MAXTOR CORP - 10-Q Quarterly Report

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 þ No o

As of August 9, 2002, 239,132,147 shares of the registrant’s Common Stock, $.01 par value, were issued and outstanding.


(1)	The amounts for three and six months ended June 29, 2002 represent only amortization of other intangible assets.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Maxtor Corporation (“Maxtor” or the “Company”) and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. The unaudited interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2001 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.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Saturday closest to December 31. As a result, the three and six month periods ended June 29, 2002 comprised 13 weeks and 26 weeks, respectively, as did the three and six month periods ended June 30, 2001. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

On April 2, 2001, Maxtor acquired the hard disk drive business of Quantum Corporation (“Quantum HDD”). The acquisition was approved by the stockholders of both companies on March 30, 2001 and was accounted for as a purchase. As of the effective time of the merger, each share of Quantum HDD common stock was converted into 1.52 shares of Maxtor common stock, and each outstanding Quantum HDD option assumed by Maxtor was converted into an option to purchase Maxtor common stock, with appropriate adjustment to the exercise price and share numbers in accordance with the exchange ratio. The total purchase price of $1,269.4 million included consideration of 121.0 million shares of Maxtor’s common stock valued at an average price of $9.40 per common share. The average market price was based on the average closing price for two trading days prior and two trading days subsequent to October 4, 2000, the announcement date of the terms of the merger.

Under purchase accounting rules, the Company recorded $29.2 million for estimated severance pay associated with termination of approximately 700 Quantum HDD employees in the United States. In addition, the Company paid and expensed $30.5 million for severance pay associated with termination of approximately 600 Quantum Corporation (“Quantum”) employees. As a result, total severance related costs amounted to $59.7 million and the total number of terminated employees, including Quantum transitional employees was approximately 1,300. The Company also recorded a $59.1 million liability for estimated facility exit costs for the closure of three Quantum HDD offices and research and development facilities located in Milpitas, California, and two Quantum HDD office facilities located in Singapore. The Company also recorded a $12.7 million liability for certain non-cancelable adverse inventory and other purchase commitments.

The following table summarizes the activity related to the merger-related restructuring costs as of June 29, 2002:

The unpaid portion of the severance accrual is expected to be paid during 2002. The balance remaining in the facilities exit accrual is expected to be paid over several years based on the underlying lease agreements.

On September 2, 2001, Maxtor completed the acquisition of MMC Technology, Inc. (“MMC”), a wholly-owned subsidiary of Hynix Semiconductor America Inc. (“Hynix”). MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor comprised 95% of MMC’s annual revenues. The primary reason for Maxtor acquiring MMC was to provide the Company with a reliable source of media supply. The acquisition has been accounted for as a purchase with a total cost of $17.9 million, which consisted of cash consideration of $1.0 million, $16.0 million of loan forgiveness and $0.9 million of direct transaction costs. In connection with the acquisition, the Company has also assumed liabilities of $105.7 million, including a $7.3 million note owed by MMC to Hynix, which was non-interest bearing through March 31, 2002, with any balance remaining thereafter bearing interest at 9% per annum (the “Maxtor Note”). On January 5, 2001, Hynix issued a promissory note to Maxtor for $2 million in principal amount, representing Hynix’s share of a settlement relating to litigation between Maxtor, Hynix and Stormedia. This note bore interest at 9% per annum, with the payment of principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of December 29, 2001. On April 5, 2002, the outstanding balance under the Maxtor Note was fully paid. MMC’s results of operations are included in the financial statements from the date of acquisition, and the assets and liabilities acquired were recorded based on their fair values as of the date of acquisition.

The total purchase price and the purchase price allocation of the MMC acquisition were as follows (in millions):

The following unaudited proforma consolidated amounts give effect to the acquisitions of Quantum HDD and MMC, excluding the charges for acquired in-process research and development, as if the acquisitions had occurred on January 1, 2001. On a proforma basis, the results of operations of Quantum HDD and MMC are consolidated with the Company’s results for the three and six months ended June 29, 2002 and June 30, 2001. The proforma amounts do not purport to be indicative of what would have occurred had the acquisitions been made as of the beginning of each period or of results which may occur in the future.

The Company’s restricted cash balance of $98.6 million at June 29, 2002, is associated with short-term letters of credits (“LOCs”), where the Company has chosen to provide cash security in order to lower the cost of the LOCs.

In accordance with the disclosure requirements of Statements of Financial Accounting Standards No. 128, “Earnings per Share” a reconciliation of the numerator and denominator of the basic and diluted net loss per share calculations is provided as follows (in thousands, except share and per share amounts):

The following securities and contingently issuable shares are excluded in the calculation of diluted shares outstanding, as their effects would be antidilutive:

Short-term borrowings and long-term debt consist of the following (in thousands):

The 5.75% Subordinated Debentures due March 1, 2012 require semi-annual interest payments and annual sinking fund payments of $5.0 million, which commenced March 1, 1998. The Debentures are subordinated in right to payment to all senior indebtedness.

In September 1999, Maxtor Peripherals (S) Pte Ltd entered into a four-year Singapore dollar denominated loan agreement with the Economic Development Board of Singapore (the “Board”), which is being amortized in seven equal semi-annual installments ending March 2004. As of June 29, 2002, the balance was equivalent to $13.0 million. The Board charges interest at 1% above the prevailing Central Provident Fund lending rate, subject to a minimum of 3.5% per year (3.5% as of June 29, 2002). This loan is supported by a two-year guaranty from a bank. Cash is currently provided as collateral for this guaranty but the Company may, at its option, substitute other assets as security. As part of this arrangement, the Company is subject to two financial covenants, the maintenance of minimum unrestricted cash and a tangible net worth test.

As of December 29, 2001, the Company determined that it was not in compliance with the tangible net worth covenant under the loan agreement. On February 15, 2002, the Company received a waiver and amendment from the lender for its Singapore loan relating to the tangible net worth covenant. On the same date, the banks participating in the Company’s asset securitization program (the “Program”) agreed to a first amendment through May 15, 2002 to the Program. In each case, the definition for calculating tangible net worth was amended to include an adjustment associated with the purchase price accounting for the acquisition of Quantum HDD. After giving effect to this first amendment, the Company was in compliance with the tangible net worth covenant.

the Program was reduced from $300 million to $210 million due to the withdrawal of one of the participating banks.

On May 28, 2002, the banks participating in the Program approved a third amendment, which modified the tangible net worth covenant and the minimum unrestricted cash requirement. On June 20, 2002 the Singapore loan was amended to the same effect. After giving effect to the third amendment to the Program and the amendment to the Singapore loan, the Company was in compliance with all covenants.

In connection with the acquisition of the Quantum HDD business, Maxtor agreed to indemnify Quantum for the Quantum HDD pro rata portion of Quantum’s outstanding $287.5 million 7% convertible subordinated notes due August 1, 2004, and accordingly the principal amount of $95.8 million has been included in the Company’s long term debt. Quantum is required to pay interest semi-annually on February 1 and August 1, and principal is payable on maturity. The Company is required to reimburse Quantum for interest and principal payments relating to the $95.8 million representing Quantum HDD’s pro rata portion of such notes.

In connection with the acquisition of the Quantum HDD business, the Company acquired real estate and related mortgage obligations. The term of the mortgages is ten years, at an interest rate of 9.2%, with monthly payments based on a twenty-year amortization schedule, and a balloon payment at the end of the 10-year term, which is September 2006. The outstanding balance at June 29, 2002 was $36.3 million.

In connection with the acquisition of MMC, the Company assumed certain amortizing equipment loans and capital leases. As of June 29, 2002, these obligations, having final maturity dates ranging from December 2002 to October 2004 and interest rates averaging 9.9%, amounted to $47.6 million.

In connection with the acquisition of MMC, the Company assumed a note for $7.3 million owing to Hynix, which bore no interest through March 31, 2002; thereafter, unpaid principal amounts were to bear interest at 9% per annum (the “Maxtor Note”). On January 5, 2001, Hynix issued a promissory note to Maxtor for $2 million in principal amount, the note bore interest at 9% per annum, with the payment of principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor have agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of such date. On April 5, 2002, the outstanding balance under the Maxtor Note was fully paid.

Cumulative other comprehensive loss on the consolidated balance sheets consists of unrealized loss on investments. Total comprehensive loss for the three and six months ended June 29, 2002 and June 30, 2001, is presented in the following table (in thousands):

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes annual and interim reporting standards for an enterprise’s business

segments and related disclosures about its products, services, geographic areas and major customers. The method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer (“CEO”). The CEO reviews financial information for purposes of making operational decisions and assessing financial performance.

The Company has determined that it has two reportable segments; the hard disk drive group and the network systems group. The Company has a world-wide sales, service and distribution network. Products are marketed and sold through a direct sales force to computer equipment manufacturers, distributors and retailers in the United States, Europe, Latin America and Asia Pacific.

The following table presents net revenue and operating loss for each operating segment:

The following table presents the reconciliation of segment operating loss to the consolidated loss before provision for income taxes:

Sales to computer equipment manufacturers for the three and six months ended June 29, 2002 represented 50.2% and 46.4% of total revenue, respectively, compared to 59.7% and 63.4% of total revenue, respectively, for the corresponding period in fiscal year 2001. Sales to the distribution and retail channels for the three and six months ended June 29, 2002 represented 49.8% and 53.6% of total revenue, respectively, compared to 40.3% and 36.6% of total revenue, respectively, in the corresponding period in fiscal year 2001. Sales to one customer were 11.8% and 10.8% of revenue in the three and six months ended June 29, 2002; sales to one customer represented 11.4% and 13.8% of total revenue for the corresponding period in fiscal year 2001, and there was only one customer with over 10% of revenue in these periods.

Assets of the segment groups are not meaningful for management of the business or for disclosure.

Maxtor operations outside the United States primarily consist of its manufacturing facilities in Singapore that produce subassemblies and final assemblies for the Company’s disk drive products. Revenue by destination information for the three and six months ended June 29, 2002 and June 30, 2001 is presented in the following table (in thousands):

Long-lived asset information by geographic area as of June 29, 2002 and December 29, 2001 is presented in the following table:

Long-lived assets located within the United States consist primarily of goodwill and other intangible assets which amounted to $1,034.8 million and $1,077.4 million as of June 29, 2002 and December 29, 2001, respectively. Long-lived assets located outside the United States consist primarily of the Company’s manufacturing operations located in Singapore which amounted to $135.8 million and $121.1 million as of June 29, 2002 and December 29, 2001, respectively.

In July 1998, the Company entered into an accounts receivable securitization program (the “Program”) with a financial institution. On November 15, 2001, the Company amended its asset securitization program to increase the amount available to $300 million from $200 million. The Program allows the Company to sell on a revolving basis an undivided interest in up to $300 million in eligible receivables. The eligible receivables are sold to bank conduits through a bankruptcy-remote special purpose entity which is consolidated for financial reporting purposes.

The transaction has been accounted for as a sale under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” As of June 29, 2002 and June 30, 2001, the Company has sold $45.0 million and $150.0 million of receivables, respectively under the Program which are reflected as reductions of receivables in the accompanying consolidated balance sheets. As part of this arrangement, the Company is subject to financial covenants including the maintenance of certain financial ratios and a tangible net worth test.

As of December 29, 2001, the Company determined that it was not in compliance with the tangible net worth covenant under the Program. On February 15, 2002, the Company received a waiver and amendment

from the lender for its Singapore loan relating to the tangible net worth covenant. On the same date, the banks participating in the Company’s asset securitization program (the “Program”) agreed to a first amendment through May 15, 2002 to the Program. In each case, the definition for calculating tangible net worth was amended to include an adjustment associated with the purchase price accounting for the acquisition of Quantum HDD. After giving effect to this first amendment, the Company was in compliance with the tangible net worth covenant.

On March 15, 2002, the first amendment was superceded by a second amendment reflecting the terms of the first amendment and extending the terms of the amendment for the duration of the Program. At this time the Program was reduced from $300 million to $210 million due to the withdrawal of one of the participating banks.

The Company receives cash in respect of the interest in its receivables sold. The proceeds were used for working capital purposes and are reflected as operating cash flows in the Company’s statement of cash flows. Delinquent amounts and credit losses related to these receivables were not material at June 29, 2002. Sales of receivables resulted in recognition of expenses of approximately $1.9 million and $3.5 million for the six months ended June 29, 2002 and June 30, 2001, respectively. These expenses are included in interest expense.

