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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 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)
<TABLE>
<S> <C>
DELAWARE 77-0123732
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 COTTONWOOD DRIVE, MILPITAS, CA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 432-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(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 [ ]
The aggregate market value of the registrant's common stock, $.01 par value
per share, held by nonaffiliates of the registrant was $673,349,427 on November
9, 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
conclusive determination for other purposes.
As of November 9, 2000, 116,169,646 shares of the registrant's Common
Stock, $.01 par value, were issued and outstanding.
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<PAGE> 2
MAXTOR CORPORATION
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets --
September 30, 2000, and January 1, 2000................... 1
Condensed Consolidated Statements of Operations --
Three months and nine months ended September 30, 2000, and
October 2, 1999........................................... 2
Condensed Consolidated Statements of Cash Flows --
Nine months ended September 30, 2000, and October 2,
1999...................................................... 3
Notes to Condensed Consolidated Financial Statements........ 4 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13 - 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 25 - 27
Item 6. Exhibits and Reports on Form 8-K............................ 27
Signature Page....................................................... 28
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAXTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 154,628 $ 240,357
Marketable securities..................................... 196,382 113,565
Accounts receivable, net of allowance for doubtful
accounts of $16,507 at September 30, 2000 and $15,459
at January 1, 2000..................................... 268,475 231,616
Inventories, net.......................................... 107,334 103,854
Prepaid expenses and other................................ 18,159 12,338
---------- ----------
Total current assets.............................. 744,978 701,730
Property, plant and equipment, net.......................... 159,157 132,089
Goodwill and other intangible assets, net................... 47,555 55,107
Other assets................................................ 13,875 17,409
---------- ----------
Total assets...................................... $ 965,565 $ 906,335
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings, including current portion of
long-term debt......................................... $ 15,300 $ 5,000
Accounts payable.......................................... 408,333 404,874
Accrued and other liabilities............................. 150,574 127,321
---------- ----------
Total current liabilities......................... 574,207 537,195
Long-term debt.............................................. 92,279 113,770
---------- ----------
Total liabilities................................. 666,486 650,965
Common Stock, $0.01 par value, 250,000,000 shares
authorized; 116,125,550 shares issued and outstanding at
September 30, 2000 and 113,428,924 shares issued and
outstanding at January 1, 2000............................ 1,137 1,119
Additional paid-in capital.................................. 1,058,689 1,043,964
Accumulated deficit......................................... (765,131) (791,928)
Cumulative other comprehensive income -- unrealized gain on
investments in equity securities.......................... 4,384 2,215
---------- ----------
Total stockholders' equity........................ 299,079 255,370
---------- ----------
Total liabilities and stockholders' equity........ $ 965,565 $ 906,335
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total revenue..................... $ 619,314 $ 589,321 $ 1,977,674 $ 1,795,499
Total cost of revenue............. 556,379 575,488 1,706,592 1,678,916
------------ ------------ ------------ ------------
Gross profit................. 62,935 13,833 271,082 116,583
Operating expenses:
Research and development........ 54,851 46,732 171,411 142,905
Selling, general and
administrative............... 23,269 21,352 75,264 64,220
Acquired in-process
technology................... -- 7,028 -- 7,028
Amortization of goodwill and
other intangible assets...... 2,520 598 7,560 598
------------ ------------ ------------ ------------
Total operating
expenses.............. 80,640 75,710 254,235 214,751
------------ ------------ ------------ ------------
Income (loss) from operations..... (17,705) (61,877) 16,847 (98,168)
Interest expense.................. (3,435) (3,349) (10,405) (9,970)
Interest and other income......... 6,410 3,088 21,765 11,508
Gain on sale of investments....... -- 21,995 -- 44,120
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes.................... (14,730) (40,143) 28,207 (52,510)
Provision for (benefit from)
income taxes.................... (737) 132 1,410 1,632
------------ ------------ ------------ ------------
Net income (loss)................. (13,993) (40,275) 26,797 (54,142)
Other comprehensive income (loss):
Unrealized gain (loss) on
investments in equity
securities................... (2,700) 187 2,169 16,831
Less: reclassification
adjustment for gain (loss)
included in net loss......... -- (21,995) -- (44,120)
------------ ------------ ------------ ------------
Comprehensive income (loss)....... $ (16,693) $ (62,083) $ 28,966 $ (81,431)
============ ============ ============ ============
Net income (loss) per share
-- basic........................ $ (0.12) $ (0.38) $ 0.23 $ (0.53)
-- diluted...................... $ (0.12) $ (0.38) $ 0.22 $ (0.53)
Shares used in per share
calculation
-- basic........................ 115,709,525 106,713,093 114,906,927 102,890,681
-- diluted...................... 115,709,525 106,713,093 119,156,289 102,890,681
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
MAXTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 26,797 $ (54,142)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 59,861 58,295
Amortization of goodwill and other intangible assets...... 7,560 598
Acquired in-process technology............................ -- 7,028
Stock compensation expense................................ 3,762 2,017
Gain on sale of investment................................ -- (44,120)
Loss (gain) on disposal of property, plant and
equipment.............................................. 2,255 (596)
Changes in assets and liabilities:
Accounts receivable.................................... (36,859) 99,683
Inventories............................................ (3,480) 29,950
Other assets........................................... (3,267) (4,857)
Accounts payable....................................... 3,451 (54,835)
Accrued and other liabilities.......................... 22,738 (6,275)
--------- ---------
Net cash provided by operating activities......... 82,818 32,746
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment................ 174 316
Purchase of property, plant and equipment................... (89,358) (95,523)
Cash acquired from acquisition.............................. -- 710
Purchase of marketable securities........................... (82,817) (99,702)
Proceeds from sale of investments, net...................... -- 44,404
Other....................................................... -- (1,566)
--------- ---------
Net cash used in investing activities............. (172,001) (151,361)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, including short-term
borrowings................................................ 28,175
Principal payments of debt, including short-term
borrowings................................................ (7,527) (55,280)
Principal payments under capital lease obligations.......... -- (27)
Proceeds from issuance of common stock from public offering,
employee stock purchase plan and stock options
exercised................................................. 10,981 103,432
--------- ---------
Net cash provided by financing activities......... 3,454 76,300
--------- ---------
Net change in cash and cash equivalents..................... (85,729) (42,315)
Cash and cash equivalents at beginning of period............ 240,357 214,126
--------- ---------
Cash and cash equivalents at end of period.................. $ 154,628 $ 171,811
========= =========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase (decrease) in receivable from affiliates......... $ -- $ (3,563)
Retirement of debt in exchange for bond redemption........ $ 5,000 $ 5,000
Decrease in unrealized gain on investments in equity
securities............................................. $ -- $ (27,167)
Common stock issued for acquisition....................... $ -- $ 81
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The consolidated
financial statements include the accounts of Maxtor Corporation ("Maxtor" or the
"Company") and its condensed wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation. All adjustments
of a normal recurring nature which, in the opinion of management, are necessary
for a fair statement of the results for the interim periods have been made. It
is recommended that the interim financial statements be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for
the fiscal year ended January 1, 2000 incorporated in the Company's Annual
Report on Form 10-K. Interim results are not necessarily indicative of the
operating results expected for later quarters or the full fiscal year.
2. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Inventories, net comprised:
Raw materials..................................... $ 33,073 $ 29,027
Work-in-process................................... 7,577 2,302
Finished goods.................................... 66,684 72,525
-------- --------
$107,334 $103,854
======== ========
</TABLE>
3. STOCKHOLDERS' EQUITY
In May 2000, the Company's stockholders approved an increase in the maximum
number of shares issuable under the Company's Amended and Restated 1996 Stock
Option Plan (the "Option Plan"), from 17,475,685 to an aggregate total of
22,975,685 shares.
