......... 4,350,934 9,305,959 8.46 78,730
Shares reserved....................... 3,676,367 -- -- --
Options assumed from acquisition...... -- 670,293 1.10 737
Options granted....................... (2,824,814) 2,824,814 5.30 14,980
Options exercised..................... -- (500,164) 4.10 (2,051)
Options canceled...................... 915,650 (915,650) 7.60 (7,349)
---------- ---------- -------
Balance as of January 1, 2000........... 6,118,137 11,385,252 $ 7.47 $85,047
========== ========== =======
</TABLE>
There were 2,543,703 shares vested but unexercised as of December 26, 1998
at a weighted average exercise price of $6.01, and no shares exercised subject
to repurchase. There were 4,734,701 shares vested but unexercised as of January
1, 2000 at a weighted average exercise price of $7.63, and no shares exercised
subject to repurchase.
The following table summarizes information for stock options outstanding as
of January 1, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- --------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.575 - $5.9375 2,720,585 9.34 $ 4.21 89,989 $ 4.84
$6.00 - $6.00 4,278,118 7.30 6.00 3,468,168 6.00
$6.0625 - $13.125 1,675,669 8.71 7.29 507,563 7.21
$13.1875 - $19.3113 2,710,880 8.87 13.30 668,981 13.25
---------- ---------
11,385,252 8.37 $ 7.50 4,734,701 $ 7.63
========== =========
</TABLE>
We account for our stock option and employee stock purchase plans in
accordance with APB 25 and related interpretations thereof. The following
information concerning such plans is provided in accordance with SFAS No. 123.
During 1997, we also granted options to the employees of MMC Technology,
Inc. ("MMC"), a wholly owned subsidiary of HEA. As of January 1, 2000, there
were 462,353 options outstanding, which are now fully vested, pursuant to these
grants which are included in the table above. Compensation cost for options
granted to non-employees is measured at their fair value in accordance with
Emerging Issues Task Force Issue
55
<PAGE> 56
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
No. 96-18. MMC has agreed to reimburse us for any compensation expense arising
from these grants. Accordingly, compensation costs related to the MMC grants are
reported as a receivable from affiliates.
The fair value of option grants has been estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
<S> <C> <C> <C>
Risk-free interest rate......................... 5.86% 5.07% 5.50%
Weighted average expected life.................. 4.5 years 4 years 4.5 years
Volatility...................................... -- 62% 76%
Dividend yield.................................. -- -- --
</TABLE>
No price volatility was assumed for 1997 because our equity securities were
not traded publicly. No dividend yield is assumed as we have not paid dividends
and have no plans to do so.
The weighted average expected life was calculated based on the vesting
period and the expected life at the date of grant. The risk-free interest rate
was calculated based on rates prevailing during grant periods and the expected
life of the options at the date of grants. The weighted average fair values of
options granted to employees during the years ended December 28, 1997, December
26, 1998 and January 1, 2000 were $0.84, $4.54 and $3.32, respectively.
Pursuant to SFAS No. 123, we also estimate the fair value of employee's
purchase rights under the Employee Stock Purchase Plan and unvested shares
issued under the Restricted Stock Plan using the Black-Scholes valuation model.
The fair value of purchase rights under the Employee Stock Purchase Plan for the
year ended January 1, 2000 was $2.77 which was estimated using the following
assumptions: a weighted-average expected life of 0.5 years; expected volatility
of 0.76; and a weighted-average risk-free interest rate of 4.92%. The fair value
of unvested shares issued under the Restricted Stock Purchase Plan for the year
ended January 1, 2000 was $4.78 which was estimated using the following
assumptions: a weighted-average expected life of 3.0 years, expected volatility
of 0.76; and a weighted-average risk-free interest rate of 5.79%.
The following pro forma net income (loss) information for our stock
options, restricted stock and employee stock purchase plan has been prepared
following the provisions of SFAS No. 123 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss)
As reported.................................. $ (109,891) $31,173 $(50,148)
Pro forma.................................... (111,613) 21,481 (63,240)
Net income (loss) per share -- diluted
As reported.................................. $(58,112.64) $ 0.47 $ (0.48)
Pro forma.................................... (59,023.27) 0.33 (0.60)
</TABLE>
The pro forma net income (loss) disclosures made above are not necessarily
representative of the effects on pro forma net income (loss) for future years as
options granted typically vest over several years and additional option grants
are expected to be made in future years. Pro forma net loss per share
information presented for the year ended December 27, 1997 is not meaningful due
to the very limited number of common shares outstanding during such period.
56
<PAGE> 57
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S. ............................. $ -- $5,563 $ 616
Foreign........................... 1,035 2,000 925
------ ------ ------
Total..................... $1,035 $7,563 $1,541
====== ====== ======
</TABLE>
Income (loss) before provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. ........................ $(194,962) $(133,866) $ (200,366)
Foreign...................... 86,106 172,602 151,759
--------- --------- ----------
Total.............. $(108,856) $ 38,736 $ (48,607)
========= ========= ==========
</TABLE>
Subject to our continued compliance with certain legal requirements, we
currently have a tax holiday for our operations in Singapore that has been
extended until June 30, 2003.
The provision for income taxes differs from the amount computed by applying
the U.S. statutory rate of 35% to the income (loss) before income taxes for the
years ended December 27, 1997, December 26, 1998 and January 1, 2000. The
principal reasons for this difference are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) at U.S. statutory
rate.......................................... $(38,100) $ 13,558 $(17,012)
Tax savings from foreign operations............. (63,487) (55,556) (52,190)
Repatriated foreign earnings.................... -- 106,853 --
U.S. loss not providing current tax benefit..... 100,748 -- 88,401
Benefit of prior year U.S. losses............... -- (63,875) --
Valuation of temporary differences.............. 2,361 (382) (22,653)
Stock compensation expense...................... -- 4,132 853
Alternative minimum tax......................... -- 2,500 --
Nondeductible acquired in-process technology.... -- -- 3,551
Other........................................... (487) 333 591
-------- -------- --------
Total................................. $ 1,035 $ 7,563 $ 1,541
======== ======== ========
</TABLE>
57
<PAGE> 58
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 26, JANUARY 1,
1998 2000
------------ ----------
<S> <C> <C>
Deferred tax assets:
Inventory reserves and accruals............................. $ 11,802 $ 7,419
Depreciation................................................ 6,254 4,647
Sales related reserves...................................... 23,521 19,654
Net operating loss carryforwards............................ 113,977 217,877
Tax credit carryforwards.................................... 22,231 25,418
Capitalized research and development........................ 92,263 79,468
Notes receivable reserve.................................... 1,712 2,621
Other....................................................... 8,283 5,532
--------- ---------
Total deferred tax assets......................... 280,043 362,636
Valuation allowance for deferred tax assets................. (267,549) (303,368)
--------- ---------
Net deferred tax assets..................................... $ 12,494 $ 59,268
========= =========
Deferred tax liabilities:
Unremitted earnings of certain foreign entities............. $ 1,961 $ 58,493
Unrealized gain on investments in equity securities......... 10,533 775
--------- ---------
Total deferred tax liabilities.................... $ 12,494 $ 59,268
========= =========
</TABLE>
During the years ended December 27, 1997, December 26, 1998 and January 1,
2000, the valuation allowance for deferred tax assets increased by $32.7
million, decreased by $16.6 million and increased by $35.8 million,
respectively.
As of January 1, 2000, for federal income tax purposes, we had net
operating loss carryforwards of $614.0 million and tax credit carryforwards of
approximately $25.0 million which expire beginning in fiscal years 2008 and
2000, respectively. To the extent that net operating loss carryforwards when
realized relate to stock option deductions, the resulting benefits will be
credited to stockholders' equity. Certain changes in stock ownership can result
in a limitation on the amount of net operating loss and tax credit carryovers
that can be utilized each year. We determined we had undergone such an ownership
change during 1998. Consequently, utilization of approximately $354.5 million of
net operating loss carryforwards and the deduction equivalent of approximately
$25.0 million of tax credit carryforwards will be limited to approximately $16.0
million per year.
We were part of the HEA consolidated group for federal income tax returns
for periods from early 1996 to August 1998 (the "Affiliation Period"). As a
member of the HEA consolidated group, we were subject to a tax allocation
agreement. During the Affiliation Period, for financial reporting purposes, our
tax loss was computed on a separate tax return basis and, as such, we did not
record any tax benefit in our financial statements for the amount of the net
operating loss included in the HEA consolidated income tax return.
We ceased to be a member of the HEA consolidated group as of August 1998.
We remain liable for our share of the total consolidated or combined tax return
liability of the HEA consolidated group prior to August 1998. We have agreed to
indemnify or reimburse HEA if there is any increase in our share of the
consolidated or combined tax return liability resulting from revisions to our
taxable income or revisions to another HEA member's taxable income, except to
the extent such revisions to another HEA members' taxable income are made after
September 15, 1999.
58
<PAGE> 59
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NET INCOME (LOSS) PER SHARE
In accordance with the disclosure requirements of SFAS No. 128, "Earnings
per Share," a reconciliation of the numerator and denominator of the basic and
diluted net income (loss) per share calculations is provided as follows (in
thousands, except share and per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ------------
<S> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss)................................. $ (109,891) $ 31,173 $ (50,148)
============ =========== ============
DENOMINATOR
Basic weighted average common shares
outstanding..................................... 1,891 38,295,095 105,503,281
Effect of dilutive securities:
Common stock options............................ -- 1,391,428 --
Convertible preferred stocks.................... -- 26,127,603 --
------------ ----------- ------------
Diluted weighted average common shares............ 1,891 65,814,126 105,503,281
------------ ----------- ------------
Basic net income (loss) per share................. $ (58,112.64) $ 0.81 $ (0.48)
============ =========== ============
Diluted net income (loss) per share............... $ (58,112.64) $ 0.47 $ (0.48)
============ =========== ============
</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>
YEARS ENDED
----------------------------------------
DECEMBER 27, DECEMBER 26, JANUARY 1,
1997 1998 2000
------------ ------------ ----------
<S> <C> <C> <C>
Convertible preferred stock............................... 44,030,000 -- --
Common stock options...................................... 4,408,000 -- 1,896,510
</TABLE>
Upon closing of the July 1998 public offering, all 44,029,850 shares of
preferred stock were converted into common stock. Proforma net income (loss) per
share information reflecting the 44,029,850 shares of convertible preferred
stock as if converted on issuance for the years ended December 27, 1997 and
December 26, 1998 is presented as follows (in thousands, except share and per
share amounts):
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------
DECEMBER 27, DECEMBER 26,
1997 1998
------------ ------------
<S> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss)........................................... $ (109,891) $ 31,173
=========== ===========
DENOMINATOR -- PRO FORMA
Pro forma basic weighted average common shares
outstanding............................................... 30,350,000 64,422,698
Effect of dilutive common stock options..................... -- 1,391,428
----------- -----------
Pro forma diluted weighted average common shares............ 30,350,000 65,814,126
=========== ===========
Pro forma basic net income (loss) per share................. $ (3.62) $ 0.48
=========== ===========
Pro forma diluted net income (loss) per share............... $ (3.62) $ 0.47
=========== ===========
</TABLE>
59
<PAGE> 60
MAXTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLAN
401(K) PLAN
We maintain a retirement and deferred savings plan for our employees (the
"401(k) Plan") which is intended to qualify as a tax-qualified plan under the
Code. The 401(k) Plan provides that each participant may contribute up to 15% of
his or her pre-tax gross compensation (up to a statutory limit). Under the
401(k) Plan, we may make discretionary contributions. Our contributions to the
401(k) Plan for the years ended December 27, 1997, December 26, 1998 and January
1, 2000 were $1.6 million, $2.0 million and $2.9 million, respectively. All
amounts contributed by participants and earnings on such contributions are fully
vested at all times.
14. UNAUDITED QUARTERLY RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 28, JUNE 27, SEPTEMBER 26, DECEMBER 26, APRIL 3, JULY 3,
1998 1998 1998 1998 1999 1999
----------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue............... $ 549,617 $ 531,265 $ 599,797 $ 727,849 $ 681,590 $ 524,588
Gross profit.......... 62,255 62,476 73,197 102,485 86,414 16,337
Net income (loss)..... (10,319) 5,416 6,078 29,998 17,003 (30,873)
Net income (loss) per
share:
Basic............... (672.16)* 164.02* 0.10 0.32 0.17 (0.30)
Diluted............. (0.23) 0.12 0.08 0.31 0.17 (0.30)
Shares used in per
share calculation:
Basic............... 15,352 33,020 59,515,691 94,276,066 98,912,770 103,046,181
Diluted............. 44,037,413 44,801,870 76,860,814 97,299,072 101,515,783 103,046,181
<CAPTION>
THREE MONTHS ENDED
---------------------------
OCTOBER 2, JANUARY 1,
1999 2000
------------ ------------
<S> <C> <C>
Revenue............... $ 589,321 $ 690,624
Gross profit.......... 13,833 82,223
Net income (loss)..... (40,275) 3,993
Net income (loss) per
share:
Basic............... (0.38) 0.04
Diluted............. (0.38) 0.03
Shares used in per
share calculation:
Basic............... 106,713,093 113,341,080
Diluted............. 106,713,093 115,237,590
</TABLE>
- ---------------
* Net income (loss) per share for the three months ended March 28 and June 27,
1998 is not considered meaningful due to the very limited number of common
shares outstanding.
60
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Maxtor Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index of this Form 10-K present fairly, in all material respects,
the financial position of Maxtor Corporation and its subsidiaries at December
26, 1998 and January 1, 2000, and the results of their operations and their cash
flows for each of the three years in the period ended January 1, 2000, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 14, 2000
61
<PAGE> 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to identification of
directors is incorporated by reference to the information contained in the
section captioned "Election of Directors" in the Proxy Statement. For
information with respect to our executive officers, see "Executive Officers" at
the end of Item 1, Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the information contained in the section captioned "Executive Compensation
and Other Matters" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the information contained in the section captioned "Stock Ownership of
Management and Certain Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the information contained in the section captioned "Certain Relationships and
Related Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements and Financial Statement Schedules -- See Index to
Consolidated Financial Statements under Item 8 on page 35 of this
report.
(2) Exhibits See Index to Exhibits on pages 65 to 68 hereof.
(b) Report on Form 8K/A
<TABLE>
<CAPTION>
DATE ITEM REPORTED ON
---- ----------------
<S> <C>
November 22, 1999 The Company announced the completion of the acquisition of
Creative Design Solutions, Inc.
</TABLE>
62
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Milpitas, State of California, on the 27TH DAY OF MARCH, 2000.