In 1994, Hyundai Electronics Industries, “HEI,” and certain of its affiliates purchased 40% of Maxtor’s outstanding common stock for $150.0 million in cash. In early 1996, Hynix, formerly Hyundai Electronics America, or HEA, acquired all of the remaining shares of common stock of Maxtor in a tender offer and merger for $215.0 million in cash and also acquired all of Maxtor’s common stock held by HEI and its affiliates. Maxtor operated as a wholly-owned subsidiary of Hynix until completion of its initial public offering on July 31, 1998, which reduced the ownership interest of Hynix to below 50%. In April 2001 as a result of Maxtor’s acquisition of the Quantum HDD business, Hynix’s ownership in Maxtor was reduced to approximately 17% of the outstanding common stock. As described below, Hynix sold Maxtor shares to the public and to Maxtor in October 2001, reducing Hynix’s ownership to 5.17% at December 29, 2001, and in February 2002, Hynix distributed the balance of its Maxtor shares to the beneficial owners of a trust and is no longer a stockholder of Maxtor.

On September 2, 2001, Maxtor completed its acquisition of MMC which had previously been a wholly-owned subsidiary of Hynix. MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor constituted 95% of MMC’s annual revenues. The primary business reason for Maxtor’s acquisition of MMC was to provide Maxtor with a reliable source of supply of media for hard disk drives. A fairness opinion was delivered to Maxtor’s Board of Directors by a nationally recognized investment banking firm in connection with the MMC acquisition. The fairness opinion concluded that the consideration to be paid by Maxtor for MMC was fair to Maxtor, from a financial point of view. The acquisition of MMC was approved by the Maxtor Board’s Affiliated Transactions Committee and was determined by the Committee to be in the best interests of Maxtor and its stockholders. The Affiliated Transactions Committee was comprised entirely of directors with no relationship with Hynix and its affiliates. The acquisition was accounted for as a purchase with a total cost of $17.9 million, which consisted of cash consideration of $1.0 million, $16.0 million of loan forgiveness, and $0.9 million of direct transaction costs. In connection with the acquisition, Maxtor also assumed liabilities of $105.7 million.

In connection with the acquisition of MMC Technology, Inc., Maxtor assumed a note for $7.3 million owing to Hynix, which bore no interest through March 31, 2002; thereafter, unpaid principal amounts bore

interest at 9% per annum (the “Maxtor Note”). On January 5, 2001, Hynix issued a promissory note to Maxtor for $2 million in principal amount representing Hynix’s share of a settlement relating to litigation between Maxtor and Hynix and Stormedia. This note bore interest at 9% per annum, with the payment of principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of December 29. On April 5, 2002, the outstanding balance under the Maxtor Note was fully paid.

Maxtor’s cost of revenue includes certain component parts Maxtor purchased from MMC. These purchases amounted to $34 million and $72 million for the three and six months ended June 30, 2001, respectively. In August 1998, Maxtor entered into an agreement with MMC with respect to the pricing of future purchases that provided for pricing discounts in return for a purchase volume commitment based on a percentage of our total media purchases through September 30, 2001. The pricing discounts generally ranged from 2% to 4% off of competitive prices. As described above, Maxtor completed its acquisition of MMC on September 2, 2001.

Maxtor’s cost of revenue also includes certain DRAM chip purchases from Hynix Semiconductor, Inc., “HSI,” formerly HEI. Hynix is treated identically to its competitors in the process by which commodity electronics, principally DRAMs, are selected, qualified, and purchased; pricing is negotiated with selected suppliers on the basis of suppliers’ bids and market information. Maxtor’s purchases from HSI totaled $26.5 million in fiscal year 1999, $41.6 million in fiscal year 2000 and $19.3 million in fiscal year 2001.

In October 2001, Hynix sold approximately 23.3 million shares of Maxtor common stock in a registered public offering. At the same time as Hynix’s sale of Maxtor common stock to the public, Maxtor purchased an additional 5.0 million shares of its common stock from Hynix. Maxtor’s purchase of its shares from Hynix was on the same terms as Hynix’s sale of shares to the public at $4 per share for an aggregate purchase price of $20.0 million. The repurchase of its shares was intended to improve Maxtor’s capital structure, increase shareholder returns, and increase the price of Maxtor’s stock. The repurchase of the shares from Hynix was approved by the Maxtor Board’s Affiliated Transaction Committee and determined to be in the best interest of the Company and its stockholders. As a result of Hynix’s sale of its Maxtor shares to the public and to Maxtor, in October 2001, and Hynix’s distribution of its remaining shares to the beneficial owners of a trust in February 2002, Hynix is no longer a stockholder of Maxtor.

Pursuant to a sublicense agreement with HEI, Maxtor is obligated to pay a portion of an IBM license royalty fee otherwise due from HEI. Such payments are due in annual installments through 2007, and are based upon the license fee separately negotiated on an arms’ length basis between HEI and IBM. For the years ended January 1, 2000, December 30, 2000 and December 29, 2001, Maxtor recorded $1.9 million of expenses each year in connection with this obligation.

Hynix was an unconditional guarantor of one of Maxtor’s facilities lease in Milpitas, California. The aggregate rent under the lease was $3.24 million per annum in each of the years ended January 1, 2000, December 30, 2000 and December 29, 2001. The lease rate was established by arms’ length negotiations with the lessor based on applicable market rates. The lease expired on March 31, 2002 and was not extended.

Prior to the Company’s acquisition of the Quantum HDD business, Maxtor, on the one hand, and Quantum and MKE, on the other hand, were sued by Papst Licensing, GmbH, a German corporation, for infringement of a number of patents that relate to hard disk drives. Papst’s complaint against Quantum and MKE was filed on July 30, 1998, and Papst’s complaint against Maxtor was filed on March 18, 1999. Both lawsuits, filed in the United States District Court for the Northern District of California, were transferred by

the Judicial Panel on Multidistrict Litigation to the United States District Court for the Eastern District of Louisiana for coordinated pre-trial proceedings with other pending litigations involving the Papst patents (the “MDL Proceeding”). The matters will be transferred back to the District Court for the Northern District of California for trial. Papst’s infringement allegations are based on spindle motors that Maxtor and Quantum purchased from third party motor vendors, including MKE, and the use of such spindle motors in hard disk drives. Maxtor purchased the overwhelming majority of the spindle motors used in our hard disk drives from vendors that were licensed under the Papst patents. Quantum purchased many spindle motors used in its hard disk drives from vendors that were not licensed under the Papst patents, including MKE. As a result of the merger with Quantum HDD, the Company assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. Maxtor filed a motion to substitute the Company for Quantum in this litigation. The motion was denied by the Court presiding over the MDL Proceeding, without prejudice to being filed again in the future.

Papst and MKE recently entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of certain Papst patents to MKE which might provide Quantum, and thus Maxtor, with additional defenses to Papst’s patent infringement claims.

On April 15, 2002, the Judicial Panel on Multidistrict Litigation ordered a separation of claims and remand to the District of Columbia of certain claims between Papst and another party involved in the MDL Proceeding. By order entered June 4, 2002, the court stayed the MDL Proceeding pending resolution by the District of Columbia court of the remanded claims. The first status conference in that District of Columbia action is scheduled for August 15, 2002.

The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, the Company cannot assure that it will be able to successfully defend itself against this or any other Papst lawsuit. The Papst complaints assert claims to an unspecified dollar amount of damages. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against Maxtor and its products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, Maxtor also could be required to pay treble damages and Papst’s attorney’s fees. Accordingly, a litigation outcome favorable to Papst could harm Maxtor’s business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

On December 30, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires goodwill to be tested for impairment under certain circumstances, written down when impaired, and requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Goodwill and indefinite lived intangible assets will be subject to an impairment test at least annually which the Company expects to perform in the third quarter of each year after the transition year.

The Company ceased amortizing goodwill totaling $846.0 million as of the beginning of fiscal 2002, including $31.1 million, net of accumulated amortization, of acquired workforce intangibles previously classified as purchased intangible assets.

Purchased intangible assets are carried at cost less accumulated amortization. The Company evaluated its intangible assets and determined that all such assets have determinable lives. Amortization is computed over the estimated useful lives of the respective assets, generally one to seven years. The Company expects amortization expense on purchased intangible assets to be $41.5 million for the remainder of fiscal 2002,

$82.3 million in fiscal 2003, $37.1 million in fiscal 2004, $22.0 million in fiscal 2005, and $5.9 million in fiscal 2006, at which time purchased intangible assets will be fully amortized.

SFAS No. 142 prescribes a two-phase transitional process for impairment testing of goodwill. The first phase, required to be completed by June 30, 2002, screens for impairment as of January 1, 2002. The second phase (if necessary), required to be completed by December 31, 2002, measures the impairment. The Company completed its first phase impairment analysis during the second quarter of 2002 and found no instances of impairment of its recorded goodwill; accordingly, the second testing phase, absent future indicators of impairment, is not necessary during 2002.

The following table presents the impact of SFAS 142 on net loss and net loss per share had the standard been in effect for the three and six months ended June 30, 2001 (in thousands, except per share amounts):

The following table presents the impact of SFAS 142 on net income (loss) and net income (loss) per share had the standard been in effect for the fiscal years ended 1999, 2000 and 2001 (in thousands, expect per share amounts):

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations or lessees. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 25, 2002. The Company is currently assessing the impact of SFAS 143 on its financial statements.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 replaces SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The FASB issued SFAS 144 to establish a single accounting model, based on the framework established in SFAS 121, as SFAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30, “Reporting The Results of Operations-Reporting The Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 also resolves significant implementation issues related to SFAS 121. Companies are required to adopt SFAS 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The adoption of SFAS 144 did not have a significant impact on Maxtor’s financial statements.

In May 2002, the FASB issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections” (“SFAS 145”). Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The Company is currently assessing the impact of SFAS 145 on its financial statements.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently assessing the impact of SFAS 146 on its financial statements.

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. In this report, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “will,” “should,” “plan,” “estimate,” “predict,” “potential,” “future,” “continue,” or similar expressions also identify forward-looking statements. These statements are only predictions. We make these forward-looking statements based upon information available on the date hereof, and we have no obligation (and expressly disclaim any such obligation) to update or alter any such forward-looking statements whether as a result of new information, future events, or otherwise. 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 section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Affecting Future Performance” and elsewhere in this report.

Maxtor Corporation (“Maxtor” or the “Company”) was founded in 1982 and completed an initial public offering of common stock in 1986. In the mid-1980’s, we were a leading technology innovator in the hard disk drive industry. As is true today, the hard disk drive industry during the 1980’s was intensely competitive and characterized by rapid technological change, rapid rates of product and technology obsolescence, changing customer requirements, dramatic shifts in market share and significant erosion of average selling prices. In an effort to mitigate the risks associated with these factors, we pursued all major product segments in the hard disk drive market, utilizing multiple product families and technology platforms. This costly strategy added significant complexity to the business, which caused us to delay or miss a number of key product introductions and ultimately led to the deterioration of our overall financial condition. As a result of this deterioration, we sold 40% of our outstanding common stock to Hyundai Electronics Industries (now Hynix Semiconductor Inc.) and its affiliates in 1994.

In early 1996, Hyundai Electronics America (Hynix Semiconductor America, Inc. — “Hynix”) acquired all of the remaining publicly held shares of our common stock as well as all of our common stock then held by Hynix Semiconductor Inc. and its affiliates. Shortly thereafter, Hynix invested in renewed efforts to revitalize Maxtor. In July 1996, we hired a new management team, headed by Michael R. Cannon, our current President and Chief Executive Officer and a 20-year veteran of the hard drive industry, to lead our turnaround and capture business at leading desktop computer manufacturers.

In the third quarter of 1998, we completed a public offering of approximately 49.7 million shares of our common stock. We received net proceeds of approximately $328.8 million from the offering.

In February 1999, we completed a public offering of 7.8 million shares of our common stock. We received net proceeds of approximately $95.8 million from the offering. We used a portion of the proceeds from the offering to prepay, without penalty, outstanding aggregate principal indebtedness of $55.0 million owing to Hynix under a subordinated note.

In September 1999, we acquired privately held Creative Design Solutions, Inc. (“CDS”), a participant in the emerging network attached storage market. The acquisition of CDS helped us to transition from only being a supplier of hard disk drives for the desktop personal computer market to also being positioned to provide storage solutions that deliver price and performance values in networked environments.

On April 2, 2001, we completed our acquisition of Quantum Corporation’s Hard Disk Drive Group (“Quantum HDD”). The primary reason for our acquisition of Quantum HDD was to create a stronger, more competitive company, with enhanced prospects for continued viability in the storage industry. For additional

On September 2, 2001, we completed the acquisition of MMC Technology, Inc. (“MMC”), a wholly-owned subsidiary of Hynix. MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor comprised 95% of MMC’s annual revenues. The primary reason for our acquisition of MMC was to provide us with a reliable source of supply of media. For additional information regarding the MMC acquisition, see note 2 of the Notes to Consolidated Financial Statements and “Related Party Transactions” below.

