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

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes þ No o

As of, August 1, 2003, 239,490,780 shares of the registrant’s Common Stock, $.01 par value, were issued and outstanding.

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 28, 2002 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.

Material differences may result in the amount and timing of the Company’s revenue for any period, if the Company’s management made different judgments or utilized different estimates.

The actual results with regard to warranty expenditures could have a material impact on Maxtor if the actual rate of unit failure or the cost to repair a unit varies significantly from what the Company has used in estimating its warranty expense accrual.

Given the volatility of the market for disk drives and for the Company’s products, the Company makes adjustments to the value of inventories based on estimates of potentially excess and obsolete inventories and negative margin products after considering forecasted demand and forecasted average selling prices. However, forecasts are always subject to revisions, cancellations, and rescheduling. Actual demand will inevitably differ from such anticipated demand and such differences may have a material impact on the financial statements.

The actual results with regard to the useful lives of property, plant and equipment may vary from their estimated useful lives, which could have a material impact on the Company’s results of operations.

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 28, 2003 comprised 13 weeks and 26 weeks, respectively, as did the three and six months ended June 29, 2002. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

On August 15, 2002, the Company announced its decision to shut down the manufacturing and sales of its MaxAttach^TM branded network attached storage products of the Company’s Network Systems Group (“NSG”). The discontinuance of the NSG operations represents the abandonment of a component of an entity as defined in paragraph 47 of Statement of Financial Accounting Standards No. 144, “Accounting for

the Impairment or Disposal of Long-Lived Assets.” Accordingly, the Company’s financial statements have been presented to reflect NSG as a discontinued operation for all periods presented. Its liabilities (no remaining assets) have been segregated from continuing operations in the accompanying consolidated balance sheets and its operating results have been segregated and reported as discontinued operations in the accompanying consolidated statements of operations.

The following is a summary of the liabilities of the NSG discontinued operations as of June 28, 2003 (in millions):

During the year ended December 28, 2002, the Company recorded a restructuring charge of $9.5 million associated with closure of one of its facilities located in California. The amount comprised $8.9 million of future non-cancelable lease payments, which are expected to be paid over several years based on the underlying lease agreement, and the write-off of $0.6 million in leasehold improvements. The restructuring accrual is included on the balance sheet within accrued and other liabilities with the balance of $8.1 million after cash payments of $0.4 and $0.8 million during the three and six months ended June 28, 2003, respectively.

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. The total purchase price of $1,269.4 million included consideration of 121.0 million shares of our common stock valued at an average of $9.40 per common share.

Under purchase accounting rules, the Company recorded $29.2 million for estimated severance pay associated with termination of approximately 700 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 28, 2003:

The balance remaining in the facilities exit accrual is expected to be paid over several years, based on the underlying lease agreements. The merger-related restructuring accrual is included on the balance sheet within Accrued and other liabilities and Other liabilities.

The Company’s restricted cash balance of $55.0 million at June 28, 2003 and $56.7 million at December 28, 2002, is associated with short-term letters of credit (“LOCs”), where the Company has chosen to provide cash security in order to lower the cost of the LOCs.

The Company records an accrual for estimated warranty costs when revenue is recognized. Warranty covers cost of repair of the hard drive and the warranty periods generally range from one to five years. The Company has comprehensive processes that it uses to estimate accruals for warranty exposure. The processes include specific detail on hard drives in the field by product type, estimated failure rates and costs to repair. Although the Company believes it has the continued ability to reasonably estimate warranty expenses, unforeseeable changes in factors used to estimate the accrual for warranty could occur. These unforeseeable changes could cause a material change in the Company’s warranty accrual estimate. Such a change would be recorded in the period in which the change was identified. Changes in the Company’s product warranty liability during the three and six months ended June 28, 2003 and June 29, 2002 were as follows (in thousands):

The Company accounts for non-cash stock-based employee compensation in accordance with APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees and Related Interpretations,” and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation” and Statement of Financial Accounting Standard No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation, Transition and Disclosures.” The Company adopted FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB 25” as of July 1, 2000. FIN 44 provides guidance on the application of APB 25 for non-cash stock-based compensation to employees. For fixed grants, under APB 25, compensation expense is based on the excess of the fair value of the Company’s stock over the exercise price, if any, on the date of the grant and is recorded on a straight-line basis over the vesting period of the options, which is generally four years. For variable grants, compensation expense is based on changes in the fair value of the Company’s stock and is recorded using the methodology set out in FASB Interpretation No. 28 (“FIN 28”), “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an Interpretation of APB 15 and APB 25.”

The Company accounts for non-cash stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity Investments that are Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

The following pro forma net income (loss) information for Maxtor’s stock options and employee stock purchase plan has been prepared following the provisions of SFAS No. 123 (in thousands, except per share data):

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):

As-if convertible shares and interest expense related to the 6.8% convertible senior notes due 2010 were excluded from the calculation, as the effect was anti-dilutive. As-if converted shares and interest expense related to the pro rata portion of Quantum Corporation’s 7% subordinated convertible notes due 2004 were excluded from the calculations, as the effect was anti-dilutive.

The following number of common stock options, restricted shares and as-if converted shares were excluded from the computation of diluted net loss per shares as the effect was anti-dilutive:

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. The Company has bonds to fulfill its sinking fund obligation until March 1, 2006.

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 September 2003. As of June 28, 2003, the balance was equivalent to $6.6 million. The Board charges interest at 1.0% above the prevailing Central Provident Fund lending rate, subject to a minimum of 3.5% per year (3.5% as of June 28, 2003). 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 agreement, the Company had been subject to two financial covenants, the maintenance of minimum unrestricted cash and a tangible net worth test. On January 29, 2003, the loan was amended to remove the tangible net worth covenant. As of June 28, 2003, the Company was in compliance with the covenant regarding maintenance of minimum restricted cash.

In connection with the Company’s acquisition of Quantum HDD, Maxtor agreed to indemnify Quantum for the Quantum HDD pro rata portion of Quantum’s outstanding $287.5 million 7.0% convertible subordinated notes due August 1, 2004, and 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 notes are convertible at the option of the holder at any time prior to maturity, unless previously redeemed into shares of Quantum common stock and Maxtor common stock. The Company’s pro rata share of the notes would be convertible to 4,716,676 shares of Maxtor common stock (or 16.405 shares per $1,000 note).

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. On August 6, 2003, Quantum announced that it has delivered a notice of redemption to the holders of such notes designating August 21, 2003 as the date for redemption of all of these notes. Assuming that the notes are not converted into Quantum and Maxtor stock prior to the redemption date, the Company intends to reimburse Quantum for $97.2 million which will satisfy the Company’s reimbursement obligation in full. Accordingly, the Company has reclassified $95.8 million on its balance sheet at June 28, 2003 as short-term debt.

In connection with the acquisition of Quantum HDD, 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 28, 2003 was $34.9 million.

In April 2003, the Company secured credit lines with the Bank of China for up to $133 million to be used for the construction and working capital requirements of the manufacturing facility to be established in Suzhou, China. These lines of credit are U.S.-dollar-denominated and are drawable until April 2007. Borrowings which, under these lines of credits will be collateralized by the facilities to be established in Suzhou, China, bear interest at LIBOR plus 50 basis points (subject to adjustments to 60 basis points) will be repayable in eight semi-annual installments commencing October 2007, except for $30 million repayable in April 2013. As of June 28, 2003, the outstanding balance was zero.

On May 7, 2003, the Company sold $230 million in aggregate principal amount of 6.8% convertible senior notes due 2010 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes are unsecured and effectively subordinated to all existing and future secured indebtedness. The notes are convertible into the Company’s common stock at a conversion rate of 81.5494 shares per $1,000 principal amount of the notes, or an aggregate of 18,756,362 shares, subject to adjustment in certain circumstances (equal to an initial conversion price of $12.2625 per share). The Company has the right to settle its obligation with cash or common stock. The initial conversion price represents a 125% premium over the closing price of the Company’s common stock on May 1, 2003, which was $5.45 per share. Prior to May 5, 2008, the Notes will not be redeemable at the Company’s option. Beginning May 5, 2008, if the closing price of the Company’s common stock for 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of mailing of the redemption notice exceeds 130% of the conversion price in effect on such trading day, the Company may redeem the Notes in whole or in part, in cash, at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus any accrued and unpaid interest and accrued and unpaid liquidated damages, if any, to, but excluding, the redemption date. If, at any time, substantially all of the Company’s common stock is exchanged or acquired for consideration that does not consist entirely of common stock that is listed on United States national securities exchange or approved for quotation on the Nasdaq National Market or similar system, the holders of the notes have the right to require the Company to repurchase all or any portion of the notes at their face value plus accrued interest.

