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 July 23, 2004, 247,569,676 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 27, 2003 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 may differ from those estimates and such differences could be material.

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 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 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 123 (in thousands, except per share data):

The fair value of option grants has been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

The fair value of employee stock purchase plan option grants has been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

No dividend yield is assumed as the Company has not paid dividends and has no plans to do so.

The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday of December in each year. Accordingly, the three and six month periods ended June 26, 2004 comprised 13 and 26 weeks, respectively, as did the three and six month periods ended June 28, 2003. The current fiscal year ends on December 25, 2004. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

Depreciation and amortization expense of property, plant and equipment for the six month periods ended June 26, 2004 and June 28, 2003 was $69.5 million and $83.1 million, respectively. Total property, plant and equipment recorded under capital leases was $36.6 million as of June 26, 2004. Total accumulated depreciation under capital leases was $17.8 million as of June 26, 2004.

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 26, 2004, 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 $10.1 million in the remainder of fiscal 2004, $20.2 million in fiscal 2005 and $5.4 million in fiscal 2006, at which time purchased intangible assets will be fully amortized. Amortization of other intangible assets was $5.1 million and $25.9 million for the three and six months ended June 26, 2004 and $20.6 million and $41.1 million for the three and six months ended June 28, 2003, respectively.

In accordance with SFAS 142, the Company completed its annual impairment review as of December 27, 2003. The Company found no instances of impairment of the recorded goodwill and accordingly no impairment was recorded.

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

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.

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 owns bonds in a principal amount sufficient to fulfill its sinking fund obligation until March 1, 2005.

On June 24, 2004, the Company entered into a one-year receivable-backed borrowing arrangement of up to $100 million with one financial institution. In the arrangement the Company used a special purpose subsidiary to purchase and hold all of its United States and Canadian accounts receivable. This special purpose subsidiary has borrowing authority up to $100 million collateralized by the United States and Canadian accounts receivable. The special purpose subsidiary was 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 26, 2004 the Company had borrowed $50 million under the arrangement, the interest rate is Libor plus 3% and $157 million of United States and Canadian

receivables were pledged under this arrangement and remain on the Company’s consolidated balance sheet. The terms of the facility require compliance with operational covenants and several financial covenants, including a liquidity covenant, an operating income (loss) before depreciation and amortization to long-term debt ratio, and certain tests relating to the quality and nature of the receivables, including limits on the percentage of all receivables represented by delinquent or defaulted receivables, a dilution to liquidation ratio comparing reductions to the invoiced amounts of receivables to actual collections in a designated period. A violation of these covenants will result in an early amortization event that will cause a prohibition on further payments and distributions to the Company from the special purpose subsidiary until the facility has been repaid in full. As of June 26, 2004, the Company was in compliance with these requirements.

In April 2003, the Company obtained 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 being established in Suzhou, China. These lines of credit are U.S.-dollar-denominated and are drawable until April 2007. Maxtor Technology Suzhou (“MTS”) has drawn down $30 million as of June 2004. Borrowings under these lines of credit are collateralized by the facilities being established in Suzhou, China, and bear interest at LIBOR plus 50 basis points (subject to adjustments to 60 basis points). The borrowings are repayable in eight semi-annual installments commencing October 2007, except for $30 million initially repayable in April 2013; in March 2004, the Company and the Bank of China amended the loan to provide that the $30 million would be repaid in two installment payments of $15 million in October 2008 and April 2009, respectively. MTS is required to maintain a liability to assets ratio as detailed in the line of credit agreement starting in fiscal 2004; the Company was in compliance with the ratio as of June 26, 2004.

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 was amortized in seven equal semi-annual installments ending March 2004. This loan was paid in full.

In September 2003, Maxtor Peripherals (S) Pte Ltd. entered into a second four-year 52 million Singapore dollar loan agreement with the Board at 4.25% which is amortized in seven equal semi-annual installments ending December 2007. As of June 26, 2004, the balance was 52.0 million Singapore dollars, equivalent to $30.2 million. This loan is supported by a guaranty from a bank. Cash is currently provided as collateral for this guaranty; $21.6 million was recorded as other assets and the remaining $8.6 million was recorded as restricted cash. However, the Company may at its option substitute other assets as security. MPS is required to invest a certain level of capital by 2006 as defined in the loan agreement.

In connection with the acquisition of the Quantum HDD business, the Company acquired real estate and related mortgage obligations. The term of the mortgages is ten years, at an interest rate of 9.2%, with monthly payments based on a twenty-year amortization schedule, and a balloon payment at the end of the 10-year term, which is September 2006. The outstanding balance at June 26, 2004 was $33.4 million.

As of June 26, 2004, the Company had capital leases totaling $11.5 million. These obligations include certain leases assumed in connection with the September 2001 acquisition of MMC Technology, Inc. These capital leases have maturity dates through September 2006 and interest rates averaging 8.5%.

On May 9, 2003, the Company entered into a two-year receivable-backed borrowing arrangement of up to $100 million with certain financial institutions. In the arrangement the Company used a special purpose subsidiary to purchase and hold all of its United States and Canadian accounts receivable. This special purpose subsidiary had borrowing authority up to $100 million collateralized by the United States and Canadian accounts receivable. The special purpose subsidiary was consolidated for financial reporting purposes. The transactions under the arrangement were accounted for as secured borrowing and accounts receivables, and the related short-term borrowings, if any, remain on our consolidated balance sheet. As of March 9, 2004, the dilution to liquidation ratio for this facility exceeded the agreed upon threshold. The lenders under the facility agreed to forbear from exercising remedies for noncompliance with this ratio through

March 31, 2004 and in return, the Company agreed to apply all collections of receivables to the repayment of the outstanding facility until repaid in full. As of March 27, 2004, the Company had a no borrowing under this facility. On April 2, 2004, this agreement was terminated by all parties involved.

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which its products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of its indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to its potential liability for indemnification relating to intellectual property infringement claims. The Company cannot estimate the amount of potential future payments, if any, that the Company might be required to make as a result of these agreements. To date, the Company has not paid any claims or been required to defend any claim related to its indemnification obligations, and accordingly, the Company has not accrued any amounts for its indemnification obligations. However, there can be no assurances that the Company will not have any future financial exposure under those indemnification obligations.

The Company generally warrants its products against defects in materials and workmanship for varying lengths of time. 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 or replace. 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 26, 2004 and June 28, 2003 were as follows (in thousands):

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 26, 2004:

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 within the balance sheet captions of Accrued and other liabilities and Other liabilities.