On October 9, 2001, Hynix sold 23,329,843 shares (including exercise of the underwriters’ over-allotment) of Maxtor common stock in a registered public offering. Maxtor did not receive any proceeds from Hynix’s sale of Maxtor stock to the public. In addition, at the same time and on the same terms as Hynix’s sale of Maxtor stock to the public, we repurchased 5.0 million shares from Hynix for an aggregate purchase price of $20.0 million. These repurchased shares are being held as treasury shares. See “Related Party Transactions” below. In February 2002, Hynix distributed all of its remaining Maxtor shares to the beneficial owners of a trust and is no longer a stockholder of Maxtor.

Our discussion and analysis of the company’s financial condition and results of operations are based upon Maxtor’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies represent our significant judgments and estimates used in the preparation of the company’s consolidated financial statements:


	•	revenue recognition;

	•	sales returns, other sales allowances and the allowance for doubtful accounts;

	•	valuation of intangibles, long-lived assets and goodwill;

	•	warranty;

	•	inventory reserves;

	•	income taxes; and

	•	restructuring liabilities, litigation and other contingencies.

For additional information regarding the Company’s critical accounting policies mentioned above, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2001.

Effective July 1, 2001, we adopted certain provisions of SFAS No. 141, and effective December 30, 2001, we adopted the full provisions of SFAS No. 141 and SFAS No. 142. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets apart from goodwill. We evaluated our goodwill and intangibles acquired prior to June 30, 2001 using the criteria of SFAS No. 141, which resulted in $31.1 million of other intangibles, net of accumulated amortization of $12.8 million, (comprised entirely of assembled workforce intangibles) being subsumed into goodwill at December 30, 2001. SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for

SFAS No. 142 prescribes a two-phase transitional process for impairment testing of goodwill. The first phase, required to be completed by June 30, 2002, screens for impairment as of January 1, 2002. The second phase (if necessary), required to be completed by December 31, 2002, measures the impairment. We completed our first phase impairment analysis and found no instances of impairment of our recorded goodwill; accordingly, the second testing phase, absent future indicators of impairment, is not necessary during 2002.

Revenue in the three and six months ended June 29, 2002 was $895.8 million and $1,940.5 million, compared to $1,041.6 million and $1,672.4 million in the corresponding periods in fiscal year 2001. Total shipments for the three months ended June 29, 2002 were 12.7 million units, which was 0.6 million units, or 5%, higher as compared to the three months ended June 30, 2001. The increase in unit volume in the three months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 primarily reflected slightly increased desktop hard disk drive sales to non-branded customers in the distribution channel. Total shipments for the six months ended June 29, 2002 were 26.4 million units, which was 7.6 million units, or 40.6%, higher as compared to the corresponding period in fiscal year 2001. The increase in unit volume in the six months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to the acquisition of the Quantum HDD business.

Although total units increased in the three months ended June 29, 2002, revenues declined, compared to the corresponding period in fiscal year 2001, primarily due to the continued decline in average selling prices in the PC and server markets, as a result of the continuing economic slowdown and reduced capital budgets. Revenue in the six months ended June 29, 2002 increased compared to the corresponding period in fiscal year 2001 primarily as a result of our acquisition of the Quantum HDD business. We have historically experienced seasonal fluctuation in sales volume with a decline typically occurring in the second quarter of the year. Although demand in the desktop computer market traditionally strengthens later in the year as next generation products are introduced and consumers refresh personal computers, we have limited visibility as to whether this trend will materialize in 2002.

Revenues on a proforma basis (as if the Quantum HDD business had been acquired on January 1, 2001) were $1,940.5 million and $2,325.0 million for the six months ended June 29, 2002 and June 30, 2001, respectively. On a pro forma basis, the percentage decrease was 16.5% in the six months ended June 29, 2002 compared to the corresponding period in fiscal year 2001, primarily reflecting the slowdown in demand for PCs and servers and the resulting reduced demand for hard disk drives and the continued pricing pressures in the market.

Sales to the top five customers in the three and six months ended June 29, 2002 represented 36.3% and 31.5% of revenue, respectively, compared to 35.5% and 36.3% of revenue, respectively, in the corresponding periods in fiscal year 2001. Sales to one customer were 11.8% and 10.8% of revenue in the three and six months ended June 29, 2002; sales to one customer represented 11.4% and 13.8% of total revenue for the corresponding period in fiscal year 2001, and there was only one customer with over 10% of revenue in these periods.

Revenue from sales to computer equipment manufacturers in the three and six months ended June 29, 2002 represented 50.2% and 46.4% of revenue, respectively, compared to 59.7% and 63.4% of revenue, respectively, in the corresponding period in fiscal year 2001. The decline in percentage of revenue from OEMs was due to lower demand for PCs and servers, resulting in lower demand for hard disk drives from the OEM channel. Revenue from sales to the distribution channel and retail customers in the three and six months ended June 29, 2002 represented 49.8% and 53.6% of revenue, respectively, compared to 40.3% and 36.6% of revenue, respectively, in the corresponding period in fiscal year 2001. The increase in revenue from sales to the distribution channel in the three months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 is primarily due to of the growth of non-branded PC customers’ market share of the overall current desktop PC market and our effort to accommodate this growth. The increase in the six months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 is primarily due to our acquisition of the Quantum HDD business and the growth of non-branded PC customers’ market share of the overall current desktop PC market and our effort to accommodate this growth.

Domestic revenue in the three and six months ended June 29, 2002 represented 34.2% and 36.1% of total sales, respectively, compared to 45.2% and 45.4% of total sales, respectively, in the corresponding period in fiscal year 2001. International revenue in the three and six months ended June 29, 2002 represented 65.8% and 63.9% of total sales, respectively, compared to 54.8% and 54.6% of total sales, respectively, in the corresponding period in fiscal year 2001. In absolute terms, international sales increased 3.2% and 35.7% in the three and six months ended June 29, 2002, respectively, compared to the corresponding periods in fiscal year 2001. Revenue from international sales in the three months ended June 29, 2002 compared to the corresponding period in the fiscal year 2001 increased primarily as a result of the growth in sales to the non-branded customers who are primarily located outside of the United States and Canada. Revenue from international sales in the six months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 increased primarily as a result of our stronger presence in Europe and Asia Pacific as a result of the acquisition of the Quantum HDD business and the growth in sales to the non-branded customers who are primarily located outside of the United States and Canada. We plan to continue building our sales efforts in Europe and Asia Pacific over the course of the year.

Sales to Europe in the three months ended June 29, 2002 and June 30, 2001 represented 30.4% and 24.7% of total revenue, respectively. In absolute terms, European sales increased 6.0% compared to the corresponding period in fiscal year 2001. Sales to Asia Pacific in the three months ended June 29, 2002 represented 34.8%, or an absolute increase of 8.9% of total revenue, compared to 27.4% of total revenue for the corresponding period in fiscal year 2001. The increases in the sales to Europe and Asia Pacific in the three month period ended June 29, 2002 were mainly due to growth in sales to the non-branded customers who are primarily located outside of the United States and Canada.

Sales to Europe in the six months ended June 29, 2002 and June 30, 2001 represented 31.7% and 24.0% of total revenue, respectively. In absolute terms, European sales increased 53.2% compared to the corresponding period in fiscal year 2001. Sales to Asia Pacific in the six months ended June 29, 2002 represented 31.3%, or an absolute increase of 33.0% of total revenue, compared to 27.3% of total revenue for the corresponding period in fiscal year 2001. The increases in the sales to Europe and Asia Pacific in the six month period ended June 29, 2002 were primarily due to the acquisition of the Quantum HDD business and increased sales to non-branded customers who are primarily located outside of the United States and Canada.

Gross profit decreased to $63.0 million in the three months ended June 29, 2002, compared to $77.9 million for the corresponding period in fiscal year 2001. As a percentage of revenue, gross profit decreased to 7.0% in the three months ended June 29, 2002 from 7.5% in the corresponding period of fiscal year 2001. Gross profit increased to $178.6 million in the six months ended June 29, 2002, compared to $167.0 million for the corresponding period in fiscal year 2001 primarily due to our acquisition of the Quantum HDD business. As a percentage of revenue, gross profit decreased to 9.2% in the six months ended June 29, 2002 from 10.0% in the corresponding period of fiscal year 2001. The decrease in gross profit as a percentage of revenues for the three and six month periods ended June 29, 2002 compared to the corresponding periods in fiscal year 2001, was primarily due to competitive pricing pressures, which caused a decline in average selling prices compared to the average unit cost, as well as the negative impact on gross profit in the second quarter from the transition of the manufacturing of desktop drive products from MKE to the Maxtor Singapore manufacturing facility. We may also experience some negative impact in the third quarter of fiscal year 2002 resulting from this manufacturing transition. We expect competitive pricing pressure to continue in the third quarter of 2002. As we complete the integration of our product development efforts associated with our acquisition of the Quantum HDD business, we expect to achieve cost benefits and efficiencies which could favorably impact our gross profits.

R&D expense in the three and six months ended June 29, 2002 was $109.1 million, or 12.2% of revenue and $218.1 million or 11.2% of revenue, respectively, compared to $139.3 million, or 13.4% of revenue, and $198.3 million or 11.9% of revenue, respectively, in the corresponding period in fiscal year 2001. The decrease in the three months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to merger related costs, such as amortization of stock-based compensation, associated with the Quantum HDD acquisition incurred during the three months ended June 30, 2001. The increase in the six months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 was due to the inclusion of Quantum HDD and MMC expenses, our on-going effort to maintain leadership products to address the requirements of the PC desktop market and our continued investments to expand our product portfolio in the enterprise class hard disk drives and the Network Systems Group.

As a result of the Quantum HDD acquisition, R&D expense includes stock-based compensation charges of $0.4 million and $1.0 million in the three and six months ended June 29, 2002, respectively, and $1.3 million in the three and six months ended June 30, 2001, resulting from options we issued to Quantum employees who joined Maxtor in connection with the merger on April 2, 2001. R&D expense in the six months ended June 29, 2002 includes $2.8 million of stock-based compensation amortization for Quantum DSS restricted shares issued to Quantum employees who joined Maxtor in connection with the merger. R&D expense in the three and six months ended June 30, 2001 includes $19.7 million of stock-based compensation amortization related to Quantum DSS restricted shares issued to Quantum employees who joined Maxtor in connection with the merger. The following table summarizes the effect of these merger-related charges:

For further information, see discussion below under the section “Stock-based Compensation.”

SG&A expense in the three and six months ended June 29, 2002 was $38.8 million, or 4.3% of revenue and $84.9 million, or 4.4% of revenue, respectively, compared to $107.9 million, or 10.4% of revenue, and $135.4 million or 8.1% of revenue, respectively, in the corresponding period in fiscal year 2001. SG&A expense decreased in absolute dollars and as a percentage of revenue in the three and six months ended June 29, 2002 compared to the corresponding periods in fiscal year 2001 primarily due to payments associated with the Quantum HDD acquisition paid subsequent to the merger.

As a result of the Quantum HDD acquisition, SG&A expense includes stock-based compensation charges of $0.1 million and $0.3 million in the three and six months ended June 29, 2002, respectively, and $0.5 million in the three and six months ended June 30, 2001, resulting from options we issued to Quantum employees who joined Maxtor in connection with the merger on April 2, 2001. SG&A expense in the six months ended June 29, 2002 includes $1.0 million of stock-based compensation amortization for Quantum DSS restricted shares issued to Quantum employees who joined Maxtor in connection with the merger. SG&A expense in the three and six months ended June 30, 2001 includes $7.0 million of stock-based compensation amortization related to the Quantum DSS restricted shares issued to Quantum employees who joined Maxtor in connection with the merger. The following table summarizes the effect of these merger-related charges:

For further information, see discussion below under the section “Stock-based Compensation.”

The Company expensed purchased in-process research and development costs of $94.7 million on the acquisition date as a result of the business combination transaction with Quantum HDD. These amounts were expensed because the acquired technology had not yet reached technological feasibility and had no future alternative uses.

On April 2, 2001, as part of our acquisition of the Quantum HDD business, we assumed the following options and restricted stock:


	•	All Quantum HDD options and Quantum HDD restricted stock held by employees who accepted offers of employment with Maxtor, or “transferred employees,” whether or not options or restricted stock have vested;

	•	Vested Quantum HDD options and vested Quantum HDD restricted stock held by Quantum employees whose employment is terminated prior to the separation, or “former service providers”; and

	•	Vested Quantum HDD restricted stock held by any other individual.