On May 9, 2003, the Company entered into a two-year receivable-backed borrowing arrangement for up to $100 million with certain financial institutions. Under this arrangement the Company uses a special purpose subsidiary to purchase U.S. and Canadian accounts receivable and can borrow up to $100 million collateralized by the U.S. and Canadian accounts receivable. The special purpose subsidiary is consolidated for financial

reporting purposes. The transactions under the arrangement are accounted for as short-term borrowings and remain on the Company’s consolidated balance sheet. As of June 28, 2003, the Company had borrowed $50.0 million under the arrangement, which had been reported as short-term borrowings in the Company’s consolidated financial statements. The average interest rate of the loans outstanding under this arrangement is 6.09%. As of June 28, 2003, $205.0 million of US and Canadian receivables were pledged under the Company’s receivable-backed borrowing arrangement and remain on the Company’s consolidated balance sheet. The arrangement requires the Company to comply with operational and financial covenants, including a liquidity covenant, and initially set forth an operating cash flow to long-term debt test. The Company entered into an amendment to replace the operating cash flow to long-term debt test with a test of operating income (loss) before depreciation and amortization to long-term debt. The Company is required under the arrangement to obtain a shadow rating for the arrangement from a credit rating agency, and in furtherance of this obligation, agreed to additional amendments to meet certain technical requirements of the rating agency and will now seek the required rating. The Company does not believe that any of these modifications will have a material adverse impact on its ability to access funds under this arrangement.

As of June 28, 2003, the Company had equipment loans and capital leases totaling $37.5 million. These obligations include certain capital equipment loans and leases assumed in connection with the September 2001 acquisition of MMC Technology, Inc., which as of June 28, 2003 amounted to $25.1 million, having maturity dates through October 2004 and interest rates averaging 9.7%.

Cumulative other comprehensive loss on the consolidated balance sheets consists of unrealized loss on investments. Total comprehensive income (loss) for the three and six months ended June 28, 2003 and June 29, 2002, respectively, 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.

Subsequent to the decision to shut down its NSG operations, the Company determined that it operates in one reportable segment.

Sales of continuing operations to original equipment manufacturers (“OEMs”) for the three and six months ended June 28, 2003 represented 50.6% and 46.5% of total revenue, compared to 50.7% and 46.7% of

total revenue for the corresponding periods in fiscal year 2002. Sales to the distribution and retail channels for the three and six months ended June 28, 2003 represented 49.4% and 53.5% of total revenue, compared to 49.3% and 53.3% of total revenue in the corresponding periods in fiscal year 2002.

The Company has a worldwide 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, Asia Pacific and Japan, Europe, Middle East and Africa, Latin America and other. 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 from continuing operations by destination for the three and six months ended June 28, 2003 and June 29, 2002, respectively, are presented in the following table:

Long-lived asset information by geographic area as of June 28, 2003 and December 28, 2002 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 $919.7 million and $960.8 million as of June 28, 2003 and December 28, 2002, respectively. Long-lived assets located outside the United States consist primarily of the Company’s manufacturing operations located in Singapore, which amounted to $105.1 million and $127.6 million as of June 28, 2003 and December 28, 2002, respectively.

In November 2001, the Company entered into an accounts receivable securitization program (the “Program”) with a group of commercial banks (the “Banks”). On December 30, 2002, the Company elected to terminate the Program. Under the Program, the Company sold U.S. and Canadian accounts receivable in securitization transactions and retains a subordinated interest and servicing rights to those receivables. The eligible receivables, net of estimated credit losses, were sold to third party conduits through a wholly-owned bankruptcy-remote entity that was consolidated for financial reporting purposes. The investors in the securitized receivables had no recourse to the Company’s assets as a result of debtor’s defaults except for the retained interests in the securitized accounts receivable. The Company retained the portion of the sold receivables that was in excess of the minimum receivables level required to support the securities issued by the

third party conduits, referred to as retained interest. The carrying amount of the Company’s retained interest, which approximated fair value because of the short-term nature of receivables, was recorded in accounts receivable. The Company serviced the sold receivables and charged the third party conduits a monthly servicing fee at market rates; accordingly, no servicing asset or liability was recorded.

The Company accounted for the Program under the FASB’s Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” The Program qualified for treatment as a sale under SFAS 140. As of December 28, 2002, the outstanding balance of securitized accounts receivable held by the third party conduits totaled $140.3 million, of which the Company’s subordinated retained interest was $95.3 million. Accordingly, $45.0 million of accounts receivable balances, net of applicable allowances, were removed from the consolidated balance sheets at December 28, 2002. Delinquent amounts and credit losses related to these receivables were not material as of December 28, 2002. Expenses associated with the Program totaled $1.9 million, in the six months ended June 29, 2002 and were included within the interest expense caption of the results of operations statement. In the six months ended June 29, 2002 $0.5 million of these expenses, related primarily to the loss on sale of receivables, net of related servicing revenues, with the remainder representing program and facility fees. Net cash flows from sales (repayments) under the Program were $0.2 million for the six months ended June 29, 2002.

From time to time, the Company has been subject to litigation including the pending litigation described below. Because of the uncertainties related to both the amount and range of loss on the remaining pending litigation, the Company is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, the Company will assess its potential liability and revise its estimates. Pending or future litigation could be costly, could cause the diversion of management’s attention and could upon resolution, have a material adverse effect on its business, results of operations, financial condition and cash flow.

In addition, the Company is engaged in certain legal and administrative proceedings incidental to the Company’s normal business activities and believes that these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flow.

Prior to the Company’s acquisition of the Quantum HDD business, the Company, 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. The Company purchased the overwhelming majority of the spindle motors used in its 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 Company’s acquisition of the Quantum HDD business, the Company assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. The Company 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.

In February 2002, Papst and MKE 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 the Company, 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. These separated claims relating to the other party are currently proceeding in the District Court for the District of Columbia.

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, there are no assurances that the Company will be able to successfully defend itself against this or any other Papst lawsuit. Because the Papst complaints assert claims to an unspecified dollar amount of damages, and because the Company was at an early stage of discovery when the litigation was stayed, the Company is unable to determine the possible loss, if any, that it may incur as a result of an adverse judgment or a negotiated settlement with respect to the claims against Maxtor. Management made an estimate of the potential liabilities which might arise from the Papst claims against Quantum at the time of the acquisition of the Quantum HDD business. This estimate will be revised as additional information becomes available. A favorable outcome for Papst in these lawsuits could result in the issuance of an injunction against the Company 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, the Company also could be required to pay treble damages and Papst’s attorney’s fees. The litigation could result in significant diversion of time by the Company’s technical personnel, as well as substantial expenditures for future legal fees. Accordingly, although the Company cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome favorable to Papst could have a material adverse effect on the Company’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.

Commencing in fiscal 2002, 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.

The Company ceased amortizing goodwill totaling $846.0 million as of the adoption date, including $31.1 million, net of accumulated amortization, of acquired workforce intangibles previously classified as purchased intangible assets. Subsequent to the decision to shut down the manufacture and sales of NSG products, the Company wrote off goodwill related to the NSG operations of $32.0 million. As of June 28, 2003, goodwill amounted to $814.0 million.

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 three to five years. The Company expects amortization expense on purchased intangible assets to be $41.1 million in the remainder of 2003, $37.0 million in 2004, $21.9 million in 2005, and $5.8 million in 2006, at which time purchased intangible assets will be fully amortized.

In accordance with SFAS No. 142, the Company completed its impairment analysis as of January 1, 2002, upon the adoption of SFAS 142, and as of December 28, 2002 for the purpose of the annual review. The Company found no instances of impairment of the recorded goodwill on both dates and accordingly no impairment was recorded.