On August 15, 2002, the Company announced its decision to shut down its Network Systems Group (“NSG”) and cease the manufacturing and sale of its MaxAttach™ branded network attached storage products. 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. There were no results from discontinued operations for the three and six months ended June 26, 2004 and June 28, 2003. The remaining liabilities of the NSG discontinued operations as of June 26, 2004 were $0.7 million relating to returns and other miscellaneous expenses.

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 $6.7 million after cash payments of $0.3 million and $0.7 million during the three and six months ended June 26, 2004, respectively.

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

Comprehensive income (loss) as defined includes all changes in equity (net assets) during a period from non-owner sources. Cumulative other comprehensive income (loss), as presented in the accompanying consolidated balance sheets, consists of the net unrealized gains (losses) on available-for-sale securities, net of tax, if any.

Total comprehensive income for the three months and six months ended June 26, 2004 and June 28, 2003, 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 to original equipment manufacturers (“OEMs”) for the three and six months ended June 26, 2004 represented 57.6% and 56.3% of total revenue, respectively, compared to 50.6% and 46.5% of total revenue for the corresponding periods in fiscal year 2003, respectively. Sales to the distribution and retail channels for the three and six months ended June 26, 2004 represented 42.4% and 43.7% of total revenue, respectively, compared to 49.4% and 53.5% of total revenue in the corresponding periods in fiscal year 2003, respectively.

Sales to one customer was over 10% of total revenues in each of the three months ended June 26, 2004 and June 28, 2003; only one customer represented more than 10% of revenue during these periods.

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 by destination for the three and six months ended June 26, 2004 and June 28, 2003, respectively, is presented in the following table (in thousands):

Long-lived asset information by geographic area as of June 26, 2004 and December 27, 2003 is presented in the following table (in thousands):

Long-lived assets located within the United States consist primarily of goodwill and other intangible assets. Goodwill and other intangible assets within the United States amounted to $849.7 million and $875.6 million as of June 26, 2004 and December 27, 2003, respectively. Long-lived assets located outside the United States consist primarily of the Company’s manufacturing operations located in Singapore and China.

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 Maxtor’s acquisition of the Quantum HDD business, the Company, on the one hand, and Quantum and Matsushita Kotobuki Electronics Industries, Ltd. (“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 spindle motors used in our hard disk drives from vendors that were licensed under the Papst patents. Quantum purchased many spindle motors used in its hard disk drives from vendors that were not licensed under the Papst patents, including MKE. As a result of the Company’s acquisition of the Quantum HDD business, Maxtor 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, the Company cannot assure you it 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 the Company may incur as a result of an adverse judgment or a negotiated settlement with respect to the claims against us. The Company made an estimate of the potential liabilities, which might arise from the Papst claims against Quantum at the time of the Company’s 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 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, 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 our 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 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.

On December 30, 2003, an action was filed by MKE against Maxtor and Quantum alleging, among other things, MKE’s ownership of certain intellectual property the Company acquired in the acquisition of the Quantum HDD business. The action was filed in the United States District Court for the Northern District of

California. On March 1, 2004, the Company filed an answer denying all material allegations and a motion to dismiss. The motion to dismiss was granted and MKE filed a First Amended Complaint on May 24, 2004. The Company again filed an answer denying all material allegations. MKE seeks damages, the return of the intellectual property, a constructive trust relating to profits from the use or license of the intellectual property, a declaratory judgment and injunctive relief. The results of any litigation are inherently uncertain. Although the Company cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome unfavorable to Maxtor could have a material adverse effect on our business, financial condition and operating results. Management believes that the lawsuit is without merit, that it has valid defenses to the claims of MKE, and plans to defend the matter vigorously.

The Company has agreed to invest $200 million over the next five years to establish a manufacturing facility in Suzhou, China, and it has 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 its commitment will be satisfied primarily with the transfer of manufacturing assets from Singapore or from our other manufacturing site. Maxtor Technology Suzhou (“MTS”) has drawn down $30 million as of June 2004. MTS is required to maintain a liability to assets ratio as detailed in the line of credit agreement starting in fiscal 2004; the Company was in compliance with the ratio as of June 26, 2004.

On April 28, 2004, in connection with the Company’s suit against Koninklijke Philips Electronics N.V. and several other Philips-related companies in the Superior Court of California, County of Santa Clara whereby the Company alleged that an integrated circuit chip supplied by Philips was defective and caused significant levels of failure of certain Quantum legacy products acquired as part of the Company’s acquisition of the Quantum HDD business, the Company entered into a settlement agreement with the other parties pursuant to which the parties dismissed the lawsuit with prejudice and the Company received a cash payment of $24.8 million, which was recorded as litigation settlement income in the three months ended June 26, 2004.

In the three and six months ended June 26, 2004, the Company sold an aggregate of approximately $30.3 million and $54.5 million of goods to Solectron Corporation, respectively, and purchased an aggregate of approximately $0.5 million and $0.9 million of goods and services from Solectron, respectively. The Company’s accounts receivable and accounts payable balances for Solectron were $16.7 million and $0.1 million, respectively, as of June 26, 2004. A Director of the Company is also the Chief Executive Officer and a Director of Solectron.

In July 2004, the Company completed a reduction in force that affected approximately 450 positions. The Company expects to incur facilities and severance-related charges beginning in the quarter ending September 25, 2004, and expects to begin to realize cost and expense savings associated with the reduction in force by the end of fiscal 2004.

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 capital expenditures, liquidity, commencement of volume shipments from our manufacturing facility in China, impacts of our restructuring, the effect of our planned transition of manufacturing server products from MKE to our Singapore facility, our indemnification obligations, the results of litigation, amortization of other intangible assets and our relationships with vendors. In this report, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “will,” “should,” “could,” “would,” “project,” “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 6 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 of Maxtor common stock in a registered public offering. Maxtor did not receive any proceeds from Hynix’s sale of Maxtor stock to the public. In addition, at the same time and on the same terms as Hynix’s sale of Maxtor stock to the public, we repurchased 5.0 million shares from Hynix for an aggregate purchase price of $20.0 million. These repurchased shares are being held as treasury shares.

On August 15, 2002, we announced our decision to shut down our Network Systems Group (“NSG”) and cease the manufacturing and sale of our MaxAttach^TMbranded network attached storage products. 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 7 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 in April 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.”

Revenue decreased 10.2% and 0.6% in the three and six months ended June 26, 2004 compared to the corresponding periods in 2003. Total revenue declined during the three and six months ended June 26, 2004 as a result of reduced shipments driven by a lost opportunity with a major OEM customer and decreased demand and pricing pressure experienced in the OEM and distribution channels. These factors were partially offset by growth in shipments and revenue resulting from increased demand for our digital entertainment and Maxtor OneTouch personal storage products. There is a possibility that pricing pressures will continue in the third quarter of 2004.