In May 2000, the Company's stockholders approved an increase in the maximum
number of shares issuable under the Company's 1998 Stock Purchase Plan (the
"Purchase Plan"), from 2,400,000 to an aggregate total of 4,500,000 shares.
4. ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC.
In September 1999, the Company acquired all the outstanding stock of
Creative Design Solutions, Inc. ("CDS"), in exchange for a total of 8,130,682
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 recognized purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the acquisition date of September 10, 1999.
Approximately $2.7 million of the aggregate recognized purchase price was
allocated to net tangible assets consisting primarily of cash, accounts
receivable, inventory, prepaids, and property, plant and equipment, and $10.42
million to short-term borrowings, accounts payable, accrued liabilities and
deferred revenue. 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
4
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MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
because it had no alternative future use. 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. The Company will evaluate the periods of amortization continually to
determine whether later events and circumstances warrant revised estimates of
useful lives.
The following unaudited pro forma consolidated amounts give effect to the
acquisition of CDS as if it had occurred on December 27, 1998 by consolidating
the results of operations of CDS with the results of the Company for the three
and nine months ended September 30, 2000 and October 2, 1999, respectively (in
thousands, except share and per share amounts:)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue........................... $ 619,314 $ 589,657 $ 1,977,674 $ 1,796,022
Net income (loss)................. $ (13,993) $ (38,593) $ 26,797 $ (67,284)
Net income (loss) per share:
Basic........................... $ (0.12) $ (0.34) $ 0.23 $ (0.64)
Diluted......................... $ (0.12) $ (0.34) $ 0.22 $ (0.64)
Shares used in per share
calculation Basic............... 115,709,525 112,877,358 114,906,927 104,945,436
Diluted......................... 115,709,525 112,877,358 119,156,289 104,945,436
</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 event described above had occurred as of the beginning of the periods
described above, nor does such information purport to indicate the results of
the Company's future operations. In the opinion of management, all adjustments
necessary to present fairly such pro forma amounts have been made.
5
<PAGE> 8
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. NET INCOME (LOSS) PER SHARE
In accordance with the disclosure requirements of Statements of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" a reconciliation of
the numerator and denominator of the basic and diluted net income per share
calculations is provided as follows (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR -- BASIC AND DILUTED
Net income (loss)................. $ (13,993) $ (40,275) $ 26,797 $ (54,142)
============ ============ ============ ============
Net income (loss) available to
common stockholders............. $ (13,993) $ (40,275) $ 26,797 $ (54,142)
============ ============ ============ ============
DENOMINATOR
Basic weighted average common
shares outstanding.............. 115,709,525 106,713,093 114,906,927 102,890,681
Effect of dilutive securities:
Common stock options............ -- -- 4,249,362 --
------------ ------------ ------------ ------------
Diluted weighted average common
shares.......................... 115,709,525 106,713,093 119,156,289 102,890,681
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE
Basic........................... $ (0.12) $ (0.38) $ 0.23 $ (0.53)
============ ============ ============ ============
Diluted......................... $ (0.12) $ (0.38) $ 0.22 $ (0.53)
============ ============ ============ ============
</TABLE>
6. SEGMENT REPORTING
The Company has determined that it has a single reportable segment
consisting of the design, manufacture and sale of data storage products for
desktop computer and network storage systems used in heterogeneous computing
environments. The Company has a worldwide 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
plants in Singapore that produce final assemblies for the Company's disk drive
products. Revenue by ship-to destination and long-lived asset information by
geographic area for the three and nine months ended September 30, 2000 and
October 2, 1999 is presented in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
United States........................... $298,297 $319,085 $ 898,522 $ 964,357
Asia Pacific............................ 157,225 112,152 $ 556,061 $ 345,316
Europe.................................. 153,925 144,129 $ 459,017 $ 470,597
Latin America and other................. 9,867 13,955 $ 64,074 $ 15,229
-------- -------- ---------- ----------
Total........................... $619,314 $589,321 $1,977,674 $1,795,499
======== ======== ========== ==========
</TABLE>
6
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MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Long-lived assets:
United States..................................... $ 58,760 $ 53,700
Asia Pacific...................................... 99,448 77,833
Europe............................................ 949 556
Latin America and other........................... 0 0
-------- --------
Total..................................... $159,157 $132,089
======== ========
</TABLE>
7. QUANTUM HDD ACQUISITION
On October 3, 2000, the Company entered into a definitive acquisition
agreement with Quantum Corporation to combine the Company and Quantum's Hard
Disk Drive Group, pursuant to which, on closing, Quantum HDD Stockholders are to
receive 1.52 shares of Maxtor Common Stock for each share of Quantum HDD stock
they hold. The transaction is to be accounted for under the purchase method of
accounting and it is expected that the merger will generate cost savings of $120
million to $200 million within 18 to 24 months following closing. Completion of
the merger which is expected in early calendar 2001 is subject to the approval
of Maxtor and Quantum Stockholders; expiration or termination of the applicable
Hart Scott Rodino waiting period; approval of European regulatory authorities
and other customary conditions.
8. CONTINGENCIES
The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
Hyundai Electronics Industries Co. Ltd. (HEI) which became effective on November
17, 1995. In that agreement, StorMedia agreed to supply disk media to the
Company. StorMedia's disk media did not meet the Company's specifications and
functional requirements as required by the agreement and the Company ultimately
terminated the agreement.
On September 18, 1996 a class action securities lawsuit was filed against
StorMedia and certain of its officers in Superior Court of the State of
California, County of Santa Clara. Among the allegations against StorMedia was
the assertion that it failed to perform under a November 17, 1995 Purchase
Agreement ("Agreement") with the Company and that StorMedia's failure to sue the
Company for breach of the Agreement was evidence that StorMedia had breached the
Agreement. (A concurrent class action was later filed in the U.S. District Court
for the Northern District of California by the same parties.)
On September 25, 1996, StorMedia commenced an action in the U.S. District
Court for the Northern District of California entitled, StorMedia Incorporated
v. Hyundai Electronics Industries Co., Ltd., et al., U.S. District Court,
Northern District, No. C-96 20805 RMW (EAI) (the "Federal Action"), against
Hyundai Electronics Industries Co., Ltd. ("HEI") -- a shareholder of one of the
company's shareholders -- which also signed the Agreement. StorMedia also sued
M.H. Chung, then HEI's chairman; K.S. Yoo, the individual who signed the
Agreement on behalf of HEI; and Dr. C.S. Park, the individual who signed the
Agreement on behalf of the Company. StorMedia, however, did not sue the Company.
StorMedia filed an Amended Complaint on February 14, 1997 in the Federal
Action. The Amended Complaint alleged Fraud and Deceit (against all Defendants);
Negligent Misrepresentation (against all Defendants); Breach of Contract
(against HEI); Breach of Contract -- Covenant Not to Compete (against HEI);
Breach of the Implied Covenant of Good Faith and Fair Dealing (against HEI); and
Unlawful, Unfair or Fraudulent Business Practices (Against HEI). StorMedia
alleged that HEI entered into a volume purchase agreement with StorMedia
pursuant to which HEI and the Company committed to purchase rigid discs for
7
<PAGE> 10
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
use in the Company's drives. StorMedia contends that at the time HEI entered the
Agreement, HEI knew that it could not and would not purchase the volume of
products that it committed to purchase. StorMedia further contends that HEI
entered into the contract in order to secure a source of components for the
Company only long enough for HEI to develop its own internal disc manufacturing
capacity and that it and the other defendants never intended to fully perform
the Agreement. StorMedia sought damages in excess of $206 million dollars,
punitive damages, injunctive relief, attorneys' fees, pre-judgment and
post-judgment interest, and costs.