In addition, Maxtor assumed vested Quantum HDD options held by Quantum employees who will continue to provide services during a transitional period, or “transitional employees.” The outstanding options to purchase Quantum HDD common stock held by transferred employees and vested options to purchase Quantum HDD common stock held by former Quantum employees, consultants and transition employees were assumed by Maxtor and converted into options to purchase Maxtor common stock according to the exchange ratio of 1.52 shares of Maxtor common stock for each share of Quantum HDD common stock. Vested and unvested options for Quantum HDD common stock assumed in the acquisition represented options for 7,650,965 shares and 4,655,236 shares of Maxtor common stock, respectively.

Included in R&D expenses and SG&A expenses are charges for amortization of stock-based compensation resulting from both Maxtor options and options issued by Quantum to employees who joined Maxtor in connection with the acquisition on April 2, 2001. Stock compensation charges were as follows:

As of June 29, 2002, $2.4 million of stock-based compensation associated with the Quantum HDD acquisition remains to be amortized, based on vesting schedules, and this amortization is expected to be completed early in fiscal year 2004.

In addition, Quantum Corporation issued restricted DSS shares to Quantum employees who joined Maxtor in connection with the acquisition in exchange for the fair value of DSS options held by such employees. A portion of the acquisition purchase price has been allocated to this deferred stock-based compensation, recorded as prepaid expense, and is amortized to expenses over the vesting period as the vesting

Amortization of other intangible assets represents the amortization of customer list and other current products and technology, arising from our acquisitions of CDS in September 1999, the Quantum HDD business in April 2001 and MMC in September 2001. Amortization of other intangible assets decreased to $21.3 million and $46.7 million, in the three and six months ended June 29, 2002, respectively, compared to $61.9 million and $64.4 million in the corresponding period in fiscal year 2001. The decrease was primarily as a result of no charges for the amortization of goodwill and workforce in 2002. The three and six months ended June 30, 2001 reflects $37.5 million and $39.2 million of goodwill amortization, respectively. On December 30, 2001, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. In compliance with SFAS No. 142:


	•	On December 30, 2001, we reclassified $31.1 million, net of accumulated amortization, in workforce assets to goodwill and we ceased amortizing the resulting net goodwill balance of $846.0 million. Accordingly, there are no charges for the amortization of goodwill in 2002 or thereafter.

	•	The net book value of goodwill will be reviewed for impairment annually and whenever there is indication that the value of the goodwill may be impaired. Any resulting impairment will be recorded in the income statement in the period it is identified and quantified.

	•	SFAS No. 142 prescribes a two-phase transitional process for impairment testing of goodwill. The first phase, required to be completed by June 30, 2002, screens for impairment as of January 1, 2002. The second phase (if necessary), required to be completed by December 31, 2002, measures the impairment. The Company completed its first phase impairment analysis during the second quarter of 2002 and found no instances of impairment of its recorded goodwill; accordingly, the second testing phase, absent future indicators of impairment, is not necessary during 2002.

	•	The amortization of intangible assets incurred in the three and six months ended June 29, 2002 was due to the amortization of other intangible assets. Other intangibles comprising customer list and purchased technology resulting from our acquisitions of CDS, the Quantum HDD business and MMC Technology will continue to be amortized. The net book value of these intangibles at June 29, 2002 was $188.8 million and amortization for the three and six months ended June 29, 2002 was $21.3 million and $42.7 million, respectively.

Interest expense increased by $1.1 million and by $4.6 million for the three and six months of fiscal year 2002, as compared to the corresponding periods in fiscal year 2001. The increase in the three months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to the debt assumed in conjunction with the acquisition of MMC on capital equipment loan and leases. The increase in the six months ended June 29, 2002 compared to the corresponding period in fiscal year 2001 was primarily due to the debt assumed in conjunction with the acquisition of MMC on capital equipment loan and leases, the obligation to reimburse for the interest due on the Quantum HDD pro rata portion of Quantum’s convertible subordinated notes and the monthly accretion of interest expense related to facility exit costs in connection with the Quantum HDD acquisition. Total short-term and long-term outstanding borrowings were $257.3 million as of June 29, 2002 compared to $231.9 million as of June 30, 2001.

Interest and other income decreased $10.5 and $13.2 million for the three and six month periods ended June 29, 2002 compared to the corresponding periods in fiscal year 2001. The decreases were largely due to reductions in cash equivalents and marketable securities. Total cash and cash equivalents, restricted cash and marketable securities were $489.9 million as of June 29, 2002 compared to $626.9 million as of June 30, 2001. See the “Liquidity and Capital Resources” discussion for further information.

The provision for income taxes consists primarily of state and foreign taxes. Due to our net operating losses (“NOL”), NOL carryforwards and favorable tax status in Singapore and Switzerland, we have not incurred any significant foreign, U.S. federal, state or local income taxes for the current or prior fiscal periods. We have not recorded a tax benefit associated with our loss carry-forward because of the uncertainty of realization.

We were part of the HEA consolidated group for federal income tax returns for periods from early 1996 to August 1998 (the “Affiliation Period”). As a member of the HEA consolidated group, the Company was subject to a tax allocation agreement. During the Affiliation Period, for financial reporting purposes, our tax

We ceased to be a member of the HEA consolidated group as of August 1998. We remain liable for our share of the total consolidated or combined tax return liability of the HEA consolidated group prior to August 1998. We have agreed to indemnify or reimburse HEA if there is any increase in our share of the HEA consolidated or combined tax return liability resulting from revisions to our taxable income.

Pursuant to a “Tax Sharing and Indemnity Agreement” entered into in connection with the Company’s merger with Quantum HDD, Maxtor, as successor to Quantum HDD, and Quantum are allocated their share of Quantum’s income tax liability for periods before the split-off, consistent with past practices and as if the Quantum HDD and Quantum DSS business divisions had been separate and independent corporations. To the extent that the income tax liability attributable to one business division is reduced by using NOLs and other tax attributes of the other business division, the business division utilizing the attributes must pay the other for the use of those attributes. We must also indemnify Quantum for additional taxes related to the Quantum DSS business for all periods before Quantum’s issuance of tracking stock and additional taxes related to the Quantum HDD business for all periods before the split-off, limited in the aggregate to $142.0 million plus 50% of any excess over $142.0 million, excluding any required gross-up payment. The Company recorded approximately $142.0 million in other liabilities associated with Maxtor’s agreement to reimburse Quantum Corporation for income tax liabilities for certain years prior to the acquisition of the Quantum HDD business by Maxtor.

We purchased a $340.0 million insurance policy covering the risk that the split-off of the Quantum HDD business from Quantum DSS could be determined to be subject to federal income tax or state income or franchise tax. Under the “Tax Sharing and Indemnity Agreement,” the Company agreed to indemnify Quantum for the amount of any tax payable by Quantum as a result of the split-off to the extent such tax is not covered by such insurance policy, unless imposition of the tax is the result of Quantum’s actions, or acquisitions of Quantum stock, after the split-off. The amount of the tax not covered by insurance could be substantial. In addition, if it is determined that Quantum owes federal or state tax as a result of the split-off and the circumstances giving rise to the tax are covered by our indemnification obligations, the Company will be required to pay Quantum the amount of the tax at that time, whether or not reimbursement may be allowed under our tax insurance policy.

We recorded approximately $196.4 million of deferred tax liabilities in connection with the acquisition of the Quantum HDD business in April 2001. The deferred taxes were recorded principally to reflect the taxes which would become payable upon the repatriation of the earnings which was invested abroad by Quantum HDD as of April 1, 2001.

Cash, cash equivalents, marketable securities and restricted cash were $489.9 million at June 29, 2002 compared to $645.8 million at December 29, 2001. The Company’s restricted cash balance at June 29, 2002 was $98.6 million, which is pledged as collateral for certain stand-by letters of credit issued by commercial banks. We have a net deferred tax liability of $196.4 million, which could become payable upon repatriation of the earnings invested abroad.

Operating activities used cash of $61.1 million in the six months ended June 29, 2002. Uses of cash from operating activities reflect our net loss of $174.0 million offset by adjustments for depreciation, amortization of intangible assets and other non-cash adjustments of $123.5 million. Sources of cash from operating activities also include a $78.6 million increase in accounts payable primarily due to timing differences in payments to vendors and a $36.0 million decrease in accounts receivable primarily due to the decrease in revenue. This was partially offset by a $80.4 million decrease in accrued and other liabilities primarily due to the satisfaction of warranty and related obligations, merger related severance and facilities expenses, and $44.7 million increase in inventory and other current assets due to managing the transition of production to our Singapore

Net cash used in investing activities was $10.4 million in the six months ended June 29, 2002. Investing activities primarily reflects the receipt of $68.0 million in proceeds from the sale of marketable securities (net of purchases), and investments made in property plant and equipment of $78.4 million. We expect that our investments in property, plant and equipment in 2002 will be approximately $200.0 million, primarily to fund manufacturing upgrades and expansion, product development and updating our information technology systems.

Net cash used in financing activities was $16.2 million during the quarter ended June 29, 2002. This was primarily attributed to the repayment of debt and lease obligations, including the payment in full of the $5.1 million principal balance owed to Hynix and the repayments of lease obligations described under “— Related Party Transactions,” and purchase of publicly traded debt in the aggregate amount of $30.1 million, offset by proceeds from employee stock purchases and stock options exercised of $14.0 million.

We believe the existing cash and cash equivalents, short term investment and capital resources, together with cash generated from operations and available 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 2002, capital expenditures are expected to be approximately $200 million, primarily used for manufacturing upgrades and expansion, product development, and updating our information technology systems. 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 hard disk drive market and pricing conditions. If we need additional capital, there can be no assurance that such additional financing can be obtained, or, if obtained, that it will be available on satisfactory terms. See discussion below under the heading “Certain Factors Affecting Future Performance.”

Future payments due under debt and capital lease obligations as of June 29, 2002 are reflected in the following table (in thousands):


(1)	For the remainder of fiscal year 2002 through fiscal year 2012, we will make interest payments of $28.7 million.

(2)	For the remainder of fiscal year 2002 through fiscal year 2004, we will make interest payments of $0.6 million.

(3)	For the remainder of fiscal year 2002 through fiscal years 2003 and 2004, we will make interest payments of $14.0 million.


(4)	For the remainder of fiscal year 2002 through fiscal year 2006, we will make interest payments of $13.2 million.

(5)	For the remainder of fiscal year 2002 through fiscal years 2003 and 2004, we will make interest payments of $4.7 million.

The Company did not enter into any significant operating lease obligations during the three month period ended June 29, 2002. For additional information regarding the Company’s operating lease obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001.

In July 1998, we entered into an accounts receivable securitization program (the “Program”) with a group of commercial banks (the “Banks”). On November 15, 2001, we amended and restated the Program, extending the Program for another three years and increasing the available size of the Program from $200 million to $300 million. Under the Program, we sell our U.S. and Canadian accounts receivable via a special purpose entity, Maxtor Receivables Corporation (“MRC”). MRC, our wholly-owned subsidiary, sells the Banks an ownership interest in our accounts receivable on a revolving basis, in an amount determined by an “eligible” pool of receivables. The Banks’ purchases of interests in our accounts receivable results in the amount of the purchases being excluded from our consolidated accounts receivable, and the proceeds of the sale being included in our consolidated cash balance. The Banks had purchased a $45.0 million interest in our accounts receivable under this Program at June 29, 2002.

We are subject to certain defined “Liquidation Events” under this Program, including a minimum tangible net worth test and a requirement to maintain a specified minimum unrestricted cash balance. Our Singapore Loan is subject to two financial covenants, including a minimum tangible net worth test, the calculation of which is the same as defined in the Program, and a minimum consolidated cash balance requirement. As of December 29, 2001, we concluded that we would not be in compliance with our tangible net worth covenant under the Program and under the Singapore loan. We were, however, in compliance with the minimum cash balance requirements under the Program and the Singapore loan.

On February 15, 2002, we received a waiver and amendment from the lender for the Singapore loan relating to the tangible net worth covenant. On the same date, the Banks participating in the Program agreed to a first amendment through May 15, 2002 to the Program. In each case, the definition for calculating tangible net worth was amended to include an adjustment associated with the purchase price accounting for the acquisition of the Quantum HDD business. After giving effect to this first amendment, we were in compliance with the tangible net worth covenant.

On March 15, 2002, the first amendment was superceded by a second amendment reflecting the terms of the first amendment and extending the terms of the first amendment for the duration of the Program. At this time the Program was reduced from $300 million to $210 million due to the withdrawal of one participating bank. We, at our discretion, can seek additional banks to expand the facility back to $300 million. However, there is no assurance that a particular level of expansion can be achieved. We do not expect that the reduction in the size of the Program will have any adverse impact on our liquidity. In 2001, the Banks’ monthly purchases of interests in our receivables under the Program fluctuated between $45.2 million and $150.0 million and averaged $103.9 million. We expect that the Program will be similarly used in 2002.