In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). Under that interpretation, certain entities known as “Variable Interest Entities” (“VIE”) must be consolidated by the “primary beneficiary” of the entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIE’s in which a significant (but not majority) variable interest is held, certain disclosures are required. FIN 46 requires disclosure of Variable Interest Entities in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date: (1) the Company will be the primary beneficiary of an existing VIE that will require consolidation or, (2) the Company will hold a significant variable interest in, or have significant involvement with, an existing VIE. Any VIEs created after January 31, 2003, are immediately subject to the consolidation guidance in FIN 46. The measurement principles of this interpretation will be effective for the Company’s 2003 financial statements. The Company does not have any entities that require disclosure or new consolidation as a result of adopting the provisions of FIN 46.

In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for interim periods beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position or results of operations.

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. Examples of forward-looking statements in this report include statements regarding our expectations as to average selling prices, demand for our products, capital expenditures, liquidity, completion of our manufacturing facility in China, our indemnification obligations, the results of litigation, amortization of other intangible assets and our relationships with vendors. In this report, the words “anticipates,” “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 1994, we sold 40% of our outstanding common stock to Hyundai Electronics Industries (now Hynix Semiconductors Inc. — “HSI”) and its affiliates. In early 1996, Hyundai Electronics America (now 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. In July 1998, we completed a public offering of 49.7 million shares of our common stock, receiving 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 with net proceeds to us of approximately $95.8 million.

On April 2, 2001, we acquired 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 information regarding the Quantum HDD acquisition, see note 4 of the Notes to Consolidated Financial Statements.

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.

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. In February 2002, Hynix distributed the balance of its Maxtor shares to the beneficial owners of a trust and ceased to be a stockholder of Maxtor.

On August 15, 2002 we announced our decision to shut down the manufacturing and sale of our MaxAttach^TM branded network attached storage products of our Network Systems Group (“NSG”). We worked with NSG customers for an orderly wind down of the business. The network attached storage market had fragmented since our entrance in 1999, with one segment of the NAS market becoming more

commoditized and the other segment placing us in competition with some of our hard disk drive customers. The shut down of the operations of our NSG business allowed us to focus on our core hard disk drive market and further reduce expenses. The NSG business was accounted for as a discontinued operation and therefore, results of operations and cash flows have been removed from our results of continuing operations for all periods presented in this report. For additional information regarding the NSG discontinued operations, see note 2 of the Notes to Consolidated Financial Statements.

On May 7, 2003, we sold $230 million in aggregate principal amount of 6.8% convertible senior notes due 2010 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. For additional information regarding the convertible senior notes, see the discussion below under the heading “Liquidity and Capital Resources.”

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 28, 2002.

Revenue in the three and six months ended June 28, 2003 were $910.9 million and $1,849.8 million, compared to $885.4 million and $1,921.5 million in the corresponding periods in fiscal 2002. Total shipments for the three months ended June 28, 2003 were 12.2 million units, which was 0.5 million units, or 3.9%, lower as compared to the three months ended June 29, 2002. Total shipments for the six months ended June 28, 2003 were 24.6 million units, which was 1.8 million units or 6.9% lower as compared to the six months ended June 29, 2002. Although total shipments declined during the three months ended June 28, 2003 as a result of our transition to the 80GB per platter areal density hard disk drive, total revenue increased as we continued to increase our average GB shipped and grow our server hard disk drive and personal storage businesses. During the six months ended June 28, 2003 total shipments and revenue declined as a result of our transition to the 80GB per platter areal density hard disk drive.

Revenue from sales to original equipment manufacturers (“OEMs”) represented 50.6% and 46.5% of revenue in the three and six months ended June 28, 2003, respectively, compared to 50.7% and 46.7% of revenue, respectively, in the corresponding period in fiscal year 2002. Revenue from sales to the distribution channel and retail customers in the three and six months ended June 28, 2003 represented 49.4% and 53.5% of revenue, respectively compared to 49.3% and 53.3% of revenue, respectively, in the corresponding period in fiscal 2002. Although the percentage of sales to OEMs remained relatively constant, sales to retail customers increased to 6.4% and 7.4% in the three and six months ended June 28, 2003, respectively compared to 4.9% and 4.9% for the corresponding period in fiscal 2002. The increase was primarily due to growth in the sales of personal storage products. Conversely, sales to distribution customers decreased to 43.0% and 46.1% in the three and six months ended June 28, 2003, respectively, from 44.4% and 48.4% for the corresponding period in fiscal 2002. The decrease was a result of reduced sales to Asian distributors due to our transition to the 80GB per platter areal density hard disk drive.

Domestic revenue in the three and six months ended June 28, 2003 represented 35.5% and 35.1% of total sales, respectively compared to 34.4% and 36.8% of total, respectively, in the corresponding period in fiscal year 2002. The increase in United States & Canada revenue as a percentage of total revenue during the three months ended June 28, 2003 was a result of increased shipments to our OEM and distribution customers. This increase was driven by the growth in server hard disk drive product sales and continued progress in the ramp of our 80GB product. The decline during the six months ended June 28, 2003 was the result of our transition to the 80GB per platter areal density hard disk drive. International revenue in the three and six months ended June 28, 2003 represented 64.5% and 64.9% of total sales, respectively compared to 65.6% and 63.2% of total, respectively, in the corresponding period in fiscal year 2002.

Sales to Europe, Middle East and Africa in the three months ended June 28, 2003 and June 29, 2002 represented 32.8% and 30.6% of total revenue, respectively. In absolute dollars, Europe, Middle East and Africa sales increased 10.1% compared to the corresponding period in fiscal year 2002. The increase in Europe, Middle East and Africa sales both in absolute dollars and as a percentage of revenue during the three months ended June 28, 2003, was the result of increased shipments of server hard disk drive product and growth of our retail and distribution business. The retail and distribution growth was driven by the success of our personal storage products and increased acceptance of our 80GB per platter areal density hard disk drive. Sales to Asia Pacific and Japan in the three months ended June 28, 2003 and June 29, 2002 represented 31.7% and 35.0% of total revenue, respectively. In absolute dollars, Asia Pacific and Japan sales decreased 6.9% compared to the corresponding period in fiscal year 2002. The decrease in Asia Pacific and Japan sales both in absolute dollars and as a percentage of revenue during the three months ended June 28, 2003, was due to decreased sales to Asian distributors as the result of the ramp of our 80GB per platter areal density hard disk drive.

Sales to Europe, Middle East and Africa in the six months ended June 28, 2003 and June 29, 2002 represented 34.0% and 31.8% of total revenue, respectively. In absolute dollars, Europe, Middle East and Africa sales increased 2.9% compared to the corresponding six months in fiscal year 2002. The increase in Europe, Middle East and Africa sales was the result of increased shipments of server hard disk drive product and growth of our retail and distribution business. The retail and distribution growth was driven by the success of our personal storage products and increased acceptance of our 80GB per platter areal density hard disk drive. Sales to Asia Pacific and Japan in the six months ended June 28, 2003 and June 29, 2002 represented 30.9 % and 31.4% of total revenue, respectively. In absolute dollars, Asia Pacific & Japan sales decreased 5.4% compared to the corresponding period in fiscal year 2002. The decrease in Asia Pacific and Japan sales was the result of decreased sales to Asian distributors as the result of the ramp of our 80GB per platter areal density hard disk drive.

Gross profit increased to $149.2 million in the three months ended June 28, 2003, compared to $59.4 million for the corresponding three months in fiscal year 2002. As a percentage of revenue, gross profit increased to 16.4% in the three months ended June 28, 2003 from 6.7% in the corresponding three months of fiscal year 2002. Gross profit increased to $321.1 million in the six months ended June 28, 2003, compared to $173.2 million for the corresponding three months in fiscal year 2002. As a percentage of revenue, gross profit increased to 17.4% in the six months ended June 28, 2003 from 9.0% in the corresponding three months of fiscal year 2002. The increase in gross profit, both as a percentage of revenue and actual dollars, was primarily due to the transition of our desktop product from MKE to our Singapore manufacturing facility and the improved manufacturing efficiencies on the 80GB per platter areal density hard disk drive. These efficiencies resulted in reduced costs associated with drive components and a more favorable product mix. Our cost of goods sold includes depreciation and amortization of property, plant and equipment.