MAXTOR CORPORATION
(Registrant)
By /s/ MICHAEL R. CANNON
------------------------------------
Michael R. Cannon
President, Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ MICHAEL R. CANNON President, Chief Executive March 27, 2000
- ----------------------------------------------------- Officer, and Director
Michael R. Cannon
/s/ PAUL J. TUFANO Sr. Vice President, Finance, March 27, 2000
- ----------------------------------------------------- Chief Financial Officer and
Paul J. Tufano Principal Accounting Officer
/s/ CHONG SUP PARK Chairman of the Board March 27, 2000
- -----------------------------------------------------
Chong Sup Park
/s/ THOMAS L. CHUN Director March 27, 2000
- -----------------------------------------------------
Thomas L. Chun
/s/ C. S. CHUNG Director March 27, 2000
- -----------------------------------------------------
C. S. Chung
/s/ CHARLES HILL Director March 27, 2000
- -----------------------------------------------------
Charles Hill
/s/ CHARLES F. CHRIST Director March 27, 2000
- -----------------------------------------------------
Charles F. Christ
/s/ ROGER W. JOHNSON Director March 27, 2000
- -----------------------------------------------------
Roger W. Johnson
/s/ Y. H. KIM Director March 27, 2000
- -----------------------------------------------------
Y. H. Kim
</TABLE>
63
<PAGE> 64
MAXTOR CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED BALANCE
BEGINNING TO COST AND DEDUCTIONS/ AT END
FISCAL YEAR ENDED OF PERIOD EXPENSES (RECOVERIES)[1] OF PERIOD
----------------- --------- ----------- --------------- ---------
<S> <C> <C> <C> <C>
January 1, 2000............................... $8,409 $9,155 $2,105 $15,459
December 26, 1998............................. $3,573 $5,659 $ 823 $ 8,409
December 27, 1997............................. $5,255 $1,000 $2,682 $ 3,573
</TABLE>
- ---------------
[1] Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 65
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of
Registrant, dated June 6, 1996.
3.2(14) Amended and Restated Certificate of Incorporation of
Registrant, dated July 1998.
3.3(14) Amended and Restated Bylaws of Registrant, dated June 6,
1996.
3.4(1) Amended and Restated Bylaws of Registrant, dated July 1998.
3.5(16) Certificate of Retirement of Series of Preferred Stock.
4.1(14) Stockholder Agreement dated June 25, 1998.
10.1(16) Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.
10.2(14) Indenture dated as of March 1, 1987 between Registrant and
Security Pacific National Bank, as Trustee.
10.3(2) Lease Agreement for Premises Located at 1821 Lefthand
Circle, Suite D, between Registrant and Pratt Land Limited
Liability Company, dated October 19, 1994.
10.4(2) Lease Agreement for Premises Located at 1841 Lefthand
Circle, between Registrant and Pratt Land Limited Liability
Company, dated October 19, 1994.
10.5(2) Lease Agreement for Premises Located at 1851 Lefthand
Circle, between Registrant and Pratt Land Limited Liability
Company, dated October 19, 1994.
10.6(2) Lease Agreement for Premises Located at 2121 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.7(2) Lease Agreement for Premises Located at 2190 Miller Drive
between Registrant and Pratt Land Limited Liability Company,
dated October 19, 1994.
10.8(3) Lease Agreement by and between 345 Partnership and
Registrant, dated February 24, 1995.
10.9(3) Lease Agreement for Premises Located at 1900 Pike Road,
Suite A, Longmont, CO, between Registrant as Tenant and
Pratt Land Limited Liability Company as Landlord, dated
February 24, 1995.
10.10(3) Lease Agreement for Premises Located at 2040 Miller Drive
Suite A, B, & C, between Registrant as Tenant and Pratt Land
Limited Liability Company as Landlord, dated February 24,
1995.
10.11(3) Manufacturing and Purchase Agreement by and between
Registrant and Hyundai Electronics Industries Co., Ltd.,
dated April 27, 1995.
10.12(3) Lease Agreement for Premises Located at 2040 Miller Drive,
Suites D, E, & F, Longmont, CO, between Registrant as Tenant
and Pratt Management Company as Landlord.
10.13(5) Credit Agreement among Registrant and The Initial Lenders
and the Issuing Bank and Citibank, N.A., dated August 31,
1995.
10.14(5) The Guaranty and Recourse Agreement among Registrant and
Hyundai Electronics Industries Co., Ltd., dated August 31,
1995.
10.15(5) Amendment to the Financing Agreement among Registrant and
the CIT Group/Business Credit, Inc., dated October 17, 1995.
10.16(6) First Supplemental Indenture, dated as of January 11, 1996,
between Registrant and State Street Bank and Trust Company.
10.17(6) Credit Agreement, dated as of December 29, 1995 between
Registrant and Hyundai Electronics America.
10.18(12) Maxtor Corporation 1996 Stock Option Plan.**
10.19(12) Intercompany Loan Agreement, dated as of April 10, 1996,
between Registrant and Hyundai Electronics America.
10.20(12) Receivables Purchase and Sale Agreement, dated as of March
30, 1996, among Registrant and Corporate Receivables
Corporation and Citicorp North America, Incorporated.
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S>
10.21(7) Recapitalization Agreement among the Registrant,
International Manufacturing Services, Incorporated and
certain investors, dated as of May 21, 1996.
10.22(7) Redemption Agreement between Registrant and International
Manufacturing Services, Incorporated, dated as of May 21,
1996.
10.23(7) Manufacturing Services Agreement between Registrant and
International Manufacturing Services, Incorporated, dated as
of June 13, 1996.*
10.24(8) Credit Facility, dated as of July 31, 1996, between
Registrant and Hyundai Electronics America.
10.25(9) Exchange Agreement effective June 18, 1996, between Maxtor
Corporation and Hyundai Electronics America.
10.26(10) 364-Day Credit Agreement, dated August 29, 1996, among
Registrant, Citibank, N.A., and Syndicate Banks.
10.27(10) Credit Agreement, dated August 29, 1996, among Registrant,
Citibank, N.A., and Syndicate Banks.
10.28(11) Employment Agreement between Michael R. Cannon and
Registrant, dated June 17, 1996.**
10.29(11) Employment Agreement between Paul J. Tufano and Registrant,
dated July 12, 1996.**
10.30(11) Employment Agreement between William Roach and Registrant,
dated December 13, 1996.**
10.31(12) Intercompany Loan Agreement, dated as of April 10, 1997,
between Registrant and Hyundai Electronics America.
10.32(10) 364-Day Credit Agreement, dated as of October 31, 1997,
among Registrant and Nomura Bank International.
10.33(13) Debt Payment and Stock Purchase Agreement, dated as of
December 12, 1997, between Registrant and Hyundai
Electronics America.
10.34(13) Amendment to August 29, 1996 364-Day Credit Agreement, dated
August 27, 1997, among Registrant, Citibank, N.A. and
Syndicate Banks.
10.35(14) Employment Agreement between Philip Duncan and Registrant,
dated July 15, 1996.**
10.36(14) Receivables Purchase and Sale Agreement dated as of April 8,
1998, among Maxtor Receivables Corporation, Registrant,
Corporate Receivables Corporation, Citicorp North America
and Bankers Trust Company.
10.37(14) Intercompany Loan Agreement, dated as of April 10, 1998,
between Hyundai Electronics America and Registrant.
10.38(14) Credit Agreement between Bank of America and Registrant
dated December 26, 1996.
10.39(14) Employment Agreement between K.H. Teh and Registrant, dated
March 23, 1997.**
10.40(14) Lease Agreement between Milpitas Oak Creek Delaware, Inc.
and Registrant dated as of February 23, 1998.
10.41(14) Business Agreement dated as of April 30, 1998, between
Registrant and Texas Instruments Incorporated.*
10.42(14) Volume Purchase Agreement dated as of January 1, 1998,
between Registrant and Lucent Technologies, Inc.*
10.43(14) Land Lease between Housing Development Board and Maxtor
Singapore Limited dated as of March 28, 1991.
10.44(14) R/3 Software End-User Value License Agreement between SAP
Korea Ltd. and Hyundai Information Technology Co. Ltd. dated
as of June 30, 1996.
10.45(14) Sublicense Agreement between Hyundai Electronics Industries
Co., Ltd., and Maxtor Corporation dated as of January 1,
1996.
10.46(14) Tax Allocation Agreement dated as of July 21, 1995 among
Hyundai Electronics America, Registrant and certain other
subsidiaries.
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S>
10.47(4) Agreement and Plan of Merger dated November 2, 1995 between
Registrant, Hyundai Electronics America and Hyundai
Acquisition, Inc.
10.48(14) Tax Indemnification Agreement and Amendment to Tax
Allocation Agreement dated June 26, 1998.
10.49(14) Indemnity Agreement between Hyundai Electronics Industries
Co., Ltd., and Registrant dated June 25, 1998.
10.50(14) License Agreement between Registrant and Hyundai Electronics
Industries Co., Ltd., dated June 25, 1998.
10.51(1) Stock Purchase Agreement between Registrant and Hyundai
Electronics Industries Co., Ltd., Hyundai Heavy Industries
Co., Ltd., Hyundai Corporation, and Hyundai Merchant Marine
Co., Ltd., dated September 10, 1993.
10.52(15) Supply Agreement between Registrant and MMC Technology dated
August 18, 1998.*
10.53(14) 1998 Restricted Stock Plan.**
10.54(14) Form of Restricted Stock Grant Agreement.**
10.55(17) Amended and Restated 1996 Stock Option Plan.**
10.56(14) Chief Executive Officer Retention Agreement dated as of May
29, 1998 between Registrant and Michael Cannon.**
10.57(14) Retention Agreement dated as of May 29, 1998 between
Registrant and Paul Tufano.**
10.58(14) Form of Retention Agreement between Registrant and Executive
Officers.**
10.59(14) Letter of Agreement between Victor B. Jipson and Registrant
dated as of June 12, 1998.**
10.60(14) Loan Agreement among Registrant, Banque Paribas and Hyundai
Electronics Industries Co., Ltd. as guarantor dated as of
September 1996.
10.61(14) Loan Agreement among Registrant, Banque Nationale de Paris
and Hyundai Electronics Industries Co., Ltd. as guarantor
dated as of December 20, 1996.
10.62(14) Letter of Agreement setting forth terms and conditions of
Loan Agreement between Registrant and the Bank of New York
dated as of December 27, 1997.
10.63(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.64(14) Waiver and Amendment dated as of May 22, 1998 to 364-Day
Credit Agreement dated as of October 31, 1997 between
Registrant and Nomura Bank International plc.
10.65(14) Waiver and Amendment dated as of May 22, 1998 to Three-Year
Credit Agreement dated as of August 29, 1996 among
Registrant, certain lenders and Citibank, N.A.
10.66(15) Purchase and Sale Agreement between Registrant and Maxtor
Receivables Corporation dated as of July 31, 1998.
10.67(15) Receivables Purchase Agreement among Maxtor Receivables
Corporation, the Registrant, BlueKeel Funding LLC and Fleet
National Bank.
10.68(17) Letter of Agreement between Registrant and MMC Technology
dated May 18, 1998.
10.69(16) Mutual Release and Termination Agreement by and among
Hyundai Electronics America, Axil Computers, Inc., Image
Quest Technologies, Inc., Registrant, Odeum Microsystems,
TV/ COM International, Inc. dated November 1998.
10.70(16) Letter of Agreement between Hyundai Electronics America and
Registrant dated January 19, 1999.
10.71(18) Executive Retention Incentive Agreement between Michael R.
Cannon and Registrant dated June 23, 1999.**
10.72(18) Promissory Note between Michael R. Cannon and Registrant
dated June 23, 1999.
10.73(18) Amendment One to Supply Agreement between MMC Technology,
Inc. and Registrant.*
10.74(18) Capital Assistant Scheme Loan Agreement between Maxtor
Peripherals (S) Pte Ltd and the Economic Development Board
of Singapore dated September 9, 1999.
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<C> <S>
10.75(18) Guarantee Facility Agreement between Maxtor Peripherals (S)
Pte Ltd and the Bank of Nova Scotia, Singapore branch dated
August 31, 1999.
10.76 Lease Agreement for Premises Located at 2452 Clover Basion
Drive, Longmont, Colorado, between Registrant, as Tenant and
Pratt Land Limited Liability Company, as Landlord, dated
October 28, 1999.
10.77 Executive Retention Incentive Agreement and Promissory Note
between Registrant and Victor B. Jipson, dated October 18,
1999.**
10.78 Executive Retention Incentive Agreement and Promissory Note
between Registrant and Paul J. Tufano, dated October 18,
1999.**
10.79 Forms of Executive Retention Incentive Agreement and
Promissory Note Between Registrant and Pantelis Alexopoulos,
Michael D. Cordano, Phillip C. Duncan, Misha Rozenberg,
Glenn H. Stevens, K.H. Teh and Michael J. Wingert, each
dated November 19, 1999.**
21.1(14) List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- ---------------
* This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
** Management contract, or compensatory plan or arrangement.
(1) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective May 27, 1993.
(2) Incorporated by reference to exhibits of Form 10-Q filed February 7, 1995.
(3) Incorporated by reference to exhibits to Annual Report on Form 10-K
effective June 23, 1995.
(4) Incorporated by reference to exhibit III of Schedule 14D-9 filed November
9, 1995.
(5) Incorporated by reference to exhibits of Form 10-Q filed November 14, 1996.
(6) Incorporated by reference to exhibits of Form 10-Q filed February 14, 1996.
(7) Incorporated by reference to exhibits of Form 8-K filed June 28, 1996.
(8) Incorporated by reference to exhibits of Form 10-K filed July 1, 1996.
(9) Incorporated by reference to exhibits of Form 10-Q filed August 13, 1996.
(10) Incorporated by reference to exhibits of Form 8-k filed September 13, 1996.
(11) Incorporated by reference to exhibits of Form 10-K filed March 26, 1997.
(12) Incorporated by reference to exhibits of Form 10-Q filed May 12, 1997.
(13) Incorporated by reference to exhibits of Form 10-K filed April 10, 1998.
(14) Incorporated by reference to exhibits of Form S-1 filed July 30, 1998.
(15) Incorporated by reference to exhibits of Form 10-Q filed November 10, 1998.
(16) Incorporated by reference to exhibits of Form S-3 filed December 21, 1998.
(17) Incorporated by reference to exhibits of Form 8-K filed January 20, 1999.
(18) Incorporated by reference to exhibits of Form 10-Q filed November 15, 1999.