Gross profit decreased to 9.0% and 12.4% in the three and six months ended June 26, 2004 compared to 16.4% and 17.4% in the corresponding periods in 2003. The decrease in gross profit, both as a percentage of revenue and in actual dollars during the three and six months ended June 26, 2004, was primarily due to the decline of average selling prices partially offset by the increase in our average capacity shipped. In the three and six months ended June 26, 2004, gross profit was also negatively impacted by weaker server product profitability due in part to price erosion and reduced cost leverage on our products produced at MKE; as well as lower than anticipated volume shipments and revenues of our 40GB per platter desktop product due in part to a lost opportunity at a major OEM customer and lower than anticipated volume shipments to our distribution channel which together resulted in reduced fixed cost absorption at our manufacturing facilities. In the three and six months ended June 26, 2004, we also experienced increased costs as a result of our investments in our China and MMC manufacturing facilities.

Operating expenses decreased in both absolute dollars and as a percentage of revenue for the three and six months ended June 26, 2004 compared to the corresponding periods in 2003. The decrease in the three month period was due to a $15.5 million decrease in amortization of intangible assets and a $3.6 million decrease in R&D expense, partially offset by increased SG&A expense of $1.4 million. The decrease in the six month period was due to a $15.2 million decrease in amortization of intangible assets and a $5.5 million decrease in R&D expense, partially offset by increased SG&A expense of $2.0 million.

In July 2004, we completed a reduction in force that affected approximately 450 positions. We expect to incur facilities and severance-related charges of approximately $80 to $90 million beginning in the third fiscal quarter of 2004 and expect to begin to realize cost and expense savings associated with the reduction in force by the end of fiscal 2004.

Operating capital (defined as accounts receivable, other receivables and inventories less accounts payable) decreased $15.2 million as a result of a decline in accounts receivable, partially offset by an increase in finished goods inventory and a decrease in accounts payable, as a result of seasonally slower sales, reduced shipments driven by a lost opportunity with a major OEM customer and decreased demand experienced in the OEM and distribution channels. Capital expenditures are expected to be below $200 million in 2004.

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 allowance for doubtful accounts;

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

	•	product warranty;

	•	inventory reserves;

	•	income taxes; and

	•	restructuring liabilities, litigation and other contingencies.

For additional information regarding our critical accounting policies mentioned above, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2003.

Revenues. Revenue in the three and six months ended June 26, 2004 was $818.3 million and $1,837.9 million, compared to $910.9 million and $1,849.8 million in the corresponding periods in fiscal 2003. Total shipments for the three months ended June 26, 2004 were 11.5 million units, which was 0.7 million units, or 5.7%, lower as compared to the three months ended June 28, 2003. Total shipments for the six months ended June 26, 2004 were 25.1 million units, which was 0.5 million units or 2.0% greater as compared to the six months ended June 28, 2003. Total revenue declined during the three and six months ended June 26, 2004 as a result of reduced shipments driven by a lost opportunity with a major OEM customer and decreased demand and pricing pressure experienced in the OEM and distribution channels. These factors were partially

Revenue from sales to original equipment manufacturers (“OEMs”) represented 57.6% and 56.3% of revenue in the three and six months ended June 26, 2004, respectively, compared to 50.6% and 46.5% of revenue, respectively, in the corresponding period in fiscal year 2003. In absolute dollars, sales to OEMs increased 2.3% and 20.3%, respectively, during the three and six months ended June 26, 2004. The increase in OEM sales as a percentage of revenue and in absolute dollars during the three and six month periods was driven by the continued growth of our sales of desktop products to digital entertainment customers as well as growth in our sales of server products. This growth in OEM sales was partially offset by a lost opportunity at a major OEM customer.

Revenue from sales to the distribution channel and retail customers in the three and six months ended June 26, 2004 represented 42.4% and 43.7% of revenue, respectively, compared to 49.4% and 53.5% of revenue, respectively, in the corresponding period in fiscal 2003. Revenue from sales to the distribution channel in the three and six months ended June 26, 2004 represented 34.1% and 36.6% of revenue, respectively, compared to 43.0% and 46.1% of revenue, respectively, in the corresponding periods in fiscal 2003. In absolute dollars, sales to the distribution channel decreased 28.8% and 21.1%, respectively, during the three and six months ended June 26, 2004. The decrease in distribution sales as a percentage of revenue and in absolute dollars during the three and six months ended June 26, 2004 was a result of decreased shipments resulting from reduced demand and pricing pressure created by higher than normal price gaps relative to OEM pricing.

Revenue from sales to retail customers in the three and six months ended June 26, 2004 represented 8.3% and 7.2% of revenue, respectively, compared to 6.4% and 7.4% of revenue, respectively, in the corresponding periods in fiscal 2003. In absolute dollars, sales to the distribution channel increased 16.1% during the three months ended June 26, 2004 and decreased 4.2% during the six months ended June 26, 2004. The increase in retail sales as a percentage of revenue and in absolute dollars in the three month period was a result of the increase in sales of our Maxtor OneTouch personal storage products. The decrease in retail sales as a percentage of revenue, during the six month period was a result of the decrease in sales of our internal hard drive products offset by an increase in sales of our Maxtor OneTouch personal storage products.

Domestic revenue in the three and six months ended June 26, 2004 represented 36.9% and 34.5% of total sales, respectively, compared to 35.6% and 35.1% of revenue, respectively, in the corresponding periods in fiscal year 2003. Domestic revenue includes sales to United States, Canada and Latin America. The increase in domestic revenue as a percentage of total revenue during the three months ended June 26, 2004 was a result of increased shipments of desktop products to our digital entertainment customers. The decline during the six months ended June 26, 2004 was the result of reduced shipments of our desktop products in the distribution channel.

International revenue in the three and six months ended June 26, 2004 represented 63.1% and 65.5% of total sales, respectively, compared to 64.4% and 64.9% of total, respectively, in the corresponding periods in fiscal year 2003. Sales to Europe, Middle East and Africa in the three months ended June 26, 2004 and June 28, 2003 represented 30.1% and 32.8% of total revenue, respectively. In absolute dollars, sales to Europe, Middle East and Africa decreased 17.4% during the three months ended June 26, 2004. The decrease in sales to Europe, Middle East and Africa as a percentage of revenue and in absolute dollars during the three months ended June 26, 2004 was the result of reduced shipments to the distribution channel of our desktop products partially offset by growth in the sales of our Maxtor OneTouch personal storage products.