R&D expense in the three and six months ended June 28, 2003 was $84.2 million, or 9.2% of revenue and $170.9 million or 9.2% of revenue, respectively, compared to $104.1 million, or 11.8% of revenue and $207.1 million or 10.8% of revenue, respectively, in the three and six month period ending June 29, 2002. The decrease in absolute dollars and as a percentage of revenue was primarily due to reduced compensation expense associated with our reductions in force in 2002 and a more focused development effort on fewer products, that resulted in less expense for development parts in the three and six months ended June 28, 2003.

As a result of our acquisition of the Quantum HDD business, R&D expense includes stock-based compensation charges of $0.2 million and $0.3 million in the three and six months ended June 28, 2003, respectively, compared to $0.4 and $1.0 million in the three and six months ended June 29, 2002, respectively, resulting from options we issued to Quantum employees who joined Maxtor in connection with the acquisition on April 2, 2001. Additionally, in the six months ended June 28, 2003 there was no longer amortization of deferred stock-based compensation required for DSS restricted shares from our acquisition of the Quantum HDD business as the amortization period had been completed. 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 acquisition. The following table summarizes the effect of these acquisition-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 28, 2003 was $31.0 million, or 3.4% of revenue and $62.9 million, or 3.4%, respectively, compared to $35.3 million, or 4.0% and $76.7 million, or 4.0% of revenue, respectively, in the corresponding periods in fiscal year 2002. SG&A expense decreased in absolute dollars and as a percentage of revenue primarily due to reduced compensation expense associated with our reductions in force in 2002 coupled with overall reduced spending on facilities.

As a result of our acquisition of the Quantum HDD business, SG&A expense includes stock-based compensation charges of $0.0 million and $0.1 million in the three and six months ended June 28, 2003 and $0.1 million and $0.3 million in the three and six months ending June 29, 2002, respectively, resulting from options we issued to Quantum employees who joined Maxtor in connection with the acquisition on April 2, 2001. Additionally, in the six months ended June 28, 2003 there was no longer amortization of deferred stock-based compensation required for DSS restricted shares from our acquisition of the Quantum HDD business as the amortization period had been completed. SG&A expense in the three and six months ended June 29, 2002 includes $0 and $1.0 million, respectively, of stock-based compensation amortization for Quantum DSS

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

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 continued 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 28, 2003, $0.5 million of stock-based compensation associated with our acquisition of the Quantum HDD business 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 of the shares are subject to continued employment with Maxtor. Amortization of the expense ended in the first quarter of 2002. In that period, the amortization expense that effected cost of revenues, research and development, selling, general and administrative was $0.3 million, $2.8 million and $1.0 million, respectively, totaling $4.1 million.

Amortization of other intangible assets represents the amortization of existing technology, arising from our acquisitions of the Quantum HDD business in April 2001 and MMC in September 2001. The net book value of these intangibles at June 28, 2003 was $105.8 million. Amortization of other intangible assets was $20.6 million and $41.1 million for the three and six months ended June 28, 2003 and June 29, 2002.

Amortization of other intangible assets is computed over the estimated useful lives of the respective assets, generally three to five years. The Company expects amortization expense on intangible assets to be $41.1 million in the remainder of 2003, $37.0 million in fiscal 2004, $21.9 million in 2005, and $5.8 million in 2006, at which time the intangible assets will be fully amortized.

Interest expense increased $1.7 million and $0.6 million in the three months and six months ended June 28, 2003 compared to the corresponding periods in fiscal year 2002. The increase in interest expense was due primarily to interest associated with the $230 million in 6.8% convertible senior notes due 2010 issued May 7, 2003. Total short-term and long-term outstanding borrowings were $514.7 million as of June 28, 2003 compared to $247.4 million, as of December 28, 2002.

Interest and other income decreased $0.9 million and $2.6 million in the three and six months ended June 28, 2003 compared to the corresponding periods in fiscal year 2002. The decrease in interest and other income was due to reduced interest income from our investment portfolios as a result of lower short-term interest rates. Total cash and cash equivalents, restricted cash and marketable securities were $626.6 million as of June 28, 2003 compared to $489.9 million as of June 29, 2002. 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 loss was computed on a separate tax return basis and, as such, we did not record any tax benefit in our financial statements for the amount of the net operating loss included in the HEA consolidated income tax return.

We ceased to be a member of the HEA consolidated group as of August 1998. We remain liable for our share of the total consolidated or combined tax return liability of the HEA consolidated group prior to August 1998. We have agreed to indemnify or reimburse HEA if there is any increase in our share of the 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 acquisition of Quantum HDD, Maxtor, as successor to Quantum HDD, and Quantum are allocated their share of Quantum’s income tax liability for periods before the Company’s acquisition of Quantum HDD, 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 our acquisition of Quantum HDD, limited in the aggregate to $142.0 million plus 50% of any excess over $142.0 million, excluding any required gross-up payment. Management believes that, based on the facts available at this time, the likelihood that our indemnification obligations will exceed $142.0 million is remote. As of June 28, 2003, the Company has reimbursed $5.3 million to Quantum Corporation leaving a balance of $136.7 million on the original indemnity, prior to any sharing of tax liability with Quantum.

We purchased a $340 million insurance policy covering the risk that the separation of Quantum HDD 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 separation of Quantum HDD from Quantum Corporation 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 transaction. 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 separation of Quantum HDD from Quantum Corporation, in connection with the Company’s acquisition of Quantum HDD, 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 our acquisition of Quantum HDD in April 2001. The deferred taxes were recorded principally to reflect the taxes which would become payable upon the repatriation of the cash which was invested abroad by Quantum HDD as of April 1, 2001.

On August 15, 2002, we announced our decision to shut down the manufacturing and sales of our MaxAttach^TM branded network attached storage products (“NSG”). The discontinuance of our NSG operations represents the disposal of a component of an entity as defined in Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, our financial statements have been presented to reflect NSG as a discontinued operation for all periods presented. Our liabilities (no remaining assets) have been segregated from continuing operations in the accompanying consolidated balance sheet as of December 28, 2002 and our operating results have been segregated and reported as discontinued operations in the accompanying consolidated statement of operations.

Operating results of the NSG discontinued operations for the three and six months ended June 28, 2003 and June 29, 2002 are as follows (in millions):

At June 28, 2003, we had $484.0 million in cash and cash equivalents, $55.0 million in restricted cash and $87.6 million in marketable securities, for a combined total of $626.6 million. In comparison, at December 28, 2002 we had $306.5 million in cash and cash equivalents, $ 56.7 million in restricted cash and $ 87.5 million in marketable securities, for a combined total of $450.7 million. The restricted cash balance was pledged as collateral for certain stand-by letters of credit issued by commercial banks. We have a net deferred tax liability amounting to $196.5 million, which could become payable upon repatriation of the earnings invested abroad.

Operating activities used cash of $5.0 million in the six months ended June 28, 2003. Sources of cash from operating activities reflect our net income from operations of $33.6 million, non-cash adjustments for depreciation and amortization of $83.1 million, amortization of intangible assets of $41.1 million, and $2.9 million of other non-cash items. Uses of cash from operating activities include an increase in accounts receivable of $73.1 million, due to closure of the asset securitization program and the purchase back of $45.0 million secured receivables and an increase in sales activity during the last month of the second quarter, an increase of inventory of $57.1 million, due to growth in average unit cost caused by a change in product mix toward higher capacity drives, as well as an increase in the quantity of server hard disk drives on hand, a decrease in accrued expenses and other liabilities of $22.2 million due to reductions in warranty liability, and an increase in other assets of $8.9 million primarily due to increases in prepaid expenses, partially offset by an increase of accounts payable of $1.6 million.

Cash used in investing activities was $38.0 million for the six months ended June 28, 2003, primarily reflecting investments of property, plant and equipment of $39.3 million and purchases (net of sales) of marketable securities of $0.7 million, partially offset by a decrease in restricted cash of $1.7 million.

Cash provided by financing activities was $220.6 million for the six months ended June 28, 2003. This increase in cash is primarily due to net proceeds of $223.9 million from the issuance of 6.8% convertible senior notes due 2010, a $47.9 million increase in short-term debt from our receivable-backed borrowing arrangement, net and proceeds of $13.1 million issuance of common stock through the Company’s employee stock purchase plan and stock option exercises, partially offset by a repurchase of common stock of $44.9 million associated with the issuance of the 6.8% convertible senior notes due 2010 and amortization of our equipment loans and capital lease obligations of $19.3 million.