On December 20, 1996, the Company filed a complaint in Colorado state court
(the "Colorado Court") entitled Maxtor Corporation v. StorMedia Inc. et al.,
District Court, County of Boulder, Colorado, No. 96 CV 161 ("Colorado Action"),
against StorMedia Incorporated, StorMedia International Ltd., and William J.
Almon, StorMedia's CEO. The complaint alleges Breach of Contract (against all
Defendants except Almon), Breach of the Implied Warranty of Fitness (against all
Defendants except Almon), Breach of the Implied Warranty of Merchantability
(against all Defendants except Almon), Fraud (against all Defendants), and
Negligent Misrepresentation (against all Defendants). The Company seeks damages
in excess of $100 million dollars, punitive damages, reasonable attorneys' fees,
and costs. In March, 1997, the Colorado Action was stayed.
On October 24, 1997, the Company filed a Motion to Intervene in the Federal
Action. HEI moved to dismiss the action for failure to join the Company as a
party. On February 18, 1998, the U.S. District dismissed the Federal Action in
its entirety. Accordingly, on February 20, 1998, the Company filed a Motion for
Relief from Stay in the Colorado Action. On February 24, 1998, the Company was
served with a new complaint by StorMedia entitled StorMedia, Inc. and StorMedia
International Ltd. v. Hyundai Electronics Industries Co., Ltd., et al., in the
Superior Court of California, County of Santa Clara, Case No. CV 772103
("California Action"). This new complaint alleges Fraud and Deceit (against all
Defendants), Negligent Misrepresentation (against all Defendants), Breach of
Contract (against HEI and the Company), Breach of Contract -- Covenant not to
Compete (against HEI), Unlawful, Unfair, or Fraudulent Business Practices
(against HEI and the Company). StorMedia seeks damages in excess of $206 million
dollars, punitive damages, injunctive relief, attorneys' fees, pre-judgment and
post-judgment interest, and costs. On March 26, 1998, the Company moved to stay
the California Action in light of the substantially identical action pending in
Colorado. On May 14, 1998, the hearing on this motion had been continued,
subject to any parties' right to seek an expedited hearing, to July 14, 1998.
Pursuant to the parties' stipulation and subsequent Order, this hearing was
continued to August 18, 1998. In the interim, pursuant to the Company's
application, discovery was stayed.
On May 15, 1998, following a motion brought by the Company, the stay of the
Colorado Action was lifted. Defendants StorMedia and StorMedia International
Limited answered the Complaint and asserted a counterclaim. In addition,
Defendants StorMedia, StorMedia International Limited and William Almon brought
a motion to dismiss portions of Maxtor's Complaint. On July 31, 1998, the
Company filed an Amended Complaint, and Dr. C.S. Park, HEI, and K.S. Yoo filed
Third-Party Answers. Defendants StorMedia, StorMedia International Limited and
William Almon moved to dismiss three causes of action in Maxtor's Amended
Complaint. No hearing date was set. On September 9, 1998, the California Action
was stayed pending resolution of the Colorado Action.
During October, 1998, StorMedia and four of its direct and indirect
subsidiaries filed voluntary petitions for relief under chapter 11 of title 11
of the United States code (the "Bankruptcy Code"). The five chapter 11 cases
were consolidated for administrative purposes only under Case No. 98-58275-ASW
(the "Bankruptcy Cases"). The bankruptcy filings caused an automatic stay of
proceedings against StorMedia, including the Colorado Action.
8
<PAGE> 11
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On or about February 17, 1999, the Company filed proofs of claim in the
Bankruptcy Cases against StorMedia and StorMedia International, Ltd. In both
proofs of claim, the Company 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 the Company's proof of claim on the grounds that under Bankruptcy Code
section 502(b) and applicable state law, the Company's claims against StorMedia
are unenforceable and not allowable because the Company 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 the
Company's claims are unenforceable and not allowable because StorMedia is
entitled to a setoff in an amount exceeding the Company's claims. StorMedia
further seeks a determination that under Bankruptcy Code section 510(c) and
applicable state law that any allowable claim of the Company is equitably
subordinated to all allowed claims of StorMedia's other creditors. In addition,
StorMedia also asserts in the Bankruptcy Action counterclaims against the
Company 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 February 16, 2000, the Bankruptcy Court approved a stipulation entered
into among the Company, 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, pursuant to 11 U.S.C. sec. 362(d), to
allow all parties to the Colorado Action to proceed to final, non-appealable
judgment or settlement.
In addition, the parties agreed that any award of damages pursuant to
final, non-appealable judgment entered by the Colorado Court in favor of the
Company or any final, non-appealable stipulated judgment or other form of
settlement entered into in the Colorado Action in favor of the Company 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 by 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
StorMedias' 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 the Company's liability to StorMedia, if any (as determined by a final
non-appealable judgment of the Colorado Court), pursuant to 11 U.S.C. sec. 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.
Trial has been scheduled to begin September 10, 2001.
The Company believes that it has valid defenses against the claims alleged
by StorMedia and intends to defend itself vigorously. However, due to the nature
of litigation and because the pending lawsuits remain in the early pre-trial
stages, the Company cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. The litigation could result in significant diversion of
time by the Company's technical personnel, as well as substantial expenditures
for future legal fees. After considering the nature of the claims and facts
relating to the litigation, including the results of preliminary discovery, the
Company's management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
9
<PAGE> 12
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
However, the results of these proceedings, including any potential settlement,
are uncertain and there can be no assurance that they will not have a material
adverse effect on the Company's business, financial position and results of
operations.
On March 18, 1999, we were sued in the United States District Court for the
Northern District of California by Papst Licensing GmbH ("Papst'). The lawsuit
alleges infringement of 15 patents covering various features of hard disk drive
technology. We filed an Answer and Counterclaim on May 19, 1999, asserting
defenses of implied license, patent exhaustion, misuse, invalidity,
unenforceability and noninfringement, among others. By Order dated October 12,
1999, this case and three other actions involving Papst patents were transferred
for coordinated or consolidated pre-trial proceedings by the Judicial Panel on
Multidistrict Litigation to the Eastern District of Louisiana. On April 12,
1999, Papst filed a motion challenging aspects of our unfair competition
counterclaim. We filed an opposition brief on May 1, 2000, and Papst filed a
reply brief on May 22, 2000. The Court has not yet ruled on this motion. We will
participate in various discovery proceedings that are expected to commence
within the next few months, and otherwise intend to vigorously defend this
action. Although the final outcome of these claims cannot be determined at this
time, we do not believe that resolution of these claims will have a material
adverse effect on Maxtor's business, financial condition or results of
operation. This statement should be read in conjunction with our Registration
Statement on form S-3 as well as our periodic reports filed with the SEC.
The Company believes that it has valid defenses against the claims alleged
by Papst and intends to defend itself vigorously. However, due to the nature of
litigation and because the pending lawsuit is in discovery, the Company cannot
determine the possible loss, if any that may ultimately be incurred either in
the context of a trial or as a result of a negotiated settlement. The litigation
could result in significant diversion of time by the Company's technical
personnel, as well as substantial expenditures for future legal fees. After
considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, the Company's management
believes that the resolution of this matter will not have a material adverse
effect of the Company's business, financial condition or results of operations.