Sales to Asia Pacific and Japan in the three months ended June 26, 2004 and June 28, 2003 represented 33.0% and 31.7% of total revenue, respectively. In absolute dollars, sales to Asia Pacific and Japan decreased 6.3% during the three months ended June 26, 2004. The increase in sales to Asia Pacific and Japan as a percentage of revenue during the three months ended June 26, 2004, was the result of the decrease in Europe, Middle East and Africa as a percentage of revenue. In absolute dollars, Asia Pacific and Japan revenue decreased due to reduced sales of our desktop products to OEM and distribution customers.

Sales to Europe, Middle East and Africa in the six months ended June 26, 2004 and June 26, 2003 represented 34.1% and 34.0% of total revenue, respectively. In absolute dollars, sales to Europe, Middle East and Africa decreased 0.2% during the six months ended June 26, 2004. The decrease in European sales as a percentage of revenue and in absolute dollars during the six months ended June 26, 2004 was the result of reduced shipments in the distribution channel of our desktop products partially offset by growth in the sales of our Maxtor OneTouch personal storage and server products.

Sales to Asia Pacific and Japan in the six months ended June 26, 2004 and June 28, 2003 represented 31.4% and 30.9% of total revenue, respectively. In absolute dollars, sales to Asia Pacific and Japan increased 0.9% during the six months ended June 26, 2004. The increase in sales to Asia and Japan as a percentage of revenue and in absolute dollars during the six months ended June 26, 2004 was due to increased sales of our server products to OEM customers.

Gross profit decreased to $73.8 million in the three months ended June 26, 2004, compared to $149.2 million for the corresponding three months in fiscal year 2003. As a percentage of revenue, gross profit decreased to 9.0% in the three months ended June 26, 2004 from 16.4% in the corresponding three months of fiscal year 2003. Gross profit decreased to $228.8 million in the six months ended June 26, 2004, compared to $321.1 million for the corresponding six months in fiscal year 2003. As a percentage of revenue, gross profit decreased to 12.4% in the six months ended June 26, 2004 from 17.4% in the corresponding six months of fiscal year 2003. The decrease in gross profit, both as a percentage of revenue and actual dollars during the three and six months ended June 26, 2004, was primarily due to the decline of average selling prices partially offset by the increase in our average capacity shipped. In the three and six months ended June 26, 2004, gross profit was also negatively impacted by weaker server product profitability due in part to price erosion and reduced cost leverage on our products produced at MKE; as well as lower than anticipated volume shipments and revenues of our 40GB per platter desktop product due in part to a lost opportunity at a major OEM customer and lower than anticipated volume shipments to our distribution channel which together resulted in reduced fixed cost absorption at our manufacturing facilities. In the three and six months ended June 26, 2004, we also experienced increased costs as a result of our investments in our China and MMC manufacturing facilities. Our cost of revenues includes depreciation and amortization of property, plant and equipment.

R&D expense in the three and six months ended June 26, 2004 was $80.6 million, or 9.8% of revenue and $165.4 million, or 9.0% of revenue compared to $84.2 million, or 9.2% of revenue and $170.9 million and 9.2% of revenue, respectively, in the corresponding periods in fiscal year 2003. R&D expenses decreased by $3.6 million, or 4.3%, in the three month period ended June 26, 2004 compared to the corresponding period in fiscal year 2003. The decrease in R&D expenses was primarily due to decreases in compensation of $5.6 million and in depreciation and equipment expense of $1.9 million. These decreases were offset by a

$3.9 million increase in expensed parts due to a change in the number of products in development. R&D expenses decreased by $5.5 million, or 3.2%, in the six month period ended June 26, 2004 compared to the corresponding period in fiscal year 2003. The decrease in R&D expenses was primarily due to decreases in compensation of $8.1 million, and $4.0 million in depreciation, our facilities and information technology departments, and services. These decreases were offset by a $6.6 million increase in expensed parts due to a change in the number of products in development.

SG&A expense in the three and six months ended June 26, 2004 was $32.4 million, or 4.0% of revenue and $64.9 million, or 3.5% of revenue compared to $31.0 million, or 3.4% of revenue and $62.9 million and 3.4% of revenue, respectively, in the corresponding periods in fiscal year 2003. SG&A expenses increased by $1.4 million, or 4.5%, in the three month period ended June 26, 2004 compared to the corresponding period in fiscal year 2003. The increase in SG&A expenses was primarily due to reduction in rental income of $0.8 million and an increase of services of $0.6 million. SG&A expenses increased by $2.0 million, or 3.2%, in the six month period ended June 26, 2004 compared to the corresponding period in fiscal year 2003. The increase in SG&A expenses was primarily due to reduction in rental income of $1.0 million, increased services of $5.3 million and $1.6 million of miscellaneous expenses. These increases were offset by reduced spending in our facilities and information technology departments of $3.4 million, as well as a decrease in bad debt of $2.5 million.

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 March 27, 2004, we completed the amortization of stock-based compensation associated with our acquisition of the Quantum HDD business.

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 26, 2004 was $35.7 million. Amortization of other intangible assets was $5.1 million and $25.9 million for the three and six months ended June 26, 2004 and June 28, 2003, respectively.

Amortization of other intangible assets is computed over the estimated useful lives of the respective assets, generally three to five years. We expect amortization expense on intangible assets to be $10.1 million in the remainder of 2004, $20.2 million in 2005, and $5.4 million in 2006, at which time the purchased intangible assets will be fully amortized.

During the year ended December 28, 2002, we recorded a restructuring charge of $9.5 million associated with closure of one of our 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 $6.7 million after cash payments of $0.3 million and $0.7 million during the three and six months ended June 26, 2004.

Interest expense decreased $0.9 million in the three months and increased $2.5 million in the six months ended June 26, 2004 as compared to the corresponding periods in fiscal year 2003. The decrease in the three months ended June 26, 2004 was due to reduction in debt balance for the quarter as compared to the corresponding quarter in 2003. The increase in the six months ended June 26, 2004 was primarily due to higher average debt balance over the six month period as compared to the corresponding period in 2003.

Interest income decreased $0.2 million and $0.4 million in the three months and six months ended June 26, 2004 compared to the corresponding periods in fiscal year 2003. The decrease resulted primarily from lower balances in our cash and cash equivalent.