We believe that our 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. Our receivable-backed borrowing arrangement has availability of $46.9 million as of June 28, 2003, and we also have availability of $133 million with the Bank of China to fund our expansion into China. 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 2003, capital expenditures are expected to be in the range of $150 million to $175 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. 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 that it will be available on satisfactory terms. See discussion below under the heading “Certain Factors Affecting Future Performance.”

Future payments due under lease and debt obligations as of June 28, 2003 are reflected in the following table (in thousands):


(1)	Does not include $103 million which may be borrowed under a facility in a U.S.-dollar-denominated loan, to be secured by our facilities in Suzhou, China, drawable until April 2007, and repayable in eight semi-annual installments commencing October 2007; the borrowings under this facility will bear interest at LIBOR plus 50 basis points (subject to adjustment to 60 basis points).

(2)	Does not include $30 million which may be borrowed under a facility in a U.S.-dollar-denominated loan to be secured by our facilities in Suzhou, China, drawable until April 2007, and repayable in April 2013; the borrowing under this facility will bear interest at LIBOR plus 50 basis points (subject to adjustment to 60 basis points).

(3)	Does not include $67 million which we are obligated to contribute to our China Subsidiary to allow drawdowns under the facilities described under footnotes (1) and (2).

(4)	Includes future minimum annual rental commitments, including amounts accrued as restructuring liabilities as of June 28, 2003.

We have agreed to invest $200 million over the next five years to establish a manufacturing facility in Suzhou, China, and we have secured credit lines with the Bank of China for up to $133 million to be used for the construction and working capital requirements of this operation. The remainder of our commitment will be satisfied primarily with the transfer of manufacturing assets from Singapore or from our other manufacturing sites.

On May 7, 2003, we sold $230 million in aggregate principal amount of 6.8% convertible senior notes due 2010 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes bear interest at a rate of 6.8% per annum and are convertible into our common stock at a conversion rate of 81.5494 shares per $1,000 principal amount of the notes, or an aggregate of 18,756,362 shares, subject to adjustment in certain circumstances (equal to an initial conversion price of $12.2625 per share). The initial conversion price represents a 125% premium over the closing price of our common stock on May 1, 2003, which was $5.45 per share.

We are obligated to file a registration statement with the Securities and Exchange Commission registering the notes and the shares underlying the notes within 90 days after May 7, 2003 and to have that registration statement declared effective within 180 days after May 7, 2003. On June 24, 2003 we filed the

registration statement with the Securities and Exchange Commission. For so long as we have not satisfied our registration obligations and the notes are not tradeable under Rule 144(k), we are subject to certain liquidated damages in the form of additional interest on the notes and if we fail to register the underlying shares into which the notes are convertible, in the event a holder elects to convert the notes during a period when the notes or the underlying shares are not registered or tradeable under Rule 144(k) and we have not satisfied our registration obligations, the conversion rate will be increased by 3%.

We may not redeem the notes prior to May 5, 2008. Thereafter, we may redeem the notes at 100% of their principal amount, plus accrued and unpaid interest, if the closing price of its common stock for 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of our mailing of the redemption notice exceeds 130% of the conversion price on such trading day. If, at any time, substantially all of our common stock is exchanged or acquired for consideration that does not consist entirely of common stock that is listed on United States national securities exchange or approved for quotation on the Nasdaq National Market or similar system, the holders of the notes have the right to require us to repurchase all or any portion of the notes at their face value plus accrued interest.

In connection with our sale of the notes, on May 7, 2003, we also repurchased from an affiliate of one of the initial purchasers of the notes 8,245,738 shares of our common stock for an aggregate purchase price of $44.9 million, or $5.45 per share, the closing price of our common stock on May 1, 2003, plus commissions. The Company will use the balance of the net proceeds of the offering for repayment of indebtedness, investments, acquisitions, general corporate purposes and working capital.

In connection with the acquisition of Quantum HDD, we agreed to indemnify Quantum for the Quantum HDD pro rata portion of payments that become due and payable for Quantum’s outstanding $287.5 million 7% convertible subordinated notes due August 1, 2004. For additional information regarding the Quantum note reimbursement obligation, see note 4 of the Notes to Consolidated Financial Statements. On August 6, 2003, Quantum announced that it has delivered a notice of redemption to the holders of such notes designating August 21, 2003 as the date for redemption of the notes. Assuming that the notes are not converted into Quantum and Maxtor stock prior to the redemption date, we intend to reimburse Quantum $97.2 million which, will satisfy our reimbursement obligation in full. Accordingly, we have reclassified $95.8 million on our balance sheet at June 28, 2003 as short term debt.

On May 9, 2003, we entered into a two-year receivable-backed borrowing arrangement of up to $100 million with certain financial institutions. In the arrangement we use a special purpose subsidiary to purchase and hold all of our U.S. and Canadian accounts receivable. This special purpose subsidiary may borrow up to $100 million collateralized by the U.S. and Canadian accounts receivable. The special purpose subsidiary is consolidated for financial reporting purposes. The transactions under the arrangement are accounted for as secured borrowing and accounts receivables, and the related short-term borrowings remain on our consolidated balance sheet. As of June 28, 2003, we had borrowed $50.0 million under the arrangement, which had been reported as short-term borrowings in our consolidated financial statements. The average interest rate of the loans outstanding under this agreement is 6.09%. As of June 28, 2003, $205.0 million of US and Canadian receivables were pledged under the company’s receivable-backed borrowing arrangement.

The arrangement requires us to comply with operational and financial covenants, including a liquidity covenant, and initially set forth an operating cash flow to long-term debt test. We entered into an amendment to replace the operating cash flow to long-term debt test with a test of operating income (loss) before depreciation and amortization to long-term debt. We are required under the arrangement to obtain a shadow rating for the arrangement from a credit rating agency, and in furtherance of this obligation, we agreed to additional amendments to meet certain technical requirements of the rating agency and will now seek the required rating. We do not believe that any of these modifications will have a material adverse impact on our ability to access funds under this arrangement.

methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002.

We have a history of significant losses and may not maintain profitability. In the last five fiscal years, we were profitable in only fiscal years 1998 and 2000. For the six months ended June 28, 2003, we had net income of $33.6 million, including $41.1 million for the amortization of intangible assets and $0.4 million in stock-based compensation expense. For the year ended December 28, 2002, our net loss was $334.1 million, which included $82.2 million for the amortization of intangible assets, charges of $5.6 million for stock-based compensation related to our acquisition of the Quantum HDD business, severance charges of $12.3 million, restructuring charges related to facilities closures of $9.5 million and losses of $73.5 million related to the discontinuation of our network attached storage business in the quarter ended September 28, 2002. As of June 28, 2003, we had an accumulated deficit of $1,707.0 million. Although we were profitable in the six months ended June 28, 2003, we have a history of losses and may not maintain profitability.

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 increases in 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 caused us in the first three quarters of fiscal 2002, 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 producing 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 will suffer.

Intense competition in the hard disk drive market 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 Global Storage, Samsung, Seagate Technology, and Western Digital. Many of our competitors historically have had a number of significant advantages, including larger market shares, a broader product line, 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 to lower their product costs or to otherwise compete more effectively against us;

	•	lower their product prices to gain market share;

	•	sell their disk drive products with other products we do not offer, which may effectively increase demand for their products;

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

	•	offer more products than we do and therefore enter into agreements with customers to supply hard disk drives as part of a larger supply agreement.

Increasing competition could reduce the demand for our products and/or the prices of our products as a result of the introduction of 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;

	•	market acceptance of our products;

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

	•	changes in purchases by our primary customers, including the cancellation, rescheduling or deferment of orders;

	•	changes in product and customer mix;

	•	actions by our competitors, including announcements of new products or technological innovations;

	•	our ability to execute future product development and production ramps effectively;

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

	•	our inability to reduce a significant portion of our fixed costs due, in part, to our ongoing capital expenditure requirements; and

	•	our ability to procure and purchase critical components at competitive prices.

Many of our expenses are relatively fixed and difficult to reduce or modify. 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 information technology spending, particularly desktop 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 adverse impact on our sales.