On May 28, 2002, the banks participating in the Program approved a third amendment, which modified the tangible net worth covenant and the minimum unrestricted cash requirement. On June 20, 2002, our Singapore loan was amended to the same effect. After giving effect to the third amendment and the amendment of the Singapore loan, the Company was in compliance with all covenants.

If a Liquidation Event were to occur, the Banks would be entitled to all cash collections on our accounts receivables in the United States until its net investment had been recovered. We do not expect that such an event by itself would have a significant adverse impact on our liquidity, given the fact that we believe the Banks’ net investment would be satisfied shortly following such Liquidation Event, based on our historical collection rate of receivables. However, we would no longer have access to the Program following such Liquidation Event. We do not expect that the unavailability of the Program would have a material adverse effect on our liquidity.

We anticipate that we may be unable to satisfy the minimum tangible net worth covenants contained in each of the Singapore loan and the Program at the end of the third fiscal quarter of 2002. We are in the process of seeking amendments under each of the Program and our Singapore loan, which would allow us to remain in compliance with our agreements; however, there can be no assurance that the Banks and the Singapore lender will agree to any such amendments or alternatively provide a waiver for any covenant violation. In the event that a default occurs in a financial covenant under our Singapore loan, and we do not receive a waiver we may be required to repay the loan earlier than anticipated; however, we do not expect that such an earlier repayment of the Singapore loan would have a material adverse impact on our liquidity.

In 1994, Hyundai Electronics Industries “HEI” and certain of its affiliates had purchased 40% of our outstanding common stock for $150.0 million in cash. In early 1996, Hynix, formerly Hyundai Electronics America, or HEA, acquired all of the remaining shares of our common stock in a tender offer and merger for $215.0 million in cash and also acquired all of our common stock held by HEI and its affiliates. We operated as a wholly-owned subsidiary of Hynix until completion of our initial public offering on July 31, 1998, which reduced the ownership interest of Hynix to below 50%. In April 2001 as a result of our acquisition of the Quantum HDD business, Hynix’s ownership in Maxtor was reduced to approximately 17% of the outstanding common stock. As described below, Hynix sold Maxtor shares to the public and to us in October 2001, reducing Hynix’s ownership to 5.17% at December 29, 2001 and distributed the balance of Maxtor shares to the beneficiaries of the DECS Trust in February 2002, and accordingly is no longer an investor in Maxtor.

On September 2, 2001, we completed our acquisition of MMC which had previously been a wholly-owned subsidiary of Hynix. MMC, based in San Jose, California, designs, develops and manufactures media for hard disk drives. Prior to the acquisition, sales to Maxtor constituted 95% of MMC’s annual revenues. The primary business reason for our acquisition of MMC was to provide us with a reliable source of supply of media for hard disk drives. A fairness opinion was delivered to Maxtor’s Board of Directors by a nationally recognized investment banking firm in connection with the MMC acquisition. The fairness opinion concluded that the consideration to be paid by Maxtor for MMC was fair to Maxtor, from a financial point of view. The acquisition of MMC was approved by the Maxtor Board’s Affiliated Transactions Committee and was determined by the Committee to be fair to and in the best interests of Maxtor and its stockholders. The Affiliated Transactions Committee was comprised entirely of directors with no relationship with Hynix and its affiliates. The acquisition was accounted for as a purchase with a total cost of $17.9 million, which consisted of cash consideration of $1 million, $16 million of loan forgiveness, and $0.9 million of direct transaction costs. In connection with the acquisition, we also assumed liabilities of $105.7 million. As part of these liabilities, we assumed a note for $7.3 million owing to Hynix, which bore no interest through March 31, 2002; thereafter, unpaid principal amounts bore interest at 9% per annum (the “Maxtor Note”). On January 5, 2001, Hynix issued a promissory note to Maxtor for $2 million in principal amount, representing Hynix’s share of a settlement relating to litigation between Maxtor, Hynix and Stormedia. This note bore interest at 9% per annum, with the payment of principal and interest due on December 31, 2001 (the “Hynix Note”). Hynix and Maxtor agreed that the principal and accrued interest on the Hynix Note as of December 28, 2001 was offset against the principal amount of the Maxtor Note, such that the Hynix Note was fully paid and the Maxtor Note had a principal amount of approximately $5.1 million as of December 29, 2001; the outstanding balance under the Maxtor Note was fully paid on April 5, 2002. As a result of the MMC acquisition, MMC’s results of operations are included in our financial statements from the date of acquisition.

In October 2001, Hynix sold approximately 23.3 million shares of Maxtor common stock in a registered public offering. At the same time as Hynix’s sale of Maxtor common stock to the public, we purchased an additional 5.0 million shares of its common stock from Hynix. Our purchase of our shares from Hynix was on the same terms as Hynix’s sale of shares to the public at $4 per share for an aggregate purchase price of $20.0 million. The repurchase of our shares was intended to improve our capital structure, increase shareholder returns, and increase the price of our stock. The repurchase of the shares from Hynix was approved by the Maxtor Board’s Affiliated Transaction Committee and determined to be in the best interest of Maxtor and its stockholders. As a result of Hynix’s sale of its Maxtor shares to the public and to Maxtor,

Hynix’s ownership in Maxtor was reduced to 5.17% of the outstanding common stock as of December 29, 2001. In February 2002, Hynix distributed all of its remaining shares of Maxtor common stock to the beneficiaries of the DECS trust and thus is no longer a stockholder of Maxtor.

In connection with the acquisition of MMC, we assumed equipment loans and capital leases. As of June 29, 2002, there was $47.6 million outstanding under these obligations, which have maturity dates ranging from December 2001 to October 2004 and interest rates averaging 9.9%. Hynix is continued as a guarantor on these leases. As a result of the MMC acquisition, MMC’s results of operations are included in our financial statements from the date of acquisition.

Our cost of revenue includes certain component parts Maxtor purchased from MMC. These purchases amounted to $34 million and $72 million for the three and six months ended June 30, 2001, respectively. In August 1998, Maxtor entered into an agreement with MMC with respect to the pricing of future purchases that provided for pricing discounts in return for a purchase volume commitment based on a percentage of our total media purchases through September 30, 2001. The pricing discounts generally ranged from 2% to 4% off of competitive prices. As described above, Maxtor completed its acquisition of MMC on September 2, 2001.

Our cost of revenue also includes certain DRAM chip purchases from Hynix Semiconductor, Inc., “HSI,” formerly HEI. Hynix is treated identically to its competitors in the process by which commodity electronics, principally DRAMs, are selected, qualified, and purchased; pricing is negotiated with selected suppliers on the basis of suppliers’ bids and market information. Our purchases from HSI totaled $26.5 million in fiscal year 1999, $41.6 million in fiscal year 2000 and $19.3 million in fiscal year 2001.

Pursuant to a sublicense agreement with HEI, we are obligated to pay a portion of an IBM license royalty fee otherwise due from HEI. Such payments are due in annual installments through 2007, and are based upon the license fee separately negotiated on an arms’ length basis between HEI and IBM. For the years ended January 1, 2000, December 30, 2000 and December 29, 2001, we recorded $1.9 million of expenses each year in connection with this obligation.

Hynix was an unconditional guarantor of one of our facilities leases in Milpitas, California. The aggregate rent under the lease was $3.24 million per annum in each of the years ended January 1, 2000, December 30, 2000 and December 29, 2001. The lease rate was established by arms’ length negotiations with the lessor based on applicable market rates. The lease expired on March 31, 2002 and was not extended.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-lived Assets.” SFAS 144 replaces SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The FASB issued SFAS 144 to establish a single accounting model, based on the framework established in SFAS 121, as SFAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30, “Reporting The Results of Operations-Reporting The Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions.” SFAS 144 also resolves significant implementation issues related to SFAS 121. Companies are required to adopt SFAS 144 for fiscal year beginning after December 15, 2001, but early adoption is permitted. The adoption of SFAS 144 did not have a significant impact on Maxtor’s financial statements.

On December 30, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 requires goodwill to be tested for impairment under certain circumstances, written down when impaired, and requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite.

Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally one to seven years. The Company expects amortization expense on purchased intangible assets to be $41.5 million for the remainder of fiscal 2002, $82.3 million in fiscal 2003, $37.1 million in fiscal 2004, $22.0 million in fiscal 2005, and $5.9 million in fiscal 2006, at which time purchased intangible assets will be fully amortized.

Certain Costs Incurred in a Restructuring).” This Statement requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently assessing the impact of SFAS 146 on its financial statements.

We have a history of significant losses and may not achieve profitability. In the last five fiscal years, we were profitable in only fiscal years 1998 and 2000 and Quantum HDD was profitable only in fiscal year 1997. In the three and six-month periods ended June 29, 2002, our net loss was $109.0 million, and $174.0 million, respectively, which included $21.3 million and $42.7 million, respectively, for the amortization of intangible assets and charges of $0.6 million and $5.5 million, respectively, for stock-based compensation related to the Quantum HDD acquisition.

The decline of average selling prices in the hard disk drive industry could cause our operating results to suffer and make it difficult for us to achieve profitability.

It is very difficult to achieve and maintain profitability and revenue growth in the hard disk drive industry because the average selling price of a hard disk drive rapidly declines over its commercial life as a result of technological enhancement, productivity improvement and increase in the industry supply. End-user demand for the computer systems that contain our hard disk drives has historically been subject to rapid and unpredictable fluctuations. In addition, intense price competition among personal computer manufacturers and Intel-based server manufacturers may cause the price of hard disk drives to decline. As a result, the hard disk drive market tends to experience periods of excess capacity and intense price competition. Competitors’ attempts to liquidate excess inventories, restructure, or gain market share also tend to cause average selling prices to decline. This excess capacity and intense price competition has caused us in the past several quarters and will likely continue to cause us in future quarters, to lower prices, which has the effect of reducing margins, causing operating results to suffer and making it difficult for us to achieve or maintain profitability. If we are unable to lower the cost of our hard disk drives to be consistent with the decline of average selling prices, we will not be able to compete effectively and our operating results would suffer.

Intense competition in the hard disk drive segment could reduce the demand for our products or the prices of our products, which could adversely affect our operating results.

The desktop computer market segment and the overall hard disk drive market are intensely competitive even during periods when demand is stable. We compete primarily with manufacturers of 3.5 inch hard disk drives, including Fujitsu, Hitachi, IBM, Samsung, Seagate Technology and Western Digital. Hitachi and IBM have recently announced a plan to merge their hard disk drive businesses into a single joint venture. Many of our competitors historically have had a number of significant advantages, including larger market shares, a broader array of product lines, preferred vendor status with customers, extensive name recognition and marketing power, and significantly greater financial, technical and manufacturing resources. Some of our competitors make many of their own components, which may provide them with benefits including lower costs. Our competitors may also:


	•	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;

	•	bundle their products with other products to increase demand for their products; or

	•	develop new technology which would significantly reduce the cost of their products.

Increasing competition could reduce the demand for our products and/or the prices of our products by introducing technologically better and cheaper products, which could reduce our revenues. In addition, new competitors could emerge and rapidly capture market share. If we fail to compete successfully against current or future competitors, our business, financial condition and operating results will suffer.

Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate in the future.

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 average selling price of our products;

	•	fluctuations in the demand for our products as a result of the seasonal nature of the desktop computer industry and the markets for our customers’ products, as well as the overall economic environment;

	•	our ability to successfully qualify our products with our customers;

	•	the availability, and efficient use, of manufacturing capacity;

	•	our customers canceling, rescheduling or deferring orders; and

	•	our ability to purchase components at competitive prices.

Many of our 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 operating results. Because of these and other factors, 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. Due to current economic conditions and their impact on IT spending, particularly personal computer sales, our ability to predict demand for our products and our financial results for current and future periods may be severely diminished. This may adversely affect both our ability to adjust production volumes and expenses and our ability to provide the financial markets with forward-looking information.

If we fail to qualify as a supplier to computer manufacturers or their subcontractors for a future generation of hard disk drives, then these manufacturers or subcontractors may not purchase any units of an entire product line, which will have a significant impact on our sales.

Most of our products are sold to desktop computer and Intel-based server manufacturers or to their subcontractors. These manufacturers select or qualify their hard disk drive suppliers, either directly or through their subcontractors, based on quality, storage capacity, performance and price. Manufacturers typically seek to qualify two or more suppliers for each hard disk drive product generation. To qualify consistently, and thus succeed in the desktop and Intel-based server hard disk drive industry, we must consistently be among the first-to-market introduction and first-to-volume production at leading storage capacity per disk, offering competitive prices and high quality. Once a manufacturer or subcontractor has chosen its hard disk drive suppliers for a given desktop computer or Intel-based server product, it often will purchase hard disk drives from those suppliers for the commercial lifetime of that product line. If we miss a qualification opportunity, we may not have another opportunity to do business with that manufacturer or subcontractor until it introduces its 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 and Intel-based servers. If we do not reach the market or deliver volume production in a timely manner, we may lose opportunities to qualify our products and may need to deliver lower margin, older products or products with higher capacity then required in order to meet our customers’ demands. In such case, our business, financial condition and operating results would be adversely affected.