S-5
<PAGE> 1
EXHIBIT 10.76
LEASE AGREEMENT
FOR PREMISES LOCATED AT
2452 CLOVER BASIN DRIVE, LONGMONT, COLORADO
BETWEEN
MAXTOR CORPORATION
AS TENANT
AND
PRATT LAND LIMITED LIABILITY COMPANY
AS LANDLORD
<PAGE> 2
TABLE OF CONTENTS
1. PREMISES LEASED; DESCRIPTION
2. CONDITION OF PROPERTY
3. TERM
3.1 Initial Term
3.2 Tenant Improvement Construction
3.3 Delivery of Possession
3.4 Option to Extend
3.5 First Right of Refusal
4. RENT
4.1 Base Rental
4.2 Escalation of Base Rental
4.3 Maintenance Expense for Grounds, Snow Removal, Exterior and HVAC
4.4 Private Security Service
4.5 Late Charges
4.6 Security Deposit
4.7 Proration of Rent for Partial Months
5. TAXES - REAL PROPERTY - PAID BY TENANT - PROTEST
6. TAXES - TENANT'S PERSONAL PROPERTY - PAID BY TENANT
7. UTILITIES - TENANT TO OBTAIN AND PAY FOR
8. HOLDING OVER
9. MODIFICATIONS OR EXTENSIONS
10. ALTERATION - CHANGES AND ADDITIONS - RESPONSIBILITY - NO HOLES IN ROOF -
NO NEW EQUIPMENT ON ROOF
11. MECHANIC'S LIENS
12. UNIFORM SIGNS; NO "FOR RENT" SIGNS
13. MAINTENANCE AND REPAIRS OF THE BUILDING; LANDLORD NOT LIABLE FOR DAMAGE
TO CONTENTS
14. CONDITION UPON SURRENDER - RETURN OF KEYS
15. CARE OF GROUNDS; STORAGE OUTSIDE THE BUILDING; NO WASTE, NO NUISANCE;
COMPLIANCE WITH LAWS; FUTURE RULES AND REGULATIONS
16. LIABILITY FOR OVERLOAD
17. NO USE OF PREMISES IN VIOLATION OF INSURANCE POLICIES
18. INSURANCE
18.1 All Risk Insurance
18.2 General Liability Insurance
18.3 Tenant Improvements
18.4 Other Insurance
18.5 Waiver of Subrogation
18.6 Other Provisions Regarding Tenant's Insurance
18.7 Changes in Standard Policies
19. FIRE REGULATIONS - TENANT RESPONSIBILITY
20. REPLACEMENT OF BUILDING - CASUALTY DAMAGE
21. ENVIRONMENTAL MATTERS
<PAGE> 3
21.1 Definitions
21.2 Tenant's Obligation to Indemnify, Defend and Hold Harmless
21.3 Tenant's Obligation to Remediate
21.4 Notification
21.5 Negative Covenants
21.6 Landlord's Right to Inspect and to Audit Tenant's Records
21.7 Landlord's Right to Remediate
21.8 Landlord's Obligation to Remediate
21.9 Landlord's Obligation to Indemnify, Defend and Hold Harmless
21.10 Survival of Environmental Obligations
22. ENTRY BY LANDLORD
23. DEFAULT - REMEDIES BY LANDLORD
23.1 Default Defined
23.2 Landlord's Remedies in the Event of Default
23.3 Tenant to Surrender Peaceably
23.4 No Termination by Re-Entry
23.5 Injunction
23.6 Remedies Listed are Cumulative and Non-Exclusive
23.7 Interest on Sums Past Due
23.8 Attorneys' Fees
23.9 Time to Cure Certain Non-Monetary Defaults
23.10 Landlord Default
24. LANDLORD'S RIGHT TO REMOVE TENANT'S PERSONAL PROPERTY
25. LEGAL PROCEEDINGS AGAINST TENANT BY THIRD PARTIES; TENANT TO PAY
LANDLORD'S FEES
26. INDEMNIFICATION BY TENANT AND BY LANDLORD
27. ASSIGNMENT OR SUBLETTING
28. LANDLORD'S WARRANTY OF TITLE; QUIET ENJOYMENT
29. ADDITIONAL DEVELOPMENT OF PROPERTY - RIGHTS OF LANDLORD
30. GOVERNMENTAL ACQUISITION OF THE PREMISES
31. SUBORDINATION OF THE LEASEHOLD TO MORTGAGES
32. MEMORANDUM OF LEASE - RECORDING
33. NO WAIVER OF BREACH; ACCEPTANCE OF PARTIAL PAYMENTS OF RENT
34. CONTROLLING LAW
35. INUREMENTS
36. TIME
37. ADDRESSES; EMPLOYER IDENTIFICATION NUMBERS; METHOD OF GIVING NOTICE
38. PARAGRAPH HEADINGS; GRAMMAR
39. ADDITIONAL PROVISIONS
39.1 Brokers
39.2 Signage
39.3 Additional Incentives
39.4 Termination of Existing Leases
EXHIBIT A: PREMISES
EXHIBIT B: TENANT IMPROVEMENTS
<PAGE> 4
EXHIBIT 10.76
LEASE
THIS LEASE, made and entered into this 28th day, of October, 1999, by and
between PRATT LAND LIMITED LIABILITY COMPANY, a Colorado limited liability
company, hereinafter referred to as "Landlord," and MAXTOR CORPORATION, a
Delaware corporation, hereinafter referred to as "Tenant."
W I T N E S S E T H:
In consideration of the covenants, terms, conditions, agreements, and
payments as hereinafter set forth, the parties hereto covenant and agree as
follows:
1. PREMISES LEASED; DESCRIPTION. Landlord hereby leases unto Tenant the
following described Premises containing approximately 450,090 square feet of
building floor space measured to the outside of the walls, including overhangs,
canopies and loading docks, and to approximately 1/2 the thickness of common
walls; commonly known as 2452 Clover Basin Drive, in the City of Longmont,
County of Boulder, State of Colorado, a more detailed description of which is
Lots 1-4, Parcel E, St. Vrain Center, County of Boulder, State of Colorado, a
diagram of which is attached as Exhibit A (hereinafter referred to as the
"Premises"); the leasing of which is made according to the terms of this
Agreement; together with all appurtenances thereto, and all fixtures attached
thereto, in condition according to agreed to plans and specifications attached
as Exhibit B, and together with nonexclusive reasonable access across any other
land owned by Landlord as may be required for use of the Premises by Tenant,
with such access to be on such roadways, sidewalks, and other common areas of
which the Premises are a part, or of any such adjacent lands owned by Landlord,
as Landlord may from time to time designate.
2. CONDITION OF PROPERTY. On or before Commencement of the Lease, Tenant
and Landlord shall examine the Premises, any fixtures on the Premises, and
Tenant Improvements as detailed on the plans and specifications attached as
Exhibit B, attached hereto and made a part hereof by reference. Landlord and
Tenant shall agree upon a list and schedule of necessary repairs. Tenant shall
have the right to have independent engineers, architects or others of its
choosing perform some or all of the inspection on its behalf. Landlord warrants
to Tenant for a period of one (1) year after the Commencement Date that the
Premises shall conform to the agreed to plans and specifications attached as
Exhibit B and that any remediation for any non-conformance not caused by
Tenant's fault shall be made by Landlord at no charge. No other representation,
statement, or warranty, express or implied, has been made by or on behalf of
Landlord as to the condition of the Premises, or as to the use that may be made
of same. In no other event shall Landlord be liable for any defect in the
Premises or for any limitation on the use of the Premises.
3. TERM.
3.1 INITIAL TERM. The term of this Lease shall commence at 12:00
midnight on the 1st day of April, 2001 (the "Commencement Date"), and unless
terminated as herein provided for, shall end at 12:00 midnight on the 31st day
of March, 2016. The Commencement Date as set forth in this Paragraph 3.1 shall
be subject to those adjustments of the Commencement Date, if any, set forth in
Paragraph 3.2 which relate to the performance of construction on the Premises.
3.2 TENANT IMPROVEMENT CONSTRUCTION. The Commencement Date of this
Lease shall be delayed until the substantial completion of the Tenant
Improvements described on Exhibit B attached hereto and delivery of possession
to Tenant, if such occurs after the Commencement Date, as follows: If for any
reason Landlord does not substantially complete such construction prior to the
Commencement Date, such failure will not affect the validity of this Lease, but
in such case Tenant shall not be obligated to pay rent until such construction
is substantially completed and possession of the Premises is delivered to
Tenant. Provided, however, if Landlord shall not have substantially completed
and delivered possession of the Premises within ninety (90) days after the
Commencement Date, Tenant may, at Tenant's option, upon notice in writing to
Landlord delivered within ten (10) days after the end of the 90-day period,
cancel this Lease without payment or penalty of any kind. Further, in such
event, Tenant may extend its current leases for three (3) years in the same
manner as if the notice provisions of the leases had been complied with, at no
increase in Base Rent , except for the cost-of-living increase provided in each
lease. Landlord shall have no other liability to Tenant for failure to
substantially complete construction prior to any date or dates.
1
<PAGE> 5
Should construction of the Tenant Improvements be completed to such an
extent as to permit the issuance of a partial certificate of occupancy by the
governing authority, Tenant may occupy the portion of the Premises so permitted
prior to (or after) the Commencement Date and shall pay Base Rental for the
occupied portion, prorated in proportion to the number of square feet of
building space occupied, beginning on date of delivery of possession. Rent
adjustments shall be similarly prorated. In no event shall Tenant take
possession prior to satisfaction of the requirements for Tenant's insurance set
forth below.
3.3 DELIVERY OF POSSESSION. Tenant shall be entitled to possession
of the Premises at midnight on the Commencement Date, as defined in Paragraph
3.1 and 3.2. Occupancy may be staggered over a one hundred eighty (180) day
period, with the Tenant's obligation for Base Rental, Maintenance Expense and
Taxes being pro-rated in accordance with the percentage of the building being
occupied, as set forth in Paragraph 39.4 herein. The foregoing staggered
occupancy provision is in addition to the provision of Paragraph 3.2.
Tenant may have access to the Premises during tenant improvement
construction for the purpose of moving in Tenant-owned furniture, fixtures,
equipment and inventory. This access and the items so moved in shall not in any
way impede the construction of the Tenant Improvements, nor shall Landlord, its
agent, employees, sub-contractors, or any other person on the Premises whether
invited or not invited, be liable for the protection, care or security of
Tenant-owned items. This paragraph shall not be construed so as to permit Tenant
to occupy the Premises prior to the satisfaction of all requirements for
Tenant's insurance set forth below.
3.4 OPTION TO EXTEND. Upon full and complete performance of all the
material terms, covenants, and conditions herein contained by Tenant and payment
of all rental due under the terms hereof, Tenant shall be given the option to
renew this Lease for one (1) additional term of five (5) years. Such option
shall be exercisable only by delivery of Tenant's written notice of extension to
Landlord not less than 360 days prior to the expiration of the then-existing
Lease term. In the event of such exercise, this Lease shall be deemed to be
extended for the additional period pursuant to all the terms and conditions set
forth herein, except that the Base Rental shall be established as the
then-current market rate, such market rate to be determined by agreement. In the
event an agreement cannot be reached, each party may appoint an appraiser to
determine market rate. In the event the higher appraisal is within 10% of the
lower appraisal, the average of the two appraisals shall be the market rate. In
the event of a wider spread, the two appraisers shall appoint a third appraiser,
and the market rate shall be the average of the two closest of the three
appraisals. In the event of exercise of said Option, any funds held by Landlord
pursuant hereto shall continue to be so held subject to the terms and conditions
relating to same.
3.5 FIRST RIGHT OF REFUSAL. Provided Tenant is not in material
default of this Lease Agreement, Tenant shall have a continuing first right of
refusal to lease additional space, in 12,000 square foot minimum increments and
at market rates, in Landlord's adjacent buildings: 2602 Clover Basin Drive, 1200
Fordham Street, and 2605 Trade Centre Avenue. Should space in such adjacent
building(s) be vacated, or planned to be vacated, then Landlord shall give
Tenant written notice thereof, specifying the applicable Base Rental rate that
Landlord believes is the current market rate. If Tenant desires to exercise
their right of refusal, Tenant shall deliver written notice of same to Landlord
within 15 days after delivery of Landlord's notice, but in no event more than
360 days before planned availability, and shall sign a lease amendment within 30
additional days, but in no event more than 180 days before planned occupancy.
4. RENT. Tenant shall pay to Landlord, at the address of Landlord as
herein set forth, the following as rental for the Premises:
4.1 BASE RENTAL. The minimum Base Rental for the full term hereof
shall be SIXTY NINE MILLION, TWO HUNDRED ONE THOUSAND, THREE HUNDRED THIRTY
SEVEN and 50/100THS U.S. Dollars ($69,201,337.50), payable in monthly
installments of THREE HUNDRED EIGHTY FOUR THOUSAND, FOUR HUNDRED FIFTY ONE and
88/100THS U.S. Dollars ($384,451.88), in advance on the first day of each month
during the term hereof.
4.2 ESCALATION OF BASE RENTAL.
4.2.1 On the second anniversary of the Commencement Date of
this Lease (the twenty-fifth (25th) month of the Lease Term), the Base Rental
payable by Tenant shall be increased to the amount of FOUR HUNDRED ONE THOUSAND,
SEVEN HUNDRED FIVE and 32/100THS U.S. Dollars ($401,705.32) per
2
<PAGE> 6
month. On the third anniversary of the Commencement Date of this Lease (the
thirty-seventh (37th) month of the Lease Term), and annually thereafter, the
base rental payable by Tenant shall be increased to an amount determined by
multiplying the basic monthly rental by a fraction, the denominator of which
shall be the most recent Consumer Price Index figure, as hereinafter defined,
published prior to the Commencement Date, and the numerator of which shall be
the most recent Consumer Price Index figure published prior to the particular
anniversary date; provided, however, that in no event shall the rent for any
month after such anniversary be less than the rent for the month immediately
preceding such anniversary. As used herein, the term "Consumer Price Index"
shall mean the Consumer Price Index, All Urban Consumers, All Items, Denver,
Colorado (1982-84 = 100), or the successor of that Index, as published by the
Bureau of Labor Statistics, U.S. Department of Labor. Should Landlord lack
sufficient data to make the proper determination on the date of any adjustment,
Tenant shall continue to pay the monthly rent payable immediately prior to the
adjustment date. As soon as Landlord obtains the necessary data, Landlord shall
determine the rent payable from and after such adjustment date and shall notify
Tenant of the adjustment in writing. Should the monthly rent for the period
following the adjustment date exceed the amount previously paid by Tenant for
that period, Tenant shall forthwith pay the difference to Landlord. Should the
Consumer Price Index as above described cease to be published, a reasonably
comparable successor index shall be selected by Landlord. If Tenant objects to
the successor index, the dispute will be resolved and a successor index
designated by arbitration pursuant to the rules and procedures of the American
Arbitration Association.
4.2.2 Notwithstanding the foregoing, the parties agree that
the increase in Base Rental for each year shall be not less than two and
one-half percent (2.5%) nor more than seven percent (7%) of the Base Rental for
the previous year, each year for such purposes to commence on the anniversary of
the Commencement Date.
4.2.3 Landlord may in its sole discretion, waive the
escalation provided for in Paragraph 4.2.1 or Paragraph 4.2.2 for any particular
year, years, or part of a year. No such waiver shall preclude Landlord from
applying the escalation to any subsequent year or part of a year, and from
making the subsequent application as if all subsequent escalations had been duly
made to the maximum permissible extent.