A significant portion 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 capacities 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. It is, however, possible to fail to maintain a qualification due to quality or yield issues in the early stages of production of

product. If we miss a qualification opportunity or cease to be qualified due to yield or quality issues, 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 than 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, financial condition and operating results.

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 28, 2002, one customer, Dell Computer Corporation, accounted for approximately 11.5% of our total revenue, and our top five customers accounted for approximately 31.8% of our revenue. For the six months ended June 28, 2003, Ingram Micro, Inc. accounted for 10% or more of our total 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 product 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. Mergers, acquisitions, consolidations or other significant transactions involving our significant customers may adversely affect our business and operating results.

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 these distribution channels continue to increase, we may experience problems typically associated with these 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, and maintain our presence in the hard disk 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 the laptop computer or handheld consumer product segments, which none of our products currently serves. Products using alternative technologies, such as optical storage, semiconductor memory and other storage technologies, may also compete with our hard disk drive products. While we continually develop new products, the success of our new product introductions is dependent on a number of factors, including market acceptance, our ability to manage the risks associated with product transitions, the effective management of inventory levels in line with product demand, and the risk that our new products will have quality problems or other defects in the early stages of introduction that were not anticipated in the design of those products. We will need to successfully develop and manufacture new products that address additional hard disk drive market segments or competitors’ technology or feature development to remain competitive in the hard disk drive industry. We cannot assure you that we will successfully or timely develop and market any new hard disk drives in response to technological changes or evolving industry standards. We also cannot assure you that we will 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 personal computer manufacturers. This exposes us to increased credit risk because these subcontractors are generally not as well capitalized as personal computer manufacturers, 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, our operating results could suffer.

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. If we fail to manage inventory of older products as we or our competitors introduce new products with higher areal density, we may have excess inventory. Excess inventory could materially adversely affect our operating results and cause our operating results to suffer.

Because we purchase a significant portion of our parts from a limited number of 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 component shortages or integration problems could result in delays of product shipments and damage our business and operating results.

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 Technologies Inc., or MMC. Instead, our products incorporate parts and components designed by and purchased from third party suppliers. Both we and Matsushita-Kotobuki Electronics Industries, Ltd., or 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 two sources, digital signal processors/ controllers from one source and spin/ servo integrated circuits from two sources. Although our acquisition of our primary media supplier, 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 two 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 some of our key existing suppliers. In the event that these suppliers cannot qualify to new leading-edge technology specifications, our ramp up of production for the new products will be delayed, and our business, operating results and financial condition will be adversely affected.

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. We cannot assure you that we will be able to obtain adequate supplies of critical components in a timely and economic manner, or at all.

The success of our products also depends on our ability to effectively integrate parts and components that use leading-edge technology. 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.

If we are unable to acquire needed additional manufacturing capacity, or MKE does not meet our manufacturing requirements or 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 facilities in Singapore and our relationship with MKE for the manufacture of 10,000 RPM hard disk drives for the enterprise market are currently our only sources of production for our hard disk drive products. MKE manufactures a substantial portion of our enterprise hard disk drives pursuant to a master agreement and a purchase agreement that has been extended through March 31, 2004. If, for any reason, we are unable in some quarters to make purchases in adequate volumes or on terms advantageous to us, our revenue may be lower or our costs may be higher than projected and our operating results would suffer.

We negotiate pricing arrangements with MKE on a quarterly basis. Any failure to reach an agreement on competitive pricing arrangements would also negatively impact our operating results.

If, at the time of termination of our current agreement with MKE we are unable to extend the agreement on mutually acceptable terms, we will need to arrange for alternative manufacturing capacity for our enterprise hard disk drive products. If we fail to make such arrangements in a timely manner, for 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. We have begun construction of a manufacturing facility in China that will provide us with a low-cost facility to accommodate anticipated future growth. We anticipate that the facility will become operational in the second half of 2004. Any significant disruption in the

In addition, our entire volume manufacturing operations are based in Singapore. Our MKE-manufactured server products are manufactured in Japan. A flood, earthquake, political instability, act of terrorism or other disaster or condition in Singapore or Japan that adversely affects our 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 one to five years and prior to the acquisition, Quantum HDD generally warranted its products for one to five years. We assumed Quantum HDD’s warranty obligations as a result of the acquisition. 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 establish a warranty provision at the time of product shipment in an amount equal to estimated warranty expenses. We may incur additional operating expenses if these steps do not reflect the actual cost of resolving warranty claims and related expenses, and if any resulting 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 with 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 we are in negotiations with Quantum 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 and defending these claims, an unfavorable resolution of these claims in the aggregate could harm our business, financial condition and operating results.

If Quantum incurs non-insured tax as a result of its separation of Quantum HDD from Quantum Corporation in connection with our acquisition of the Quantum HDD business, 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 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 transaction. 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 transaction 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 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.

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 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 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. We 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 our acquisition of the Quantum HDD business, we assumed Quantum’s potential liabilities to Papst arising from the patent infringement allegations Papst asserted against Quantum. We filed a motion to substitute Maxtor 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.

In February 2002, Papst and MKE 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.

because we were at an early stage of discovery when the litigation was stayed, we are unable to determine the possible loss, if any, that we may incur as a result of an adverse judgment or a negotiated settlement. 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. The litigation could result in significant diversion of time by our technical personnel, as well as substantial expenditures for future legal fees. Accordingly, although we cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome favorable to Papst could have a material adverse effect on 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 our principal manufacturing operations are located, and in Japan, where MKE’s manufacturing operations are located. Such concentration of operations in Singapore and Japan will likely magnify the effects on us of any disruptions or disasters relating to Singapore and Japan. In addition, we also sell a significant portion of our products to foreign distributors and retailers. As a result, we will be dependent on revenue from international sales. Inherent risks relating to our overseas operations include:


	•	difficulties with staffing and managing international operations;

	•	transportation and supply chain disruptions as a result of epidemics, terrorist activity, acts of war or hostility;

	•	economic slowdown and/or downturn in foreign markets;

	•	international currency fluctuations;

	•	political and economic uncertainty caused by epidemics, 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;

	•	legislative, regulatory, police, or civil responses to epidemics or other outbreaks of infectious diseases such as quarantines, factory closures, or increased restrictions on transportation or travel;

	•	general strikes or other disruptions in working conditions;

	•	labor shortages;

	•	political instability;

	•	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 or other adverse tax consequences;

	•	difficulty in obtaining export licenses and other trade barriers;

	•	seasonality;

	•	increased transportation/shipping costs; and

	•	credit and access to capital issues faced by our international customers.

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.

We significantly increased our leverage as a result of the sale of the 6.8% convertible senior notes due 2010.

In connection with our sale of the 6.8% convertible senior notes due 2010 on May 7, 2003, we incurred $230 million of indebtedness, set to mature in April 2010. We will require substantial amounts of cash to fund semi-annual interest payments on the Notes, payment of the principal amount of the Notes upon maturity (or earlier upon a mandatory or voluntary redemption or if we elect to satisfy a conversion of the Notes, in whole or in part, with cash rather than shares of our common stock), as well as future capital expenditures, investments and acquisitions, payments on our leases and loans, and any increased working capital requirements. If we are unable to meet our cash requirements out of available funds, we may need be to obtain alternative financing, which may not be available on favorable terms or at all. The degree to which we are financially leveraged could materially and adversely affect our ability to obtain additional financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. In the absence of such financing, our ability to respond to changing business and economic conditions, to make future acquisitions, to absorb adverse operating results or to fund capital expenditures or increased working capital requirements would be significantly reduced. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, some of which are beyond our control. If we do not generate sufficient cash flow from operations to repay the convertible senior notes at maturity, we could attempt to refinance the 6.8% convertible senior notes due 2010; however, no assurance can be given that such a refinancing would be available on terms acceptable to us, if at all. Any failure by us to satisfy our obligations under the 6.8% convertible senior notes due 2010 or the indenture could cause a default under agreements governing our other indebtedness.

We entered into a receivable-backed borrowing arrangement for up to $100 million which has certain financial covenants with which we will have to comply to use the facility.