Because we are substantially dependent on desktop computer drive sales, a decrease in the demand for desktop computers could reduce demand for our products.

Our revenue growth and profitability depend significantly on the overall demand for desktop computers and related products and services. In recent quarters, demand for desktop computers has been adversely affected by unfavorable economic conditions. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global economic slowdown, we may experience a further decrease in demand for desktop computers. Because we sell a significant portion of our products to the desktop

segment of the personal computer industry, we will be affected more by changes in market conditions for desktop computers than a company with a broader range of products. Any decrease in the demand for desktop computers could reduce the demand for our products, harming our business.

The loss of one or more significant customers or a decrease in their orders of products would cause our revenues to decline.

We sell most of our products to a limited number of customers. For the fiscal year ended December 29, 2001, one customer, Dell Computer Corporation, accounted for approximately 11.3% of our total revenue, and our top five customers accounted for approximately 33.8% of our revenue. We expect that a relatively small number of customers will continue to account for a significant portion of our revenue, and the proportion of our revenue from these 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, the customer generally will not be obligated to purchase any minimum volume of products from us and generally will be 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 operating results could suffer.

If we fail to develop and maintain relationships with our key distributors, if we experience problems associated with distribution channels, or if our key distributors favor our competitors’ products over ours, our operating results could suffer.

We sell a significant amount of our hard disk drive products through a limited number of key distributors. If we fail to develop, cultivate and maintain relationships with our key distributors, or if these distributors are not successful in their sales efforts, sales of our products may decrease and our operating results could suffer. As our sales through distribution channels continue to increase, we may experience problems typically associated with distribution channels such as unstable pricing, increased return rates and other logistical difficulties. Our distributors also sell products manufactured by our competitors. If our distributors favor our competitors’ products over our products for any reason, they may fail to market our products effectively or continue to devote the resources necessary to provide us with effective sales and, as a result, our operating results could suffer.

If we do not expand into new hard drive market segments, or continue to maintain our presence in the hard drive market, our revenues will suffer.

To remain a significant supplier of hard disk drives to major manufacturers of personal computers and Intel-based servers, we will need to offer a broad range of hard disk drive products to our customers. Although almost all of our current products are designed for the desktop computer and the Intel-based server markets, demand in these segments may shift to products we do not offer or volume demand may shift to other segments. Such segments may include laptop computers or handheld consumer products, which none of our products currently serves. Accordingly, we will need to develop and manufacture new products that address additional hard disk drive market segments to remain competitive in the hard disk drive industry. We cannot assure you that we will successfully or timely develop or market any new hard disk drives in response to technological changes or evolving industry standards or avoid technical or other difficulties that could delay or prevent the successful development, introduction or marketing of new hard disk drives. Any failure to successfully develop and introduce new products for our existing customers or to address additional market segments could result in loss of customer business or require us to deliver product not targeted effectively to customer requirements, which in turn could adversely affect our business, financial condition and operating results.

Our customers have adopted a subcontractor model that increases our credit risk and could result in an increase in our operating costs.

Our significant OEM customers have adopted a subcontractor model that requires us to contract directly with companies that provide manufacturing services for the personal computer manufacturers. This exposes us to increased credit risk because these subcontractors are generally less capitalized than the personal computer manufacturers themselves, and our agreements with our customers may not permit us to increase our prices to compensate for this increased credit risk. Any credit losses would increase our operating costs, which could cause our operating results to suffer.

If we fail to match production with product demand or to manage inventory, we may incur additional costs.

We base our inventory purchases and commitments on forecasts from our customers, who are not obligated to purchase the forecast amounts. If actual orders do not match our forecasts, or if any products become obsolete between order and delivery time, we may have excess or inadequate inventory of our products. In addition, our significant OEM customers have adopted build-to-order manufacturing models or just-in-time inventory management processes that require component suppliers to maintain inventory at or near the customer’s production facility. These policies, combined with continued compression of product life cycles, have complicated inventory management strategies that make it more difficult to match manufacturing plans with projected customer demand and cause us to carry inventory for more time and to incur additional costs to manage inventory which could cause our operating results to suffer. Excess inventory could materially adversely affect our operating results due to increased storage or obsolescence costs and cause our operating results to suffer.

We may fail to complete successfully the integration of the Quantum HDD business, and in that event our product development efforts and our operating results may suffer.

We acquired the Quantum HDD business in April 2001 and since then we have made substantial progress in merging the two companies. However, we have further work to do to complete the integration of the two operations, primarily related to migration to a common product roadmap. The risks of unsuccessful integration of the product development process include delays in time to market and time to volume production, which would in turn adversely impact our operating results.

We are reviewing our alternatives for our network attached storage business consistent with the need for contributions to profit, and any significant reduction in our commitment to this business segment may adversely impact our operating results.

We have made substantial investments in the network attached storage business. This emerging industry is continuing to evolve rapidly and certain segments are becoming commoditized. We are exploring alternatives for this business consistent with the need to provide contributions to profit. Any significant reduction in our commitment to this business segment will result in charges which may adversely impact our operating results.

Because we are dependent on a limited number of suppliers, component shortages could result in delays of product shipments and damage our business and operating results.

Both we and MKE depend on a limited number of qualified suppliers for components and subassemblies, including recording heads, media and integrated circuits. Currently, we purchase recording heads from three sources, digital signal processor/ controllers from two sources and spin/ servo integrated circuits from one source. Although our recent purchase of our primary supplier of media, MMC, has reduced our dependence on outside suppliers for this component, MMC cannot supply all of our media needs, and therefore we are still required to purchase media from a limited number of outside sources. As we have experienced in the past, some required parts may be periodically in short supply. As a result, we will have to allow for significant ordering lead times for some components. In addition, we may have to pay significant cancellation charges to

suppliers if we cancel orders for components because we reduce production due to market oversupply, reduced demand, transition to new products or technologies or for other reasons. We order the majority of our components on a purchase order basis and we have limited long-term volume purchase agreements with only some of our existing suppliers. If we cannot obtain sufficient quantities of high-quality parts when needed, product shipments would be delayed and our business, financial condition and operating results could suffer.

Because we purchase a significant portion of our parts from third party suppliers, we are subject to the risk that we may be unable to acquire quality components in a timely manner, or effectively integrate parts from different suppliers, and these problems would cause our business to suffer.

Unlike some of our competitors, we do not manufacture any of the parts used in our products, other than media as a result of our acquisition of MMC. Instead, our products incorporate parts designed by and purchased from third party suppliers. 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 the integration of parts, we must:


	•	acquire technologically advanced parts;

	•	effectively integrate different parts from a variety of suppliers;

	•	manage difficult scheduling and delivery problems; and

	•	develop and maintain relationships with key suppliers.

If we are unable to successfully manage the integration of parts obtained from third party suppliers, our business, financial condition and operating results could suffer.

Our consolidation of manufacturing of our desktop drive products may adversely impact our operating results. Further, if we are unable to acquire needed additional manufacturing capacity, or MKE does not meet our manufacturing requirements, or if a disaster occurs at one of our or MKE’s plants, our growth will be adversely impacted and our business, financial condition and operating results could suffer.

Our Maxtor-owned facility in Singapore and our relationship with MKE for the manufacture of hard disk drives are currently our only sources of production for our hard disk drive products. We intend to consolidate manufacturing of our desktop drive products to our Singapore facility by the end of third quarter of 2002. Unexpected difficulties in such consolidation may significantly harm our business, financial condition and operating results. Following this consolidation, MKE will continue to manufacture a substantial portion of our enterprise hard disk drives pursuant to a master agreement and a purchase agreement. The purchase agreement has been extended pursuant to an agreement in principle through November 2, 2002. If the purchase agreement is not extended further and if we are unable to reach agreement with MKE on mutually acceptable terms for the manufacture of enterprise hard disk drives, we will need to arrange for alternative manufacturing capacity. If we fail to make such arrangements in a timely manner, in adequate volumes or on acceptable terms, our revenue might be lower than projected and our business, financial condition and operating results would suffer. We will need to acquire additional manufacturing capacity in the future. Our inability to add capacity to allow us to meet customers’ demands in a timely manner may limit our future growth and could harm our business, financial condition and operating results.

In addition, our entire volume manufacturing operations, and a portion of MKE’s, are based in Singapore. A flood, earthquake, political instability, act of terrorism or other disaster or condition in Singapore that adversely affects our or MKE’s facilities or ability to manufacture our hard disk drive products could significantly harm our business, financial condition and operating results.

We are subject to risks related to product defects, which could subject us to warranty claims in excess of our warranty provision or which are greater than anticipated due to the unenforceability of liability limitations.

Our products may contain defects. We generally warrant our products for three to five years and prior to the merger, Quantum HDD generally warranted its products for one to five years. We assumed Quantum HDD’s warranty obligations as a result of the merger. The standard warranties used by us and Quantum HDD contain limits on damages and exclusions of liability for consequential damages and for negligent or improper use of the products. We generally establish and, prior to the merger, Quantum HDD established, a warranty provision at the time of product shipment in an amount equal to estimated warranty expenses. We determined that there were issues with certain Quantum HDD products that we acquired in the merger, and which are no longer being manufactured. We have established a warranty provision for these products and have increased goodwill associated with the merger to reflect pre-acquisition contingencies related to these issues. We may incur additional operating expenses if these steps do not reflect the actual cost of resolving such issues; and if these expenses are significant, our business, financial condition and results of operations will suffer.

We have asserted claims against Quantum, and Quantum has asserted claims against us, for payment under agreements entered into in connection with our acquisition of the Quantum HDD business. In the event these claims are not resolved favorably in the aggregate, our business, financial condition and operating results could be harmed.

We have asserted multiple claims against Quantum, and Quantum has asserted multiple claims against us, for payment under agreements entered into in connection our acquisition of the Quantum HDD business, including a tax sharing and indemnity agreement, which provides for the allocation of certain liabilities related to taxes. We disagree with Quantum about the amounts owed by each party under the agreements and are in negotiations to resolve the claims. The parties have commenced dispute resolution procedures under the tax sharing and indemnity agreement. Although we believe that we will be successful in asserting or defending these claims in the aggregate, an unfavorable resolution of such claims in the aggregate could harm our business, financial condition and operating results.

If Quantum incurs non-insured tax as a result of its split-off of Quantum HDD, our financial condition and operating results could be negatively affected.

In connection with our acquisition of the Quantum HDD business, we agreed to indemnify Quantum for the amount of any tax payable by Quantum as a result of the separation of the Quantum HDD business from Quantum Corporation (referred to as a split-off) to the extent such tax is not covered by insurance, unless imposition of the tax is the result of Quantum’s actions, or acquisitions of Quantum stock, after the split-off. The amount of the tax not covered by insurance could be substantial. In addition, if it is determined that Quantum owes federal or state tax as a result of the split-off and the circumstances giving rise to the tax are covered by our indemnification obligations, we will be required to pay Quantum the amount of the tax at that time, whether or not reimbursement may be allowed under the insurance policy. Even if a claim is available, made and pending under the tax opinion insurance policy, there may be a substantial period after we pay Quantum for the tax before the outcome of the insurance claim is finally known, particularly if the claim is denied by the insurance company and the denial is disputed by us and/or Quantum. Moreover, the insurance company could prevail in a coverage dispute. In any of these circumstances, we would have to either use our existing cash resources or borrow money to cover our obligations to Quantum. In either case, our payment of the tax, whether covered by insurance or not, could harm our business, financial condition, operating results and cash flows.

Our ability to use our equity for financings or acquisitions and our attractiveness as an acquisition target could be limited until April 3, 2003 due to restrictions we must comply with to mitigate the risk of triggering a tax obligation to Quantum for which we are indemnitor.

Under the federal tax rules applicable to the treatment of our acquisition of the Quantum HDD business as a tax-free split-off, the following events occurring during the two-year period after the merger may cause the split-off to become taxable to Quantum under circumstances in which the tax opinion insurance policy will not cover the tax:


	•	we issue our equity securities to acquire other businesses or to raise financing;

	•	a 50% or greater interest in us is acquired by another party.

In addition, these restrictions could discourage potential acquisition proposals and could delay or prevent a change of control of the company, including offers at a price above the then-current market price for our common stock.

We may need additional capital in the future which may not be available on favorable terms or at all and our ability until April 3, 2003 to issue equity securities has been severely limited by our acquisition of Quantum HDD.