4.3 MAINTENANCE EXPENSE FOR GROUNDS, SNOW REMOVAL, EXTERIOR AND
HVAC. Tenant shall pay the cost of having Landlord maintain the HVAC systems
(excluding Clean Room units), the elevators and the exterior of the Premises
including parking lots, green areas, sidewalks, entrances, and corridors (but
not the exterior surfaces of the building, other than glass). Cost of
maintaining such areas shall include, but shall not be limited to, repairs,
preventative maintenance, HVAC filters, parts and compressors, sealing,
striping, lawn mowing, snow removal (Tenant is responsible for snow removal of
less than 2"), gardening, shrub care and replacements, lawn watering, parking
area maintenance, electricity for lighting, sign maintenance, depreciation of
equipment used for the foregoing purposes and other costs related to the
Premises or common areas. Landlord shall perform such maintenance and charge the
cost thereof to Tenant, which shall be paid as additional rent within 10 days
after delivery of Landlord's invoice. Landlord shall keep reasonable records of
such cost, which shall be available for Tenant's inspection during normal
business hours. Certain items of such maintenance (such as landscape maintenance
and snow removal) are performed by Landlord on numerous areas owned and/or
maintained by Landlord, in addition to the Premises, and the cost thereof cannot
be precisely ascribed to the Premises. As to such services which are performed
on areas in addition to the Premises, the cost for all areas so serviced shall
be allocated to the Premises in proportion to the square feet of building floor
space in the Premises compared to the square feet of building floor space in the
entire area to which such services are provided.
For the first year of the Lease, Landlord agrees that the total of the
maintenance fees referred to in this paragraph will not exceed $0.69 per square
foot annually. Thereafter, such costs may increase only with increases in actual
costs and such actual cost increases shall not exceed five percent 5% annually.
4.4 PRIVATE SECURITY SERVICE. Landlord may, in its sole discretion
and at its sole expense, engage a private security service, as an independent
contractor, to patrol an area which includes the Premises, but not to enter upon
the Premises, except by prior written permission of Tenant, such permission to
be granted in Tenant's sole discretion.
Landlord shall have absolutely no obligation to engage a private security
service and shall not be liable for any damages or loss which might have been
averted had a private security service been engaged. If Landlord does engage a
private security service, Landlord shall not be liable for any damages or loss
which may result from actions, inactions, non-performance or quality of
performance by the security service. If the Tenant desires a higher level of
3
<PAGE> 7
security services than Landlord provides, or wishes to obtain an agreement that
there will be liability for actions, inactions, non-performance or quality of
performance by a security service, Tenant may itself engage such security
service as Tenant chooses, at Tenant's sole expense.
Nothing herein shall limit any action by Tenant against any person or
entity providing private security service, provided that Landlord shall not be
party to, or liable for any judgment entered in such an action, as a defendant,
cross defendant, third-party defendant, or otherwise. Tenant shall indemnify
Landlord against any loss, liability or claim arising out of any action brought
by Tenant against any person or entity providing private security service. The
obligation to indemnify shall include payment of Landlord's attorneys' fees
incurred in connection with the claim covered by the indemnity and in enforcing
the obligation to indemnify.
4.5 LATE CHARGES. Tenant will pay a late charge equal to five
percent (5%) of any monthly rental payment or other payment not paid when due
and remaining unpaid five (5) days after written or facsimile notice of such
nonpayment, which payment shall be in addition to any interest elsewhere
provided for.
4.6 SECURITY DEPOSIT. On or before the Commencement Date, Tenant
shall pay to Landlord the sum of THREE HUNDRED EIGHTY FIVE THOUSAND and
00/100THS U.S. Dollars ($385,000.00), to be retained by Landlord as security for
the performance of all of the terms and conditions of this Lease Agreement to be
performed by Tenant, including payment of all rental due under the terms hereof.
Existing Security Deposits in the amount of $166,188.24 shall be applied to this
deposit; the balance of $218,811.76 shall be paid in the form of cash or an
irrevocable Letter of Credit. Landlord shall not owe Tenant any interest on the
deposit. At Landlord's election, deductions may be made by Landlord from the
amount so retained for the reasonable cost of repairs to the Premises which
should have been performed by Tenant, for any rental payment or other sum
delinquent under the terms hereof, and for any sum used by Landlord in any
manner to cure any default in the performance of Tenant under the terms of this
Lease. In the event deductions are so made during the rental term, upon notice
by Landlord, Tenant shall redeposit such amounts so expended so as to maintain
the security deposit in the amount as herein provided for, within 10 days after
receipt of such written demand from Landlord. Nothing herein contained shall
limit the liability of Tenant as to any repairs or maintenance of the Premises;
and nothing herein shall limit the obligation of Tenant promptly to pay all sums
otherwise due under this Lease and to comply with all the terms and conditions
hereof. The security deposit, less any sums withheld by Landlord pursuant to the
terms hereof, shall be repaid to Tenant within sixty days after the date of
termination of the Lease.
4.7 PRORATION OF RENT FOR PARTIAL MONTHS. If the lease term begins
on other than the first day of a month, base rent and additional rent from such
date until the first day of the next succeeding calendar month shall be prorated
on the basis of the actual number of days in such calendar month and shall be
payable in advance. If the Lease term terminates on other than the last day of
the calendar month, rent from the first day of such calendar month until such
termination date shall be prorated on the basis of the actual number of days in
such month, and shall be payable in advance.
5. TAXES - REAL PROPERTY - PAID BY TENANT - PROTEST. Tenant shall pay as
additional rent, all real estate taxes and assessments, as shall, from and after
the date hereof, be assessed upon the Premises and any appurtenances or
improvements thereto. Tenant shall pay one-twelfth (1/12) of such estimated
additional rent, in advance, with each monthly rental payment. Landlord shall
reasonably estimate such taxes and advise Tenant in writing of the amount to be
paid each month. Such payments shall be separately accounted for by Landlord,
(and may be deposited with any holder of a mortgage or deed of trust on the
Premises) and shall be used to make prompt payment of such taxes as they come
due. If the estimated payments made by Tenant are not sufficient to fully pay
such taxes as they come due, Tenant shall pay to Landlord any amount necessary
to make up the deficiency within thirty (30) days of notice from Landlord. If
the estimated payments made by the Tenant are in excess of the tax obligation,
Landlord shall credit the excess to the Tenant's account within thirty (30)
business days of learning the Tenant has overpaid the taxes. Landlord shall have
no obligation to pay any interest to Tenant on such additional rent, but
Landlord shall give Tenant an annual accounting showing credit for such payments
made by Tenant, and debits for payments made by Landlord or Landlord's lender.
If Tenant fails to make any required payment to Landlord, Landlord may, but
shall not be required to, pay any such tax and shall become entitled to
repayment from Tenant without demand, together with interest thereon as
elsewhere provided. The real estate taxes and assessments for the year in which
the term of this Lease shall begin, as well as for the year in which the Lease
shall end, shall be apportioned so that Tenant shall pay only the portions that
correspond with the portions of such years as are within such lease term. In the
event that the Premises are assessed for tax purposes as a part of a larger
parcel, the tax on the entire parcel shall be prorated in proportion to the
number of square feet of building floor space
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on each portion of the entire parcel.
Upon written request from Tenant, Landlord shall protest the tax
assessment on the Premises, to the extent that Landlord, in good faith, believes
that such protest is justifiable and likely to be successful. In the event of
any such protest Tenant shall nevertheless pay to Landlord the taxes as
assessed, and Tenant shall be entitled to the appropriate share of any refund.
Tenant shall not protest any real property tax assessment on the Premises.
6. TAXES - TENANT'S PERSONAL PROPERTY - PAID BY TENANT. Tenant shall be
responsible for and timely pay any and all personal property taxes assessed
against any furniture, fixtures, equipment and items of a similar nature
installed and/or located in or about the Premises by Tenant.
7. UTILITIES - TENANT TO OBTAIN AND PAY FOR. Landlord shall not be
required to furnish to Tenant any utility services of any kind, such as but not
limited to, water, hot water, heat, gas, electricity, light, telephone, cable TV
and power. Tenant shall obtain and pay all charges for gas, electricity, light,
heat, power, water (and lawn watering), and telephone, cable TV or other
communication services or other utilities used, rendered, or supplied, upon or
in connection with the Premises. Tenant irrevocably appoints Landlord as
Tenant's attorney-in-fact solely for the purpose of terminating Tenant's account
with any provider of such utilities, if the Premises are abandoned by Tenant or
if the Lease is terminated.
8. HOLDING OVER. If, after expiration of the term of this Lease, Tenant
shall remain in possession of the Premises and continue to pay rent without a
written agreement as to such possession, then Tenant shall be deemed a
month-to-month Tenant and the rental rate during such holdover tenancy shall be
equivalent to one hundred fifteen percent (115%) of the monthly rental paid for
the last month of tenancy under this Lease. Such month-to-month tenancy may be
terminated by the Landlord at midnight on any day which is more than twenty-nine
(29) days after date of delivery of Landlord's written notice of termination to
Tenant.
9. MODIFICATIONS OR EXTENSIONS. No holding over by Tenant shall operate to
renew or extend this Lease without the written consent of Landlord. No
modification of this Lease shall be binding unless endorsed hereon or otherwise
written and signed by the respective parties.
10. ALTERATION - CHANGES AND ADDITIONS - RESPONSIBILITY - NO HOLES IN ROOF
- - NO NEW EQUIPMENT ON ROOF. Tenant may, during the term of this Lease, at
Tenant's expense, erect inside partitions, add to existing electric power
service, add telephone outlets or other communication services, add light
fixtures, install additional heating and/or air conditioning or make such other
changes or alterations as Tenant may desire and that do not negatively affect
the integrity of the leased Premises. For any changes or alterations that are
not in strict conformance with original plans and specifications, for any
placement of additional heavy equipment on the roof or floor structure, and for
any changes or alterations which have an estimated cost of more than ONE HUNDRED
THOUSAND US dollars ($100,000.00), Tenant shall submit to Landlord a set of
fully detailed working drawings and specifications for the proposed alteration,
and shall obtain Landlord's consent to the work prior to commencement of the
work. In all cases, as-built drawings and plans shall be submitted to Landlord.
If Tenant so requests, Landlord will have the drawings and specifications
prepared for Tenant, at Tenant's expense, utilizing Landlord's in-house staff.
Tenant will pay Landlord's customary hourly charges for such services, as
additional rent, to be paid within 30 days after delivery of invoice. In
particular, but not as a limitation, the working drawings must fully detail
changes to mechanical, wiring and electrical, lighting, plumbing and HVAC
systems to Landlord's satisfaction. Landlord may refuse to consent to the
alterations because of the inadequacy of the drawings and specifications. Tenant
may not commence the alterations until Landlord's written consent has been
given. Landlord's consent shall include the determination of whether the project
must be undone to return the Premises to original condition.
If the drawings and specifications are adequate, to Landlord's sole
satisfaction, then Landlord will not unreasonably withhold its consent to the
alterations. If within ten (10) days after such plans and specifications are
submitted by Tenant to Landlord for such approval, Landlord shall have not given
Tenant notice of disapproval, stating the reason for such disapproval, such
plans and specifications shall be considered approved by Landlord. For any
changes or alterations that require any roofing work whatsoever, such as new
openings, patches, and the like, Tenant shall use the designated roofing
contractor or manufacturer, as the case may be, so as to maintain the roofing
warranty.
At the end of this Lease, all such fixtures, equipment, additions and/or
alterations (except trade fixtures
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installed by Tenant) shall be and remain the property of Landlord, provided,
however, Landlord shall have the option to require Tenant to remove any or all
such fixtures, equipment, additions, and/or alterations and restore the Premises
to the condition existing immediately prior to such change and/or installation,
normal wear and tear excepted, all at Tenant's cost and expense. All work done
by Tenant shall conform to appropriate city, county and state building codes and
health standards and OSHA standards and Tenant shall be responsible for
obtaining and paying for building permits.
If any such work done by Tenant causes damage to the structural portion,
exterior finish or roof of the Premises, then the costs of repair of such
damage, and of all further maintenance and repairs to such structural portion,
exterior finish or roof during the term of the Lease shall thereafter be the
responsibility of Tenant.
Neither Landlord's right of entry, nor any actual inspection by Landlord,
nor Landlord's actual knowledge of any alteration accomplished or in progress
shall constitute a waiver of Landlord's rights concerning alterations by Tenant.
11. MECHANIC'S LIENS. Tenant shall pay all costs for construction done by
it or caused to be done by it on the Premises as permitted by this Lease. Tenant
shall keep the building, other improvements and land of which the Premises are a
part free and clear of all mechanic's liens resulting from construction by or
for Tenant. Tenant shall have the right to contest the correctness or validity
of any such lien if, immediately on demand by Landlord, Tenant deposits with
Landlord and/or any appropriate court or title insurance company a bond or sum
of money sufficient to allow issuance of title insurance against the lien and/or
to comply with the statutory requirements for discharge of the lien found in
Section 38-22-130 and Section 131, Colorado Revised Statutes, or any successor
statutory provision. Landlord shall have the right to require Tenant's
contractor(s), subcontractors and materialmen to furnish to both Tenant and
Landlord adequate lien waivers on work or materials paid for, in connection with
all periodic or final payments, by endorsement on checks, making of joint
checks, or otherwise, and Landlord shall have the right to review invoices prior
to payment. Landlord reserves the right to post notices on the Premises that
Landlord is not responsible for payment of work performed and that Landlord's
interest is not subject to any lien.
12. UNIFORM SIGNS; NO "FOR RENT" SIGNS. It is Landlord's intent to
maintain uniformity of signs throughout the area where signs may be controlled
by Landlord. Tenant shall place no signs on the Premises (except inside Tenant's
portion of the building on the Premises) without prior written consent of
Landlord, which consent shall not be unreasonably withheld.
Tenant may not put any signs on the Premises indicating that the same are
for rent, or available for assignment or sub-lease, and may put no signs of real
estate brokers on the Premises.
13. MAINTENANCE AND REPAIRS OF THE BUILDING; LANDLORD NOT LIABLE FOR
DAMAGE TO CONTENTS. Landlord shall be responsible for maintenance and repairs of
the structural portions, the roof and the exterior finish of the building (other
than glass) on the Premises at the sole cost and expense of Landlord; provided,
however, that if any such maintenance or repairs are necessitated by the acts of
Tenant or its employees, agents, contractors, sub-contractors, licensees,
invitees or guests, Tenant shall reimburse Landlord for the cost of same, as
additional rent, to be paid within 30 days after delivery of invoice. All other
maintenance, repairs and replacements shall be performed by Tenant, at its own
expense, including all necessary maintenance, repairs and replacements to pipes,
plumbing systems, electrical systems, window or other glass, doors, fixtures,
interior decorations, and all other appliances and appurtenances. Such repairs
and replacements, interior and exterior, ordinary as well as extraordinary,
shall be made promptly, as and when necessary, so that the Premises are
maintained in first class condition. All such maintenance, repairs and
replacements shall be in quality and class at least equal to the original work.
On default of Tenant in making such maintenance, repairs or replacements,
Landlord may, but shall not be required to, make such repairs and replacements
for Tenant's account, and the expense shall constitute and be collectable as
additional rent, together with interest thereon as hereinafter provided.