On May 9, 2003, we entered into a two-year receivable-backed borrowing arrangement for up to $100 million with certain financial institutions. Under this arrangement, we use a special purpose subsidiary to purchase and hold all of our U.S. and Canadian accounts receivable. This special purpose subsidiary borrows up to $100 million secured by the purchased receivables. This special purpose subsidiary is consolidated for financial reporting purposes, and its resulting liabilities appear on our consolidated balance sheet as short-term debt. The terms of the arrangement require compliance with operational covenants and financial covenants, including a liquidity covenant and an operating income (loss) before depreciation and amortization to long-term debt ratio. We are also required to obtain a shadow rating letter for the arrangement from a credit rating agency, and in furtherance of this obligation, we agreed to amendments to meet certain technical requirements of the rating agency and will now seek the required rating. We do not believe that these modifications will have a material adverse effect on our ability to access funds under this arrangement. A violation of the covenants would result in an early amortization event that will cause a prohibition on further payments and distributions to use from the special purpose subsidiary until the arrangement has been repaid in full. However, early amortization events under this arrangement generally will not cause an event of default under the 6.8% convertible senior notes due 2010. We do not believe that the lack of borrowing availability under this arrangement would have a material adverse effect on our liquidity.

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 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 environmental regulations often require parties to fund remedial action regardless of fault. As a consequence, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. 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 segments;

	•	gains or losses of significant customers;

	•	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. These 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, Switzerland and Japan. 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. For additional information regarding our impairment policy, see note 1 of the Notes to Consolidated Financial Statements.

The following table presents the hypothetical changes in fair values in the financial instruments held at June 28, 2003 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.

Under the supervision and with the participation of our management, including our President, Chief Executive Officer and Acting Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our President, Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

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. We 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 our acquisition of the Quantum HDD business, 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.

In February 2002, Papst and MKE 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. Because the Papst complaints assert claims to an unspecified dollar amount of damages, and because we were at an early stage of discovery when the litigation was stayed, we are unable to determine the possible loss, if any, that we may incur as a result of an adverse judgment or a negotiated settlement with respect to the claims against Maxtor. We made an estimate of the potential liabilities, which might arise from the Papst claims against Quantum at the time of our acquisition of the Quantum HDD business. Our estimate will be revised as additional information becomes available. 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. The litigation could result in significant diversion of time by our technical personnel, as well as substantial expenditures for future legal fees. Accordingly, although we cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome favorable to Papst could have a material adverse effect on 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 and on January 6, 2003, we filed a Second 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. Philips’ subsequent

motions to dismiss were withdrawn or denied. Philips answered the complaint on March 13, 2003. On April 25, 2003, the Philips-related companies brought cross-complaints against a number of Sumitomo-related companies and a number of Amkor-related companies. Discovery is ongoing. 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 8, 2003, the stockholders elected the nominees for Class II directors to our Board of Directors. The votes were as follows:

Mr. Hill and Mr. Johnson’s terms will expire at the 2006 annual meeting. The following directors’ terms of office continue until the annual meeting indicated: Charles M. Boesenberg, Michael R. Cannon and Paul J. Tufano (Class III term expires at the 2004 annual meeting); and Dr. C.S. Park and Charles F. Christ (Class I term expires at the 2005 annual meeting). Greg Myers was appointed to Class I on August 7, 2003.

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

Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending December 27, 2003:

Maxtor filed a Current Report on Form 8-K on April 23, 2003, in which it reported financial results for the first fiscal quarter ended March 29, 2003.

Maxtor filed a Current Report on Form 8-K/ A on May 1, 2003, amending the Form 8-K filed on April 23, 2003, in which it reported information concerning management’s reasons for using non-GAAP financial measures.

Maxtor filed a Current Report on Form 8-K on May 1, 2003, in which it reported the offering of its senior convertible notes to qualified institutional buyers pursuant to Rule 144A.

Maxtor filed a Current Report on Form 8-K on May 1, 2003, in which it reported information regarding its leases and long-term debt.

Maxtor filed a Current Report on Form 8-K on May 2, 2003, in which it reported certain material terms of the offering of its senior convertible notes to qualified institutional buyers pursuant to Rule 144A.

Maxtor filed a Current Report on Form 8-K on May 5, 2003, in which it reported the repurchase of shares of its common stock.

Maxtor filed a Current Report on Form 8-K on May 7, 2003, in which it reported the completion of the sale of its senior convertible notes to qualified institutional buyers pursuant to Rule 144A and repurchase of shares of its common stock.

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 the capacities and on the dates indicated


	MAXTOR CORPORATION

	By /s/ PAUL J. TUFANO

	Paul J. Tufano
	President, Chief Executive Officer
	and Acting Chief Financial 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 28, 2003
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)


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements		2
	Condensed Consolidated Balance Sheets — June 28, 2003, and December 28, 2002		2
	Condensed Consolidated Statements of Operations — Three and six months ended June 28, 2003, and June 29, 2002		3
	Condensed Consolidated Statements of Cash Flows — Six months ended June 28, 2003, and June 29, 2002		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		41
Item 4.	Controls and Procedures		42
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		43
Item 2.	Changes in Securities		44
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		44
Item 4.	Submission of Matters to a Vote of Security Holders		44
Item 6.	Exhibits and Reports on Form 8-K		44
Signature Page
Certifications


			June 28,			December 28,
			2003			2002


			(Unaudited)

			(In thousands, except share and
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	483,984		$	306,444
	Restricted cash			55,020			56,747
	Marketable securities			87,614			87,507
	Accounts receivable, net of allowance for doubtful accounts of $16,846 at June 28, 2003 and $18,320 at December 28, 2002			436,800			363,664
	Inventories			232,630			175,545
	Prepaid expenses and other			60,788			33,438

		Total current assets		1,356,836			1,023,345
Property, plant and equipment, net				322,892			364,842
Goodwill				813,951			813,951
Other intangible assets, net				105,780			146,898
Other assets				14,973			11,798

		Total assets	$	2,614,432		$	2,360,834

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings, including current portion of long-term debt		$	184,587		$	41,042
	Accounts payable			641,721			642,206
	Accrued and other liabilities			456,438			471,750
	Liabilities of discontinued operations			5,506			11,646

		Total current liabilities		1,288,252			1,166,644
Deferred taxes				196,455			196,455
Long-term debt, net of current portion				330,134			206,343
Other liabilities				192,200			199,071

		Total liabilities		2,007,041			1,768,513
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; 250,804,397 shares issued and 237,558,659 shares outstanding at June 28, 2003 and 247,507,244 shares issued and 242,507,244 shares outstanding at December 28, 2002			2,508			2,475
Additional paid-in capital				2,362,090			2,349,253
Deferred stock-based compensation				(457	)		(1,193	)
Accumulated deficit				(1,706,989	)		(1,740,591	)
Cumulative other comprehensive income				15,178			2,377
Treasury stock of 13,245,738 shares at June 28, 2003 and 5,000,000 shares at December 28, 2002 at cost				(64,939	)		(20,000	)

		Total stockholders’ equity		607,391			592,321

		Total liabilities and stockholders’ equity	$	2,614,432		$	2,360,834



			Three Months Ended						Six Months Ended

			June 28, 2003			June 29, 2002			June 28, 2003			June 29, 2002


			(Unaudited)						(Unaudited)

			(In thousands, except share and per share amounts)
Net revenues			$	910,903		$	885,350		$	1,849,792		$	1,921,450
Cost of revenues				761,657			825,960			1,528,699			1,748,294

	Gross profit			149,246			59,390			321,093			173,156
Operating expenses:
	Research and development			84,218			104,052			170,879			207,110
	Selling, general and administrative			30,967			35,318			62,899			76,670
	Amortization of intangible assets			20,562			20,562			41,124			41,124

		Total operating expenses		135,747			159,932			274,902			324,904

Income (loss) from operations				13,499			(100,542	)		46,191			(151,748	)
Interest expense				(8,325	)		(6,562	)		(13,747	)		(13,108	)
Interest and other income				1,459			2,376			2,786			5,405
Other gain				—			1,577			88			1,577

Income (loss) from continuing operations before income taxes				6,633			(103,151	)		35,318			(157,874	)
Provision for income taxes				437			152			1,714			806

Income (loss) from continuing operations				6,196			(103,303	)		33,604			(158,680	)
Loss from discontinued operations				—			(5,699	)		—			(15,360	)

Net income (loss)			$	6,196		$	(109,002	)	$	33,604		$	(174,040	)