However, the results of these proceedings, including any potential settlement,
are uncertain and there can be no assurance that they will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company filed a declaratory relief action against Magnetic Media
Development LLC ("MMD") in the United States District Court for the Central
District of California, Civil Case No. 00-04153 GAF, alleging that patents MMD
asserted against it are invalid and not infringed (the "MMD Matter").
MMD is the owner by assignment of six United States patents, issued to
Virgle L. Hedgcoth (the "Hedgcoth Patents"), that relate to thin film magnetic
recording media and methods for producing such media. MMD asserted that media
Maxtor purchases from third party suppliers and uses in Maxtor drives, infringe
one or more claims of the Hedgcoth Patents. Maxtor filed an action for
declaratory relief, on April 18, 2000, asserting the patents are invalid,
unenforceable and not infringed, and also asserted claims of unfair competition
and patent misuse. MMD answered and counterclaimed on May 19, 2000, alleging
Maxtor infringes five of the Hedgcoth patents. On July 10, 2000, by stipulation
of the parties, the Court dismissed the claims of unfair competition and patent
misuse without prejudice.
There are no motions pending and discovery is ongoing. A claim construction
hearing is scheduled for March 12, 2001 and trial is scheduled for July 18,
2001.
The Company believes that it has valid defenses against the claims alleged
by MMD and intends to defend itself vigorously. However, due to the nature of
litigation and because the pending lawsuit is in discovery, the Company cannot
determine the possible loss, if any that may ultimately be incurred either in
the context of a trial or as a result of a negotiated settlement. The litigation
could result in significant diversion of time by the Company's technical
personnel, as well as substantial expenditures for future legal fees. After
10
<PAGE> 13
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, the Company's management
believes that the resolution of this matter will not have a material adverse
effect on the Company's business, financial condition or results of operations.
However, the results of these proceedings, including any potential settlement,
are uncertain and there can be no assurance that they will not have a material
adverse effect on the Company's business, financial position and results of
operations.
Discovision ("DVA") notified the Company in writing that it believes that
certain of the Company's drives may infringe DVA's patents (the "Discovision
Matter"). The Company is in active discussions with Discovision regarding the
assertions of infringement. There is no litigation pending.
No amounts have been reserved in the accompanying condensed consolidated
financial statements for any legal claims or actions.
9. RECLASSIFICATIONS
Certain reclassifications have been made to prior quarter balances to
conform to current quarter classifications.
10. 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. The Company is in the process of
evaluating requirements of SFAS No. 133, but does not expect this pronouncement
to materially impact its financial position or results of operation.
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
101 with earlier application encouraged. Subsequently, in June 2000, the SEC
issued SAB No. 101B to defer the implementation of SAB 101 until the fourth
fiscal quarter of 2000. The Company is required to adopt SAB 101 in the fourth
quarter of fiscal 2000. The Company does not expect adoption of SAB 101 to have
a material effect on its financial position or results of operations.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaces SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of provisions in SFAS 125 without reconsideration. SFAS No.
140 provides accounting and reporting standards for transfers and servicing of
11
<PAGE> 14
MAXTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
financial assets and extinguishments of liabilities, is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. SFAS 140 is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. Disclosures about
securitization and collateral accepted need not be reported for periods ending
on or before December 15, 2000, for which financial statements are presented for
comparative purposes. This Statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier or retroactive application of
its accounting provisions is not permitted.
11. RELATED PARTY TRANSACTION
The Company had cost of revenue that included certain component parts
purchased from MMC Technology, Inc., a wholly owned subsidiary of HEA, amounting
to $40 million for the quarter ended September 30, 2000 and $121 million for the
nine months ended September 30, 2000. The cost of revenue also includes certain
component parts purchased from HEI which to date have not been significant.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes included in Part I.
Financial Information, Item 1. Condensed Consolidated Financial Statements of
this report.
This report contains forward-looking statements within the meaning of the
U.S. federal securities laws that involve risks and uncertainties. The
statements contained in this report that are not purely historical, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future, are forward-looking statements including
those discussed in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations: "Results of Operations"; "Liquidity and
Capital Resources"; "Certain Factors Affecting Future Performance"; and
elsewhere in this report. In this report, the words "anticipate," "believe,"
"expect," "intend," "future" and similar expressions also identify forward-
looking statements. We make these forward-looking statements based upon
information available on the date hereof, and we have no obligation to update
any such forward-looking statements. Our actual results could differ materially
from those anticipated in this report as a result of certain factors including,
but not limited to, those set forth in the following risk factors and elsewhere
in this report.
Maxtor(R) and No Quibble(R) are registered trademarks of Maxtor. The Maxtor
logo, DiamondMax(TM) and Formula 4(TM) are trademarks of Maxtor. All other brand
names and trademarks appearing in this report are the property of their
respective holders.
ACQUISITION OF CREATIVE DESIGN SOLUTIONS, INC.
In September 1999, we acquired privately held Creative Design Solutions,
Inc. ("CDS"), a leading participant in the emerging network attached storage
market. We transitioned from 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 formed Maxtor Network Systems Group ("MNSG") subsequent to the
acquisition of CDS. MSNG concentrates on products and offerings in or related to
the Network Attached Storage market.
ACQUISITION OF QUANTUM HDD
On October 3, 2000, the Company entered into a definitive acquisition
agreement with Quantum Corporation to combine the Company and Quantum's Hard
Disk Drive Group, pursuant to which, on closing, Quantum HDD Stockholders are to
receive 1.52 shares of Maxtor Common Stock for each share of Quantum HDD stock
they hold. The transaction is to be accounted for under the purchase method of
accounting and it is expected that the merger will generate cost savings of $120
million to $200 million within 18 to 24 months following closing. Completion of
the merger which is expected in early calendar 2001 is subject to the approval
of Maxtor and Quantum Stockholders; expiration or termination of the applicable
Hart Scott Rodino waiting period; approval of European regulatory authorities
and other customary conditions.
REVENUE AND GROSS PROFIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 CHANGE 2000 1999 CHANGE
------------- ---------- ------ ------------- ---------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total revenue............ $619.3 $589.3 $30.0 $1,977.7 $1,795.5 $182.2
Gross profit............. $ 62.9 $ 13.8 $49.1 $ 271.1 $ 116.6 $154.5
Net income (loss)........ $(14.0) $(40.3) $26.3 $ 26.8 $ (54.1) $ 80.9
As a percentage of
revenue:
Total revenue.......... 100.0% 100.0% 100.0% 100.0%
Gross profit........... 10.2% 2.3% 13.7% 6.5%
Net income (loss)...... -2.3% -6.8% 1.4% -3.0%
</TABLE>
13
<PAGE> 16
Revenue
Total revenue for the third quarter of fiscal year 2000 increased 5.1%
compared to the same quarter in fiscal year 1999 primarily due to the increase
in volume shipments coupled with better product and channel mix. Total shipments
for the third fiscal quarter 2000 were 6.5 million units, which was .6 million
units or 10.3% higher compared to the third fiscal quarter a year ago. Revenue
from the Original Equipment Manufacturer (OEM) channel for the quarter ended
September 30, 2000 represented 70.6% of total revenue compared to 76.3% for the
corresponding quarter in 1999. Revenue from the distribution and retail channels
represented 29.4% of total revenue for the third quarter in 2000 compared to
23.7% for the same quarter in fiscal year 1999.