Notwithstanding the Landlord's obligations elsewhere set forth in this
Lease, Landlord shall not be liable, except in cases of Landlord's negligence,
for damage to the contents of the building or consequential damages to Tenant
resulting from roof or window leaks or failure, or leakage of any water pipe or
gas pipe, failure of any communications system or alarm, failure or leakage or
discharge by any sprinkler system or other fire suppression system, power
surges, power shortages or outage, sewer failure or sewage backup, or failure or
malfunction of any heating or cooling system. The term "contents" shall include,
but shall not be limited to, improvements made by Tenant, and data bases and
other information stored or contained in computers, hard or floppy disks, tapes,
computer
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chips and other memory or storage devices. The term "consequential damages"
shall include, but not be limited to, Tenant's inability to perform any contract
on which Tenant is bound, loss of sales, loss of profit, or loss of business
reputation or goodwill.
14. CONDITION UPON SURRENDER - RETURN OF KEYS. Tenant shall vacate the
Premises in the same condition as when received, ordinary wear and tear
excepted, and shall remove all of Tenant's property, so that Landlord can
repossess the Premises not later than midnight on the day upon which this Lease
or any extension hereof ends, whether upon notice, holdover or otherwise. The
Landlord shall have the same rights to enforce this covenant by ejectment and
for damages or otherwise as for the breach of any other conditions or covenant
of this Lease. Upon termination of the Lease, Tenant shall deliver to Landlord
keys in its immediate possession which operate all locks on the exterior or
interior of the Premises, including, without limitation, keys to locks on
cupboards and closets. Tenant shall make reasonable commercial efforts to
retrieve all keys to the Premises which Tenant has delivered to employees or
others, and include same with the keys delivered to Landlord.
15. CARE OF GROUNDS; STORAGE OUTSIDE THE BUILDING; NO WASTE; NO NUISANCE;
COMPLIANCE WITH LAWS; FUTURE RULES AND REGULATIONS. Tenant shall use the
Premises for office, research and development, light manufacturing, and other
uses appurtenant thereto. Except as otherwise provided herein, Tenant will
maintain the grounds which are part of the Premises, keeping them free from
accumulation of trash or debris and will be responsible for snow removal up to
two inches of snow. Tenant shall conform to all present and future laws,
agreements and ordinances of any governmental authority having jurisdiction over
the Premises, and will make no use in violation of same. No outside storage
shall be allowed unless first approved by Landlord in writing and then only in
such areas as are designated as storage areas by Landlord. Any legal parking of
trucks and/or trailers shall be permitted, except that long-term (greater than
two weeks) storage of trucks and/or trailers shall be confined to the courtyard
loading areas not visible from the public streets. Tenant shall not commit or
suffer any waste on the Premises. Tenant shall not permit any nuisance to be
maintained on the Premises nor permit any disorderly conduct, noise or other
activity having a tendency to annoy or to disturb occupants of any other part of
the property of which the Premises are a part and/or of any adjoining property.
As part of a common scheme for orderly development, use and protection, of
its various properties and those properties adjacent to the Premises, Landlord
may impose upon Tenant reasonable rules and regulations concerning parking and
vehicle traffic; locations at which deliveries are to be made and access
thereto; trash disposal; use of common areas such as recreation areas,
corridors, and sidewalks; signs and directories; use of communication wires or
cables which are used in common but which may be inadequate fully to serve all
the demands placed upon them; provided that such rules and regulations shall be
uniform in their application and shall not violate the express terms of this
Lease elsewhere set forth.
16. LIABILITY FOR OVERLOAD. Tenant shall be liable for the cost of any
damage to the Premises or the building or the sidewalks and pavements adjoining
the same which results from the movement of heavy articles or heavy vehicles or
utility cuts made by or on behalf of Tenant. Tenant shall not overload the
floors or any other part of the Premises.
17. NO USE OF PREMISES IN VIOLATION OF INSURANCE POLICIES. Tenant shall
make no use of the Premises which would void or make voidable any insurance upon
the Premises.
18. INSURANCE.
18.1 ALL RISK INSURANCE. Tenant shall keep the building and
improvements insured throughout the term of this Lease against losses covered by
an "All Risk" policy, as defined in the insurance industry, which shall also
cover 1) loss of rental and 2) deposit of Hazardous Materials on the Premises by
those acts of third parties which constitute vandalism. Tenant shall pay any
premium on such policy. Tenant shall supply to Landlord certificates of
insurance as provided in Paragraph 18.6. In the event Tenant fails to secure
such insurance or to give evidence to Landlord of such insurance by depositing
with Landlord certificates as provided below, Landlord may purchase such
insurance in Tenant's name and charge Tenant the premiums therefor. Bills for
the premiums therefor shall be deemed and paid as additional rent due within 10
days after delivery of invoice. The Landlord and Landlord's property management
entity, Pratt Management Company, LLC, shall each be an additional named insured
on the policy.
18.2 GENERAL LIABILITY INSURANCE. Tenant agrees to carry
comprehensive general liability
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insurance in the minimum total amount of ONE MILLION Dollars ($1,000,000.00) for
each occurrence of bodily injury and ONE MILLION Dollars ($1,000,000.00) for
each occurrence of property damage. Tenant shall supply to Landlord certificates
of insurance as provided in Paragraph 18.6. In the event Tenant fails to secure
such insurance or to give evidence to Landlord of such insurance by depositing
with Landlord certificates as provided below, Landlord may purchase such
insurance in Tenant's name and charge Tenant the premiums therefor. Bills for
the premiums therefor shall be deemed and paid as additional rent due within 10
days after delivery of invoice. The Landlord and Landlord's property management
entity, Pratt Management Company, LLC, shall each be an additional named insured
on the policy.
18.3 TENANT IMPROVEMENTS. Tenant agrees to carry insurance covering
all of Tenant's leasehold improvements, alterations, additions or improvements,
trade fixtures, merchandise and personal property from time to time in, on or
upon the Premises, in an amount not less than one hundred percent (100%) of the
full replacement cost of such items from time to time during the term of this
Lease, providing protection against any peril included within an "All-Risk"
policy. Any policy proceeds shall be used for the repair or replacement of the
property damaged or destroyed unless this Lease shall cease and terminate due to
destruction of the Premises as provided below.
18.4 OTHER INSURANCE. Tenant agrees to carry insurance against such
other commercially reasonable hazards and in such commercially reasonable
amounts and available to Tenant on commercially reasonable terms as the holder
of any mortgage or deed of trust to which the Lease is subordinate may require
from time to time.
18.5 WAIVER OF SUBROGATION. Landlord and Tenant grant to each other
on behalf of any insurer providing fire and extended insurance coverage to
either of them covering the Premises, improvements thereon, and contents
thereof, a waiver of any right of subrogation or recovery of any payments of
loss under such insurance, such waiver to be effective so long as each is
empowered to grant such waiver under the terms of its insurance policy, and to
give all necessary notice of such waiver to its insurance carriers.
18.6 OTHER PROVISIONS REGARDING TENANT'S INSURANCE. All insurance
required of Tenant in this Lease shall be effected under enforceable policies
issued by insurers of recognized good financial condition licensed to do
business in this State. At least fifteen (15) days prior to the expiration date
of any such policy, a certificate evidencing a new or renewal policy shall be
delivered by Tenant to Landlord. Within fifteen (15) days after the premium on
any policy shall become due and payable, Landlord shall be furnished with
satisfactory evidence of its payment. To the extent obtainable, all policies
shall contain an agreement that notwithstanding any act or negligence of Tenant
which might otherwise result in forfeiture of such insurance, such policies
shall not be canceled except upon ten (10) days prior written notice to
Landlord, and that the coverage afforded thereby shall not be affected by the
performance of any work in or about the Premises.
If Tenant provides any insurance required of Tenant by this Lease in the
form of a blanket policy, Tenant shall furnish satisfactory proof that such
blanket policy complies in all respects with the provisions of this Lease, and
that the coverage thereunder is at least equal to the coverage which would be
provided under a separate policy covering only the Premises.
18.7 CHANGES IN STANDARD POLICIES. If the definition of insurance
industry policy language relating to "All-Risk" insurance or other term changes,
the insurance requirements hereunder shall be modified to conform to the
existing insurance industry language; however, the dollar amount of the
coverages required under this Lease shall not be less than those existing at the
time of the effective beginning date of this Lease.
19. FIRE REGULATIONS - TENANT RESPONSIBILITY. It shall be Landlord's sole
and exclusive responsibility to meet all fire regulations of any governmental
unit having jurisdiction over the Premises to the extent such regulations relate
to the plans and specifications attached as Exhibit B, at Landlord's sole
expense. It shall be Tenant's sole and exclusive responsibility after the
occupancy of the Premises to meet all fire regulations of any governmental unit
having jurisdiction over the Premises to the extent such regulations affect
Tenant's operations, at Tenant's sole expense.
20. REPLACEMENT OF BUILDING - CASUALTY DAMAGE. If the Premises are damaged
or destroyed by fire or other cause at any time after the Date of Commencement
of this Lease, Landlord shall proceed with due diligence to repair or restore
the same to the same condition as existed before such damage or destruction,
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and as soon as possible thereafter will give possession to the Tenant of the
Premises without diminution or change of location. Provided, however, that in
case of total destruction of the Premises by fire, or in case the Premises are
so badly damaged that, in the opinion of the Landlord, it is not feasible to
repair or rebuild the same, then, Landlord shall have the right to terminate
this Lease instead of rebuilding the improvements; provided, however, that
Landlord shall give Tenant written notice of Landlord's intention to terminate,
said notice to be served not later than thirty (30) days after the occurrence of
the damage to the property. In the event the Premises are rendered temporarily
untenantable because of fire or other casualty, base monthly rent shall abate on
the untenantable area until the Premises are restored to their former condition,
abatement to be based on the square feet of building floor space in the
untenantable area compared to the total square feet of building floor space on
the Premises. Provided, however, that to the extent the damage or destruction
results from the negligence or other action of Tenant or its employees, agents,
contractors, subcontractors, invitees, guests or licensees, Tenant shall pay for
the restoration or repair, to the extent the cost of same is not covered by
insurance.
21. ENVIRONMENTAL MATTERS.
21.1 DEFINITIONS.
21.1.1 Hazardous Material. Hazardous Material means any
substance:
(a) the presence of which requires investigation, notice or
remediation under any federal, state or local statute, regulation, ordinance,
order, action, policy or common law; or
(b) which is or becomes defined as a "hazardous material,"
"hazardous waste," "hazardous substance," "regulated substance," "pollutant" or
"contaminant" under any federal, state or local statute, regulation, rule or
ordinance or amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601
et seq.), Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), the
Colorado Underground Storage Tank Act (Colo. Rev. Stat. Section 25-18-101 et
seq.), and/or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901
et seq.); or
(c) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is
or becomes regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, the State of
Colorado or any political subdivision thereof; or
(d) the presence of which on the Premises causes or threatens
to cause a nuisance upon the Premises or to adjacent properties or poses or
threatens to pose a hazard to the health or safety of persons on or about the
Premises; or
(e) which contains gasoline, diesel fuel or other petroleum
hydrocarbons; or
(f) which contains polychlorinated biphenyls (PCBs), asbestos
or urea formaldehyde foam insulation; or
(g) radon gas.
21.1.2 Environmental Requirements. Environmental Requirements
means all applicable present and future statutes, regulations, rules,
ordinances, codes, licenses, permits, orders, approvals, plans, authorizations,
concessions, franchises, and similar items, of all governmental agencies,
departments, commissions, boards, bureaus, or instrumentalities of the United
States, states and political subdivisions thereof and all applicable judicial,
administrative, and regulatory decrees, judgments, and orders relating to the
protection of human health or the environment, including, without limitation:
(a) All requirements, including but not limited to those
pertaining to reporting, licensing, permitting, investigation, and remediation
of emissions, discharges, releases, or threatened releases of Hazardous
Materials, chemical substances, pollutants, contaminants, or hazardous or toxic
substances, materials or wastes whether solid, liquid, or gaseous in nature,
into the air, surface water, groundwater, or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of chemical substances, pollutants, contaminants, or
hazardous or toxic substances, materials, or wastes, whether solid, liquid, or
gaseous in nature; and
(b) All requirements pertaining to the protection of the
health and safety of employees or the public.
21.1.3 Environmental Damages. Environmental Damages means all
claims, judgments, damages, losses, penalties, fines, liabilities (including
strict liability), encumbrances, liens, costs, and expenses of investigation and
defense of any claim, whether or not such claim is ultimately defeated, and of
any good faith settlement or judgment, of whatever kind or nature, contingent or
otherwise, matured or unmatured, foreseeable
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or unforeseeable, including without limitation reasonable attorneys' fees and
disbursements and consultants' and witnesses' fees, any of which are incurred at
any time as a result of the existence of Hazardous Material upon, about, beneath
the Premises or migrating or threatening to migrate to or from the Premises, or
the existence of a violation of Environmental Requirements pertaining to the
Premises, including without limitation:
(a) Damages for personal injury, or injury to property or
natural resources occurring upon or off of the Premises, foreseeable or
unforeseeable, including, without limitation, lost profits, consequential
damages, the cost of demolition and rebuilding of any improvements on real
property, interest and penalties including but not limited to claims brought by
or on behalf of employees of Tenant;
(b) Fees incurred for the services of attorneys, consultants,
contractors, experts, laboratories and all other costs incurred in connection
with the investigation or remediation of such Hazardous Materials or violation
of Environmental Requirements including, but not limited to, the preparation of
any feasibility studies or reports or the performance of any cleanup,
remediation, removal, response, abatement, containment, closure, restoration or
monitoring work required by any federal, state or local governmental agency or
political subdivision or court, or reasonably necessary to make full economic
use of the Premises and any other property in a manner consistent with its
current use or otherwise expended in connection with such conditions, and
including without limitation any attorneys' fees, costs and expenses incurred in
enforcing this agreement or collecting any sums due hereunder;
(c) Liability to any third person or governmental agency to
indemnify such person or agency for costs expended in connection with the items
referenced herein; and
(d) Diminution in the value of the Premises and adjoining
property, and damages for the loss of business and restriction on the use of or
adverse impact on the marketing of rentable or usable space or of any amenity of
the Premises and adjoining property.
21.2 TENANT'S OBLIGATION TO INDEMNIFY, DEFEND AND HOLD HARMLESS.
Tenant, its successors, assigns and guarantors, agree to indemnify, defend,
reimburse and hold harmless the following persons from and against any and all
Environmental Damages arising from activities of Tenant or its employees,
agents, contractors, subcontractors, or guests, licensees, or invitees which (1)
result in the presence of Hazardous Materials upon, about or beneath the
Premises or migrating to or from the Premises, or (2) result in the violation of
any Environmental Requirements pertaining to the Premises and the activities
thereon:
21.2.1 Landlord;
21.2.2 any other person who acquires an interest in the
Premises in any manner, including but not limited to purchase at a foreclosure
sale or otherwise; and
21.2.3 the directors, officers, shareholders, employees,
partners, agents, contractors, subcontractors, experts, licensees, affiliates,
lessees, mortgagees, trustees, heirs, devisees, successors, assigns, guests and
invitees of such persons.
This obligation shall include, but not be limited to, the burden and
expense of the indemnified parties in defending all claims, suits and
administrative proceedings, including attorneys' fees and expert witness and
consulting fees, even if such claims, suits or proceedings are groundless, false
or fraudulent, and conducting all negotiations of any description, and paying
and discharging, when and as the same become due, any and all judgments,
penalties or other sums due against such indemnified persons, and all such
expenses incurred in enforcing the obligation to indemnify. Tenant, at its sole
expense, may employ additional counsel of its choice to associate with counsel
representing the indemnified parties.