Our business is capital intensive and we may need more capital in the future. Our future capital requirements will depend on many factors, including:


	•	the rate of our sales growth;

	•	the level of our profits or losses;

	•	the timing and extent of our spending to expand manufacturing capacity, support facilities upgrades and product development efforts;

	•	the timing and size of business or technology acquisitions; and

	•	the timing of introductions of new products and enhancements to our existing products.

To mitigate the risk of triggering a tax obligation of Quantum for which we have indemnification obligations as a result of our acquisition of the Quantum HDD business, we are restricted in our ability to issue additional equity securities to raise capital for two years after the split-off and merger, or until April 3, 2003. In the event we decide to raise capital by issuing equity securities, such financing will decrease the percentage equity ownership of our stockholders and may, depending on the price at which the equity is sold, result in significant economic dilution to them. Our board of directors is authorized under our charter documents to issue preferred stock with rights, preferences or privileges senior to those of the common stock without stockholder approval.

We may be unable to satisfy a financial covenant in our asset securitization program or under our Singapore loan at the end of our third fiscal quarter and if we are unable to obtain a waiver for any such default, we will not have access to the asset securitization program and may be required to pay down our Singapore loan earlier than anticipated.

On May 28, 2002, the banks participating in the Program approved a third amendment, which modified the tangible net worth covenant and the minimum unrestricted cash requirement. On June 20, 2002, our Singapore loan was amended to the same effect. After giving effect to the third amendment and the amendment of the Singapore loan, the Company was in compliance with all covenants.

Protection of our intellectual property is limited and it is exposed to third party claims of infringement.

Any failure to adequately protect and enforce our intellectual property rights could harm our business. Our protection of our intellectual property is limited. For example, we have patent protection on only some of our technologies. We may not receive patents for our pending or future patent applications, and any patents that we own or that are issued to us may be invalidated, circumvented or challenged. In the case of products offered in rapidly emerging markets, such as Network Storage and consumer electronics, our competitors may file patents more rapidly or in greater numbers resulting in the issuance of patents that may result in unexpected infringement assertions against us. Moreover, the rights granted under any such patents may not provide us with any competitive advantages. Finally, our competitors may develop or otherwise acquire

equivalent or superior technology. We also rely on trade secret, copyright and trademark laws as well as the terms of our contracts to protect our proprietary rights. We may have to litigate to enforce patents issued or licensed to us, to protect trade secrets or know-how owned by us or to determine the enforceability, scope and validity of our proprietary rights and the proprietary rights of others. Enforcing or defending our proprietary rights could be expensive and might not bring us timely and effective relief. We may have to obtain licenses of other parties’ intellectual property and pay royalties. If we are unable to obtain such licenses, we may have to stop production of our products or alter our products. In addition, the laws of certain countries in which we sell and manufacture our products, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Our remedies in these countries may be inadequate to protect our proprietary rights. Any failure to enforce and protect our intellectual property rights could harm our business, financial condition and operating results.

We are subject to existing infringement claims which are costly to defend and may harm our business.

Prior to our acquisition of the Quantum HDD business, we, on the one hand, and Quantum and MKE, on the other hand, were sued by Papst Licensing, GmbH, a German corporation, for infringement of a number of patents that relate to hard disk drives. Papst’s complaint against Quantum and MKE was filed on July 30, 1998, and Papst’s complaint against Maxtor was filed on March 18, 1999. Both lawsuits, filed in the United States District Court for the Northern District of California, were transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Eastern District of Louisiana for coordinated pre-trial proceedings with several other pending litigations involving the Papst patents. The matters will be transferred back to the District Court for the Northern District of California for trial. Papst’s infringement allegations are based on spindle motors that Maxtor and Quantum purchased from third party motor vendors, including MKE, and the use of such spindle motors in hard disk drives. Maxtor purchased the overwhelming majority of the spindle motors used in our hard disk drives from vendors that were licensed under the Papst patents. Quantum purchased many spindle motors used in its hard disk drives from vendors that were not licensed under the Papst patents, including MKE. As a result of the merger with Quantum HDD, we assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. Papst and MKE recently entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of the Papst patents to MKE which might provide Quantum, and thus us, with additional defenses to Papst’s patent infringement claims.

The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, we cannot assure you we will be able to successfully defend ourselves against this or any other Papst lawsuit. The Papst complaint asserts claims to an unspecified dollar amount of damages. A favorable outcome for Papst in this lawsuit could result in the issuance of an injunction against us and our products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, we also could be required to pay treble damages and Papst’s attorney’s fees. Accordingly, a litigation outcome favorable to Papst could harm our business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

We conduct most of our manufacturing and testing operations and purchase a substantial portion of our key parts outside the United States. In particular, manufacturing operations for our products are concentrated in Singapore, where both our and MKE’s principal manufacturing operations are located. Such concentration of operations in Singapore will likely magnify the effects on us of any disruptions or disasters relating to Singapore. In addition, we also sell a significant portion of our products to foreign distributors and retailers. As


	•	difficulties with staffing and managing international operations;

	•	transportation and supply chain disruptions as a result of terrorist activity;

	•	economic slowdown and/or downturn in the foreign markets;

	•	international currency fluctuations;

	•	political and economic uncertainty caused by terrorism or acts of war or hostility;

	•	legislative and regulatory responses to terrorist activity such as increased restrictions on cross-border movement of products and technology;

	•	general strikes or other disruptions in working conditions;

	•	labor shortages;

	•	political instability;

	•	trade restrictions;

	•	changes in tariffs;

	•	generally longer periods to collect receivables;

	•	unexpected legislative or regulatory requirements;

	•	reduced protection for intellectual property rights in some countries;

	•	significant unexpected duties or taxes; and

	•	difficulty in obtaining export licenses and other trade barriers.

The specific economic conditions in each country 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 result in higher product prices and/or declining margins and increased manufacturing costs. 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 operating results could suffer.

Our success depends upon the continued contributions of key employees, many of whom would be extremely difficult to replace. Like many other technology companies, we have implemented workforce reductions that have in some cases resulted in the termination of key employees who have substantial knowledge of our business. These and any future workforce reductions may also adversely affect the morale of, and our ability to retain, employees who have not been terminated, which may result in the further loss of key employees. We do not have key person life insurance on any of our personnel. Worldwide competition for skilled employees in the hard disk drive industry is extremely intense. If we are unable to retain existing employees or to hire and integrate new employees, our business, financial condition and operating results could suffer. In addition, companies in the hard disk drive industry whose employees accept positions with competitors often claim that the competitors have engaged in unfair hiring practices. We may be the subject of such claims in the future as we seek to hire qualified personnel and we could incur substantial costs defending ourselves against those claims.

We could be subject to environmental liabilities which could increase our expenses and harm our business, financial condition and results of operations.

Because of the chemicals we use in our manufacturing and research operations, we are subject to a wide range of environmental protection regulations in the United States and Singapore. While we do not believe our operations to date have been harmed as a result of such laws, future regulations may increase our expenses and harm our business, financial condition and results of operations. Even if we are in compliance in all material respects with all present environmental regulations, in the United States environment regulations often require parties to fund remedial action regardless of fault. As a consequence, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. Moreover, we may be subject to liability in connection with our acquisition of the Quantum HDD and MMC businesses to the extent that contamination requiring remediation at our expense is present on properties currently or formerly occupied by those businesses, or those businesses sent wastes to sites at which remediation is required. If we have to make significant capital expenditures or pay significant expense in connection with future remedial actions or to continue to comply with applicable environmental laws, our business, financial condition and operating results could suffer.

The market price of our common stock fluctuated substantially in the past and is likely to fluctuate in the future as a result of a number of factors, including the release of new products by us or our competitors, the loss or gain of significant customers or changes in stock market analysts’ estimates.

The market price of our common stock and the number of shares traded each day have varied greatly. Such fluctuations may continue due to numerous factors, including:


	•	quarterly fluctuations in operating results;

	•	announcements of new products by us or our competitors such as products that address additional hard disk drive and NAS products segments;

	•	gains or losses of significant customers such as Dell or Compaq, which was later acquired by Hewlett Packard;

	•	changes in stock market analysts’ estimates;

	•	the presence of short-selling of our common stock;

	•	sales of a high volume of shares of our common stock by our large stockholders;

	•	events affecting other companies that the market deems comparable to us;

	•	general conditions in the semiconductor and electronic systems industries; and

	•	general economic conditions in the United States and abroad.

Anti-takeover provisions in our certificate of incorporation could discourage potential acquisition proposals or delay or prevent a change of control.

We have a number of protective provisions in place designed to provide our board of directors with time to consider whether a hostile takeover is in our best interests and that of our stockholders. For example, in connection with our merger with Quantum HDD, we amended our certificate of incorporation to eliminate temporarily the requirement that our three classes of directors be reasonably equal in number. As a result of this amendment, a person could not take control of the board until the third annual meeting after the closing of the merger, since a majority of our directors will not stand for election until that third annual meeting. This and other provisions could discourage potential acquisition proposals and could delay or prevent a change in control of the company and also could diminish the opportunities for a holder of our common stock to participate in tender offers, including offers at a price above the then-current market price for our common stock. These provisions also may inhibit fluctuations in our stock price that could result from takeover attempts.

We enter into foreign exchange forward contracts to manage foreign currency exchange risk associated with our operations primarily in Singapore and Switzerland. The foreign exchange forward contracts we enter into generally have original maturities ranging from one to three months. We do not enter into foreign exchange forward contracts for trading purposes. We do not expect gains or losses on these contracts to have a material impact on our financial results.

We maintain an investment portfolio of various holdings, types and maturities. These marketable securities are generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. Part of this portfolio includes investments in bank issues, corporate bonds and commercial papers.

The following table presents the hypothetical changes in fair values in the financial instruments held June 29, 2002 that are sensitive to changes in interest rates. These instruments are not leveraged and are held for purposes other than trading. The hypothetical changes assume immediate shifts in the U.S. Treasury yield curve of plus or minus 50 basis points (“bps”), 100 bps, and 150 bps.

We are exposed to certain equity price risks on our investments in common stock. These equity securities are held for purposes other than trading. The following table presents the hypothetical changes in fair values of the public equity investments that are sensitive to changes in the stock market. The modeling technique used measures the hypothetical change in fair value arising from selected hypothetical changes in the stock price. Stock price fluctuations of plus or minus 15 percent, plus or minus 25 percent, and plus or minus 50 percent were selected based on the probability of their occurrence.

Prior to our acquisition of the Quantum HDD business, we, on the one hand, and Quantum and MKE, on the other hand, were sued by Papst Licensing, GmbH, a German corporation, for infringement of a number of patents that relate to hard disk drives. Papst’s complaint against Quantum and MKE was filed on July 30, 1998, and Papst’s complaint against Maxtor was filed on March 18, 1999. Both lawsuits, filed in the United States District Court for the Northern District of California, were transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Eastern District of Louisiana for coordinated pre-trial proceedings with other pending litigations involving the Papst patents (the “MDL Proceeding”). The matters will be transferred back to the District Court for the Northern District of California for trial. Papst’s infringement allegations are based on spindle motors that Maxtor and Quantum purchased from third party motor vendors, including MKE, and the use of such spindle motors in hard disk drives. Maxtor purchased the overwhelming majority of the spindle motors used in our hard disk drives from vendors that were licensed under the Papst patents. Quantum purchased many spindle motors used in its hard disk drives from vendors that were not licensed under the Papst patents, including MKE. As a result of the merger with Quantum HDD, we assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. We filed a motion to substitute the Company for Quantum in this litigation. The motion was denied by the Court presiding over the MDL Proceeding, without prejudice to being filed again in the future.

Papst and MKE recently entered into an agreement to settle Papst’s pending patent infringement claims against MKE. That agreement includes a license of certain Papst patents to MKE which might provide Quantum, and thus us, with additional defenses to Papst’s patent infringement claims.

The results of any litigation are inherently uncertain and Papst may assert other infringement claims relating to current patents, pending patent applications, and/or future patent applications or issued patents. Additionally, we cannot assure you we will be able to successfully defend ourselves against this or any other Papst lawsuit. The Papst complaints assert claims to an unspecified dollar amount of damages. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against us and our products and/or the payment of monetary damages equal to a reasonable royalty. In the case of a finding of a willful infringement, we also could be required to pay treble damages and Papst’s attorney’s fees. Accordingly, a litigation outcome favorable to Papst could harm our business, financial condition and operating results. Management believes that it has valid defenses to the claims of Papst and is defending this matter vigorously.