Revenue and unit volume growth in 2000 were favorably impacted by continued
time to market performance, increased penetration of the distribution channel,
and a continued trend to shipping higher capacity drives.
Gross Profit
Gross profit as a percentage of revenue increased to 10.2% in the third
quarter of 2000 from 2.3% in the same quarter of 1999. The increase in gross
profit is due, overall, to manufacturing efficiencies including improved product
designs, and lower component costs. We expect continued volume growth for the
remainder of fiscal year 2000.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 CHANGE 2000 1999 CHANGE
------------- ---------- ------ ------------- ---------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Research and development............ $54.9 $46.7 $ 8.2 $171.4 $142.9 $28.5
Selling, general and
administrative.................... $23.3 $21.4 $ 1.9 $ 75.2 $ 64.2 $11.0
Acquired in-process technology...... $ -- $ 7.0 $(7.0) $ -- $ 7.0 $(7.0)
Amortization of goodwill and other
intangible assets................. $ 2.5 $ 0.6 $ 1.9 $ 7.6 $ 0.6 $ 7.0
As a percentage of revenue:
Research and development.......... 8.9% 7.9% 8.7% 8.0%
Selling, general and
administrative................. 3.8% 3.6% 3.8% 3.6%
Acquired in-process technology.... -- 1.2% -- 0.4%
Amortization of goodwill and other
intangible assets.............. 0.4% 0.1% 0.4% 0.0%
</TABLE>
Research and Development (R&D)
R&D expense as a percentage of revenue increased to 8.9% in the third
quarter of 2000 compared to 7.9% for the same quarter in 1999. R&D expense for
the nine months ended September 30, 2000 as a percentage of revenue increased to
8.7% compared to 8.0% for the same period a year ago. The absolute dollar level
of R&D expenditures during fiscal 2000 increased due to our continued efforts to
maintain leadership products, and addressing the requirements of the desktop PC
market as well as investments in the Network Attached Storage division.
Selling, General and Administrative (SG&A)
SG&A expense as a percentage of revenue increased to 3.8% in the third
quarter of 2000 compared to 3.6% for the same quarter in 1999. SG&A expense for
the nine months ended September 30, 2000 as a percentage of revenue increased to
3.8% compared to 3.6% for the same period a year ago. The increase in
14
<PAGE> 17
absolute dollars is primarily due to our costs associated with supporting
Maxtor's higher sales volume and increased emphasis in the distribution and
retail markets.
Stock Compensation
In 1996, we adopted the 1996 Stock Option Plan (the "Plan"), pursuant to
which substantially all of our domestic employees and certain international
employees received options that were required to be accounted for as variable
options. These options, which were granted between May 1996 and October 1997,
required remeasurement of any intrinsic compensation element at each reporting
date determined by the difference between the estimated current fair value of
our stock and the exercise price of the options. In the first quarter of 1998,
we amended and restated the Plan to remove the variable features and all grants
subsequent to October 1997 have been subject to fixed terms. In the second
quarter of 1998, we offered and re-issued new fixed-award options in exchange
for options previously issued under variable terms, thereby eliminating the
requirement to remeasure these options in subsequent periods. In connection
therewith, we recorded compensation expense related to the difference between
the estimated fair market value of our stock as of March 28, 1998 and the stated
value of our options. Compensation cost was reflected in accordance with
Financial Accounting Standards Board Interpretation No. 28, "Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans."
Accordingly, we recorded non-cash compensation expense of $0.5 million in the
third quarter of 1999 and $0.2 million in the third quarter of 2000. Non-cash
compensation expense in the nine months ended October 2, 1999 was $2.0 million
and $.7 million in the first nine months of 2000. The remaining unrecognized
compensation element will be reflected in quarterly charges, decreasing
sequentially through the second quarter of 2001.
Amortization of goodwill and other intangible assets
Amortization of goodwill and other intangible assets represents the
amortization of workforce, customer list and other current products and
technology, arising from our acquisition of CDS in September 1999.
INTEREST EXPENSE AND INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 CHANGE 2000 1999 CHANGE
------------- ---------- ------ ------------- ---------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest expense................... $(3.4) $(3.3) $ (0.1) $(10.4) $(10.0) $ (0.4)
Interest and other income.......... $ 6.4 $ 3.1 $ 3.3 $ 21.8 $ 11.5 $ 10.3
Gain on sale of investment......... $ -- $22.0 $(22.0) $ -- $ 44.1 $(44.1)
As a percentage of revenue:
Interest expense................. -0.5% -0.6% -0.5% -0.6%
Interest and other income........ 1.0% 0.5% 1.1% 0.6%
Gain on sale of investment....... -- 3.7% -- 2.5%
</TABLE>
Interest Expense
Interest expense as a percentage of revenue decreased from -0.6% in the
third quarter of 1999 to -0.5% in the third quarter of fiscal year 2000. In
absolute dollar terms, interest expense increased by $0.1 million in the third
quarter of 2000 and increased by $0.4 million for the first nine months of 2000.
Our total short-term and long-term outstanding borrowings were $118.8 million as
of October 2, 1999 and $107.6 million as of September 30, 2000.
Interest and Other Income
Interest and other income in the third quarter of 2000 increased in both
absolute dollar amount and as a percentage of revenue when compared to the third
quarter of 1999. Additionally, interest and other income for the first nine
months of 2000 also improved over the same period a year ago. Our total cash and
cash
15
<PAGE> 18
equivalents and marketable securities were $285.4 million as of October 2, 1999
compared to $351.0 million as of September 30, 2000.
Gain on Sale of Investment
In September 1999, the Company sold its remaining equity investment in
Celestica Inc. resulting in approximately a $22 million gain.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 CHANGE 2000 1999 CHANGE
------------- ---------- ------ ------------- ---------- ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before provision for
income taxes...................... $(14.7) $(40.1) $25.4 $28.2 $(52.5) $80.7
Provision for (benefit from) income
taxes............................. $ (0.7) $ 0.1 $(0.8) $ 1.4 $ 1.6 $(0.2)
</TABLE>
The provision for income taxes consists primarily of federal alternative
minimum tax and foreign taxes. Due to our net operating losses (NOL), NOL
carryforwards and favorable tax status in Singapore, we have not incurred any
significant foreign, U.S. federal, state or local income taxes for the current
or prior fiscal periods.
YEAR 2000 READINESS
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. Based on the work
done, we have not incurred material costs to address the year 2000 readiness of
our systems (as a result of relatively new information systems) and products.
There can be no assurance that the cost associated with Year 2000 or leap year
date issues will not have a material adverse effect on our results of operations
and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had $351.0 million in cash and cash
equivalents and marketable securities as compared to $353.9 million at January
1, 2000.
Operating activities provided net cash of $82.8 million for the nine-month
period ended September 30, 2000. The cash provided from operating activities was
principally generated from net income after adjustment for depreciation and
amortization, which was partially offset by the increase of accounts receivable.
Investing activities used cash of $172.0 million during the first nine months of
2000, principally for the purchase of marketable securities and for the purchase
of property, plant and equipment.
As of September 30, 2000, our outstanding debt comprised $85.0 million of
publicly-traded subordinated debentures, due March 1, 2012 and a Singapore
dollar denominated loan equivalent to $28.0 million from the Economic
Development Board of Singapore which is guaranteed by a bank. Our outstanding
subordinated debentures are entitled to 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 Maxtor. The Singapore
dollar denominated loan has seven consecutive semi-annual installment payments,
commencing on March 1, 2001.