Net income (loss) per share — basic
Continuing operations			$	0.03		$	(0.43	)	$	0.14		$	(0.67	)
Discontinued operations			$	—		$	(0.03	)	$	—		$	(0.06	)

Total			$	0.03		$	(0.46	)	$	0.14		$	(0.73	)

Net income (loss) per share — diluted
Continuing operations			$	0.03		$	(0.43	)	$	0.14		$	(0.67	)
Discontinued operations			$	—		$	(0.03	)	$	—		$	(0.06	)

Total			$	0.03		$	(0.46	)	$	0.14		$	(0.73	)

Shares used in per share calculation
	— basic			241,120,075			238,803,423			242,382,530			237,892,949
	— diluted			245,259,831			238,803,423			245,999,915			237,892,949


Item 1.	*Condensed Consolidated Financial Statements*



				Six Months Ended

				June 28,			June 29,
				2003			2002


				(Unaudited)
				(In thousands)
Cash Flows from Operating Activities:
Net income (loss) from continuing operations				$	33,604		$	(158,680	)
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities:
	Depreciation and amortization				83,130			73,000
	Amortization of intangible assets				41,124			41,124
	Amortization of deferred compensation related to Quantum				—			4,103
	Stock-based compensation expense				496			2,850
	Loss on sale of property, plant and equipment and other assets				2,555			3,104
	Gain on retirement of bond				(111	)		(1,162	)
	Realized gain on investment				—			(1,079	)
	Change in assets and liabilities:
		Accounts receivable			(73,136	)		33,726
		Inventories			(57,085	)		(35,129	)
		Prepaid expenses and other assets			(8,866	)		4,527
		Accounts payable			1,574			68,413
		Accrued and other liabilities			(22,188	)		(84,752	)

			Net cash provided by (used in) operating activities from continuing operations		1,097			(49,955	)
			Net cash flow used in discontinued operations		(6,140	)		(12,498	)

			Net cash provided by (used in) operating activities		(5,043	)		(62,453	)

Cash Flows from Investing Activities:
Proceeds from sale of property, plant and equipment					274			65
Purchase of property, plant and equipment					(39,290	)		(77,082	)
Decrease (Increase) in restricted cash					1,727			(18	)
Proceeds from sale of marketable securities					28,761			102,158
Purchase of marketable securities					(29,493	)		(34,192	)

			Net cash used in investing activities		(38,021	)		(9,069	)

Cash Flows from Financing Activities:
Proceeds from issuance of debt including short-term borrowings					223,858			—
Principal payments of debt including short-term borrowings					(5,327	)		(18,400	)
Principal payments under capital lease obligations					(14,004	)		(11,741	)
Purchase of treasury shares at cost					(44,939	)		—
Net proceeds from receivable-backed borrowing					47,908			—
Proceeds from issuance of common stock from employee stock purchase plan and stock options exercised					13,108			13,988

			Net cash provided by (used in) financing activities		220,604			(16,153	)

Net change in cash and cash equivalents					177,540			(87,675	)
Cash and cash equivalents at beginning of period					306,444			379,927

Cash and cash equivalents at end of year				$	483,984		$	292,252

Supplemental Disclosures of Cash Flow Information:
	Cash paid during the period for:
		Interest		$	2,049		$	11,583
		Income taxes		$	687		$	5,369
Schedule of Non-Cash Investing and Financing Activities:
	Purchase of property, plant and equipment financed by accounts payable			$	4,999		$	13,728
	Retirement of debt in exchange for bond redemption			$	—		$	5,000
	Change in unrealized gain (loss) on investments			$	12,801		$	(603	)
	Purchase of property, plant and equipment financed by capital lease obligations			$	5,526		$	—


Payroll and other accrued expenses	$	3.1
Warranty, returns and other		2.4

Total	$	5.5


				Severance
	Facility			and			Other
	Costs			Benefits			Costs			Total


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

Balance at December 29, 2001		58.2			13.7			—			71.9
Amounts paid		(4.5	)		(13.7	)		—			(18.2	)

Balance at December 28, 2002		53.7			—			—			53.7
Amounts paid		(4.9	)		—			—			(4.9	)

Balance at June 28 2003	$	48.8		$	—		$	—		$	48.8



		For the Three						For the Six
		Months Ended						Months Ended

		June 28,			June 29,			June 28,			June 29,
		2003			2002			2003			2002

Balance at the beginning of the period		$	(266,583	)	$	(301,287	)	$	(278,713	)	$	(313,894	)
	Accruals for warranties issued during the period		(30,591	)		(35,282	)		(60,887	)		(90,808	)
	Settlements made (in cash or in kind) during the period		40,513			63,924			82,939			132,057

Balance at the end of the period		$	(256,661	)	$	(272,645	)	$	(256,661	)	$	(272,645	)



	Revenue				Revenue


	Three Months Ended				Six Months Ended

	June 28,		June 29,		June 28,		June 29,
	2003		2002		2003		2002

United States	$	319,986	$	298,870	$	639,094	$	689,248
Asia Pacific and Japan		288,434		309,974		571,761		604,264
Europe, Middle East and Africa		298,424		270,940		629,017		611,563
Latin America and other		4,059		5,566		9,920		16,375

Total	$	910,903	$	885,350	$	1,849,792	$	1,921,450



	Long-lived Assets

	June 29,		December 28,
	2003		2002

United States	$	1,148,455	$	1,207,738
Asia Pacific and Japan		108,474		128,860
Europe, Middle East and Africa		667		891

Total	$	1,257,596	$	1,337,489



					June 28, 2003							December 28, 2002

					Gross							Gross
			Useful		Carrying		Accumulated					Carrying		Accumulated
			Life		Amount		Amortization			Net		Amount		Amortization			Net

			(Years)
Goodwill				—	$	813,951	$	—		$	813,951	$	813,951	$	—		$	813,951

Quantum HDD
	Existing Technology
		Core technology		5	$	105,000		(47,250	)		57,750	$	105,000		(36,750	)		68,250
		Consumer electronics		3		8,900		(6,675	)		2,225		8,900		(5,192	)		3,708
		High-end		3		75,500		(56,625	)		18,875		75,500		(44,042	)		31,458
		Desktop		3		96,700		(72,525	)		24,175		96,700		(56,408	)		40,292

						286,100		(183,075	)		103,025		286,100		(142,392	)		143,708

MMC Technology
	Existing technology			5		4,350		(1,595	)		2,755	$	4,350		(1,160	)		3,190

Total other intangible assets					$	290,450	$	(184,670	)	$	105,780	$	290,450	$	(143,552	)	$	146,898


									More than
			Less than				3-5 Years		5 Years
	Total		1 Year		1-3 Years		(1)(2)(3)		(1)(2)(3)

Debt	$	479,451	$	160,730	$	13,918	$	39,918	$	264,885
Capital Lease Obligations		35,270		23,857		11,402		11		—
Operating Leases		283,759		33,247		57,798		54,829		137,885

Total	$	798,480	$	217,834	$	83,118	$	94,758	$	402,770


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk*


1.	Summary of Significant Accounting Policies


	*Basis of Presentation*


	*Use of Estimates*


	*Fiscal Calendar*


										Fair Value
										as of
										June 28,
										2003
	+150 bps			+100 bps			+50 bps			($000)		-50 bps			-100 bps			-150 bps

Financial Instruments	$	86,401		$	86,795		$	87,196		$	87,614	$	88,014		$	88,428		$	88,621
% Change		(1.38	)%		(0.93	)%		(0.48	)%				0.46	%		0.93	%		1.15	%


Item 4.	*Submission of Matters to a Vote of Security Holders*


Nominee	For		Withheld Authority

Charles Hill		213,697,739		11,915,136
Roger W. Johnson		213,575,341		12,037,534


Exhibit
Number			Description

	10	.1(1)	U.S. $100,000,000 Receivables Loan and Security Agreement, dated as of May 9, 2003 among Maxtor Funding LLC, Maxtor Corporation, Merrill Lynch Commercial Finance Corp., Merrill Lynch Commercial Finance Corp., Radian Reinsurance Inc., and U.S. Bank National Association
	10	.2(1)	Purchase and Contribution Agreement between Maxtor Corporation and Maxtor Funding LLC, dated as of May 9, 2003