21.3 TENANT'S OBLIGATION TO REMEDIATE. Notwithstanding the
obligation of Tenant to indemnify Landlord pursuant to this Agreement, Tenant
shall, upon demand of Landlord, and at its sole cost and expense, promptly take
all actions to remediate the Premises which are reasonably necessary to mitigate
Environmental Damages or to allow full economic use of the Premises, or are
required by Environmental Requirements, which remediation is necessitated by the
1) introduction of a Hazardous Material upon, about or beneath the Premises or
2) a violation of Environmental Requirements, either of which is caused by the
actions of Tenant, its employees, agents, contractors, subcontractors, guests,
invitees or licensees. Such actions shall include, but not be limited to, the
investigation of the environmental condition of the Premises, the preparation of
any feasibility studies, reports or remedial plans, and the performance of any
cleanup, remediation, containment, operation, maintenance, monitoring or
restoration work, whether on or off of the Premises. Tenant shall take all
actions necessary to restore the Premises to the condition existing prior to the
introduction of Hazardous Material upon, about or beneath the Premises,
notwithstanding any lesser standard of remediation allowable under applicable
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law or governmental policies. All such work shall be performed by one or more
contractors, selected by Tenant and approved in advance and in writing by
Landlord. Tenant shall proceed continuously and diligently with such
investigatory and remedial actions, provided that in all cases such actions
shall be in accordance with all applicable requirements of governmental
entities. Any such actions shall be performed in a good, safe and workmanlike
manner and shall minimize any impact on the business conducted at the Premises.
Tenant shall pay all costs in connection with such investigatory and remedial
activities, including but not limited to all power and utility costs, and any
and all taxes or fees that may be applicable to such activities. Tenant shall
promptly provide to Landlord copies of testing results and reports that are
generated in connection with the above activities, and copies of any
correspondence with any governmental entity related to such activities. Promptly
upon completion of such investigation and remediation, Tenant shall permanently
seal or cap all monitoring wells and test holes to industrial standards in
compliance with applicable federal, state and local laws and regulations, remove
all associated equipment, and restore the Premises to the maximum extent
possible, which shall include, without limitation, the repair of any surface
damage, including paving, caused by such investigation or remediation hereunder.
Provided, however, that Tenant shall not be obligated to remediate environmental
damages which result from seepage of Hazardous Materials onto the Premises from
adjacent property unless the presence on the adjacent property was caused by
Tenant or its employees, agents, contractors, subcontractors, guests, invitees
or licensees.
21.4 NOTIFICATION. If Tenant shall become aware of or receive notice
or other communication concerning any actual, alleged, suspected or threatened
violation of Environmental Requirements, or liability of Tenant for
Environmental Damages in connection with the Premises or past or present
activities of any person thereon, or that any representation set forth in this
Agreement is not or is no longer accurate, including but not limited to notice
or other communication concerning any actual or threatened investigation,
inquiry, lawsuit, claim, citation, directive, summons, proceeding, complaint,
notice, order, writ, or injunction, relating to same, then Tenant shall deliver
to Landlord, within ten days of the receipt of such notice or communication by
Tenant, a written description of said violation, liability, correcting
information, or actual or threatened event or condition, together with copies of
any such notice or communication. Receipt of such notice shall not be deemed to
create any obligation on the part of Landlord to defend or otherwise respond to
any such notification or communication.
21.5 NEGATIVE COVENANTS.
21.5.1 No Hazardous Material on Premises. Except in compliance
with all Environmental Requirements, Tenant shall not cause, permit or suffer
any Hazardous Material to be brought upon, treated, kept, stored, disposed of,
discharged, released, produced, manufactured, generated, refined or used upon,
about or beneath the Premises by Tenant, its agents, employees, contractors,
subcontractors, guests, licensees or invitees, or any other person. Tenant shall
deliver to Landlord copies of all documents which Tenant provides to any
governmental body in connection with compliance with Environmental Requirements
with respect to the Premises, such delivery to be contemporaneous with provision
of the documents to the governmental agency.
21.5.2 No Violations of Environmental Requirements. Tenant
shall not cause, permit or suffer the existence or the commission by Tenant, its
agents, employees, contractors, subcontractors or guests, licensees or invitees,
or by any other person of a violation of any Environmental Requirements upon,
about or beneath the Premises or any portion thereof.
21.5.3 No Environmental or Other Liens. Tenant shall not
create or suffer or permit to exist with respect to the Premises, any lien,
security interest or other charge or encumbrance of any kind, including without
limitation, any lien imposed pursuant to section 107(f) of the Superfund
Amendments and Reauthorization Act of 1986 (42 U.S.C. section 9607(1) or any
similar state statute to the extent that such lien arises out of the actions of
Tenant, its agents, employees, contractors, subcontractors or guests, licensees
or invitees.
21.6 LANDLORD'S RIGHT TO INSPECT AND TO AUDIT TENANT'S RECORDS.
Landlord shall have the right in its sole and absolute discretion, but not the
duty, upon reasonable notice, to enter and conduct an inspection of the Premises
and to inspect and audit Tenant's records concerning Hazardous Materials at any
reasonable time to determine whether Tenant is complying with the terms of the
Lease, including but not limited to the compliance of the Premises and the
activities thereon with Environmental Requirements and the existence of
Environmental Damages as a result of the condition of the Premises or
surrounding properties and activities thereon. If Landlord has reasonable cause
to believe Tenant is in default with respect to any of the provisions of this
Lease related to Hazardous Materials, Environmental Requirements or
Environmental Damages, then Landlord shall have the right, but not the duty, to
retain at the sole expense of Tenant an independent professional consultant to
enter the Premises
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to conduct such an inspection and to inspect and audit any records or reports
prepared by or for Tenant concerning such compliance. Tenant hereby grants to
Landlord the right to enter the Premises and to perform such tests on the
Premises as are reasonably necessary in the opinion of Landlord to assist in
such audits and investigations. Landlord shall use reasonable efforts to
minimize interference with the business of Tenant by such tests inspections and
audits, but Landlord shall not be liable for any interference caused thereby.
21.7 LANDLORD'S RIGHT TO REMEDIATE. Should Tenant fail to perform or
observe any of its obligations or agreements pertaining to Hazardous Materials
or Environmental Requirements, then Landlord shall have the right, but not the
duty, without limitation upon any of the rights of Landlord pursuant to this
agreement, to enter the Premises personally or through its agents, consultants
or contractors and perform the same. Tenant agrees to indemnify Landlord for the
costs thereof and liabilities therefrom as set forth in Paragraph 21.2.
21.8 LANDLORD'S OBLIGATION TO REMEDIATE. Landlord agrees to
remediate all Environmental Damages: 1) caused by Landlord, its agents,
employees, contractors, subcontractors, guests, licensees or invitees, or 2) not
so caused but arising prior to the Commencement Date hereof and not caused by
Tenant, its agents, employees, contractors, subcontractors, guests, licensees or
invitees.
21.9 LANDLORD'S OBLIGATION TO INDEMNIFY, DEFEND AND HOLD HARMLESS
CONCERNING ENVIRONMENTAL MATTERS. Landlord, its successors, assigns and
guarantors, agree to indemnify, defend, reimburse and hold harmless the
following persons from and against any and all Environmental Damages arising
from activities of Landlord or its employees, agents, contractors,
subcontractors or guests, licensees, invitees; or which occurred prior to the
Commencement Date (and were not caused by Tenant, its agents, employees,
contractors, subcontractors, guests, licensees or invitees) which (1) result in
the presence of Hazardous Materials upon, about or beneath the Premises or
migrating to or from the Premises, or (2) result in the violation of any
Environmental Requirements pertaining to the Premises and the activities
thereon:
21.9.1 Tenant;
21.9.2 the directors, officers, shareholders, employees,
partners, agents, contractors, subcontractors, experts, licensees, affiliates,
lessees, mortgagees, trustees, heirs, devisees, successors, assigns and invitees
of Tenant.
This obligation shall include, but not be limited to, the burden and
expense of the indemnified parties in defending all claims, suits and
administrative proceedings, including attorneys' fees and expert witness and
consulting fees, even if such claims, suits or proceedings are groundless, false
or fraudulent, and conducting all negotiations of any description, and paying
and discharging, when and as the same become due, any and all judgments,
penalties or other sums due against such indemnified persons, and all such
expenses incurred in enforcing the obligation to indemnify. Landlord, at its
sole expense, may employ additional counsel of its choice to associate with
counsel representing Tenant.
21.10 SURVIVAL OF ENVIRONMENTAL OBLIGATIONS. The obligations of
Landlord and Tenant as set forth in Paragraph 21 and all of its subparagraphs
shall survive termination of this Lease.
22. ENTRY BY LANDLORD. Landlord, or its authorized representative, and/or
any lender or prospective lender, shall have the right to enter the Premises
during the Lease term at all reasonable times during usual business hours for
purposes of inspection, and/or the performance of any maintenance, repairs or
replacement therein. Landlord shall give Tenant such advance notice of entry as
is reasonable in light of the purpose for the entry. Landlord shall have the
right to enter the Premises and show the same to a prospective tenant during the
last 180 days of this Lease or any extended term, unless the term shall have
been extended by mutual written agreement or delivery of notice of exercise of
any option to extend. Landlord, and all persons entering premises with, by, or
under the authority of Landlord must comply with Tenant's requirements for
identification, nondisclosure, and other, similar safety or security procedures.
23. DEFAULT - REMEDIES OF LANDLORD.
23.1 DEFAULT DEFINED. Any one or more of the following events (each
of which is herein sometimes called "event of default") shall constitute a
default:
23.1.1 Tenant defaults in the due and punctual payment of any
rent, taxes, tax
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deposits, insurance premiums, maintenance fees or other sums required to be paid
by Tenant under this Lease when and as the same shall become due and payable;
23.1.2 Tenant abandons the Premises;
23.1.3 Tenant defaults in the performance of or compliance
with any of the covenants, agreements, terms and conditions contained in this
Lease other than those referred to in the foregoing Paragraph 23.1.1, and such
default shall continue for a period of 10 days after written notice thereof from
Landlord to Tenant, and shall not be cured as permitted by Paragraph 23.9;
23.1.4 Tenant files a voluntary petition in bankruptcy or is
adjudicated a bankrupt or insolvent, or takes the benefit of any relevant
legislation that may be in force for bankrupt or insolvent debtors or files any
petition or answer seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief for itself under any
present or future federal, state or other statute, law or regulation, or
proceedings are taken by Tenant under any relevant Bankruptcy Act in force in
any jurisdiction available to Tenant, or Tenant seeks or consents to or
acquiesces in the appointment of any trustee, receiver or liquidator of Tenant
or of all or any substantial part of its properties or of the Premises, or makes
any general assignment for the benefit of creditors;
23.1.5 A petition is filed against Tenant seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future federal, state or other statute,
law or regulation, and shall remain undismissed for an aggregate of 120 days, or
if any trustee, receiver or liquidator of Tenant or of all or any substantial
part of its properties or of the Premises is appointed without the consent or
acquiescence of Tenant and such appointment remains unvacated for an aggregate
of 20 days.
23.2 LANDLORD'S REMEDIES IN THE EVENT OF DEFAULT. In the event of
any event of default, Landlord shall have the option, without further notice to
Tenant or further demand for performance exercise any one or more of the
following remedies (and any other remedy available at law or in equity):
23.2.1 If Tenant has been late in payment of rent or other
sums due on four or more occasions during any period of one year, Landlord,
without terminating this Lease, may 1) require that all future payments be made
by bank cashier's check, and/or 2) require an additional security deposit in the
amount of the then-current base rent for two months, and/or 3) require that rent
for each month be paid on or before the 15th day of the preceding month. Such
requirement shall be imposed by Landlord's written notice delivered to Tenant.
The additional security deposit shall be paid within 10 days after delivery of
the notice. The Landlord may or may not exercise the remedies provided in this
Paragraph 23.2.1, in its sole discretion. The exercise of the remedies provided
in this Paragraph 23.2.1 shall not be required prior to the exercise of any
other available remedy.
23.2.2 Without obligation to seek a new tenant, to institute
suit against Tenant to collect each installment of rent or other sum as it
becomes due or to enforce any other obligation under this Lease even though the
Premises be left vacant.
23.2.3 As a matter of right, to procure the appointment of a
receiver for the Premises by any court of competent jurisdiction upon ex parte
application and without notice, notice being hereby expressly waived. All rents,
issues and profits, income and revenue from the Premises shall be applied by
such receiver to the payment of the rent, together with any other obligations of
the Tenant under this Lease.
23.2.4 To re-enter and take possession of the Premises and all
personal property therein and to remove Tenant and Tenant's agents and employees
therefrom, and either:
a) terminate this Lease and sue Tenant for damages for breach
of the obligations of Tenant to Landlord under this Lease; or
b) without terminating this Lease, relet, assign or sublet the
Premises and personal property, as the agent and for the account of Tenant in
the name of Landlord or otherwise, upon the terms and conditions Landlord deems
fit with the new Tenant for such period (which may be greater or less than the
period which would otherwise have constituted the balance of the term of this
Lease) as Landlord may deem best, and collect any rent due upon any such
reletting. In this event, the rents received on any such reletting shall be
applied first to the expenses of reletting and collecting, including, without
limitation, all repossession costs, reasonable attorneys' fees, and real estate
brokers' commissions, alteration costs and expenses of preparing said Premises
for reletting, and thereafter toward payment of the rental and of any other
amounts payable by Tenant to Landlord. If the
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sum realized shall not be sufficient to pay the rent and other charges due from
Tenant, then within five days after demand, Tenant will pay to Landlord any
deficiency as it accrues. Landlord may sue therefor as each deficiency shall
arise if Tenant shall fail to pay such deficiency within the time limit.
23.3 TENANT TO SURRENDER PEACEABLY. In the event Landlord elects to
re-enter or take possession of the Premises, Tenant shall quit and peaceably
surrender the Premises to Landlord, and Landlord may enter upon and re-enter the
Premises and possess and repossess itself thereof, by force, summary
proceedings, ejectment or otherwise, and may dispossess and remove Tenant and
may have, hold and enjoy the Premises and the right to receive all rental income
of and from the same.
23.4 NO TERMINATION BY RE-ENTRY. No re-entry or taking of possession
by Landlord shall be construed as an election on Landlord's part to terminate or
accept surrender of this Lease unless Landlord's written notice of such
intention is delivered to Tenant.
23.5 INJUNCTION. In the event of any breach by Tenant of any of the
agreements, terms, conditions or covenants contained in this Lease, Landlord, in
addition to any and all other rights, shall be entitled to enjoin such breach
and shall have the right to invoke any right and remedy allowed at law or in
equity or by statute or otherwise for such breach as though re-entry, summary
proceedings, and other remedies were not provided for in this Lease.