On April 28, 2004, in connection with our suit against Koninklijke Philips Electronics N.V. and several other Philips-related companies in the Superior Court of California, County of Santa Clara whereby the Company alleged that an integrated circuit chip supplied by Philips was defective and caused significant levels of failure of certain Quantum legacy products acquired as part of our acquisition of the Quantum HDD business, we entered into a settlement agreement with the other parties pursuant to which the parties dismissed the lawsuit with prejudice and we received a cash payment of $24.8 million, which was recorded as litigation settlement income in the three months ended June 26, 2004.

Other gain was zero in the three months and six months ended June 26, 2004 as compared to zero and $0.2 million for the corresponding periods in fiscal year 2003.

The provision for income taxes consists primarily of state and foreign taxes. Due to our net operating losses (“NOL”), NOL carry-forwards and favorable tax status in Singapore and Switzerland, we have not

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. Although we expect to be required to make indemnification payments in future periods, we are unable to determine significantly in advance the amount and timing of such payments. Management believes that, based on the facts available at this time, the likelihood that our aggregate indemnification obligations will exceed $142.0 million is remote. As of June 26, 2004, the Company has reimbursed $8.0 million to Quantum Corporation leaving a balance of $134.0 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.

At June 26, 2004, we had $387.7 million in cash and cash equivalents, $23.4 million in restricted cash, $63.7 million in marketable securities and $41.7 million in restricted marketable securities for a combined total of $516.5 million. In comparison, at December 27, 2003, we had $530.8 million in cash and cash equivalents, $37.2 million in restricted cash and $44.6 million in marketable securities and $42.3 million in restricted marketable securities for a combined total of $654.9 million. The restricted cash and restricted marketable securities balance amounts are pledged as collateral for certain stand-by letters of credit issued by commercial banks.

Cash used in operating activities was $44.5 million in the six months ended June 26, 2004. This comprised $16.9 million in net loss plus non-cash items of $96.0 million primarily relating to depreciation and amortization, a decrease in operating capital (defined as accounts receivables, other receivables and inventories less accounts payables) of $15.2 million and prepaid expenses and other assets of $1.1 million, partially offset by a decrease in accrued and other liabilities of $139.1 million and cash used in discontinued operations of $0.8 million. The change in accrued and other liabilities was primarily due to a $77.0 million

The decrease in operating capital during the six months ended June 26, 2004 was a result of the following factors: decline in accounts receivable, partially offset by an increase in finished goods inventory and a decrease in accounts payable as a result of seasonally slower sales, reduced shipments driven by a lost opportunity with a major OEM customer and decreased demand experienced in the OEM and distribution channels.

Cash used in investing activities was $120.8 million for the six months ended June 26, 2004, primarily reflecting investments in property, plant and equipment (net of proceeds) of $93.3 million and purchases (net of sales) of marketable securities of $19.6 million, partially offset by an increase in restricted cash of $7.9 million.

Cash provided by financing activities was $22.2 million for the six months ended June 26, 2004. Primarily this represented increased borrowings of $49.7 net of transaction fees from the new asset backed borrowing facility, $15 million drawing on the manufacturing facility loan in Suzhou, China, $9.7 million drawing on the second EDB loan and $10.9 million received upon the issuance of common stock through our employee stock purchase plan and options exercised. This was primarily offset by repayments of $50 million on original asset back borrowing, $8.7 million amortization of capital lease obligations and payments of $3.4 million on the first EDB Loan.

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. 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 2004, capital expenditures are expected to be below $200 million, primarily used for manufacturing expansion and upgrades, product development, and updating our information technology systems. 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.” Our ability to generate cash will depend on, among other things, demand in the hard disk drive market and pricing conditions. We have a net deferred tax liability amounting to $196.4 million, which could become payable upon repatriation of our earnings invested abroad.

Payments due under known contractual obligations as of June 26, 2004 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 $67 million which we are obligated to contribute to our China subsidiary to allow drawdowns under the facilities described under footnote (1).


(3)	Includes future minimum annual rental commitments, including amounts accrued as restructuring liabilities as of June 26, 2004.

(4)	Purchase obligations are defined as contractual obligations for purchase of goods or services, which are enforceable and legally binding on the Company and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. The expected timing of payment of the obligations set forth above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

(5)	We have excluded $134.0 million relating to our tax sharing indemnification agreement with Quantum Corporation as the time period within which the obligations may become due and owing is not specified.

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. The notes and underlying stock have been registered for resale with the Securities and Exchange Commission.

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 our 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 a 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.

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 site. Maxtor Technology Suzhou (“MTS”) has drawn down $30 million as of June 2004. MTS is required to maintain a liability to assets ratio as detailed in the line of credit agreement starting in fiscal 2004; we were in compliance with the ratio as of June 26, 2004. We and the Bank of China are in discussions which may affect terms for future drawings and the availability of the facility.

In September 2003, Maxtor Peripherals (S) Pte Ltd. (“MPS”) entered into a second four-year 52 million Singapore dollar loan agreement with the Economic Development Board of Singapore (the “Board”) at 4.25% which is amortized in seven equal semi-annual installments ending December 2007. As of June 26, 2004, the balance was 52.0 million Singapore dollars, equivalent to $30.2 million. This loan is supported by a guaranty from a bank. Cash is currently provided as collateral for this guaranty; $21.6 million was recorded as other assets and the remaining $8.6 million was recorded as restricted cash. However, we may at our option substitute other assets as security. MPS is required to invest a certain level of capital by 2006 as defined in the loan agreement.

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 used a special purpose subsidiary to purchase and hold all of our United States and Canadian accounts receivable. This special purpose subsidiary had borrowing authority up to $100 million collateralized by the United States and Canadian accounts receivable. The special purpose subsidiary was consolidated for financial reporting purposes. The transactions under the arrangement were accounted for as secured borrowing and accounts receivables, and the related short-term borrowings, if any, remain on our consolidated balance sheet. As of March 9, 2004 the dilution to liquidation ratio for this facility exceeded the agreed upon threshold. The lenders under the facility agreed to

forbear from exercising remedies for noncompliance with this ratio through March 31, 2004 and in return, we agreed to apply all collections of receivables to the repayment of the outstanding facility until repaid in full. As of March 27, 2004, we had no borrowing under this facility. On April 2, 2004, this agreement was terminated by all parties involved.