We also have a $200.0 million asset securitization program with Fleet
National Bank under which we sell our eligible trade accounts receivable on a
non-recourse basis through a special purpose entity. At September 30, 2000,
$75.0 million of accounts receivable was securitized under the program and
excluded from our accounts receivable balance.
16
<PAGE> 19
We believe the existing capital resources, together with cash generated
from operations and borrowing capacity, will be sufficient to fund our
operations through at least the next twelve months. We require substantial
working capital to fund our business, particularly to finance accounts
receivable and inventory, and to invest in property, plant and equipment. During
2000, capital expenditures are expected to be between approximately $170.0
million and $190.0 million, to be used principally for updating and adding
manufacturing capacity, and research and development activities. We intend to
seek financing arrangements to fund our future capacity expansion and working
capital, 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.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
We Have a History of Losses and an Accumulated Deficit of $765.1 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.
During the quarter ended September 30, 2000 the Company had a net loss of
$14.0 million as compared to a net loss of $40.3 during the same quarter of
fiscal 1999.
Unless We Consistently Execute, We Will Have Significant Losses
Most of our products are sold to desktop computer manufacturers. Such
manufacturers use the quality, storage capacity, performance and price
characteristics of hard disk drives to select, or qualify, their hard disk drive
suppliers. Such manufacturers typically seek to qualify three or four suppliers
for each hard disk drive product generation. To qualify consistently with these
manufacturers, and thus succeed in the desktop hard disk drive industry, we must
execute consistently on our product development and manufacturing processes to
be among the first-to-market introduction and first-to-volume production at
leading storage capacity per disk with competitive prices and high quality. Once
a manufacturer has chosen its hard disk drive suppliers for a given desktop
computer product, it generally will purchase hard disk drives from those
suppliers for the commercial life of that product line. If we miss a
qualification opportunity, we may not have another opportunity to do business
with that manufacturer until we introduce our next generation of products. The
effect of missing a product qualification opportunity is magnified by the
limited number of high volume manufacturers of personal computers. If we do not
reach the market or deliver volume production in a timely manner, we may lose
opportunities to qualify our products, our gross margins probably will decline
due to rapidly declining average selling prices, and we probably will lose
market share.
Substantial Dependence on the Desktop Computer Market
While there has been significant growth in the demand for desktop computers
over the past several years, according to International Data Corporation, the
growth rate in the desktop computer market has slowed in recent quarters.
Because of our reliance on the desktop segment of the personal computer market,
we will be affected more by changes in market conditions for desktop computers
than would a company with a broader range of products. Any decrease in the
demand for desktop computers could cause a decrease in the demand for our
products.
17
<PAGE> 20
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; 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
nine months ended September 30, 2000, two customers accounted for approximately
30% of our revenue. Our top ten customers accounted for approximately 72% of our
revenue, with Dell representing 19%. During the nine months ended July 3, 1999,
two customers, Dell and IBM, accounted for approximately 26% and 10%,
respectively, of our revenue, and our top ten customers accounted for
approximately 69% of our revenue.
We believe that a relatively small number of customers will continue to
account for a significant portion of our revenue for the foreseeable future, and
that the proportion of our revenue from such customers could continue to
increase in the future. These customers have a wide variety of suppliers to
choose from and therefore can make substantial demands on us. Even if we
successfully qualify a product for a given customer, such customer generally is
not obligated to purchase any minimum volume of products from us and generally
is able to terminate its relationship with us at any time. Our ability to
maintain strong relationships with our principal customers is essential to our
future performance. If we lose a key customer or if any of our key customers
reduce their orders of our products or require us to reduce our prices before we
are able to reduce costs, our business, financial condition and results of
operations could be materially and adversely affected.
Our Quarterly Results Fluctuate Significantly
Our quarterly results may not be indicative of our future performance. Our
quarterly operating results have fluctuated significantly in the past and may
fluctuate significantly in the future. Our future performance will depend on
many factors, including the following:
- our ability to be consistently among the first to volume-production with
competitive products;
- the average unit selling 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;
- changes in product or customer mix;
- our existing competitors introducing better products at competitive
prices before we do;
- new competitors entering our market;
- our ability to manage successfully the complex and difficult process of
qualifying our products with our customers;
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- 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.
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, have adopted build-to-order manufacturing models that reduce their
component inventories and related costs and enable them to tailor their products
more specifically to the needs of their customers.
Some of our personal computer manufacturing customers also are considering
or have implemented a "channel assembly" model in which the manufacturer ships a
minimal computer system to the dealer or other assembler, and component
suppliers (including hard disk drive manufacturers such as us) ship parts
directly to the dealer or other assembler for installation at its location.
Finally, certain of our manufacturing customers have adopted just-in-time
inventory management processes that require component suppliers to maintain
inventory at or near the customer's production facility. These new business
models require us to hold our products in inventory longer, which increases our
risk of inventory obsolescence and average selling price decline. These changing
models also increase our capital requirements and costs, complicate our
inventory management strategies, and make it difficult for us to match our
manufacturing plans with projected customer demand.
The Hard Disk Drive Market Is Highly Competitive
Although our share of the desktop hard disk drive market has increased
steadily since the first quarter of 1997, this market segment and the hard disk
drive market in general are intensely competitive even during periods when
demand is stable. We compete primarily with manufacturers of 3.5-inch hard disk
drives for the personal computer industry, including:
- Fujitsu Limited;
- IBM;
- Quantum Corporation;
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- Samsung Electronic Company Limited;
- Seagate Technology, Inc.; and
- Western Digital Corporation.
Many of our competitors have a number of significant advantages over us,
including:
- a larger market share;
- a broader array of product lines;
- preferred vendor status with some of our customers;
- extensive name recognition and marketing power; and
- significantly greater financial, technical and manufacturing resources.
Unlike us, some of our competitors make many of their own components which
may provide them with certain benefits including lower costs. Our competitors
also may:
- consolidate or establish strategic relationships among themselves to
lower their product costs or to otherwise compete more effectively
against us;
- lower their product prices to gain market share; or
- bundle their products with other products to increase demand for their
products.
In addition, new competitors could emerge and rapidly capture market share.
If we fail to compete successfully against current or future competitors,
our business, operating results and financial condition may be materially and
adversely affected.
Demand For Our Products Fluctuates
We currently offer 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
market tends 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.
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 from
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Texas Instruments, Inc. and Lucent Technologies Inc. We 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.
Supplier Consolidations
Recently, two consolidations have been announced by Maxtor media suppliers.
HMT Technology Corp. and Komag, Inc. on the one hand and MMC Technology, Inc.
and Trace Storage Technology, Inc. on the other hand have announced intentions
to enter into business combinations. While the business consolidations are not
complete, the period of negotiation may lead to operational disruptions,
including supply interruptions or quality issues. If the business combinations
are completed, our risks include increased costs and reduced quality, from
causes ranging from reduced competition to internal disruption, as well as the
possibility of reduced or interrupted supply. While there are other media
sources, there is no assurance that they would choose to do business with us, or
that they could be successfully qualified or that they could provide an adequate
supply. If we cannot obtain sufficient quantities of high quality media when we
need them, our business, financial condition and results of operations could be
materially and adversely affected.
We Depend on Our Key Personnel
Our success depends upon the continued contributions of our key employees,
many of whom would be extremely difficult to replace. We also do not have key
person life insurance on any of our personnel. Most of our senior management and
a significant number of our other employees have been with us for four years or
more. 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. There is no guarantee
that we will be successful in retaining our key employees. If we are unable to
retain our existing employees or to hire and integrate new employees, our
business, financial condition and results of operations could be materially and
adversely affected.