23.6 REMEDIES LISTED ARE CUMULATIVE AND NON-EXCLUSIVE. The
enumeration of the foregoing remedies does not exclude any other remedy, but all
remedies are cumulative and shall be in addition to every other remedy now or
hereafter existing at law or in equity, including, but not limited to, the
remedies provided in Paragraph 24 concerning Landlord's security interest in
Tenant's personalty and Landlord's right to remove same.
23.7 INTEREST ON SUMS PAST DUE. In addition to the late charge which
is elsewhere established, all rent and all other amounts due from Tenant
hereunder shall bear interest at the rate of twelve (12%) percent per annum
compounded quarter-annually from their respective due dates until paid, provided
that this shall in no way limit, lessen or affect any claim for damages by
Landlord for any breach or default by Tenant.
23.8 ATTORNEYS' FEES. Reasonable attorneys' fees, expert witness
fees, consulting fees and other expenses incurred by either party by reason of
the breach by either party in complying with any of the agreements, terms,
conditions or covenants of this Lease shall constitute additional sums to be
paid to the prevailing party on demand.
23.9 TIME TO CURE CERTAIN NON-MONETARY DEFAULTS. In the event of any
default other than failure to pay a sum of money, for which notice has been
given as provided herein, which because of its nature can be cured but not
within the period of grace heretofore allowed, then such default shall be deemed
remedied, if the correction thereof shall have been commenced within said grace
period or periods and shall, when commenced, be diligently prosecuted to
completion.
23.10 LANDLORD DEFAULT. If Landlord is in default under any of its
obligations and the default continues for thirty (30) days after written notice
from Tenant (subject to extension pursuant to 23.9), Tenant may pursue all
remedies at law or in equity. Tenant may, but shall not be required to, correct
such default for the Landlord's account, and the expense shall be promptly paid
within ten (10) days by Landlord; however, in no event shall Tenant have the
right to rental abatement, offset of expenses against rental, or the right to
terminate this Lease, subject to Tenant's legal or equitable remedies.
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Tenant may not offset any sum due or assertedly due from Landlord to
Tenant against any sum due from Tenant to Landlord.
Tenant agrees that if Tenant obtains a judgment against Landlord arising
out of Landlord's obligations under this Lease, such judgment may be satisfied
only by execution and sale of Landlord's interest in the Premises leased hereby.
Tenant may not seek execution against other property of Landlord, nor pursue any
judgment, execution or other remedy against the partners or other owners of
Landlord or any of their property. Immediately upon receipt of Landlord's
written request, Tenant will release any property (other than the Premises
leased hereby) from the lien of any judgment obtained by Tenant against Landlord
arising out of Landlord's obligations under this Lease.
24. LANDLORD'S RIGHT TO REMOVE TENANT'S PERSONAL PROPERTY. In the event of
default by Tenant, after Landlord has given Tenant notice of the default and the
default has remained uncured after the period allowed for cure, at Landlord's
sole election, Landlord may proceed to remove, or have the appropriate
governmental agencies remove, all of Tenant's property from the Premises and
leave same on any public street or landfill at Tenant's sole risk. The cost of
any such removal shall be paid by Tenant to Landlord upon demand.
25. LEGAL PROCEEDINGS AGAINST TENANT BY THIRD PARTIES; TENANT TO PAY
LANDLORD'S FEES. In the event of any proceeding at law or in equity wherein
Landlord, without being in default as to its covenants under the terms hereof,
shall be made a party to any litigation by reason of Tenant's interest in the
Premises, or, in the event Landlord shall be required to commence any legal
proceedings relating to the Premises and Tenant's occupancy thereof and Tenant's
relation thereto, Landlord shall be allowed and Tenant shall be liable for and
shall pay all costs and expenses incurred by Landlord, including reasonable
attorneys' fees, expert witness fees and consultant's fees.
26. INDEMNIFICATION BY TENANT AND BY LANDLORD. The Tenant shall indemnify
and save harmless Landlord of and from liability for damages or claims against
Landlord, including costs, attorneys' fees and expenses of Landlord in defending
against the same, on account of injuries to any person or property, if the
injuries are caused by the negligence or willful misconduct of Tenant, its
agents, subcontractors, servants or employees, or of any other person entering
upon the Premises under express or implied invitation of Tenant, or if such
injuries are the result of the violation by Tenant, its agents, subcontractors,
servants, or employees, of laws, ordinances, other governmental regulations, or
of the terms of this Lease.
The Landlord shall indemnify and save harmless Tenant of and from
liability for damages or claims against Tenant, including costs, attorneys' fees
and expenses of Tenant in defending against the same, on account of injuries to
any person or property, if the injuries are caused by the negligence or willful
misconduct of Landlord, its agents, subcontractors, servants or employees, or of
any other person entering upon the Premises under express or implied invitation
of Landlord or where such injuries are the result of the violation by Landlord,
its agents, subcontractors, servants or employees, of laws, ordinances, other
governmental regulations, or of the terms of this Lease.
Landlord provides recreation facilities for the use of employees of Tenant
and other occupants within the property developed by Landlord, which property
presently includes LONG'S PEAK INDUSTRIAL PARK, FIRST, SECOND and THIRD FILINGS,
and portions of ST. VRAIN CENTRE, both in the City of Longmont and County of
Boulder, Colorado, and will include such additional property in the immediate
vicinity thereof as may be developed by Landlord. The term "recreation
facilities" includes, at present, a fitness trail with 34 exercise stations,
volleyball courts, basketball courts, and a park, and will include such
additional facilities as Landlord may provide.
Tenant shall indemnify and save harmless Landlord of and from Liability
for damages or claims against Landlord, including costs, attorneys' fees and
expenses of Landlord in defending against the same, on account of any injury to
(or death of) an employee of Tenant arising out of use of the recreation
facilities.
27. ASSIGNMENT OR SUBLETTING. Tenant shall not assign, mortgage, or
encumber this Lease, nor sub-let or permit the Premises or any part thereof to
be used by others, without the prior written consent of Landlord in each
instance, such consent not to be unreasonably withheld.
Should Tenant desire the services of a real estate broker to market the
Premises as available for sub-lease, Tenant shall employ Landlord for a minimum
period of six (6) months. If Landlord acting as broker shall produce a
prospective sub-tenant who is willing and able to lease the space on the terms
advertised, then Tenant shall pay
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Landlord a brokerage fee of three percent (3%) of the base rental value of the
sub-lease, including any fee due a cooperating broker representing the
sub-tenant. If, after such period, the space has not been sub-leased, Tenant may
then, upon ten (10) days written notice of termination of Landlord's brokerage,
proceed to contract with another licensed real estate broker.
In connection with an assignment, sub-lease or encumbrance Landlord may
require the submittal of detailed financial information about the prospective
sub-tenant or assignee, to be reviewed by Landlord, and may require a guarantee
of the obligations of the prospective sub-tenant or assignee, and may require
detailed financial information about the guarantor, to be reviewed by Landlord;
and there may be alterations to this Lease and alterations to the building which
are necessary to consummate the transaction. The Landlord will require Tenant or
the prospective assignee or sub-tenant to pay for the alterations to the
building, and may require that Landlord perform same. In addition, Landlord may
charge a fee of two percent (2%) of Base Rent of the sub-lease only during the
first five years of the Lease, due in full upon Landlord's consent, as payment
to Landlord for such investigations, lease alterations and similar matters. No
two percent (2%) fee will be charged in a case when Landlord receives a
brokerage fee as set forth in the preceding paragraph, nor in connection with an
assignment or sub-lease to an assignee or sub-tenant who is "affiliated" with
Tenant. "Affiliated" means under common voting control, directly or indirectly.
A sale or transfer of control of a majority of the votes which may be cast
to elect Tenant's board of directors or other governing body shall be deemed to
be an assignment of this Lease, requiring Landlord's consent if the sale or
transfer is essentially accomplished in a single transaction, except for sales
of Tenant's common stock offered to the general public.
If this Lease is assigned, or if the Premises or any part thereof is
sub-let, or occupied by anyone other than Tenant, Landlord may, after default by
Tenant, collect rent from the assignee, sub-tenant, or occupant and apply the
net amount collected against all rent herein reserved. No such assignment,
sub-letting, occupancy, or collection shall be deemed a waiver of this covenant,
or the acceptance of the assignee, sub-tenant, or occupant as tenant, or a
release of Tenant from further performance by Tenant of the covenants in this
Lease. The consent by Landlord to an assignment or sub-letting shall not be
construed to relieve Tenant (or any subsequent tenant) from obtaining the
consent in writing of Landlord to any further assignment or sub-letting.
28. LANDLORD'S WARRANTY OF TITLE; QUIET ENJOYMENT. Landlord covenants it
has good right to lease the Premises in the manner described herein and that
Tenant shall peaceably and quietly have, hold, occupy, and enjoy the Premises
during the term of the Lease; except as provided in Paragraph 31 concerning
subordination to mortgage lenders.
29. ADDITIONAL DEVELOPMENT OF PROPERTY - RIGHTS OF LANDLORD. Landlord does
reserve, during the term of this Lease, the right to go upon and deal with the
Premises or part thereof for the purpose of implementing a common development
plan for the project of which the Premises are a part, and to install
non-exclusive sidewalks, paths, roadways and other street improvements for use
by vehicles, pedestrians, and for parking; to undertake such drainage programs
to handle underground and surface drainage water and to make any other changes
and/or improvements as Landlord shall deem advisable in the exercise of its sole
discretion and with reasonable notice; provided, however, any such action by
Landlord shall not unreasonably interfere with the rights of Tenant hereunder.
30. GOVERNMENTAL ACQUISITION OF THE PREMISES. The parties agree that
Landlord shall have sole and exclusive authority to negotiate and settle all
matters pertaining to the acquisition of all or part of the Premises by a
governmental agency by eminent domain or threat thereof (condemnation), and to
convey all or any part of the Premises under threat of condemnation, and the
Lease shall terminate as to any area so conveyed. It is agreed that any
compensation for land and/or buildings to be taken whether resulting from
negotiation and agreement or condemnation proceedings, shall be the exclusive
property of Landlord, and that there shall be no sharing whatsoever between
Landlord and Tenant of any such sum. Such taking of property shall not be
considered as a breach of this Lease by Landlord, nor give rise to any claims in
Tenant for damages or compensation from Landlord. Tenant may separately claim
and recover from the condemning authority the value of any personal property
owned by Tenant which is taken, and any relocation expenses owed to Tenant by
the condemning authority. If the taken portion of the Premises consists only of
areas where no building is constructed, and the land area of the Premises is
reduced by less than ten percent, and the parking area available for use by
Tenant is reduced by less than five percent, and there is no material change in
Tenant's access to the Premises, then there shall be no change in the terms of
the Lease. If no building area is taken but the foregoing limits on parking area
reductions are exceeded, then Tenant may
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terminate the Lease unless Landlord provides sufficient reasonably adjacent
parking area so that the total available parking area is reduced by less than
five percent. If any portion of the building on the Premises is taken, then
Landlord, at its election, may replace the square footage taken with space in
the same building, or may provide land and building area essentially the same as
the Premises in a reasonably adjacent location, within 10 days after the
conveyance or taking, under the same terms and conditions as contained in this
Lease, and this Lease shall be in full force and effect as to the new Premises.
If Landlord does not so provide reasonable space, then Tenant shall have two
options. First, Tenant may terminate the Lease by written notice delivered to
Landlord within 60 days after the conveyance or taking. Second, Tenant may
retain the remaining portion of the Premises, under all the terms and conditions
hereof, but the base rental shall be reduced in proportion to the number of
square feet of building floor space taken compared to the number of square feet
of building floor space on the Premises prior to the taking.
31. SUBORDINATION OF THE LEASEHOLD TO MORTGAGES. This Lease shall be
subject and subordinate in priority at all times to the lien of any existing
and/or hereafter executed mortgages and trust deeds encumbering the Premises.
Although no instrument or act on the part of Tenant shall be necessary to
effectuate such subordination, Tenant will execute and deliver such further
instruments subordinating this Lease to the lien of any such mortgages or trust
deeds as may be desired by the mortgagee or holder of such trust deeds. Tenant
hereby appoints Landlord as his attorney in fact, irrevocably, to execute and
deliver any such instrument for Tenant. Tenant further agrees at any time and
from time to time upon not less than ten (10) days prior written request by
Landlord, to execute, acknowledge, and deliver to Landlord an estoppel affidavit
in form acceptable to Landlord and the holder of any existing or contemplated
mortgage or deed of trust encumbering the Premises. Tenant's failure to deliver
such statement within such time shall be conclusive upon Tenant (1) that this
Lease is in full force and effect, without modification except as may be
represented by Landlord; (2) that there are no uncured defaults in Landlord's
performance; and (3) that not more than one (1) month's rent has been paid in
advance. Further, upon request, Tenant shall supply to Landlord a corporate
resolution certifying that the party signing this statement on behalf of Tenant
is properly authorized to do so, if Tenant is a corporation. Tenant agrees to
provide Landlord within ten business days of Landlord's request, Tenant's most
recently completed financial statements and such other financial information as
reasonably requested by Landlord in order to verify Tenant's financial condition
to satisfy requirements of Landlord's existing or contemplated lender or
mortgagee.
Tenant agrees with lender and Landlord that if there is a foreclosure of
any such mortgage or deed of trust and pursuant to such foreclosure, the Public
Trustee or other appropriate officer executes and delivers a deed conveying the
Premises to the lender or its designee, or in the event Landlord conveys the
Premises to the lender or its designee in lieu of foreclosure, Tenant will
attorn to such grantee of the Premises, rather than to Landlord, to perform all
of Tenant's obligations under the Lease, and Tenant shall have no right to
terminate the Lease by reason of the foreclosure or deed given in lieu thereof.
Landlord will endeavor to include in the terms of any mortgage or deed of
trust on the Premises a provision that if Tenant is not in default under the
terms of this Lease and Tenant is then in possession of the Premises, Tenant's
rights of quiet enjoyment arising out of the Lease shall not be affected or
disturbed by lender in the event of a default by Landlord and any sale of the
Premises through foreclosure of any deed of trust or otherwise.
32. MEMORANDUM OF LEASE - RECORDING. This Lease shall not be recorded in
the office of the County Clerk and Recorder of Boulder County, except by
Landlord as a financing statement. In order to effect public recordation, the
parties hereto may, at the time this Lease is executed, agree to execute a
Memorandum of Lease incorporating therein by reference the terms of this Lease,
but deleting therefrom any expressed statement or mention of the amount of rent
herein reserved, which instrument may be recorded by either party in the office
of the Clerk and Recorder of Boulder County.
33. NO WAIVER OF BREACH; ACCEPTANCE OF PARTIAL PAYMENTS OF RENT. No
assent, or waiver expressed or implied, or failure to enforce, as to any breach
of any one or more of the covenants or agreements herein shall be deemed or
taken to be a waiver of any succeeding or additional breach.
Payment by Tenant or receipt by Landlord of an amount less than the rent
or other payment provided for herein shall not be deemed to be other than a
payment on account of the earliest rent then due, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment of rent
be deemed an accord and satisfaction, and Landlord may accept such check or
other payment without prejudice to Landlord's right to recover the balance of
all rent then due, and/or to pursue any or all other remedies provided for in
this Lease, in law, and/or in equity including, but not limited to, eviction of
Tenant. Specifically, but not as a limitation, acceptance of a
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partial payment of rent shall not be a wavier of any default by Tenant.