On June 24, 2004, we entered into a one-year receivable-backed borrowing arrangement of up to $100 million with one financial institution. In the arrangement we used a special purpose subsidiary to purchase and hold all of our United States and Canadian accounts receivable. This special purpose subsidiary has borrowing authority up to $100 million collateralized by the United States and Canadian accounts receivable. The special purpose subsidiary was consolidated for financial reporting purposes. The transactions under the arrangement are accounted for as short term borrowings and remain on our consolidated balance sheet. As of June 26, 2004 we had borrowed $50 million under the arrangement, the interest rate is Libor plus 3% and $157 million of United States and Canadian receivables were pledged under this arrangement and remain on our consolidated balance sheet. The terms of the facility require compliance with operational covenants and several financial covenants, including a liquidity covenant, an operating income (loss) before depreciation and amortization to long-term debt ratio, and certain tests relating to the quality and nature of the receivables, including limits on the percentage of all receivables represented by delinquent or defaulted receivables, a dilution to liquidation ratio comparing reductions to the invoiced amounts of receivables to actual collections in a designated period. A violation of these covenants will result in an early amortization event that will cause a prohibition on further payments and distributions to us from the special purpose subsidiary until the facility has been repaid in full. As of June 26, 2004, we were in compliance with these requirements.

We have a history of significant losses. In the last five fiscal years, we were profitable in only fiscal years 2000 and 2003. For the year ended December 27, 2003, our net income was $102.7 million, which included $85.3 million for the amortization of intangible assets, charges of $0.8 million for stock-based compensation and income from discontinued operations of $2.2 million. As of December 27, 2003, we had an accumulated deficit of $1,637.9 million. Although we were profitable in the fiscal year 2003, we have experienced a quarterly loss in the second fiscal quarter of 2004. We are projecting a loss for the third fiscal quarter of 2004 and may continue to experience losses in the future.

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 or maintain 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 may cause us in future quarters to lower prices, which will have 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 any 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 products with other products to 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. Our ability to predict demand for our products and our financial results for current and future periods may be affected by economic conditions. 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 is 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. 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

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. 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 27, 2003, one customer, Dell Computer Corporation, accounted for approximately 11% of our total revenue, and our top five customers accounted for approximately 38.9% of our revenue. We expect that a relatively small number of customers will continue to account for a significant portion of our revenue, and the proportion of our revenue from these customers could continue to increase in the future. These customers have a wide variety of suppliers to choose from and therefore can make substantial demands on us. Even if we successfully qualify a product for a given customer, the customer generally will not be obligated to purchase any minimum volume of 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 existing 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. We recently entered into agreements with our two recording head suppliers, TDK/ SAE and ALPS Electric Co., Ltd., pursuant to which these suppliers will each be collaborating with Maxtor on the development of future head technologies, efficiencies, and in the case of

TDK/ SAE, manufacturing and manufacturing strategies. TDK/ SAE will be supplying recording heads to Maxtor on a “priority customer” basis, subject to qualification and pricing conditions. 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 only some of our 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 Atlas 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 Atlas hard disk drives for the enterprise market pursuant to a master agreement and a purchase agreement that has been extended through March 31, 2004. Following the termination of the purchase agreement with MKE in March 2004, we expect to continue to have MKE manufacture a significant portion of our Atlas products pursuant to purchase orders through September 2004. We plan to transition the manufacturing of our server products to our Singapore manufacturing facility and begin volume shipments in the second half of 2004. Although we do not anticipate any disruption in supply of the enterprise products which are being manufactured by MKE prior to our transition to Singapore, any failure to reach an agreement with MKE on competitive pricing arrangements for product delivered before the transition, or any disruption of supply of such products manufactured by MKE prior to the transition of manufacturing to Singapore would negatively impact our business and operating results for such periods.

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 a new manufacturing facility in China that is intended to provide us with a low-cost facility to accommodate anticipated future growth. We anticipate that the facility will begin volume shipments in the second half of 2004. Initial shipments commenced during the second quarter of 2004 and we plan to ramp production and qualify the facility for OEM customers. Any delay or difficulty in qualifying the facility’s production with customers could delay the time at which the facility could commence volume shipments, which could harm our business, financial condition and operating results.

In addition, our entire volume manufacturing operations are based in Singapore. Our MKE-manufactured server products are manufactured in Japan. We are planning to have our factory in China begin volume shipments in the second half of 2004. A flood, earthquake, political instability, act of terrorism or other disaster or condition in Singapore or Japan, or after our China plant is operational, in China, 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 these issues, 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, operating results, cash flows and liquidity 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, operating results, cash flows and liquidity.

If Quantum incurs non-insured tax liabilities 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 (referred to as a “split-off”) to the extent such tax is not covered by insurance, unless imposition of the tax is the result of Quantum’s actions, or acquisitions of Quantum stock, after the 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 tax opinion insurance policy, there may be a substantial period after we pay Quantum for the tax before the outcome of the insurance claim is finally known, particularly if the claim is denied by the insurance company and the denial is disputed by us and/or Quantum. Moreover, the insurance company could prevail in a coverage dispute. In any of these circumstances, we would have to either use our existing cash resources or borrow money to cover our obligations to Quantum. In either case, our payment of the tax, whether covered by insurance or not, could harm our business, financial condition, operating results and cash flows.

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 claims relating to our intellectual property 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.

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.

On December 30, 2003, an action was filed by MKE against us and Quantum alleging, among other things, MKE’s ownership of certain intellectual property we acquired in the acquisition of the Quantum HDD business. The action was filed in the United States District Court for the Northern District of California. On March 1, 2004, we filed an answer denying all material allegations and a motion to dismiss. The motion to dismiss was granted and MKE filed a First Amended Complaint on May 24, 2004. We again filed an answer denying all material allegations. MKE seeks damages, the return of the intellectual property, a constructive trust relating to profits from the use or license of the intellectual property, a declaratory judgment and injunctive relief. The results of any litigation are inherently uncertain. Although we cannot currently estimate whether there will be a loss, or the size of any loss, a litigation outcome unfavorable to us could have a material adverse effect on our business, financial condition and operating results. Management believes that the lawsuit is without merit, that it has valid defenses to the claims of MKE, and plans to defend the 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, currently 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. We expect to transition our manufacturing from MKE to Singapore in the second half of 2004 and we also expect our new manufacturing plant in Suzhou, China to begin volume shipments in the second half of 2004. Such concentration of operations in Singapore and either Japan or China will likely magnify the effects on us of any disruptions or disasters relating to those countries. 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 and increased transportation expense as a result of epidemics, terrorist activity, acts of war or hostility, increased security and less developed infrastructure;

	•	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.

Our operations and prospects in China are subject to significant political, economic and legal uncertainties.