We Will Need Additional Manufacturing Capacity in the Future
Our volume manufacturing operations currently are based in Singapore. A
flood, earthquake or other disaster or condition affecting our facility could
have a material adverse effect on our business, financial condition and results
of operations. Although we believe that we will be able to add capacity at our
current facilities or another facility to provide sufficient capacity through at
least the end of 2000, our inability to add capacity to allow us to meet our
customers' demands in a timely manner may limit our future growth and could have
a material adverse effect on our business, financial condition and results of
operations.
Protection of Our Intellectual Property Is Limited; We Face Risk of Third
Party Claims of Infringement
We have patent protection on some of our technology. We may not receive
patents for our current or future patent applications, and any patents that we
have or that are issued to us may be invalidated, circumvented or challenged.
Moreover, the rights granted under any such patents may not provide us with any
competitive advantages. Finally, our competitors may develop or otherwise
acquire equivalent or superior technology.
We also rely on trade secret, copyright and trademark laws, as well as the
terms of our contracts to protect our proprietary rights. We may have to
litigate to enforce patents issued or licensed to us, to protect trade secrets
or know-how owned by us or to determine the enforceability, scope and validity
of our proprietary
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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. See Part II. Item I Legal
Proceedings. In addition, the laws of certain countries in which we sell and
manufacture our products, including various countries in Asia, may not protect
our products and intellectual property rights to the same extent as the laws of
the United States. Our protective measures in these countries may be inadequate
to protect our proprietary rights. Any failure to enforce and protect our
intellectual property rights could have a material adverse effect on our
business, financial condition and results of operations.
When we were a majority-owned subsidiary of Hyundai Electronics America, we
had the benefit of certain third party intellectual property rights on terms
that may have been more favorable than would have been available to us if we had
not been a majority-owned subsidiary of Hyundai Electronics America. We may not
be able to obtain similar rights in the future on terms as favorable.
We Are Dependent on Our International Operations; We Face Risks From Our
International Sales
We conduct most of our manufacturing and testing operations and purchase a
substantial portion of our key parts outside the U.S. We also sell a significant
portion of products to foreign distributors and retailers.
Our dependence on revenue from international sales and our need to manage
international operations each involves a number of inherent risks, including:
- economic slowdown and/or downturn in the computer industry in such
foreign markets;
- international currency fluctuations;
- general strikes or other disruptions in working conditions;
- political instability;
- trade restrictions;
- changes in tariffs;
- the difficulties associated with staffing and managing international
operations;
- generally longer periods to collect receivables;
- unexpected changes in or impositions of legislative or regulatory
requirements;
- reduced protection for intellectual property rights in some countries;
- potentially adverse taxes; and
- delays resulting from difficulty in obtaining export licenses for certain
technology and other trade barriers.
The specific economic conditions in each country will impact our
international sales. For example, our international contracts are denominated
primarily in U.S. dollars. Significant downward fluctuations in currency
exchange rates against the U.S. dollar could cause our products to become
relatively more expensive to distributors and retailers in those countries. In
addition, we attempt to manage the impact of foreign currency exchange rate
changes by entering into short-term, foreign exchange contracts. If we do not
effectively manage the risks associated with international operations and sales,
our business, financial condition and results of operations could be materially
and adversely affected.
We Have Exposure From Our Warranties
Our products may contain defects. We generally warrant our products for
three years. Our standard warranty contains a limit on damages and an exclusion
of liability for consequential damages and for negligent or improper use of the
product. We establish a reserve, at the time of product shipment, in an amount
equal to
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our estimated warranty expenses. We had warranty reserves of $63.8 million as of
September 30, 2000 and $51.2 million as of January 1, 2000. 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 may result from
the following factors:
- quarterly fluctuations in operating results;
- announcements of new products by us or our competitors;
- gains or losses of significant customers;
- changes in stock market analysts' estimates;
- the presence or absence of short-selling of our common stock; and
- events affecting other companies that the market deems comparable to us.
Our stock price also may be affected by events relating to Hyundai
Electronics America and Hyundai Electronics Industries, including sales of our
common stock by Hyundai Electronics America or the perception that such sales
may occur (due to the financial condition of Hyundai Electronics America or
otherwise). There have been reports that Hyundai Electronics Industries is
planning to sell some operations that do not directly relate to its core
semiconductor business. Hyundai Electronics America and Hyundai Electronics
Industries have informed Maxtor that following the closing of its February 1999
public offering and the expiration of the 90-day period during which Hyundai
Electronics America has agreed not to offer or sell additional shares without
the consent of Salomon Smith Barney Inc., they may consider selling additional
Maxtor shares at a time they deem appropriate. Finally, our stock price may be
subject to extreme fluctuations in response to general economic conditions in
the U.S., Korea, Southeast Asia and elsewhere, such as interest rates, inflation
rates, exchange rates, unemployment rates, and trade surpluses and deficits. It
is likely that in some future quarter or quarters our operating results will be
below the expectations of stock market analysts or investors. In such event, our
stock price probably will decline.
In February 1999, DECS Trust IV, a newly formed trust, sold 12,500,000
DECS. The terms of the DECS provide that DECS Trust IV may distribute shares of
our common stock owned by Hyundai Electronics America on or about February 15,
2002, or upon earlier liquidation of DECS Trust IV under certain circumstances.
We do not know how or whether investors in the DECS offering will resell the
DECS. Any market that develops for the DECS could reduce the demand for our
common stock or otherwise negatively affect the market for our common stock.
There Are Numerous Risks Associated With Our Recently Announced, Pending
Merger With the Hard Disk Drive Business of Quantum Corporation.
We have recently announced that we have entered into a definitive agreement
to acquire the hard disk drive business of Quantum Corporation ("Quantum HDD").
Such merger is subject to a number of risks, including risks related to:
- the inability to obtain regulatory approvals;
- actions of the U.S., foreign, and local governments;
- the inability to successfully integrate the operations, products, and
personnel of Quantum HDD;
- unanticipated costs related to the merger;
- distraction of our management;
- disruption of our ongoing business operations;
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- the economic environment of the hard disk drive industry; and
- general economic conditions.
Because shares of our common stock are expected to be issued in connection
with the merger, substantial dilution to our existing stockholders will result
and our earnings per share may suffer if the merger is consummated. In addition,
if the merger is not consummated for any reason, Maxtor may be subject to a
number of material risks, including:
- a decline in the price of Maxtor's common stock to the extent that the
relevant current market price reflects a market assumption that the
merger will be consummated;
- the effect of incurring substantial costs related to the merger which
will be required to be paid even if the merger is not consummated; and
- depending upon the reason for termination of the merger, the possible
requirement that Maxtor pay a termination fee to Quantum Corporation of
$35 million.
We cannot assure you that the merger will close, or, if it closes, that the
business strategy on which it is predicated will be successful.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently is involved in a dispute with StorMedia Incorporated
("StorMedia"), which arises out of an agreement among the Company, StorMedia and
Hyundai Electronics Industries Co. Ltd. (HEI) which became effective on November
17, 1995. In that agreement, StorMedia agreed to supply disk media to the
Company. StorMedia's disk media did not meet the Company's specifications and
functional requirements as required by the agreement and the Company ultimately
terminated the agreement.