In addition to the Papst lawsuit, on June 13, 2002, we filed suit against Koninklijke Philips Electronics N.V. and several other Philips-related companies in the Superior Court of California, County of Santa Clara. On June 26, 2002, we filed a First Amended Complaint. The lawsuit alleges that an integrated circuit chip supplied by Philips was defective and caused significant levels of failure of the Quantum HDD Corona Plus, Eagle, and Eagle Plus products, each of which is a product line we acquired as part of our acquisition of the Quantum HDD business. By agreement, the Philips entities will file responsive pleadings on or before September 9, 2002. In the lawsuit, we are claiming damages of at least $77 million, however, the results of litigation are inherently uncertain and we cannot assure you that we will achieve a favorable outcome.

At our annual meeting of stockholders held on May 10, 2001, the stockholders elected the nominee for Class I director to our Board of Directors. The votes were as follows:

Mr. Christ’s term will expire at the 2005 annual meeting. The following directors’ terms of office continue until the annual meeting indicated: Dr. C.S. Park and Michael R. Cannon (Class III term expires at the 2004 annual meeting); and Thomas Lyman Chun, Charles Hill and Roger W. Johnson (Class II term expires at the 2003 annual meeting).

The following matters were also submitted to and approved by a vote of the stockholders with the results of the voting being as shown:

Proposal to approve the amendment of our 1998 Employee Stock Purchase Plan to increase the number of shares of common stock authorized for issuance thereunder from 8,000,000 to 17,000,000:

Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending December 28, 2002:

Effective July 5, 2002, the employment of Dr. Victor B. Jipson, formerly Executive Vice President and General Manager of the Desktop Products Group, was terminated.

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.


	By	/s/ PAUL J. TUFANO



	Paul J. Tufano
	Executive Vice President,
	Chief Financial Officer, and
	Chief Operating Officer


(Mark one)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period ended June 29, 2002

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		77-0123732
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 McCarthy Boulevard, Milpitas, CA (Address of principal executive offices)		95035 (Zip Code)


INDEX
PART I. FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 99.1
EXHIBIT 99.2


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets — June 29, 2002, and December 29, 2001		2
	Condensed Consolidated Statements of Operations — Three and six months ended June 29, 2002, and June 30, 2001		3
	Condensed Consolidated Statements of Cash Flows — Six months ended June 29, 2002, and June 30, 2001		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		47
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		48
Item 4.	Submission of Matters to a Vote of Security Holders		49
Item 5.	Other Information		49
Item 6.	Exhibits and Reports on Form 8-K		49
Signature Page			50


			June 29,			December 29,
			2002			2001

ASSETS
Current assets:
	Cash and cash equivalents		$	292,252		$	379,927
	Restricted cash			98,647			98,629
	Marketable securities			98,994			167,217
	Accounts receivable, net of allowance of doubtful accounts of $25,421 at June 29, 2002 and $21,638 at December 29, 2001			343,942			379,918
	Inventories			234,315			185,556
	Prepaid expenses and other			39,958			45,606

		Total current assets		1,108,108			1,256,853
Property, plant and equipment, net				382,791			366,786
Goodwill				845,972			814,863
Other intangible assets, net				188,789			262,552
Other assets				11,056			14,410

		Total assets	$	2,536,716		$	2,715,464

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings, including current portion of long-term debt		$	39,872		$	44,160
	Accounts payable			685,626			593,263
	Accrued and other liabilities			460,129			532,358

		Total current liabilities		1,185,627			1,169,781
Deferred taxes				196,452			196,455
Long-term debt, net of current portion				217,443			244,458
Other liabilities				196,525			204,587

		Total liabilities		1,796,047			1,815,281
Stockholders’ equity:
	Preferred stock, $0.01 par value, 95,000,000 shares authorized; no shares issued or outstanding			—			—
	Common stock, $0.01 par value, 525,000,000 shares authorized; 245,255,384 shares issued and 240,255,384 shares outstanding at June 29, 2002 and 241,977,795 shares issued and 236,977,795 shares outstanding at December 29, 2001			2,452			2,420
Additional paid-in capital				2,339,162			2,323,885
Deferred stock-based compensation				(2,391	)		(3,809	)
Accumulated deficit				(1,580,564	)		(1,406,524	)
Cumulative other comprehensive income				2,010			4,211
Treasury stock (5,000,000 shares) at cost				(20,000	)		(20,000	)

		Total stockholders’ equity		740,669			900,183

		Total liabilities and stockholders’ equity	$	2,536,716		$	2,715,464



			Three Months Ended						Six Months Ended

			June 29,			June 30,			June 29,			June 30,
			2002			2001			2002			2001

Net revenues			$	895,752		$	1,041,567		$	1,940,471		$	1,672,388
Cost of revenues				832,714			963,630			1,761,871			1,505,435

Gross profit				63,038			77,937			178,600			166,953
Operating expenses:
	Research and development			109,139			139,277			218,141			198,297
	Selling, general and administrative			38,810			107,873			84,907			135,339
	Amortization of goodwill and intangible assets(1)			21,330			61,919			42,660			64,406
	Purchased in-process research and development			—			94,740			—			94,740

		Total operating expenses		169,279			403,809			345,708			492,782

Loss from operations				(106,241	)		(325,872	)		(167,108	)		(325,829	)
Interest expense				(6,562	)		(5,533	)		(13,108	)		(8,471	)
Interest and other income				2,376			12,885			5,405			18,641
Other gain (loss)				1,577			(176	)		1,577			(1,462	)

Loss before income taxes				(108,850	)		(318,696	)		(173,234	)		(317,121	)
Provision for income taxes				152			1,072			806			1,308

Net loss			$	(109,002	)	$	(319,768	)	$	(174,040	)	$	(318,429	)

Net loss per share — basic			$	(0.46	)	$	(1.35	)	$	(0.73	)	$	(1.81	)
Net loss per share — diluted			$	(0.46	)	$	(1.35	)	$	(0.73	)	$	(1.81	)
Shares used in per share calculation
		— basic		238,803,423			236,680,543			237,892,949			175,772,877
		— diluted		238,803,423			236,680,543			237,892,949			175,772,877


Value of securities issued		$	1,133.5
Assumption of Quantum HDD options			107.1

			1,240.6
Transaction costs			28.8

	Total purchase price	$	1,269.4


Tangible assets:
	Cash and cash equivalents		$	315.3
	Restricted cash			93.9
	Accounts receivable			249.1
	Inventories			181.7
	Prepaid expenses and other current assets			120.9
	Property, plant and equipment			126.4
	Other noncurrent assets			21.1

		Total tangible assets			$	1,108.4

Intangible assets acquired:
	Core and other existing technology					286.1
	Assembled workforce					43.0
Deferred stock-based compensation						6.8
Goodwill						896.3
In-process research and development						94.7
Liabilities assumed:
	Accounts payable			230.0
	Accruals and other liabilities			364.3
	Deferred taxes			196.2
Long-term debt				132.4
Other long-term liabilities				142.0
Merger-related restructuring costs				101.0

		Total liabilities assumed				(1,165.9	)

		Total purchase price			$	1,269.4


				Severance
	Facility			and			Other
	Costs			Benefits			Costs			Total


	(In millions)
Provision at April 2, 2001	$	59.1		$	29.2		$	12.7		$	101.0
Cash payments		(0.9	)		(15.5	)		(12.7	)		(29.1	)

Balance at December 29, 2001		58.2			13.7			—			71.9
Cash payments		(2.7	)		(7.7	)		—			(10.4	)

Balance at March 30, 2002		55.5			6.0			—			61.5
Cash payments		(1.4	)		(4.8	)		—			(6.3	)

Balance at June 29, 2002	$	54.1		$	1.2		$	—		$	55.2


Cash paid		$	1.0
Forgiveness of loan consideration			16.0

			17.0
Transaction costs			0.9

	Total purchase price	$	17.9


Total tangible assets				$	97.7
Existing technology					4.4
Goodwill					21.1
In-process research and development					0.5
Liabilities assumed:
	Accruals and other liabilities		30.6
	Capital lease obligations and debt		75.1

		Total liabilities assumed			(105.7	)

		Total purchase price		$	17.9



		Years Ended

		January 1,			December 30,		December 29,
		2000			2000		2001

Net income (loss) — as reported		$	(50,148	)	$	31,802	$	(646,398	)
Adjustments:
	Amortization of goodwill		2,122			6,692		140,779
	Amortization of acquired workforce intangibles previously classified as purchased intangible assets		45			144		12,616

	Net adjustments		2,167			6,836		153,395

Net income (loss) — adjusted		$	(47,981	)	$	38,638	$	(493,003	)

Basic net income (loss) per share — as reported		$	(0.48	)	$	0.28	$	(3.12	)
Diluted net income (loss) per share — as reported		$	(0.48	)	$	0.27	$	(3.12	)
Basic net income (loss) per share — adjusted		$	(0.45	)	$	0.34	$	(2.38	)
Diluted net income (loss) per share — adjusted		$	(0.45	)	$	0.32	$	(2.38	)


					Pro Rata Portion
			Economic		of Quantum
	5.75%		Development		Corporation’s 7%				Equipment
	Subordinated		Board of		Subordinated				Loans and
	Debentures Due		Singapore Loan		Convertible Notes				Capital
	2012(1)		Due March 2004(2)		Due 2004(3)		Mortgages(4)		Leases(5)		Total

Fiscal Year Ending
2002(remaining six months)	$	—	$	3,253	$	—	$	675	$	14,450	$	18,378
2003		5,000		6,506		—		1,444		23,487		36,437
2004		5,000		3,253		95,833		1,583		9,623		115,292
2005		5,000		—		—		1,734		—		6,734
2006		5,000		—		—		30,847		—		35,847
Thereafter		44,627		—		—		—		—		44,627

Total	$	64,627	$	13,012	$	95,833	$	36,283	$	47,560	$	257,315


										Fair Value
										as of
										June 29,
										2002
	+150 bps			+100 bps			+50 bps			($000)		-50 bps			-100 bps			-150 bps

Financial Instruments		97,874			98,243			98,616			98,994		99,368			99,749			100,133
% Change		(1.13	)%		(0.76	)%		(0.38	)%				0.38	%		0.76	%		1.15	%


Nominee	For		Withheld Authority

Charles F. Christ		212,953,221		5,206,814


	*Basis of Presentation*


	*Use of Estimates*


	*Fiscal Calendar*


	*a. Quantum HDD*


10.1		Form of Second Amendment To Executive Retention Agreement between Registrant and Pantelis S. Alexopoulos, Michael D. Cordano, Phillip C. Duncan, Michael J. Wingert, David L. Beaver, Misha Rozenberg and Glenn H. Stevens each dated as of May 24, 2002.
10.2		Third Amendment to Amended and Restated Receivables Purchase Agreement, dated as of May 28, 2002 by and among Registrant, Maxtor Receivables Corporation, the Conduit Purchasers, the Committed Purchasers, the Agents and Fleet National Bank.
10.3		Bank Guarantee Facility of SGD23,000,000, Amendments to Covenants on Tangible Networth and Consolidated Cash Balance, dated as of June 20, 2002, between the Bank of Nova Scotia, Singapore Branch and Maxtor Peripherals (s) Pte Ltd.
10.4		Revolving Bank Guarantee Facility of SGD666,000, Amendments to Covenants on Tangible Networth and Consolidated Cash Balance, dated as of June 20, 2002, between the Bank of Nova Scotia, Singapore Branch and Maxtor Peripherals (s) Pte Ltd.
99.1		Certification of Michael R. Cannon, President and Chief Executive Officer of the Registrant pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification of Paul J. Tufano, Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Registrant pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Exhibit
Number		Description

	10.1	Form of Second Amendment To Executive Retention Agreement between Registrant and Pantelis S. Alexopoulos, Michael D. Cordano, Phillip C. Duncan, Michael J. Wingert, David L. Beaver, Misha Rozenberg and Glenn H. Stevens each dated as of May 24, 2002.
	10.2	Third Amendment to Amended and Restated Receivables Purchase Agreement, dated as of May 28, 2002 by and among Registrant, Maxtor Receivables Corporation, the Conduit Purchasers, the Committed Purchasers, the Agents and Fleet National Bank.
	10.3	Bank Guarantee Facility of SGD23,000,000, Amendments to Covenants on Tangible Networth and Consolidated Cash Balance, dated as of June 20, 2002, between the Bank of Nova Scotia, Singapore Branch and Maxtor Peripherals (s) Pte Ltd.
	10.4	Revolving Bank Guarantee Facility of SGD666,000, Amendments to Covenants on Tangible Networth and Consolidated Cash Balance, dated as of June 20, 2002, between the Bank of Nova Scotia, Singapore Branch and Maxtor Peripherals (s) Pte Ltd.
	99.1	Certification of Michael R. Cannon, President and Chief Executive Officer of the Registrant pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	99.2	Certification of Paul J. Tufano, Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Registrant pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.