We expect our new manufacturing plant in China to begin volume shipments in the second half of 2004, and we have secured a credit facility with the Bank of China to fund the construction of this facility. We also intend to expand our presence in the distribution channels serving China. Our business, financial condition and operating results may be adversely affected by changes in the political, social or economic environment in China. Under its current leadership, China has been pursuing economic reform policies, including the encouragement of private economic activity and greater economic decentralization. There can be no assurance, however, that the Chinese government will continue to pursue such policies or that such policies will not be significantly altered from time to time without notice. In addition, Chinese credit policies may fluctuate from time to time without notice and this fluctuation in policy may adversely impact our credit arrangements. Any changes in laws and regulations, or their interpretation, the imposition of surcharges or any material increase in Chinese tax rates, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our ability to conduct business and operate our planned manufacturing facility in China. Chinese policies toward economic liberalization, and, in particular, policies affecting technology companies, foreign investment and other similar matters could change. In addition, our business and prospects are dependent upon agreements and regulatory approval with various entities controlled by Chinese governmental instrumentalities. Our operations and prospects in China would be materially and adversely affected by the failure of such governmental entities to grant necessary approvals or honor existing contracts. If breached, any such contract might be difficult to enforce in China. The legal system of China relating to corporate organization and governance, foreign investment, commerce, taxation and trade is both new and continually evolving, and currently there can be no certainty as to the application of its laws and regulations in particular instances. Our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our business ventures in China are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important financial and operational information regarding these ventures. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and operating results. Further, our intellectual property protection measures may not be sufficient to prevent misappropriation of our technology in China. The Chinese legal system does not protect intellectual property rights to the same extent as the legal system of the United States and effective intellectual property enforcement may be unavailable or limited. If we are unable to adequately protect our proprietary information and technology in China, our business, financial condition and operating results could be materially adversely affected.

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

In connection with our sale of the 6.8% convertible senior notes (the “Notes”) 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 Notes at maturity, we could attempt to refinance the Notes; 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 Notes or the indenture could cause a default under agreements governing our other indebtedness.

We entered into a new asset securitization facility of up to $100 million which has certain financial covenants with which we will have to comply to use the facility.

On June 24, 2004, we entered into a one-year asset backed securitization facility for up to $100 million with one financial institution. The facility will use a special purpose subsidiary to purchase and hold all of our United States and Canadian accounts receivable. This special purpose subsidiary will borrow up to $100 million secured by the purchased receivables and will use such borrowed funds and collections from the receivables to purchase additional receivables from us and to make other permitted distributions to us. This special purpose subsidiary will be consolidated for financial reporting purposes, and its resulting liabilities will appear on our consolidated balance sheet as short-term debt. The terms of the facility require compliance with operational covenants and several financial covenants, including a liquidity covenant, an operating income (loss) before depreciation and amortization to long-term debt ratio, and certain tests relating to the quality and nature of the receivables, including limits on the percentage of all receivables represented by delinquent or defaulted receivables, a dilution to liquidation ratio comparing reductions to the invoiced amounts of receivables to actual collections in a designated period. A violation of these covenants will result in an early amortization event that will cause a prohibition on further payments and distributions to us from the special purpose subsidiary until the facility has been repaid in full. However, early amortization events under the facility generally will not cause an event of default under the convertible senior notes due 2010. We do not believe that an early amortization event or the lack of borrowing availability under the facility 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

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. Once our new manufacturing facility in Suzhou, China is operational, we will also be subject to environmental regulation in China. 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. 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.

The following table presents the hypothetical changes in fair values in the financial instruments held at June 26, 2004 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 and Chief Executive Officer and our 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 and Chief Executive Officer and our 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.

There has been no change in our internal control over financial reporting during the quarter ended June 26, 2004 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

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 us. 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 alleged that an integrated circuit chip supplied by Philips was defective and caused significant levels of failure of certain Quantum legacy products, which 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. The parties entered into a settlement agreement relating to this lawsuit on April 28, 2004, pursuant to which the parties agreed that the lawsuit would be dismissed with prejudice and we received a cash payment of $24.8 million; neither party made any admission relating to liability. Philips and we agreed that we would continue as a preferred supplier to Philips’ consumer electronics business, subject to terms and conditions agreed between the parties.

At our annual meeting of stockholders held on May 20, 2004, the stockholders elected the nominees for Class III directors to our Board of Directors. The votes were as follows:

Mr. Tufano, Mr. Boesenberg and Mr. Cannon’s terms will expire at the 2007 annual meeting. The following Directors’ terms of office continue until the annual meeting indicated: Dr. C.S. Park, Charles F. Christ and Gregory E. Myers, (Class I term expires at the 2005 annual meeting) and Roger Johnson and Charles Hill, (Class II term expires at the 2006 annual meeting).

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 25, 2004:

Maxtor filed a Current Report on Form 8-K on April 6, 2004 in which it reported the termination of the Receivables Loan and Security Agreement dated as of May 9, 2003, by and among Radian Reinsurance Inc., Maxtor Funding LLC, Maxtor Corporation, Merrill Lynch Commercial Finance Corp., and U.S. Bank National Association and its related agreements.

Maxtor filed a Current Report on Form 8-K on April 21, 2004 in which it reported financial results for the first fiscal quarter ended March 27, 2004.

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.


	By	/s/ THEODORE A. HULL



	Theodore A. Hull
	Vice President, Finance and
	Acting Chief Financial Officer


*	Portions of this exhibit have been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by asterisks.


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

For the period ended June 26, 2004

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 (Unaudited)		2
	Condensed Consolidated Balance Sheets — June 26, 2004, and December 27, 2003 (Unaudited)		2
	Condensed Consolidated Statements of Operations — Three and six months ended June 26, 2004, and June 28, 2003 (Unaudited)		3
	Condensed Consolidated Statements of Cash Flows — Six months ended June 26, 2004, and June 28, 2003 (Unaudited)		4
	Notes to Condensed Consolidated Financial Statements (Unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		41
Item 4.	Controls and Procedures		41
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		42
Item 2.	Changes in Securities and Use of Proceeds		43
Item 3.	Defaults Upon Senior Securities		43
Item 4.	Submission of Matters to a Vote of Security Holders		43
Item 5.	Other Information		44
Item 6.	Exhibits and Reports on Form 8-K		44
Signature Page			45
EXHIBIT 10.1
EXHIBIT 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


			June 26,			December 27,
			2004			2003


			(Unaudited)

			(In thousands, except share and
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	387,667		$	530,816
	Restricted cash			23,460			37,154
	Marketable securities			63,674			44,543
	Restricted marketable securities			41,686			42,337
	Accounts receivable, net of allowance of doubtful accounts of $10,095 at June 26, 2004 and $11,220 at December 27, 2003			372,145			540,943
	Other receivables			39,232			37,964
	Inventories			259,339			218,011
	Prepaid expenses and other			37,174			38,301