34. CONTROLLING LAW. The Lease, and all terms hereunder shall be governed
by the laws of the State of Colorado, exclusive of its conflicts of laws rules.
35. INUREMENTS. The covenants and agreements herein contained shall bind
and inure to the benefit of Landlord and Tenant and their respective successors.
This Lease shall be signed by the parties in duplicate, each of which shall be a
complete and effective original lease.
36. TIME. Time is of the essence in this Lease in each and all of its
provisions in which performance is a factor.
37. ADDRESSES; EMPLOYER IDENTIFICATION NUMBERS; METHOD OF GIVING NOTICE.
The street address of Landlord is Suite 200, 2101 Ken Pratt Blvd., Longmont, CO
80501. The mailing address of Landlord is PO Box 1937, Longmont, CO 80502-1937.
All payments, notices and communications which are sent to Landlord via United
States mail shall be addressed to the mailing address. Only payments, notices
and communications which are hand delivered or delivered by private courier
service shall be addressed to the street address.
Tenant's street and mailing address prior to occupancy of the Premises is
2190 Miller Drive, Longmont, CO 80501, Attention: Facilities Director, and a
copy to: Vice President General Counsel. After occupancy, such notice shall
be made addressed to the Premises, Attention: Facilities Director, and a copy
to: Vice President General Counsel.
Landlord's current fax number is (303)776-4946. Tenant's current fax
number is 303 678 3111. Any written notice required hereby may be delivered by
fax, U.S. mail (certified return receipt requested), private courier service
with receipt of delivery required, or hand delivery. Notice shall be effective
at time of delivery to the address or fax number shown.
Either party may change its street or mailing address, or fax number, for
purposes hereof, by written notice delivered to the other. The federal employer
identification number of Landlord is 84-1165-292. The federal identification
number of Tenant is 77-012-3732.
38. PARAGRAPH HEADINGS; GRAMMAR. All paragraph headings are made for the
purposes of ease of location of terms and shall not affect or vary the terms
hereof. Throughout this Lease, wherever the words, "Landlord" and "Tenant" are
used they shall include and imply to the singular, plural, persons both male and
female, and all sorts of entities and in reading said Lease, the necessary
grammatical changes required to make the provisions hereof mean and apply as
aforesaid shall be made in the same manner as though originally included in said
Lease.
39. ADDITIONAL PROVISIONS.
39.1 BROKERS. Tenant and Landlord acknowledge that there is no real
estate agent or broker representing them in this transaction, and that no fee or
commission shall be due and payable. Tenant hereby agrees to indemnify and hold
Landlord harmless of and from any and all loss, costs, damages or expenses
(including, without limitation, all attorneys' fees and disbursements) by reason
of any claim of or liability to any broker or person claiming through Tenant and
arising out of or in connection with the negotiation, execution and delivery of
this Lease. Additionally, Tenant acknowledges and agrees that Landlord shall
have no obligation for payment of any brokerage fee or similar compensation to
any person with whom Tenant has dealt or may in the future deal with respect to
leasing of any additional or expansion space in the Building or renewals or
extensions of this Lease. In the event any claim shall be made against Landlord
by any broker who shall claim to have negotiated this Lease on behalf of Tenant
or to have introduced Tenant to the Building or to Landlord, Tenant shall be
liable for payment of all attorneys' fees, costs and expenses incurred by
Landlord in defending against the same, and in the event such broker shall be
successful in any such action, Tenant shall, in addition, make payment to such
broker.
39.2 SIGNAGE. Tenant shall have the right to install signage on a
lighted exterior monument sign and on the building in locations and style
mutually agreed upon by Landlord and Tenant. Signage shall be subject to
protective covenants, if any, and City of Longmont sign code.
18
<PAGE> 22
39.3 ADDITIONAL INCENTIVES. During the Term of the Lease, Landlord
shall provide each year to Tenant:
(1) Meeting space at the Conference Center free of charge for up to 4
quarterly meetings.
(2) The lowest net corporate room rate for Maxtor corporate guests at
the Raintree Plaza Hotel and Plaza Suites.
(3) Up to 30 room nights annually free of charge for Maxtor CEO and
Executive Staff members at the Raintree Plaza Hotel and Plaza
Suites. In addition, these executives shall be allowed the
best-available room upgrade at no additional charge.
(4) 10% discount for Maxtor employees at the following restaurants: The
Ptarmigan, Egg & I (Monday - Friday only), Ichiban Japanese
restaurant, Johnny Carino's, Red Lobster.
(5) 10% discount for Maxtor employees at The Village Gardener.
39.4 TERMINATION OF EXISTING LEASES. Leases on existing space in
Landlord's buildings shall be extended to terminate with occupancy of the
Premises. Occupancy may be staggered over a period not-to-exceed one hundred
eighty (180) days as provided herein. Base Rental, Maintenance Expense, and Tax
Payments shall be pro-rated so that Tenant shall pay for no more than one
tenancy throughout the staggered occupancy period. However, Tenant's liability
for the entire Premises and obligations for insurance coverage and all utilities
for the entire Premises shall begin upon the Commencement Date.
Upon Tenant vacating an entire existing building, Tenant's liability for
that building and obligations for Base Rental, Maintenance Expense and Taxes for
that building shall cease; simultaneously, Tenant's obligation for Base Rental,
Maintenance Expense and Taxes for a comparable area of the Premises, i.e., an
equal square footage, shall commence. Upon the sooner of (a) Tenant's vacating
all existing buildings leased from Landlord, or (b) one hundred eighty (180)
days following the Commencement Date, Tenant's obligation for Base Rental,
Maintenance Expense and Taxes for the entire Premises shall commence.
Landlord shall not look to Tenant for removal and replacement of
alterations in these existing spaces, except as follows. Tenant will pay the
Landlord FIFTY THOUSAND US dollars ($50,000.00) within one hundred twenty (120)
days after Tenant has fully vacated 1851 Lefthand Circle, but only if the
Landlord has not obtained a tenant willing to rent the 1851 Lefthand Circle
facility with the cleanrooms intact. The foregoing is Tenant's sole liability
and Landlord's sole recourse to Tenant for removal and replacement of
alterations in the existing spaces, including without limit the demolition and
removal of the cleanrooms at 1851 Lefthand Circle.
39.5 REPRESENTATION AND WARRANTY. As a specific inducement to
Tenant, upon which Tenant has made substantial reliance, to enter into this
Lease, Landlord represents and warrants that, as of the date of this Lease and
thereafter:
(1) Landlord has a binding commitment to restructure its existing
portfolio loan with TIAA;
(2) Landlord has contractually enforceable rights to relocate or has
relocated existing tenants in the Premises for suitable terms;
(3) Landlord has contractually enforceable rights to purchase or has
purchased land adjacent to the Premises for parking; and
(4) Landlord has secured preliminary approval of City of Longmont for
the design concept of the Premises reflected herein, including
without limit Exhibit A and Exhibit B.
In the event that any of the foregoing are not true or become untrue, Tenant
may, at Tenant's option, upon notice in writing to Landlord, cancel this Lease
without payment or penalty of any kind and Tenant may extend its current leases
for three (3) years in the same manner as if the notice provisions of those
leases had been complied with, at no increase in Base Rent , except for the
cost-of-living increase provided in each lease.
[REMAINDER OF PAGE LEFT BLANK]
19
<PAGE> 23
IN WITNESS WHEREOF, the Parties have executed this Lease as of the date hereof.
LANDLORD: PRATT LAND LIMITED LIABILITY COMPANY
By
---------------------------------
Martin W. McElwain, Manager
TENANT: MAXTOR CORPORATION
By /s/ Phillip Duncan
---------------------------------
Title
------------------------------
STATE OF COLORADO )
) ss.
COUNTY OF BOULDER )
The foregoing instrument was acknowledged before me this _________ day of
October, 1999 by Martin W. McElwain, Manager, Pratt Land Limited Liability
Company.
Witness my hand and official seal.
My commission expires:
Notary Public
STATE OF __________)
) ss.
COUNTY OF _________)
The foregoing instrument was acknowledged before me this day of October, 1999 by
Maxtor Corporation.
Witness my hand and official seal.
My commission expires:
----------------
---------------------------------
Notary Public
20
<PAGE> 24
EXHIBIT A
(Premises)
21
<PAGE> 25
EXHIBIT B
(Tenant Improvements)
Landlord shall construct a new corporate campus incorporating existing
structures at 2402 & 2502 Clover Basin Drive and 2405 & 2505 Trade Centre
Avenue, substantially in accordance with plan dated 4/27/99, General
Specifications dated 9/18/98 (r2), and Clarifications dated 5/26/99, which
documents are incorporated herein by reference.
Landlord shall provide, at Landlord's expense, design and construction services
to complete the project on a turn-key basis. All additional costs for changes to
the plans and specifications, requested by Tenant, shall be the expense of the
Tenant, to be paid to Landlord as the work is performed, but no later than the
Commencement Date.
22
<PAGE> 1
EXHIBIT 10.77
EXECUTIVE RETENTION INCENTIVE AGREEMENT
This Executive Retention Agreement (the "Agreement") is made and entered
into as of October 18, 1999 (the "Effective Date"), by and between Maxtor
Corporation, a Delaware corporation (the "Company") and Victor B. Jipson
("Executive").
R E C I T A L S
A. Executive is the Senior Vice President, Engineering, 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 Seven Hundred Fifty Thousand Dollars ($750,000.00) (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 October
17, 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
<PAGE> 2
(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 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 Boulder County, Colorado
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
2
<PAGE> 3
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
Colorado, without regard to such state's conflict of laws rules.
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
3
<PAGE> 4
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.
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 October 18, 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.
<TABLE>
<CAPTION>
MAXTOR CORPORATION
<S> <C> <C>
Date: October 18, 1999 By: /s/ GLENN H. STEVEN
---------------------------
Glenn H. Steven
Title: V.P., General Counsel
and Secretary
EXECUTIVE:
Date: October 18, 1999 /s/ VICTOR B. JIPSON
---------------------------
Victor B. Jipson
</TABLE>
Address for Notice:
3185 Nelson Road
Longmont, CO 80503
4
<PAGE> 5
PROMISSORY NOTE
$750,000.00 Longmont, Colorado
October 18, 1999
The undersigned, Victor B. Jipson ("Borrower"), hereby unconditionally
promises to pay to the order of Maxtor Corporation, a Delaware corporation (the
"Lender"), the sum of Seven Hundred Fifty Thousand Dollars ($750,000.00) plus
interest, in accordance with the terms of the Executive Retention Agreement by
and between Lender and Borrower effective October 18, 1999 (the "October 1999
Retention Agreement").
The outstanding principal balance of this Note, together with all accrued
and unpaid interest hereon, shall be due and payable on October 17, 2002, or
upon termination for "Cause" or voluntary termination of employment for reasons
other than "Good Reason" as those terms are defined in the October 1999
Retention Agreement. Interest shall accrue on unpaid principal from the date
hereof until maturity at a rate of 5.54% 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.
5
<PAGE> 6
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 Colorado.
IN WITNESS WHEREOF, Borrower has executed this Note as of the day and year
first above written.
---------------------------------
Victor B. Jipson
6
<PAGE> 1
Exhibit 10.78
EXECUTIVE RETENTION INCENTIVE AGREEMENT
This Executive Retention Agreement (the "Agreement") is made and entered
into as of October 18, 1999 (the "Effective Date"), by and between Maxtor
Corporation, a Delaware corporation (the "Company") and Paul J. Tufano
("Executive").
R E C I T A L S
A. Executive is the Senior Vice President Finance and Chief Financial 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 Seven Hundred Fifty Thousand Dollars ($750,000.00) (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 October
17, 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
1
<PAGE> 2
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 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 Boulder County, Colorado
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
2
<PAGE> 3
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
Colorado, without regard to such state's conflict of laws rules.
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
3
<PAGE> 4
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.
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 October 18, 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: October 18, 1999 By: /s/ Glenn H. Stevens
------------------- ---------------------------------------
Title: V.P., General Counsel & Secretary
-----------------------------------
EXECUTIVE:
Date: October 18, 1999 /s/ Victor B. Jipson
-------------------- -----------------------------
Victor B. Jipson
Address for Notice:
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4
<PAGE> 5
PROMISSORY NOTE
$750,000.00 Longmont, Colorado
October 18, 1999
The undersigned, Paul J. Tufano ("Borrower"), hereby unconditionally promises to
pay to the order of Maxtor Corporation, a Delaware corporation (the "Lender"),
the sum of Seven Hundred Fifty Thousand Dollars ($750,000.00) plus interest, in
accordance with the terms of the Executive Retention Agreement by and between
Lender and Borrower effective October 18, 1999 (the "October 1999 Retention
Agreement").
The outstanding principal balance of this Note, together with all accrued and
unpaid interest hereon, shall be due and payable on October 17, 2002, or upon
termination for "Cause" or voluntary termination of employment for reasons other
than "Good Reason" as those terms are defined in the October 1999 Retention
Agreement. Interest shall accrue on unpaid principal from the date hereof until
maturity at a rate of 5.54% 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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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/ Paul J. Tufano
------------------
Paul J. Tufano
6
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No.: 333-86991) dated September 13, 1999, of Maxtor
Corporation and incorporation by reference in the Registration Statements on
Form S-8 (Nos.: 333-08181, 333-61011, and 333-87041) dated July 16, 1996, August
7, 1998, and September 13, 1999, respectively, of Maxtor Corporation of our
report dated March 14, 2000 relating to the consolidated financial statements
and financial statement schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> DEC-27-1998
<PERIOD-END> JAN-01-2000
<CASH> 240,357
<SECURITIES> 113,565
<RECEIVABLES> 247,075
<ALLOWANCES> 15,459
<INVENTORY> 103,854
<CURRENT-ASSETS> 701,730
<PP&E> 376,933
<DEPRECIATION> 244,844
<TOTAL-ASSETS> 906,335
<CURRENT-LIABILITIES> 537,195
<BONDS> 113,770
0
0
<COMMON> 1,119
<OTHER-SE> 254,251<F1>
<TOTAL-LIABILITY-AND-EQUITY> 906,335
<SALES> 2,486,123
<TOTAL-REVENUES> 2,486,123
<CGS> 2,287,316
<TOTAL-COSTS> 2,287,316
<OTHER-EXPENSES> 293,368<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,723
<INCOME-PRETAX> (48,607)
<INCOME-TAX> 1,541
<INCOME-CONTINUING> (50,148)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,148)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
<FN>
<F1>Other SE includes additional paid-in capital of $1,043,964, account deficit of
$<791,928> and cumulative other comprehensive income of $2,215.
<F2>Other expenses include R&D of $191,511, SG&A of $89,274, stock compensation
expense of $2,437, acquired in-process technology of $7,028, and amortization
of goodwill and other intangible assets of $3,118.
</FN>
</TABLE>