After a class action securities lawsuit was filed against StorMedia by
certain of its shareholders in September 1996 which alleged, in part, that
StorMedia failed to perform under the agreement, StorMedia sued HEI, Mong Hun
Chung (then HEI's chairman), Dr. Chong Sup Park (then Hyundai Electronics
America (HEA)'s President and the individual who signed the agreement on behalf
of the Company) and K.S. Yoo (the individual who signed the agreement on behalf
of HEI) (collectively the "Original Defendants") in federal court (the "Federal
Suit"). In the Federal Suit, StorMedia alleged that at the time HEI entered into
the StorMedia Agreement, it knew that it would not and could not purchase the
volume of products it committed to purchase, and that failure to do so caused
damages to StorMedia in excess of $206 million.
In December 1996, the Company filed a complaint against StorMedia and
William Almon (StorMedia's Chairman and Chief Executive Officer) in a Colorado
state court seeking approximately $100 million in damages and alleging, among
other claims, breach of contract, breach of implied warranty of fitness and
fraud under the agreement (the "Colorado Suit"). This proceeding was stayed
pending resolution of the Federal Suit. The Federal Suit was permanently
dismissed early in February 1998. On February 24, 1998, StorMedia filed a new
complaint in a California state court for $206 million, alleging fraud and
deceit against the Original Defendants and negligent misrepresentation against
HEI and the Company (the "California Suit"). On May 18, 1998, the stay on the
Colorado Suit was lifted by the Colorado state court. The Company filed an
Amended Complaint in July, 1998. Defendants filed a motion to dismiss in August,
1998, which is still 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.
Maxtor filed a proof of claim in the bankruptcy cases of both StorMedia
Inc. and StorMedia International. In response, on November 2, 1999, StorMedia
filed its Objections to Proof of Claim and Counterclaims and Crossclaims thereby
commencing an adversary proceeding in its bankruptcy proceeding against Maxtor
and HEI.
On February 16, 2000, StorMedia, Maxtor and HEI stipulated and the
Bankruptcy Court ordered that the stay of the Bankruptcy Court be modified to
allow the Colorado suit to proceed to final, non-appealable judgment or
settlement in the Colorado court.
On April 11, 2000, Defendants filed an Answer to the Company's Amended
Complaint and an Amended Counterclaim against the Company, HEI, Dr. Park, and
Mr. Yoo.
On May 2, 2000, the Company filed: (i) a Reply to Defendants' Amended
Counterclaim; (ii) a Motion to Dismiss the Third Counterclaim; and (iii) a
Motion to Strike Defendants' Seventh, Twelfth, Fourteenth, Fifteenth, and
Sixteenth Affirmative Defenses. The Company's Motion to Dismiss and Motion to
Strike still are pending.
The Company believes that it has valid defenses against the claims alleged
by StorMedia and intends to defend itself vigorously. However, due to the nature
of litigation and because the pending lawsuits are in the very early pre-trial
stages, the Company cannot determine the possible loss, if any, that may
ultimately be incurred either in the context of a trial or as a result of a
negotiated settlement. The litigation could result in significant diversion of
time by the Company's technical personnel, as well as substantial expenditures
for future legal fees. After considering the nature of the claims and facts
relating to the litigation, including the results of preliminary discovery, the
Company's management believes that the resolution of this matter will
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not have a material adverse effect on the Company's business, financial
condition or results of operations. However, the results of these proceedings,
including any potential settlement, are uncertain and there can be no assurance
that they will not have a material adverse effect on the Company's business,
financial position and results of operations.
On March 18, 1999, we were sued in the United States District Court for the
Northern District of California by Papst Licensing GmbH ("Papst"). The lawsuit
alleges infringement of 15 patents covering various features of hard disk drive
technology. We filed an Answer and Counterclaim on May 19, 1999, asserting
defenses of implied license, patent exhaustion, misuse, invalidity,
unenforceability and noninfringement, among others. By Order dated October 12,
1999, this case and three other actions involving Papst patents were transferred
for coordinated or consolidated pre-trial proceedings by the Judicial Panel on
Multidistrict Litigation to the Eastern District of Louisiana. On April 10,
2000, Papst filed a motion challenging aspects of our unfair competition
counterclaim. We filed an opposition brief on May 1, 2000, and Papst filed a
reply brief on May 22, 2000. The Court has not yet ruled on this motion. We will
participate in various discovery proceedings that are expected to commence
within the next few months, and otherwise intend to vigorously defend this
action. Although the final outcome of these claims cannot be determined at this
time, we do not believe that resolution of these claims will have a material
adverse effect on Maxtor's business, financial condition or results of
operations.
The Company believes that it has valid defenses against the claims alleged
by Papst and intends to defend itself vigorously. However, due to the nature of
litigation and because the pending lawsuit is in discovery, the Company cannot
determine the possible loss, if any that may ultimately be incurred either in
the context of a trial or as a result of a negotiated settlement. The litigation
could result in significant diversion of time by the Company's technical
personnel, as well as substantial expenditures for future legal fees. After
considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, the Company's management
believes that the resolution of this matter will not have a material adverse
effect on the Company's business, financial condition or results of operations.
However, the results of these proceedings, including any potential settlement,
are uncertain and there can be no assurance that they will not have a material
adverse effect on the Company's business, financial position and results of
operations.
The Company filed a declaratory relief action against Magnetic Media
Development LLC ("MMD") in the United States District Court for the Central
District of California, Civil Case No. 00-04153 GAF, alleging that patents MMD
asserted against it are invalid and not infringed (the "MMD Matter").
MMD is the owner by assignment of six United States patents, issued to
Virgle L. Hedgcoth (the "Hedgcoth Patents"), that relate to thin film magnetic
recording media and methods for producing such media. MMD asserted that media
Maxtor purchases from third party suppliers and uses in Maxtor drives, infringe
one or more claims of the Hedgcoth Patents. Maxtor filed an action for
declaratory relief, on April 18, 2000, asserting the patents are invalid,
unenforceable and not infringed, and also asserted claims of unfair competition
and patent misuse. MMD answered and counterclaimed on May 19, 2000, alleging
Maxtor infringes five of the Hedgcoth patents. On July 10, 2000, by stipulation
of the parties, the Court dismissed the claims of unfair competition and patent
misuse without prejudice.
There are no motions pending and discovery is ongoing. A claim construction
hearing is scheduled for March 12, 2001 and trial is scheduled for July 18,
2001.
The Company believes that it has valid defenses against the claims alleged
by MMD and intends to defend itself vigorously. However, due to the nature of
litigation and because the pending lawsuit is in discovery, the Company cannot
determine the possible loss, if any that may ultimately be incurred either in
the context of a trial or as a result of a negotiated settlement. The litigation
could result in significant diversion of time by the Company's technical
personnel, as well as substantial expenditures for future legal fees. After
considering the nature of the claims and facts relating to the litigation,
including the results of preliminary discovery, the Company's management
believes that the resolution of this matter will not have a material adverse
effect on the Company's business, financial condition or results of operations.
However, the results of these proceedings, including any potential settlement,
are uncertain and there can be no assurance that they will not have a material
adverse effect on the Company's business, financial position and results of
operations.
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Discovision ("DVA") notified the Company in writing that it believes that
certain of the Company's drives may infringe DVA's patents (the "Discovision
Matter"). The Company is in active discussions with Discovision regarding the
assertions of infringement. There is no litigation pending.
No amounts have been reserved in the accompanying consolidated financial
statements for any legal claims or actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. See Index to Exhibits on pages 26 to 27 hereof.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
MAXTOR CORPORATION
By /s/ PAUL J. TUFANO
------------------------------------
Senior Vice President, Finance,
Chief Financial Officer and
Principal Accounting Officer
Date: November 14, 2000
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
------- ----------- --------------
<C> <S> <C>
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
29