		Total current assets		1,224,377			1,490,069
Property, plant and equipment, net				367,668			342,679
Goodwill				813,951			813,951
Other intangible assets, net				35,730			61,619
Other assets				34,348			13,908

		Total assets	$	2,476,074		$	2,722,226


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings, including current portion of long-term debt		$	72,976		$	77,037
	Accounts payable			620,669			730,056
	Accrued and other liabilities			322,451			454,388
	Liabilities of discontinued operations			692			1,487

		Total current liabilities		1,016,788			1,262,968
Deferred taxes				196,455			196,455
Long-term debt, net of current portion				371,405			355,809
Other liabilities				179,291			186,485

		Total liabilities		1,763,939			2,001,717
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; 260,818,982 shares issued and 247,573,244 shares outstanding at June 26, 2004 and 259,246,819 shares issued and 246,001,081 shares outstanding at December 27, 2003			2,608			2,592
Additional paid-in capital				2,421,051			2,410,082
Deferred stock-based compensation				—			(110	)
Accumulated deficit				(1,654,855	)		(1,637,920	)
Cumulative other comprehensive income				8,270			10,804
Treasury stock (13,245,738 shares) at cost				(64,939	)		(64,939	)

		Total stockholders’ equity		712,135			720,509

		Total liabilities and stockholders’ equity	$	2,476,074		$	2,722,226



			Three Months Ended						Six Months Ended

			June 26,			June 28,			June 26,			June 28,
			2004			2003			2004			2003


			(Unaudited)						(Unaudited)

			(In thousands, except share and per share amounts)
Net revenues			$	818,254		$	910,903		$	1,837,942		$	1,849,792
Cost of revenues				744,468			761,657			1,609,093			1,528,699

	Gross profit			73,786			149,246			228,849			321,093
Operating expenses:
	Research and development			80,615			84,218			165,385			170,879
	Selling, general and administrative			32,383			30,967			64,897			62,899
	Amortization of intangible assets			5,053			20,562			25,889			41,124

		Total operating expenses		118,051			135,747			256,171			274,902

Income (loss) from operations				(44,265	)		13,499			(27,322	)		46,191
Interest expense				(7,364	)		(8,325	)		(16,196	)		(13,747	)
Interest income				1,082			1,423			2,370			2,631
Income from litigation settlement				24,750			—			24,750			—
Other gain				16			36			54			243

Income (loss) before income taxes				(25,781	)		6,633			(16,344	)		35,318
Provision for income taxes				317			437			591			1,714

Net income (loss)			$	(26,098	)	$	6,196		$	(16,935	)	$	33,604

Net income (loss) per share — basic			$	(0.11	)	$	0.03		$	(0.07	)	$	0.14
Net income (loss) per share — diluted			$	(0.11	)	$	0.03		$	(0.07	)	$	0.14
Shares used in per share calculation
		— basic		247,367,176			241,120,075			246,981,817			242,382,530
		— diluted		247,367,176			245,259,831			246,981,817			245,999,915



					June 26, 2004							December 27, 2003


					(In thousands)							(In thousands)
					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	$	96,700	$	(62,855	)	$	33,845	$	96,700	$	(53,185	)	$	43,515
		Consumer electronics		3		8,900		(8,900	)		—		8,900		(8,158	)		742
		High-end		3		75,500		(75,500	)		—		75,500		(69,208	)		6,292
		Desktop		3		105,000		(105,000	)		—		105,000		(96,250	)		8,750

MMC Technology
	Existing technology			5		4,350		(2,465	)		1,885		4,350		(2,030	)		2,320

Total other intangible assets					$	290,450	$	(254,720	)	$	35,730	$	290,450	$	(228,831	)	$	61,619


				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		(8.5	)		—			—			(8.5	)

Balance at December 27, 2003		45.2			—			—			45.2
Amounts paid		(1.9	)		—			—			(1.9	)

Balance at March 27, 2004		43.3			—			—			43.3
Amounts paid		(1.8	)		—			—			(1.8	)

Balance at June 26, 2004	$	41.5		$	—		$	—		$	41.5


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

Long-term Debt	$	432,908	$	65,287	$	58,994	$	44,316	$	264,311
Capital Lease Obligations		11,473		7,689		3,784		—		—
Operating Leases(3)		292,386		34,678		63,461		61,796		132,451
Purchase Obligations(4)		762,076		736,204		14,607		11,265		—

Total	$	1,498,843	$	843,858	$	140,846	$	117,377	$	396,762


										Fair Value
										as of
										June 26,
										2004
	+150 bps			+100 bps			+50 bps			($000)		-50 bps			-100 bps			-150 bps

Financial Instruments	$	104,021		$	104,464		$	104,909		$	105,360	$	105,811		$	106,269		$	106,729
% Change		(1.27	)%		(0.85	)%		(0.43	)%				0.43	%		0.86	%		1.30	%


								Fair Value
								as of
	Valuation of Security							June 26,		Valuation of Security
	Given X% Decrease in the							2004		Given X% Increase in the
	Security Price							($000)		Security Price


Corporate equity investments		$6,824		$10,237		$11,601		$	13,649		$15,696		$17,061		$20,473
% Change		(50	)%	(25	)%	(15	)%				15	%	25	%	50	%


Nominee	For		Withheld Authority

Paul J. Tufano		217,982,032		8,207,584
Charles M. Boesenberg		221,561,360		4,628,256
Michael R. Cannon		180,725,056		45,464,560


Exhibit
Number		Description

10.1		U.S. $100,000,000 Receivables Loan and Security Agreement dated as of June 24, 2004 among Maxtor Receivables LLC, Maxtor Corporation, Merrill Lynch Commercial Finance Corp. and U.S. Bank National Association.
10.2		Purchase and Contribution Agreement dated as of June 24, 2004 between Maxtor Corporation and Maxtor Receivables LLC.
10.3		Amendment No. 1 to Maxtor Standard Volume Purchase Agreement dated as of July 1, 2004 between Maxtor Corporation and Agere Systems Inc.*
10.4		Agreement dated as of July 19, 2004 between Maxtor Corporation and Phillip C. Duncan.**
10.5		Employment Offer Letter dated as of July 19, 2004 from Maxtor Corporation to John Viera.**
31.1		Certification of Paul J. Tufano, President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Theodore A. Hull, Acting Chief Financial Officer of the Registrant pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Paul J. Tufano, President and Chief Executive Officer of the Registrant furnished pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Theodore A. Hull, Acting Chief Financial Officer of the Registrant furnished pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


1.	Summary of Significant Accounting Policies


	*Basis of Presentation*


	*Use of Estimates*


	*Stock-Based Compensation*